L & H Airco, Inc. v. Rapistan Corp.

• Decision Date: 06 October 1989
• Docket Number: C4-88-1878,Nos. C2-88-1796,s. C2-88-1796
• Citation: 446 N.W.2d 372
• Parties: L & H AIRCO, INC. (formerly L & H Enterprises, Inc.), Respondent, v. RAPISTAN CORP., successor by merger to Lear Siegler, Inc., Mammoth Division, et al., Respondents (C2-88-1796), Defendants (C4-88-1878), Alan C. Eidsness, et al., Petitioners, Respondents (C2-88-1796), Appellants (C4-88-1878), Robert L. Michaud, Petitioner, Appellant (C2-88-1796), Respondent (C4-88-1878).
• Court: Minnesota Supreme Court

Page 372

446 N.W.2d 372

58 USLW 2274

L & H AIRCO, INC. (formerly L & H Enterprises, Inc.) Respondent, v. RAPISTAN CORP., successor by merger to Lear Siegler, Inc Mammoth Division, et al., Respondents (C2-88-1796), Defendants (C4-88-1878) Alan C. Eidsness, et al., Petitioners, Respondents (C2-88-1796), Appellants (C4-88-1878) Robert L. Michaud, Petitioner, Appellant (C2-88-1796), Respondent (C4-88-1878).

Nos. C2-88-1796, C4-88-1878.

Supreme Court of Minnesota.

Oct. 6, 1989.

Rehearing Denied Nov. 29, 1989.

Syllabus by the Court

1. The trial court correctly dismissed an independent action maintained to recover costs and expenses allegedly incurred in obtaining a vacation of an original arbitration award and in resubmitting a matter to a second arbitration.

2. An arbitrator is entitled to immunity from liability for a failure to disclose prior and present social and professional relationships with parties to the proceeding.

3. An attorney owed no duty of care to his client's adversary on which a claim of negligent misrepresentation could be based.

4. An attorney's mere failure to disclose known facts to his client's adversary does not constitute fraud absent a legal duty to disclose those facts to the adversary.

Hart, Bruner & O'Brien, P.A., B.C. Hart, and Gregory T. Spalj, Minneapolis, for appellant, Robert L. Michaud.

Rider, Bennett, Egan & Arundel, Eric J. Magnuson, and Sheryl Ramstad Hvass, Minneapolis, for appellants, Alan C. Eidsness and Henson & Efrom, P.A. LeFevre, Lefler, Kennedy, O'Brien & Drawz, James J. Thomson, Jr., Corrine A. Heine, and David C. Roland, Minneapolis, for respondent, L & H Airco.

Rider, Bennett, Egan & Arundel, Eric J. Magnuson, Sheryl Ramstad Hvass, Minneapolis, for respondents, Rapistan Corp. and Frank Manning.

Heard, considered and decided by the court en banc.

KEITH, Justice.

We accelerated review of an order of the district court denying the defendants' separate motions for summary judgment and certifying as important and doubtful questions relating to arbitral immunity and an attorney's potential tort liability. We affirm in part and reverse in part.

Rapistan Corporation, the successor by merger to Lear Siegler, Inc., Mammoth Division (hereafter collectively designated as "Rapistan"), is engaged in the manufacture and sale of heating, ventilating and air-conditioning equipment. It entered an agreement in 1980 which designated L & H Airco, Inc. as its manufacturer's representative in the western United States. Rapistan terminated the agreement. As a result, L & H filed a complaint in February 1982 in the California Superior Court alleging breach of contract, breach of warranty, fraud and intentional and negligent interference with the business relationship. The California litigation was stayed when Rapistan exercised its right under a contract provision to have the dispute arbitrated in Minnesota. Rapistan then filed its claim for arbitration with the American Arbitration Association in Minnesota and retained the law firm of Henson & Efron, P.A. to represent it in the arbitration proceedings. Petitioner Alan C. Eidsness served as chief counsel in those proceedings. One of the three arbitrators selected from lists circulated among the parties was petitioner Robert L. Michaud, a registered professional engineer whose firm, Michaud, Cooley, Halberg, Erickson and Associates, specializes in the preparation of mechanical, electrical and communications systems for building construction projects. These consolidated proceedings all center upon Michaud's alleged business and social contacts with Rapistan through its officers and agents and matters related thereto.

The record discloses that in the past Michaud had drawn engineering specifications which allegedly favored Rapistan products on occasions unrelated to Rapistan's relationship with L & H Airco and that, socially, he had accepted invitations to Christmas parties and trips to Las Vegas, all prior to the notification on July 9, 1982 of his appointment as an arbitrator in the underlying proceedings. His appointment letter instructed him as follows:

If you are able to accept appointment as one of the arbitrators in this case and have no association with either of the parties or their representatives which would disqualify you from serving, please execute and return one copy of the enclosed Notice of Appointment at your earliest convenience.

On July 14, Michaud executed the notice of appointment which contained the following caution:

It is most important that the parties have complete confidence in the Arbitrator's impartiality. Therefore, please disclose any past or present relationship with the parties or their counsel, direct or indirect, whether financial, professional, social or other kind. Any doubt should be resolved in favor of disclosure.

Michaud did not disclose any of the prior business or social contacts with Rapistan, its officers or its agents.

In August 1982, three weeks prior to the scheduled arbitration proceeding, Michaud traveled to northern Canada on a fishing trip with three of Rapistan's agents--Frank Manning, Rapistan's president, Rod McKinley, Rapistan's national sales manager and Eugene Johnson, Rapistan's exclusive representative in Minnesota. The trip was arranged months before Michaud's arbitration appointment and Michaud claims that he did not know who would be traveling until the day of departure. Manning claims that prior to the trip, he had informed Rapistan's counsel Eidsness that Michaud would attend the trip and inquired as to the propriety; he later was not as clear about whether the conversation occurred. Although Eidsness disputes whether the following conversation took place, Manning claims that he was informed that there would be no problem as long as there was no discussion of the pending arbitration. During the four day trip, the individuals fished and stayed together but claim that they did not discuss the pending arbitration.

The arbitration proceeding commenced as scheduled on September 27, 1982. During the course of the proceeding, Rapistan sought to add Manning and other Rapistan officers as defendants. When the arbitration panel requested that the parties stipulate to the naming of additional defendants, L & H agreed, later asserting that the agreement had been predicated on an express oral condition that none of the additional defendants had any social or business contacts with the arbitrators. No disclosure was made of the fishing trip or of any of the other prior social or business contacts. L & H argues that it accordingly agreed to the naming of the additional parties.

In November 1982, the three member arbitration panel rendered its unanimous decision awarding no damages to either party. Thereafter, L & H commenced an investigation into the relationship between Rapistan and Michaud which disclosed the August 1982 fishing trip and the other prior contacts. L & H then brought a motion before the district court to vacate the arbitration award pursuant to Minn.Stat. Sec. 572.19 (1988). Although the trial court found no evidence of actual bias in the arbitrators' decision, it was convinced that the fact of undisclosed social and business contacts required that the award be vacated and that the matter be rearbitrated.

A different arbitration panel considered the dispute in late 1985 resulting in an award in favor of L & H of damages of $219,990. The district court confirmed the award and directed the entry of judgment. Rapistan paid the judgment with interest.

This action was commenced in November 1987 by L & H against Rapistan, Manning, Eidsness, Henson & Efron, P.A. and Michaud alleging fraud, negligent misrepresentation and breach of covenants of good faith and fair dealing with regard to their failure to disclose the existing relationships. It claimed damages as a result of the expenses, disbursements and fees incurred in having the original award vacated and in participating by necessity in a second arbitration proceeding. The defendants moved for dismissal on the grounds that the complaint filed by L & H failed to state a claim upon which relief could be granted or, in the alternative, for summary judgment. The trial court granted Rapistan and Manning's motions to dismiss, but denied the motions of the defendants Eidsness and Michaud, certifying as important and doubtful the questions of whether Michaud was entitled to arbitral immunity and whether Eidsness could be subject to tort liability to his client's adversary for failing to divulge relevant information. ¹ The separate appeals of Michaud and Eidsness were consolidated and their petitions for accelerated review were granted.

1. We first examine L & H's claim that the trial court erred in granting Rapistan and Manning's motion to dismiss its complaint which alleged fraud and negligent misrepresentation resulting in out-of-pocket damages incurred in connection with the required second arbitration proceeding. In concluding that the complaint failed to set forth a legally sufficient claim for relief, pursuant to Minn.R.Civ.P. 12.02, the trial court reasoned that a party cannot, in a subsequent action against the original adverse party, recover attorney fees or litigation expenses incurred in that prior proceeding. Stickney v. Goward, 161 Minn. 457, 458-59, 201 N.W. 630, 630-31 (1925). See also Smith v. Chaffee, 181 Minn. 322, 324, 232 N.W. 515, 516 (1930). Rapistan and Manning were both parties to the two arbitration proceedings commenced by L & H. An exception to this rule may arise where the prior litigation and its resulting expenses were occasioned by the wrongful conduct of a non-party and the subsequent action to recover the fees and expenses is maintained against that non-party. Hill v. Okay Constr. Co., 312 Minn. 324, 347, 252 N.W.2d 107, 121 (1977). However, the facts presented do not invoke that exception and the general rule is applicable to the claims asserted against Rapistan and...