Youngs v. American Nutrition, Inc.
| Decision Date | 07 August 2008 |
| Docket Number | No. 06-4253.,No. 06-4203.,No. 06-4266.,No. 06-4257.,No. 06-4207.,No. 06-4205.,06-4203.,06-4205.,06-4207.,06-4253.,06-4257.,06-4266. |
| Citation | 537 F.3d 1135 |
| Parties | Jack R. YOUNGS, James G. Corell, William R. McDavid, and Margaret B. McDavid, Plaintiffs-Appellees, v. AMERICAN NUTRITION, INC., Jack Behnken, Nancy Behnken, John Behnken, Sandi Behnken, and William Behnken, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Robert M. Anderson (Jennifer A. Whitlock with him on the brief), of Van Cott, Bagley, Cornwall & McCarthy, Salt Lake City, UT, for Plaintiffs-Appellees.
Richard F. Ensor of Young, Hoffman, Strassberg & Ensor, LLP, Salt Lake City, UT, (Robert S. Clark and James Alhstrom of Parr Waddoups Brown Gee & Loveless, Salt Lake City UT and Brent O. Hatch and T. Parker Douglas of Hatch, James & Dodge, P.C., Salt Lake City, UT, with him on the brief), for Defendants-Appellants.
Before LUCERO, HOLLOWAY and EBEL, Circuit Judges.
These appeals by related parties are from an order confirming an arbitration award and a subsequent order awarding pre-judgment and post-judgment interest. Jurisdiction in the district court was based on diversity of citizenship. This court's jurisdiction is based on 28 U.S.C. § 1291.1
Appellants are the majority shareholders of the closely held corporation, American Nutrition, Inc. ("ANI"), and ANI itself. The majority shareholders are the members of the Behnken family — Jack and Nancy Behnken and their three adult children, William, Sandi, and John Behnken ("the Behnken siblings"). The Behnkens, directly or through other completely controlled corporate entities, own about 87% of the stock of ANI. The appellees are four of the five minority shareholders of ANI.
The primary underlying dispute between the majority and minority shareholders of ANI involves allegations that the majority usurped ANI's corporate opportunities and transferred ANI's assets to the detriment of the minority. Other companies owned by the Behnkens — Rocky Mountain Milling Company, Solar Engineering Ltd., and Behnken Properties — are involved in this dispute because they were the beneficiaries of the transactions that allegedly diminished the value of ANI and thus of the minority shares.2
In the early 1990s, all of ANI's real property was transferred to Behnken Properties and then leased back to ANI. The minority shareholders have alleged that they approved this transfer, which benefitted the Behnkens, only because they were promised a "day of fairness," by which they apparently meant that they were promised that they would be compensated for the diminution in value of their shares caused by this arrangement. But that never happened. Moreover, Jack Behnken allegedly caused ANI to pay higher lease rates to Behnken Properties than had been disclosed and approved.
Also in the 1990s, ANI's equipment was transferred to another Behnken family entity, Solar Engineering, and leased back. Allegedly ANI received less than the real value of the equipment in the sale, and the lease-back was at inflated rates. The low sales price and high lease-back costs were allegedly concealed from the minority shareholders.
ANI makes dry pet food. In 1997 and 1998, Jack Behnken allegedly caused profitable product lines (canned pet food and treats, primarily) to be transferred from ANI to yet another Behnken family entity, Rocky Mountain Milling Co. The minority shareholders alleged that in six years, this transfer of product lines resulted in Rocky Mountain Milling distributing over $26 million in profits to the Behnken family.
In an earlier effort to resolve this dispute, the parties agreed to mediation. After a day of efforts, they entered into a Memorandum of Understanding in which they agreed to a mechanism for valuing ANI and the minority's interest. The parties agreed that the "fair market enterprise value" of ANI would include Rocky Mountain Milling and Solar Engineering. They also agreed to continue mediation and to go to arbitration if mediation was unsuccessful. The Memorandum of Understanding recited that after an agreement was reached as to the value of the minority's interest, their stock would be bought at that price by the majority.
The Behnken parties terminated the Memorandum of Understanding before further settlement efforts, however. This led to the filing of the instant lawsuit in the district court, which was first filed by the minority shareholders as an action to enforce the Memorandum of Understanding and compel mediation or arbitration. The district court ruled, however, that the mediation had been properly terminated.
The parties then entered into the May 26, 2005 Arbitration Agreement under which the arbitration award now at issue was eventually made. Like the Memorandum of Understanding, the Arbitration Agreement contemplated an eventual buyout of the minority after the value of the minority's interest would have been determined. John Heald, who had been a director of ANI for some years, was named arbitrator, with all parties waiving any objection that he did not meet the American Arbitration Association's definition of a neutral arbitrator because of his history with the company and the parties. Proceedings in the district court were stayed on joint motion of the parties to permit the arbitration to go forward.
There were other disputes between the parties, or some of them at least, that were not directly related to ANI. Jack Youngs, the first named plaintiff/appellee, had other business dealings with Jack Behnken, and the Agreement recites that "controversies have also developed" between them regarding these other dealings, "which may include but not be limited to investment by each of them in entities or properties owned or controlled by the other." These other disputes are called the "Youngs/Behnken Controversy" in the Arbitration Agreement, which recites that Jack Youngs and Jack Behnken "desire to resolve" those matters in the arbitration procedure.
One of the issues raised on appeal by the majority shareholders is that the arbitrator failed to resolve the Youngs/Behnken Controversy. Thus, it is surprising that the majority's brief has nothing whatsoever to say about the content of the controversy. Our study of the record on the matter has not been very enlightening, a point to which we shall return. For now, we note only that appellants' appendix, which appears to contain all relevant material from the district court record, shows only a single document that was provided to the arbitrator that appears to relate to the Youngs/Behnken Controversy. It is a message from Jack Behnken to Jack Youngs, a copy of which was submitted to the arbitrator. IV Aplt.App. 1314. This document purports to summarize the outcome of the investments each of the two men made in ventures of the other. The document purports to show that three of five of Behnken's investments in Youngs' ventures resulted in losses to Behnken (the losses being substantially greater than the gains on the two profitable ventures), while Youngs' investments in Behnken's ventures all resulted in gains to Youngs. These matters date back to 1978, according to the document, with Behnken's largest reported loss (some $422,000) coming on an investment dated 1981-1983. The document also purports to show that Behnken lost about $125,000 in an investment in the years 1987-1988, and another $102,000 that was invested in the years 1994, 1996 and 2001. The record reveals nothing as to the nature of Mr. Behnken's potential claims against Mr. Youngs arising from these investment losses.
The arbitrator ultimately set a value of just over $7.5 million for the minority's interest in ANI. The arbitrator gave a brief written explanation for the method of valuation. He stated that ANI and Rocky Mountain Milling Co. were "inseparable in all respects" and that he had therefore included the four-year average of the full earnings of both companies in his calculations. He also included the four-year average rental income of Behnken Properties in order to recognize "the value associated with the transfer of property and plant to Behnken [P]roperties."
The parties filed competing motions in the district court, the minority moving to confirm the award and the majority moving to vacate it. The district court granted the motion to confirm, but with one necessary modification of the arbitrator's award.3 In a later order, the court granted pre-judgment and post-judgment interest to the plaintiff minority shareholders.
In the Arbitration Agreement, the parties stipulated to application of Utah law. On appeal, both parties cite to Utah law regarding the standard of review that this court should apply. We have found no significant differences between Utah law and federal law on the issues involved in this appeal. We thus have no occasion to grapple with questions about which law to apply, and we will cite to both state and federal authorities herein, assuming without deciding in each instance that it would make no difference if we were to consult state instead of federal law or vice-versa.4 We note in this regard that the Utah Supreme Court looks to federal caselaw for guidance because of the "nearly identical" provisions of the Federal Arbitration Act, while reserving the option to adopt a different construction. Buzas Baseball, Inc. v. Salt Lake Trappers, Inc., 925 P.2d 941, 947 n. 5 (Utah 1996).
Under Utah law "judicial review of arbitration awards should not be pervasive in scope ... but should be limited to the statutory grounds and procedures for review." Buzas Baseball, 925 P.2d at 947 (quoting De Vore v. IHC Hospitals, Inc., 884 P.2d 1246, 1251 (Utah 1994)). In general, a trial court should not disturb an arbitration award "because the court does not agree with the award as long as the proceeding was fair and honest and the substantial rights of the parties were respected." Id.
This is an extremely deferential standard. But "very limited grounds" for...
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