Humitech Dev. Corp. v. Perlman

• Decision Date: 26 March 2014
• Docket Number: No. 05–12–00857–CV.,05–12–00857–CV.
• Citation: 424 S.W.3d 782
• Parties: HUMITECH DEVELOPMENT CORPORATION, and Emil Lippe, Jr., Appellants v. Alan PERLMAN, Michael Perlman, Ann Perlman, David Perlman Michelle Perlman Berke, Beth Perlman Dreifach, Harry Sher, and Betty Sher, Appellees.
• Court: Texas Court of Appeals

424 S.W.3d 782

HUMITECH DEVELOPMENT CORPORATION, and Emil Lippe, Jr., Appellants

v.Alan PERLMAN, Michael Perlman, Ann Perlman, David Perlman Michelle Perlman Berke, Beth Perlman Dreifach, Harry Sher, and Betty Sher, Appellees.

No. 05–12–00857–CV.

Court of Appeals of Texas, Dallas.

Feb. 27, 2014.

Rehearing Overruled March 26, 2014.

Emil Lippe Jr., Law Offices of Lippe & Associates, Dallas, Kendyl Hanks, Greeberg Traurig, LLP, Austin, for Appellants.

Mark C. Enoch, Lawrence S. Fischman, Glast, Phillips & Murray, PC, Dallas, for Appellees.

Before Justices O'NEILL, MYERS, and BROWN.

OPINION

Opinion by Justice MYERS.

Humitech Development Corporation (HDC) appeals the trial court's judgment confirming an arbitration award in favor of Alan Perlman, Michael Perlman, Ann Perlman, David Perlman, Michelle Perlman Berke, Beth Perlman Dreifach, Harry Sher, and Betty Sher. HDC's counsel, Emil Lippe, Jr., appeals the trial court's order imposing a $10,000 sanction against him. Appellants bring seven issues on appeal, contending (1) the arbitration proceeding was governed by Texas law; (2) the arbitrator exceeded his authority; (3) the arbitrator manifestly disregarded Texaslaw or made a gross error in the arbitration award; (4) the arbitrator's award violated the public policy against kickbacks and bribes; (5) the trial court erred by confirming the award without evidentiary support for the award and by applying the wrong legal standard to HDC's motion to vacate the award; (6) the trial judge erred by failing to recuse herself or be disqualified; and (7) the trial court erred by imposing a sanction against Lippe. We affirm the trial court's confirmation of the arbitration award, but we reverse the trial court's order imposing a sanction against Lippe, and we remand the cause to the trial court for further proceedings on appellees' motion for sanctions.

BACKGROUND

In 1983, appellee Alan Perlman staked claims (in his own name and in the names of the other appellees, his family members) on land controlled by the federal Bureau of Land Management in southern California to mine Sorbite, a type of diatomaceous earth found only in that area that is the raw material used in filters installed in food freezers. Humitech International Group (HIG) used Sorbite in the filters it manufactured and sold. In 2001, Perlman agreed with C.J. Comu, HIG's CEO, chairman of the board of directors, and majority stock owner, to pay Comu $500,000 if Comu brought Perlman a buyer of the mining claims for $2 million. Also in 2001, Perlman contracted with HIG to supply HIG with its needs for Sorbite. In 2003, HIG decided to buy appellees' interest in the mining claims to reduce its costs for Sorbite. Perlman, representing appellees, and Comu, representing HIG, agreed on a price of $2 million ¹ for appellees' interest in the claims. The parties' agreement contained a provision requiring any dispute be arbitrated.²

HIG created appellant HDC to purchase appellees' claims. The purchase was funded by an unaffiliated company, King Louie Mining, owned by Ronald Katz. King Louie Mining loaned the purchase price to HIG, and King Louie Mining took the shares of HDC as security for the loan to HIG. When Perlman received the purchase price, he paid Comu $500,000 as he had promised.

HIG, HDC, and their affiliates' filter business faltered. In 2006, HIG defaulted on its debt to King Louie Mining, and King Louie Mining foreclosed on the shares of HDC. Katz and King Louie Mining then controlled HDC.

When Katz learned of the $500,000 payment to Comu, HDC brought a claim in arbitration against appellees for numerous causes of action, including for fraud incident to Perlman's payment of $500,000 to Comu. HDC sought rescission of the purchase agreement and return of the purchase price or, alternatively, damages in the amount of the purchase price. The arbitrator presided over the trial of the case at which the parties presented witness testimony and other evidence. The arbitrator issued the “Final Award,” ruling that HDC take nothing on its claims against appellees.

The arbitration award discusses HDC's fraud claim concerning the $500,000 payment to Comu as follows:

On the causes of action pled, HDC's claim for fraud depends entirely upon [Stuart] Ducote [an officer and director of HDC] having no knowledge of the payment agreement with Comu and Perlman knowing that Ducote did not know of the payment agreement. To be liable for fraud, Perlman must have intentionally paid an undisclosed/secret “kickback”. Having heard Ducote testify for more than eight hours, this Arbitrator finds him not credible and unworthy of belief on the question of his knowledge of the Comu payment agreement. Ducote was sued along with Comu and [Ivan] Gatti [an officer and director of HIG], but managed to bargain his affidavit and testimony for his dismissal from that suit. Ducote was brought to HIG by Comu and performed his duties as CFO and director of HIG as instructed by Comu and with little or no regard to his duties to HIG. Perlman had never heard of Katz or KLM [King Louie Mining] when he first agreed to pay Comu a $500,000 “finders fee” if Comu could bring him a buyer for his BLM [Bureau of Land Management] claims. Comu did bring a buyer, himself and his new company HDC, a wholly owned subsidiary of Comu's other company HIG of which Comu was the majority shareholder. Comu and Ducote were the only officers and directors of HDC. If they both knew of the $500,000 payment agreement, then Perlman's failing to tell Ducote means nothing; he already knew and HDC already knew.

In contrast to Ducote, this Arbitrator finds Perlman to be quite credible. Under these circumstances, Perlman had reason to believe that Ducote knew that Comu would receive a finder's fee. Perlman had no intent to defraud HDC. Perlman was simply paying a finder's fee originally contemplated for a sale of the mine.

HDC, represented by Emil Lippe, Jr., then filed this suit to vacate the arbitration award, and appellees filed a petition to confirm the arbitration award. The petition to vacate the arbitration award alleged the statutory ground that the arbitrator exceeded his powers and the common-law grounds that the arbitrator acted in manifest disregard of the law, and that the final award contained gross error and violated public policy. The trial court denied the request to vacate the arbitration award and ordered the arbitration award confirmed. The trial court also imposed a sanction of $10,000 on Lippe because the factual allegations in three paragraphs of HDC's original petition to vacate the arbitration award lacked evidentiary support.

COMMERCIAL BRIBERY

Many of appellants' arguments concern whether Perlman's payment to Comu was an illegal commercial bribe. Appellants cite section 32.43 of the Texas Penal Code, which defines commercial bribery as follows:

(b) A person who is a fiduciary commits an offense if, without the consent of his beneficiary, he intentionally or knowingly solicits, accepts, or agrees to accept any benefit from another person on agreement or understanding that the benefit will influence the conduct of the fiduciary in relation to the affairs of his beneficiary.

(c) A person commits an offense if he offers, confers, or agrees to confer any benefit the acceptance of which is an offense under Subsection (b).

Tex. Penal Code Ann. § 32.43(b), (c) (West 2011).³ Appellants defined fraud in the form of a commercial bribe as “the payment of a secret commission to a corporate fiduciary.” The arbitrator likewise concluded that resolution of whether the payment to Comu was a fraud on HDC depended on whether the payment was disclosed to the company. The arbitrator concluded that if both Comu and Ducote, the only officers and directors of HDC, knew of the payment agreement, then the payment was not fraudulent. The arbitrator, after weighing the evidence and the credibility of the witnesses determined that Ducote knew of the payment agreement, the payment was a finder's fee, and there was no intent to defraud HDC.

Appellants state in their brief, “It is, therefore, crystal clear that Appellees' conduct was illegal under Texas law. The arbitrator exceeded his powers by finding such conduct acceptable.” However, the arbitrator's determination that there was no fraud in the form of an illegal kickback was based on the arbitrator's determination of the credibility of the witnesses and the weight of the evidence, to which the reviewing courts must give due deference. See Quinn v. Nafta Traders, Inc., 360 S.W.3d 713, 722 (Tex.App.-Dallas 2012, pet. denied). Therefore, it was not “crystal clear that Appellees' conduct was illegal under Texas law,” and the arbitrator made no finding that illegal conduct was “acceptable.”

ARBITRATION

Arbitration of disputes is strongly favored under Texas law. Prudential Secs. Inc. v. Marshall, 909 S.W.2d 896, 898 (Tex.1995) (per curiam). We review a trial court's decision to vacate or confirm an arbitration award de novo, based on review of the entire record. Cambridge Legacy Group, Inc. v. Jain, 407 S.W.3d 443, 447 (Tex.App.-Dallas 2013, pet. denied). “[A]n award of arbitrators upon matters submitted to them is given the same effect as the judgment of a court of last resort. All reasonable presumptions are indulged in favor of the award, and none against it.” CVN Group, Inc. v. Delgado, 95 S.W.3d 234, 238 (Tex.2002) (quoting City of San Antonio v. McKenzie Constr. Co., 136 Tex. 315, 150 S.W.2d 989, 996 (1941)). The award is presumed valid, and it is entitled to great deference. Cambridge Legacy Group, 407 S.W.3d at 447. The award is conclusive on the parties as to all matters of fact and law; in other words, we may not vacate an award even if it is based upon a mistake of fact or law. Id. at 448;Centex/Vestal v. Friendship W. Baptist Church, 314 S.W.3d 677, 683 (Tex.App.-Dallas 2010, pet. denied). We may not substitute our judgment for that of the arbitrators merely because ...