Johnson v. Baumgardt

• Decision Date: 25 July 1991
• Docket Number: No. 2-90-1367,2-90-1367
• Citation: 159 Ill.Dec. 846,576 N.E.2d 515,216 Ill.App.3d 550
• Parties: , 159 Ill.Dec. 846 Doug JOHNSON, Plaintiff and Counterdefendant-Appellee, v. Tim BAUMGARDT et al., Defendants and Counterplaintiffs-Appellants.
• Court: United States Appellate Court of Illinois

Page 515

576 N.E.2d 515

216 Ill.App.3d 550, 159 Ill.Dec. 846

Doug JOHNSON, Plaintiff and Counterdefendant-Appellee, v. Tim BAUMGARDT et al., Defendants and Counterplaintiffs-Appellants.

No. 2-90-1367.

Appellate Court of Illinois,

Second District.

July 25, 1991.

Schlueter, Ecklund, Olson, Barrett & Moore, Gregory E. Barrett, Rockford, for Tim Baumgardt and Roy Baumgardt.

Conde, Stoner & Killoren, Robert A. Calgaro, Rockford, for Doug Johnson.

Justice McLAREN delivered the opinion of the court:

Defendants, Tim and Roy Baumgardt, appeal from an order of the circuit court of Winnebago County which granted the motion for summary judgment of plaintiff, Doug Johnson. The sole issue raised by defendants on appeal is whether the trial court erred in determining that it had no authority to compel the parties to return to arbitration. We reverse and remand.

On March 14, 1990, plaintiff filed a complaint seeking the entry of judgment on an arbitration award. The complaint alleged that the parties entered into an agreement which was dated March 22, 1989. The agreement was attached to the complaint as exhibit A. It was three pages long and was prepared by Gregory Barrett, defendants' attorney. The agreement provided that defendants agreed to purchase "all of [plaintiff's] right, title and interest in and to ROCKFORD CARBIDE DIE AND TOOL, LTD. consisting of 50 shares of stock for the sum of $85,000.00." The contract further provided that defendants would pay the sum of $23,323 at closing and would pay the remaining balance of $61,677 in 12 equal monthly installments. In return, plaintiff agreed to complete and sign "such minutes and other documents" necessary to bring the corporate records and minute book current and to execute the documents and instruments necessary to resign from the board of directors and as an officer of the corporation. Plaintiff also warranted that the shares he was selling to defendants had not been pledged, encumbered, sold or otherwise transferred as of the date of closing and further agreed to cooperate with defendants in the execution of all transfers of shares of stock, corporate minutes and resolutions.

The agreement stated that it set forth the entire understanding of the parties and included an arbitration clause which provided:

"In the event a dispute arises between the parties regarding the interpretation of this Agreement, or any other matter related to the purchase herein or its terms, it shall be resolved by arbitration. If either party determines a dispute should be resolved by arbitration, he shall give notice by delivery or by certified mail to the other party of the nature of the dispute and the name and address of an arbitrator he has chosen. The other party shall, within 14 days thereafter, choose an arbitrator and give notice thereof to the first party and both arbitrators. The two arbitrators shall select a third arbitrator and the written agreement of any two arbitrators shall be binding on both parties. The Circuit Court of Winnebago County, Illinois, shall enforce the decision of the arbitrators on all parties without review of the facts or the means used by the arbitrators for making their decision. The costs and expenses incurred by the arbitrators shall be assessed between the parties as determined by the arbitrators."

Plaintiff's complaint further alleged that a dispute arose between the parties concerning whether defendants were obligated to pay certain sums to plaintiff pursuant to the contract. An arbitration hearing was held February 5, 1990, and the arbitrators entered an award finding that defendants owed plaintiff $56,537.25. A copy of the arbitration award was also attached to the complaint. The award provided, in pertinent part:

"2. The Arbitrators, by majority vote with Arbitrator Reese dissenting, find that the Defendants, TIM BAUMGARDT and ROY BAUMGARDT, are indebted to the Plaintiff, DOUG JOHNSON, on the Agreement, marked as Johnson's Exhibit No. 1 in the sum of $56,537.25.

3. That Attorney Calgaro on behalf of the Plaintiff, has made a Motion to Exclude from evidence any of the matters and defenses as raised in the letter dated January 31, 1990, addressed to Mr. Calgaro from Mr. Barrett. A copy of said letter is attached hereto and incorporated herein by this reference.

4. The Arbitrators with Arbitrator Reese dissenting hereby grant the Motion of Attorney Calgaro and in so doing, exclude from evidence any testimony pertaining to the issues as are set forth in the letter marked as Johnson's Exhibit No. 5.

5. It is to be clearly understood that the defenses and rights as raised on Exhibit No. 5 whether by individually named Defendant or the Corporation, Rockford Carbide Die & Tool Limited, are hereby reserved and the Defendants are entitled to raise those defenses and/or allegations at a later date in a separate proceeding if they so elect."

The seven-page letter attached to the arbitration award was signed by Gregory Barrett. The letter stated that, almost immediately after the sale of plaintiff's interest in the business, irregularities began to surface. These "irregularities" included: missing inventory; numerous questionable checks including checks with forged signatures, some of which were cashed by plaintiff or written to a relative of plaintiff; misuse of company funds; and work which was performed by the company but for which no payment was received by the company. The letter concluded that there was "a total of $38,740.87 of discrepancies with regard to this business." The letter further stated that defendants were willing to pay plaintiff the balance due under the terms of the contract, less that amount.

On April 16, 1990, defendants filed their answer to the complaint and a counterclaim to compel arbitration. Defendants admitted the allegations of plaintiff's complaint, but further alleged:

"[T]hat the award of the arbitrators is neither valid nor enforceable for the reason that the aribtrators [sic ], with one arbitrator dissenting, refused to hear and decide the entire controversy between the parties, finding that the claims, defenses and set-offs to be raised by the Defendants were not arbitrable under the provisions of the agreement between the parties. The refusal to hear and decide the controversy between the parties renders the award of the arbitrators unenforceable."

Defendants prayed that the court deny plaintiff relief and "order the parties to arbitrate the controversy between them as set forth in the arbitration award and attachment thereto." In their counterclaim, defendants asked that the court enter an order compelling arbitration of those issues.

Plaintiff filed an answer to defendants' counterclaim and later filed a motion for summary judgment, alleging that there were no issues of material fact. Defendants then filed their motion for judgment on the pleadings and/or summary judgment. They alleged that the issue before the court raised by the complaint and counterclaim was solely one of law: whether the matters sought to be raised by defendants as set forth in the letter attached to the arbitration award were arbitrable under the terms of the agreement. Defendants contended that, under the terms of the agreement, plaintiff sold his interest in the corporation of which he was the president and chief operating officer for a price which was agreed upon, taking into account the assets and financial condition of the corporation. Defendants further argued that they sought to raise matters at the arbitration hearing which, if known at the time they negotiated the purchase of the shares of stock, "would have affected the value of the corporate assets and financial condition of the corporation as well as the value of the shares they were purchasing."

A hearing was held regarding the parties' cross-motions for summary judgment on August 31, 1990. The trial judge noted that he disagreed with the decision of the arbitrators to exclude evidence sought to be introduced by defendants and to "reserve" those defenses. He stated, "they can't piecemeal it and they can't say we will give you an award but we are not going to consider this, this is set for some future date, that would clog up the docket; they have to treat it as a whole down there." Nevertheless, the court granted plaintiff's motion for summary judgment because the agreement provided for binding arbitration. Judgment was therefore entered in favor of plaintiff in the amount of $56,537.25, plus interest from the date of the arbitration award and costs of suit.

Defendants filed a motion to reconsider, arguing that, once the court determined that the parties should have arbitrated an issue, "the court has the duty under the law to enter an order compelling the parties to return to the arbitration hearing so that the matters sought to be raised under the arbitration clause can be heard as a part of the arbitration procedure." A hearing was held regarding the motion, and plaintiff argued that arbitration could not be compelled because plaintiff did not refuse to submit to arbitration. Plaintiff also contended that there was no basis to overturn the arbitration award based on the relevant statute. The trial court agreed, noting that it was not an "appellate court for the arbitrators," and denied defendants' motion. This timely appeal followed.

Defendants argue on appeal that the trial court correctly found that the issues they sought to raise at the arbitration hearing were arbitrable but erred in determining that it did not have the authority to compel arbitration on those issues. In other words, the issue is whether the trial court erred in entering judgment in favor of plaintiff based on an arbitration award where the arbitrators excluded evidence related to defenses to plaintiff's claim at the arbitration hearing. We conclude that the trial court improperly entered judgment in favor of plaintiff under these circumstances.

The purpose of arbitration is to...