Jewel Of Kahana, LLC et al v. Donnelly et al
Filing
43
ORDER CONFIRMING ARBITRATION AWARD. Signed by JUDGE HELEN GILLMOR on 3/28/2013. ~ Petitioners Mark Donnelly, Chrissy Donnelly, and Hang 10 Investments, LLC's Statement of Relief Requested in Their Motion to Confirm in Part and V acate in Part Arbitration Award, filed on July 25, 2012 (ECF No. 30 ) is: GRANTED with respect to the Motion to Confirm the Arbitrators rulings that: (1) The Donnellys (Mark Donnelly, Chrissy Donnelly, and Hang 10 Investments, LLC) are the prevai ling parties against the JKL Parties (Jewel of Kahana, LLC, Meritage Investments, LLC, Aubery Family Limited Partnership, Jeff Aubery, Patty Aubery, James LeCron, Karen LeCron, Melinda Walsh, and Michael Walsh) on the Counterclaim; (2) The Donnellys (Mark Donnelly, Chrissy Donnelly, and Hang 10 Investments, LLC) are entitled to recover the award of attorneys' fees and costs related to the Counterclaim from the JKL Parties (Jewel of Kahana, LLC, Meritage Investments, LLC, Aubery Family Limi ted Partnership, Jeff Aubery, Patty Aubery, James LeCron, Karen LeCron, Melinda Walsh, and Michael Walsh), jointly and severally; and (3) The Donnellys (Mark Donnelly, Chrissy Donnelly, and Hang 10 Investments, LLC) shall recover from the JKL Parties (Jewel of Kahana, LLC, Meritage Investments, LLC, Aubery Family Limited Partnership, Jeff Aubery, Patty Aubery, James LeCron, Karen LeCron, Melinda Walsh, and Michael Walsh), jointly and severally, the total amount of $283,093.87, which include s: (a) $201,323.12 in attorneys' fees and $29,677.00 in costs, (b) $14,000.00 as and for American Arbitration Association fees incurred by the Donnellys (Mark Donnelly, Chrissy Donnelly, and Hang 10 Investments, LLC) up to and inc luding November 30, 2010, and (c) $38,093.75, as and for ADR Services, Inc. fees and costs up to and including November 30, 2012; and DENIED with respect to the Motion to Vacate the Arbitrator's ruling related to the valuation of the Donnel lys' interest in Jewel of Kahana, LLC..Respondents Jewel of Kahana, LLC, Meritage Investments, LLC, Aubery Family Limited Partnership, Jeff Aubery, Patty Aubery, James LeCron, Karen LeCron, Melinda Walsh, and Michael Walsh'sMotion to Vacat e in Part Arbitration Award (ECF No. 31 ) is DENIED. The Clerk of the Court is directed to enter a Final Judgment, incorporating and confirming the Arbitrator's Final Order, issued on February 13, 2012 and served on May 16, 2012, and close the case. Associated Cases: 1:12-cv-00347-HG-KSC, 1:12-cv-00419-HG-KSC(ecs, )CERTIFICATE OF SERVICEParticipants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications were served by first class mail on the date of this docket entry
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
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Petitioners,
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vs.
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JEWEL OF KAHANA, LLC, MERITAGE )
INVESTMENTS, LCC, AUBERY FAMILY )
LIMITED PARTNERSHIP, JEFF
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AUBERY, PATTY AUBERY, JAMES
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LECRON, KAREN LECRON, MELINDA
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WALSH, and MICHAEL WALSH,
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Respondents.
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JEWEL OF KAHANA, LLC, MERITAGE )
INVESTMENTS, LCC, AUBERY FAMILY )
LIMITED PARTNERSHIP, JEFF
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AUBERY, PATTY AUBERY, JAMES
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LECRON, KAREN LECRON, MELINDA
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WALSH, and MICHAEL WALSH,
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Cross-Petitioners,
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vs.
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MARK DONNELLY, CHRISSY
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DONNELLY, and HANG 10
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INVESTMENTS, LLC,
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Cross-Respondents.
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MARK DONNELLY, CHRISSY
DONNELLY, and HANG 10
INVESTMENTS, LLC,
Civ. Nos. 12-00347 HG-KSC
(CONSOLIDATED)12-00419 HG-KSC
ORDER CONFIRMING ARBITRATION AWARD
1
The Arbitration decision before the Court, No. 73 180 Y
34087 08, arose from Petitioners/Cross-Respondents involuntary
dissociation from the Jewel of Kahana, LLC, a company developing
a property in Maui. The Parties dispute various aspects of the
Arbitration Award. The matter comes before the Court on the basis
of federal diversity jurisdiction.
Petitioners/Cross-Respondents Mark Donnelly, Chrissy
Donnelly, and Hang 10 Investments, LLC (collectively “the
Donnellys”) filed a demand for arbitration against
Respondents/Cross-Petitioners Jewel of Kahana, LLC and its
Managers and Members, (collectively “the JKL Parties”), primarily
to determine the value of the Donnellys’ share in the Jewel of
Kahana, LLC.
The JKL Parties filed a Counterclaim against the Donnellys
for breach of fiduciary duties.
The Arbitrator determined that the value of the Donnellys’
share in the Jewel of Kahana, LLC was zero dollars. The
Arbitrator held that the Counterclaim did not involve a breach of
fiduciary duty. The Donnellys were awarded attorneys’ fees and
costs on the Counterclaim, for which the JKL Parties
were held
to be jointly and severally liable.
The Donnellys move to confirm in part and vacate in part the
Arbitration Award. (ECF No. 30.) They seek to confirm the
2
Arbitrator’s rulings on the Counterclaim and vacate portions of
the Arbitrator’s rulings on the valuation issue.
The JKL Parties move to vacate a portion of the Arbitration
Award. They seek to vacate the ruling that the individual
Managers and Members of the Jewel of Kahana, LLC are jointly and
severally liable for the judgment on the Counterclaim and the
ruling that there was no prevailing party on the valuation issue.
(ECF No. 31.)
The Donnellys’ Motion to Confirm in Part and Vacate in Part
the Arbitration Award (ECF No. 30) is GRANTED with respect to the
Motion to Confirm, and DENIED with respect to the Motion to
Vacate.
The JKL Parties’ Motion to Vacate in Part Arbitration Award
(ECF No. 31) is DENIED.
The Arbitration Award is CONFIRMED.
PROCEDURAL HISTORY
On October 14, 2008 Petitioners/Cross-Respondents Mark
Donnelly, Chrissy Donnelly, and Hang 10 Investments, LLC
(collectively “the Donnellys” or “Petitioners”) submitted a
demand for arbitration to the American Arbitration Association,
Arbitration No. 73 180 Y 34087 08, regarding the valuation of the
3
Donnellys’ interest in the Jewel of Kahana, LLC. (Petitioners’
Mot. Ex. B, ECF No. 30.)
On January 5, 2009, Respondents/Cross-Petitioners Jewel of
Kahana, LLC, Meritage Investments, LLC, Aubery Family Limited
Partnership, Jeff Aubery, Patty Aubery, James LeCron, Karen
LeCron, Melinda Walsh, and Michael Walsh (collectively “the JKL
Parties” or “Respondents”) filed a Counterclaim, alleging various
breaches of the fiduciary duty owed to the Jewel of Kahana, LLC
and its Managers and Members. (Petitioners’ Mot. Ex. A, ECF No.
30.) On November 30, 2009, the Arbitrator issued an Interim
Binding Arbitration Award on the Counterclaim, finding that the
Donnellys had not breached their fiduciary duties under Hawaii
law. (Respondents’ Mot. Ex. 9, ECF No. 31.)
On August 16, 2011, the Arbitrator issued a subsequent
Interim Binding Arbitration Award on the Counterclaim and the
valuation issue.1 (Petitioners’ Mot. Ex. D, ECF No. 30)
On January 27, 2012, the Arbitration was suspended due to
non-payment of arbitration fees. (Respondents’ Mot. Ex. 27, ECF
No. 31.)
1
The JKL Parties provided an earlier version of the
Award, dated August 12, 2011, entitled Final Binding Arbitration
Award. (Respondents’ Mot. Ex. 22). The earlier version does not
include two amendments requested by the American Arbitration
Association that are reflected in the August 16, 2011 Award,
entitled Interim Binding Arbitration Award. (Petitioners’ Mot.
Ex. J). The August 16, 2011 Award includes a statement about
arbitration fees and bears the title Interim Binding Arbitration
Award.
4
On February 13, 2012, the Arbitrator issued the Arbitrator’s
Final Order. (Petitioners’ Mot. Ex. H, ECF No. 30.)
On May 16, 2012, the Parties were served with the
Arbitrator’s Final Order. The service of the Final Order, issued
on February 13, 2012, was delayed until the suspension of the
arbitration for non-payment of arbitration fees was lifted.
(Respondents’ Mot. Ex. 28, ECF No. 31.)
On May 31, 2012, the JKL Parties filed a Motion to Vacate
the Arbitrator’s Final Order in the Second Circuit Court of the
State of Hawaii. (Notice of Removal Ex. 1, ECF No. 1.)
On June 19, 2012, the Donnellys removed the action to
Federal District Court, Case No. 12-00347-HG-KSC. (Id.)
On July 25, 2012, the Donnellys filed a separate action in
Federal District Court, Case No. 12-00419-HG-KSC, moving to
confirm in part and vacate in part the Arbitration Award.
On August 2, 2012, the two actions were consolidated. All
subsequent filings were required to be filed in Case No. 1200347-HG-KSC. (ECF No. 12.)
On October 17, 2012, a Status Conference was held regarding
the consolidated actions. The Donnellys were ordered to file a
Motion setting forth their request for relief and legal
objections to the JKL Parties’ position. The JKL Parties were
ordered to file their response to the Donnellys’ Motion, which
5
they entitled “Respondents’ Motion to Vacate in Part Arbitration
Award.” The Parties were permitted to file a Reply. (ECF No. 28.)
On October 31, 2012, the Donnellys filed a Motion to Confirm
in Part and Vacate in Part the Arbitration Award. (ECF No. 30.)
On November 19, 2012, the JKL Parties filed a Motion to
Vacate in Part the Arbitration Award. (ECF No. 31.)
On December 4, 2012, the Donnellys filed a Reply. (ECF No.
33.)
A Hearing Date on the Pending Arbitration Motions (ECF Nos.
30 and 31) was set for February 15, 2013.
After the matter had been fully briefed, nine days prior to
the hearing, on February 6, 2013, Margery S. Bronster, Counsel
for the JKL Parties, filed a Motion to Withdraw as Attorney and
to Continue the Hearing on the Pending Arbitration Motions. (ECF
No. 36.)
On February 11, 2013, the Court held a hearing on Ms.
Bronster’s Motion to Withdraw as Attorney for the JKL Parties and
to Continue the Hearing set for February 15, 2013 (ECF No. 36).
The Court denied the Motion to Withdraw and the Motion to
Continue. The Court elected to decide the Pending Arbitration
Motions without a hearing, pursuant to Local Rule 7.2(d). (ECF
No. 41.)
On February 21, 2013, the attorneys for the JKL Parties
filed a Statement indicating their agreement with the Court’s
6
decision to decide the Pending Arbitration Motions without a
hearing, given that all briefing had been completed. (ECF No.
42.)
BACKGROUND
Jewel of Kahana, LLC
Jewel of Kahana, LLC is a Hawaii Limited Liability Company,
which was created in early 2005 for the purpose of acquiring,
developing, and selling property. (Respondents’ Mot. Ex. 1,
Operating Agreement §§ 1.1, 1.3, ECF No. 31.)
On April 22, 2005, the Jewel of Kahana, LLC purchased real
property in Lahaina, Hawaii (“Jewel of Kahana, LLC Real
Property”), with the intention of developing a luxury singlefamily residence.
The Jewel of Kahana, LLC Members had previously purchased
another property on Maui, Kahana Paradise, also with the
intention of developing a high-end residential property.
The Jewel of Kahana, LLC Members were:
•
Hang 10 Investments, LLC (managed by Chrissy and Mark
Donnelly),
•
Meritage Investments, LLC (managed by Melinda and
Michael Walsh),
7
•
Aubery Family Limited Partnership (managed by Jeff and
Patty Aubery),
•
and James and Karen LeCron.
The Managers of the Jewel of Kahana, LLC were Chrissy and Mark
Donnelly, Melinda and Michael Walsh, Jeff and Patty Aubery, and
James and Karen LeCron. (Operating Agreement at Ex. A, ECF No.
30.)
The Donnellys’ Dissociation from the Jewel of Kahana, LLC
The development of the Jewel of Kahana, LLC Real Property,
as well as the Kahana Paradise Property, suffered from
significant set backs.
(Petitioners’ Mot. Ex. D, Interim Binding
Arb. Award at 2, Aug. 16, 2011, ECF No. 30.) According to the
Pleadings, the development of the properties fell behind schedule
and created major financial problems for the Jewel of Kahana, LLC
Members.
The Donnellys began loaning funds from the Kahana Paradise
Project to the Jewel of Kahana, LLC Project to help cover the
Jewel of Kahana, LLC’s accruing bills. The other Jewel of Kahana,
LLC Members began to question the Donnellys’ financial
transactions. (Id.)
On July 30, 2008, the Jewel of Kahana, LLC Members voted to
remove the Donnellys as Officers and Managers of the Jewel of
Kahana, LLC. The Jewel of Kahana, LLC Operating Agreement permits
8
removal of managers without cause, § 5.7, and the removal of
officers if the Board determines that the removal will serve the
best interests of the Company, § 5.17.3. The Donnellys were
dissociated from the Jewel of Kahana, LLC allegedly for cause.
(Respondents’ Mot. Ex. 2, ECF No. 31.)
Upon their dissociation, the Donnellys possessed the right
to receive a withdrawal distribution, valued according to a
Formula set forth in the Operating Agreement. (Operating
Agreement § 7.11, Ex. B, ECF No. 30.)
The Arbitration
Pursuant to the Operating Agreement § 12.1.2, providing for
the arbitration of disputes, on October 14, 2008, Chrissy
Donnelly, Mark, Donnelly, and Hang 10 Investments, LLC
(collectively “the Donnellys” or “Petitioners”) filed a Demand
for Arbitration with the American Arbitration Association.
(Petitioners’ Mot. Ex. B, ECF No. 30.) The Donnellys sought the
valuation of their interest in the Jewel of Kahana, LLC, as of
July 30, 2008, the date of their involuntary dissociation. They
also sought attorneys’ fees, interest, arbitration costs, and
punitive and exemplary damages. The Jewel of Kahana, LLC and its
remaining Managers and Members (Meritage Investments, LLC, Aubery
Family Limited Partnership, Jeff Aubery, Patty Aubery, James
Lecron, Karen Lecron, Melinda Walsh, and Michael Walsh),
9
(collectively “the JKL Parties” or “Respondents”), were named as
Respondents. The Donnellys ultimately waived their claims for
damages. (Petitioners’ Mot. Ex. C, Interim Binding Arb. Award at
¶ 5, Nov. 30, 2009, ECF No. 30.)
On January 5, 2009, the Jewel of Kahana, LLC and each of its
individual Managers and Members, filed a Counterclaim, alleging
that the Donnellys breached their fiduciary duty. (Petitioners’
Mot. Ex. A, ECF No. 30.)
The Arbitrator bifurcated the proceedings and addressed the
Counterclaim first.
Phase One: Arbitration of The Counterclaim
The Arbitrator issued an Interim Binding Arbitration Award
on November 30, 2009 on the Counterclaim, finding that the
Donnellys had not breached their fiduciary duty under Hawaii law.
(Petitioners’ Mot. Ex. C, ECF No. 30.)
Phase Two: Valuation of the Donnellys’ Interest in the Jewel of
Kahana, LLC
The second phase, concerning the valuation of the Donnellys’
interest in the Jewel of Kahana, LLC, took place over
approximately three years. The Operating Agreement that the
Parties had set up when they entered into their business contains
a “Formula for Determining the Purchase Price of a Member’s
Interest.” The Arbitrator entered various Orders implementing the
10
Valuation Formula. (See Petitioners’ Mot. Ex. D, Arb. Award at
43-45, Aug. 16, 2011, ECF No. 30 (providing an overview of the
valuation process); Respondents’ Mot. Exs. 12, 16, 18, 20-21, ECF
No. 31 (Arbitrator’s various e-mailed rulings on the valuation
procedure, spanning from Dec. 29, 2009 through Jun. 20, 2011).)
The Arbitrator determined that the Valuation Formula did not
require an evidentiary hearing. (Id.)
The Arbitration Award
On August 16, 2011, the Arbitrator issued an Interim Binding
Arbitration Award on the Counterclaim and valuation issue.
(Petitioners’ Mot. Ex. D, ECF No. 30.) The Donnellys’ share in
the Jewel of Kahana, LLC was found to have no value.
The August 16, 2011 Arbitration Award ruled that the
Donnellys prevailed on the Counterclaim and were entitled to
related attorneys’ fees and costs. The Award specified that a
Final Order would issue regarding the exact amount of fees and
costs awarded on the Counterclaim. The Arbitrator found that
there was no prevailing party on the valuation issue, because the
valuation was governed by the formula in the Operating Agreement.
The Arbitrator held that the process of following the steps to
determine valuation, as contained in the Operating Agreement, was
not litigation on the valuation issue. (Id. at 46.)
The Arbitrator issued a Final Order on February 13, 2012,
which was not served on the Parties until May 16, 2012.
11
(Respondents’ Mot. Ex. 28, ECF No. 31.) The delay was due to the
non-payment of fees owed for the Arbitrator’s services.
(Respondents’ Mot. Ex. 27, ECF No. 31.)
The Final Order included, in relevant part, the following
rulings:
•
The Donnellys are the prevailing party against the JKL
Parties on the Counterclaim and are entitled to recover
their attorneys’ fees and costs related to the
Counterclaim.
•
The Jewel of Kahana, LLC, and its Individual Members
and Managers, are jointly and severally liable for a
total of $283,093.87 for attorneys’ fees and costs
related to the Counterclaim, incurred up to and
including November 30, 2010.
•
The Donnellys’ request for an evidentiary hearing
regarding the value of the Jewel of Kahana, LLC or its
Real Property is denied.
•
There was no prevailing party on the valuation issue
because the value of the withdrawal distribution was
governed by the Valuation Formula in the Operating
Agreement. There was no litigation of the valuation
issue. The fact that the Donnellys’ share is worth
$0.00 does not make the JKL Parties the prevailing
12
party. The Donnellys prevailed on the only dispute
litigated.
(Respondents’ Mot. Ex. 28, Feb, 13, 2012, ECF No. 31.)
The Donnellys’ Motion to Vacate in Part and Confirm in Part
The Donnellys seek to vacate the Arbitration rulings
(1) valuing their share in the Jewel of Kahana, LLC at zero
dollars and (2) denying their request for an evidentiary hearing
on the valuation. The Donnellys contend that the valuation
process violated arbitration law and the terms of the Operating
Agreement. (Petitioners’ Mem. Supp. Mot. at 22-33, ECF No. 30.)
The Donnellys seek to confirm the Arbitration rulings on the
Counterclaim that the Donnellys did not breach any fiduciary duty
and that the JKL Parties are jointly and severally liable for
$283,093.97 in attorneys’ fees and costs. Once the rulings are
confirmed, they request an entry of final judgment, pursuant to
the Federal Arbitration Act, 9 U.S.C. § 13. (Id. at 14-22.)
The JKL Parties’ Motion to Vacate in Part
The JKL Parties seek to vacate the Arbitrator’s rulings
(1) finding the Jewel of Kahana, LCC and its individual Members
and Managers liable for the attorneys’ fees and costs on the
Counterclaim and (2) finding that there was no prevailing party
13
on the valuation issue. (Respondents’ Mem. Supp. Mot. at 3, 1324, 29-31.)
The JKL Parties claim that the Award against the Jewel of
Kahana, LLC’s Members and Managers, in their individual
capacities, violates Hawaii law and the terms of the Operating
Agreement. The JKL Parties claim that they are entitled to
attorneys’ fees and costs, as the “prevailing party” on the
valuation issue.
LEGAL STANDARDS
The Parties have the ability to choose an applicable legal
standard in an arbitration agreement. Fid. Fed. Bank, FSB v.
Durga Ma Corp., 386 F.3d 1306, 1312 (9th Cir. 2004). Parties may
choose which law governs the contract, the arbitration, and
review of an arbitration award. See id. The parties’ choice of
law, however, is subject to some limitations. Hall St.
Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 586 (2008).
Private parties cannot, for instance, create their own standard
for confirming or vacating an arbitration award. Id.
Substantive Law
The Jewel of Kahana, LLC Operating Agreement’s General
Choice-of-law Clause provides: “This Agreement will be governed
14
by and construed according to the laws of the State of Hawaii
without regard to conflicts of law principles . . . .”
(Respondents’ Mot. Ex. 1, Operating Agreement § 11.5, ECF No.
31.)
The Parties agree that Hawaii state substantive law governs
disputes arising from the Operating Agreement, including
interpretation of the Operating Agreement itself. The Arbitrator
properly interpreted the Operating Agreement and determined the
substantive issues before him, pursuant to Hawaii law.
Choice of Rules to Govern Arbitration
The Jewel of Kahana, LLC Operating Agreement’s Arbitration
Clause § 12.1.2 provides that disputes arising from the Operating
Agreement that cannot be resolved by mediation, shall be settled
through arbitration. The Donnellys submitted the Demand for
Arbitration to the American Arbitration Association (“AAA”) in
California, in accordance with the Operating Agreement’s
Arbitration Clause. (Petitioners’ Mot. Ex. B, ECF No. 30.)
Parties to an agreement may elect which procedural rules
shall govern an arbitration, as well as the confirmation or
vacatur process of an arbitration award. Fid. Fed. Bank, FSB.,
386 F.3d at 1312. The agreement must manifest a clear and
unambiguous intent to elect particular procedural rules for
arbitration. A contract’s general choice-of-law clause is not
15
sufficient to establish a clear intent to elect particular
arbitration rules. Fid. Fed. Bank, 386 F.3d at 1312. The contract
must specifically state what rules or law shall be utilized to
conduct the arbitration.
In the absence of the parties’ clear intent to elect
particular rules for arbitration, the decisions of the Ninth
Circuit Court of Appeals provide a strong presumption that the
Federal Arbitration Act applies. The Federal Arbitration Act
(“FAA”), 9 U.S.C. §§ 9 through 11, supplies the rules for both
arbitration and the confirmation or vacatur of an arbitration
award. Johnson v. Gruma Corp., 614 F.3d 1062, 1066-67 (9th Cir.
2010); Fid. Fed. Bank, FSB, 386 F.3d at 1311.
The Operating Agreement contains an Arbitration Clause,
which provides for the rules governing Arbitration, as follows:
The arbitrator shall conduct all proceedings
pursuant to the then existing Commercial
Arbitration Rules of the AAA, to the extent
such rules are not inconsistent with the
provisions of this Article XII. The Uniform
Rules of Procedure for Arbitration shall not
apply to any arbitration proceeding relating
to the subject matter or terms of the
documents.
(Operating Agreement § 12.1.2.)
The Parties agree that the Operating Agreement manifests a
clear intent that the American Arbitration Association’s
Commercial Arbitration Rules govern the Arbitration proceedings.
The Arbitration properly relied on the American Arbitration
16
Association’s Commercial Arbitration Rules. (See Respondents’
Mot. Ex. 27, Order to Suspend the Arbitration Proceedings, Jan.
26, 2012, ECF No. 31.)
Standard Governing Judicial Review of an Arbitration Award
The Parties disagree as to what law the Court should look to
in deciding the Motions before it. The JKL Parties contend that
the Operating Agreement’s General Choice-of-law Clause evinces
the Parties’ clear intent that the Hawaii Arbitration Act should
provide the standard for vacatur or confirmation of an
arbitration award. (Respondents’ Mem. Supp. Mot. at 14-15, ECF
No. 31.) The Donnellys assert that the General Choice-of-law
Clause only evinces a clear intent to have Hawaii substantive law
govern the interpretation of the Operating Agreement and the
substantive disputes. They contend the Federal Arbitration Act
should provide the standard for judicial review, because the
Operating Agreement does not state a clear intent to the
contrary. (Petitioners’ Mem. Supp. Mot. at 13-14, ECF No. 30.)
The Court agrees with the Donnellys’ position.
The Federal Arbitration Act (“FAA”) provides the default
standard for judicial review of an arbitration award, when a
contract does not evince a clear intent to incorporate some other
standard. Johnson, 614 F.3d at 1066; Metzler Contracting Co. LLC
17
v. Stephens, 774 F. Supp. 2d 1073, 1077 (D. Haw. 2011) aff'd, 479
F.App’x 783 (9th Cir. 2012).
In Johnson v. Gruma Corp., 614 F.3d 1062 (9th Cir. 2010),
the Ninth Circuit Court of Appeals held that the state standard
governed judicial review of an arbitration award. The contract in
Johnson evinced a clear intent to incorporate the state standard
by specifying that the arbitration was to be “conducted and was
subject to enforcement pursuant to the California Arbitration
Act, or other applicable law.” The language of the contract there
overcame the presumptive application of the FAA standard for the
motion to vacate. Id. at 1066-67. There is no language in the
Operating Agreement here that mentions a choice of law with
respect to enforcement of the Arbitration Decision.
A contract’s general choice-of-law clause, such as we have
in the case before the Court here, cannot establish a clear
intent to incorporate a standard for confirmation or vacatur.
Fid. Fed. Bank, 386 F.3d at 1312. In Fidelity Federal Bank, 383
F.3d 1306, a contract provided for arbitration “in accordance
with the laws of . . . California and the rules of the American
Arbitration Society.” 386 F.3d at 1308. The Ninth Circuit Court
of Appeals held that the contract elected California state
substantive law, but did not overcome the presumption that the
FAA provided the standard for the motion to vacate. Id. at 1312.
Similarly, in Metzler, 774 F.Supp.2d at 1078, a contract’s
18
choice-of-law clause stated that disputes should be governed by
Hawaii law and that arbitration should be conducted in accordance
American Arbitration Association’s Construction Industry
Arbitration Rules. The Hawaii Federal District Court held that
the FAA governed the judicial review of the arbitration award and
Hawaii law governed the substantive dispute. Id.
The Jewel of Kahana, LLC Operating Agreement provides
limited guidance for enforcement of an arbitration award. It
states: “Judgment to enforce the decision of the arbitrator,
whether for legal or equitable relief, may be entered in any
court having jurisdiction thereof.” (Operating Agreement §
12.1.2.) The Operating Agreement does not specify the standard a
court should apply in reviewing an arbitration award.
The Jewel of Kahana, LLC’s Operating Agreement is similar to
the contracts in Fidelity Federal Bank and Metzler. It does not
evince a clear intent to elect a certain standard for a motion to
confirm or vacate an arbitration award. The Operating Agreement’s
General Choice-of-law clause does not establish that the Court’s
review of the Arbitration Award should be governed by the Hawaii
Arbitration Act.
Although the Operating Agreement requires that the
arbitration proceedings be conducted, pursuant to the American
Arbitration Association’s Commercial Arbitration Rules, those
Rules do not address judicial review of an arbitration ruling.
19
See American Arbitration Association, Commercial Arbitration
Rules, R-48(c)(Jun. 2009)(“Parties to an arbitration under these
rules shall be deemed to have consented that judgment upon the
arbitration award may be entered in any federal or state court
having jurisdiction thereof.”); see also Metzler, 774 F.Supp.2d
at 1077-78 (American Arbitration Association’s Construction
Industry Arbitration Rules, containing the same relevant
provision as the Commercial Arbitration Rules, does not evince an
intent to use state over federal arbitration rules in a motion to
confirm or vacate).
The Jewel of Kahana, LLC Operating Agreement does not evince
a clear intent to overcome the presumption favoring the FAA
standard for judicial review of an arbitration decision. The
Court looks to the FAA standard for confirming or vacating the
Arbitration Award.
The Federal Arbitration Act’s Standard for Confirming and
Vacating an Arbitration Award
The Federal Arbitration Act (“FAA”) promotes a national
policy favoring arbitration. Hall St. Assocs., L.L.C. v. Mattel,
Inc., 552 U.S. 576, 583-84 (2008). Arbitration is favored for its
ability to respond to the parties’ wishes. Kyocera, 341 F.3d at
998. Arbitration offers greater flexibly and speed than
litigating, and is considered to be more cost-effective. Id.
20
Judicial review of an arbitration award, under the FAA, is
strictly limited, in order to prevent unnecessary public
intrusion into private arbitration procedures. Id. The
limitations on judicial review are designed to preserve due
process, without undermining the benefits of arbitration, by
rendering it “merely a prelude to a more cumbersome and timeconsuming judicial review process.” Hall, 552 U.S. at 587
(quoting Kyocera, 341 F.3d at 998).
Under the FAA, the Court must confirm an arbitration award
unless it is vacated, corrected, or modified. See 9 U.S.C. § 9.
An arbitration award may be vacated under the FAA, pursuant
to the standards set forth in 9 U.S.C. § 10(a):
(1) where the award was procured by corruption, fraud, or
undue means;
(2) where there was evident partiality or corruption in the
arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in
refusing to postpone the hearing, upon sufficient cause
shown, or in refusing to hear evidence pertinent and
material to the controversy; or of any other misbehavior by
which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so
imperfectly executed them that a mutual, final, and definite
award upon the subject matter submitted was not made.
9 U.S.C. § 10(a).
Section 10 of the FAA, which provides the exclusive means
for reviewing an arbitration award under the FAA, establishes a
“high hurdle” for vacatur. See Stolt-Nielsen S.A. v. AnimalFeeds
21
Int’l Corp., 559 U.S. 662, 667 (2010); Biller v. Toyota Motor
Corp., 668 F.3d 655, 664 (9th Cir. 2012). A merits review of an
arbitration award is outside a court’s authority, under the FAA.
An arbitrator’s error in determining the merits of a dispute is
not grounds for vacatur. Biller, 668 F.3d at 664.
If an award is not vacated, pursuant to § 10 of the FAA, or
modified, pursuant to § 11 (allowing modification for
miscalculations or imperfection of form, which are not at issue
here), confirmation is required, even if the award contains
erroneous findings of fact or misinterpretations of law. See
Lagstein v. Certain Underwriters at Lloyd's, London, 607 F.3d
634, 640 (9th Cir. 2010).
Use of the Hawaii Arbitration Law for Enforcement
The Court finds that use of the Hawaii Arbitration Act as
the standard for review would not change the results here. The
FAA and Hawaii standards for judicial review are nearly
identical. Metzler, 774 F.Supp.2d at 1077. The Hawaii statute
provides, in relevant part, that an arbitration award may be
vacated if:
(1)
The award was procured by corruption, fraud, or other
undue means;
(2)
There was:
(A)
Evident partiality by an arbitrator appointed as a
neutral arbitrator;
22
(B)
Corruption by an arbitrator; or
©
Misconduct by an arbitrator prejudicing the rights
of a party to the arbitration proceeding;
(3)
An arbitrator refused to postpone the hearing upon
showing of sufficient cause for postponement, refused
to consider evidence material to the controversy, or
otherwise conducted the hearing . . . so as to
prejudice substantially the rights of a party to the
arbitration proceeding;
(4)
An arbitrator exceeded the arbitrator's powers;
(5)
There was no agreement to arbitrate, unless the person
participated in the arbitration proceeding without
raising the objection . . . .
Haw. Rev. Stat. § 658A-23(a).
The Hawaii Arbitration Act requires a showing of
“substantial prejudice,” and the FAA requires a showing of
“prejudice.” The allegations of the Parties here withstand a
motion for vacatur under either standard. Howard Fields &
Associates v. Grand Wailea Co., 848 F.Supp. 890, 895 (D. Haw.
1993); Tatibouet v. Ellsworth, 54 P.3d 397, 406 n.7 (Haw.
2002)(using Ninth Circuit case law interpreting the terms of the
FAA to interpret the same terms in the Hawaii Arbitration Act).
23
ANALYSIS
I.
THE DONNELLYS’ MOTION TO VACATE THE ARBITRATOR’S RULINGS
THAT RESULTED IN THE ZERO-DOLLAR VALUATION OF THEIR INTEREST
IN THE JEWEL OF KAHANA, LCC
Petitioners Mark Donnelly, Chrissy Donnelly, and Hang 10
Investments, LLC (collectively “the Donnellys” or “Petitioners”)
seek to vacate the Arbitrator’s rulings that resulted in the
zero-dollar valuation of the Donnellys’ interest in the Jewel of
Kahana, LLC. The Donnellys seek to overturn the following rulings
in the August 16, 2011 Arbitration Award and the February 13,
2012 Final Order, pursuant to the Federal Arbitration Act, 9
U.S.C. §§ 10(a)(3) and 10(a)(4): the findings of (1) the value of
the Jewel of Kahana, LLC Real Property in Lahaina, Hawaii, at the
time of the Donnelly’s dissociation, was $6,240,000; (2) the
value of the Donnellys’ interest in the Jewel of Kahana, LLC, at
the time of their dissociation, was zero dollars; and (3) the
Donnellys are not entitled to an evidentiary hearing on the
valuation issue. (Petitioners’ Mem. Supp. Mot. at 22-33, ECF No.
30.)
A.
The Jewel of Kahana, LLC’s Operating Agreement’s
Formula for Determining the Value of a Member’s
Withdrawal Distribution
The Jewel of Kahana, LLC Operating Agreement provides that a
Withdrawn Member has the right to receive a withdrawal
24
distribution, the value of which is to be established by the
Valuation Formula set forth in the Operating Agreement.
(Petitioners’ Mot. Ex. B, Operating Agreement § 7.11, ECF No.
30.)
The Valuation Formula in the Operating Agreement provides
that the value of a member’s interest will be “determined by an
appraiser experienced in valuing businesses similar to that of
the Company, jointly selected by the Company and [the Withdrawn
Member] . . . .”
(Operating Agreement at Ex. B.) If the
Withdrawn Member and the Company cannot agree on one appraiser,
each shall select its own, and the two appraisers shall attempt
to reconcile their valuations to a single valuation. If the two
appraisers are not able to agree on a single valuation, the two
shall jointly appoint a third appraiser to value the Withdrawn
Member’s interest. If the three appraisers cannot reconcile their
valuations to arrive at a single valuation, the middle of the
three appraisals shall be used as the valuation of the Withdrawn
Member’s interest. (Id.)
B.
The Arbitration’s Zero-Dollar Valuation of the
Donnellys’ Withdrawal Distribution
The Arbitrator correctly implemented the Valuation Formula
in the Operating Agreement to determine the value of the
25
Donnellys’ interest in the Jewel of Kahana, LLC at the time of
their dissociation.
The Donnellys and the JKL Parties, unable to agree on one
appraiser, each hired a real estate appraiser and business
appraiser. (Petitioners’ Mot. Ex. D, Arb. Award at 43-45, Aug,
16, 2011, ECF No. 30.) The Parties’ real estate appraisers could
not agree on a single valuation for the Jewel of Kahana, LLC Real
Property, nor could the business appraisers agree as to the value
of the Donnellys’ interest in the Jewel of Kahana, LLC at the
time of their dissociation. (Id.)
The disagreements led to a neutral real estate appraiser and
a neutral business appraiser being selected.
The neutral real estate appraiser independently determined
the value of the Jewel of Kahana, LLC Real Property at the time
of the Donnellys’ dissociation. The neutral real estate appraiser
then met with the Parties’ real estate appraisers. They attempted
to reconcile their valuations of the Jewel of Kahana, LLC Real
Property, but were unable to do so. Based on the Operating
Agreement’s Valuation Formula (Operating Agreement Ex. B), the
middle number, $6,240,000, was submitted to the neutral business
appraiser as the value of the Jewel of Kahana, LLC Real Property.
(Petitioners’ Mot. Ex. D, Arb. Award at 43-45, Aug, 16, 2011, ECF
No. 30.)
26
The neutral business appraiser independently determined the
value of the Donnelly’s interest in the Jewel of Kahana, LLC at
the time of their dissociation. The neutral business appraiser
and the Parties’ business appraisers met, but could not agree on
a single valuation for the Donnellys’ interest in the Jewel of
Kahana, LLC. Once again, it was necessary to use the middle
valuation, as required by the Valuation Formula in the Operating
Agreement. (Id.)
The neutral business appraiser and the JKL Parties’ business
appraiser both determined that the Donnelly’s interest at the
time of their dissociation was zero dollars. Both the neutral
business appraiser and the JKL Parties’ business appraiser
determined that the Jewel of Kahana, LLC’s liabilities exceeded
its assets by over $300,000. The Donnellys’ business appraiser
valued the Donnellys’ interest at $4,406,000. (Id.)
The middle number was used, resulting in a zero-dollar
valuation of the Donnellys’ interest in the Jewel of Kahana, LLC
at the time of their dissociation. (Id.)
The Parties were then allowed to submit briefing on
outstanding issues. The Donnellys claim that they were entitled
to an evidentiary hearing on the value of the Jewel of Kahana,
LLC or the underlying the Jewel of Kahana, LLC Real Property at
the time of their dissociation. The JKL Parties agree with the
27
Arbitrator’s reliance on the fact that the Operating Agreement
did not provide for such a hearing. (Id.)
The Arbitrator denied the Donnellys’ request for an
evidentiary hearing on the valuation issue. The Arbitrator ruled
that the Operating Agreement’s Valuation Formula requires that
“the value of the Donnellys’ share in the Company must be
determined by an appraiser (not the Arbitrator).” The Valuation
Formula does not provide for an evidentiary hearing. Instead, it
specifically requires that, in the event that the appraisers
cannot reconcile their valuations, the middle of the three
appraisals must be used as the value. (Petitioners’ Mot. Ex. D,
Arb. Award at 43-45, Aug, 16, 2011, ECF No. 30.)
C.
The Arbitrator Properly Determined the Value of the
Donnellys’ Interest in the Jewel of Kahana, LLC
The Donnellys claim that the Arbitrator’s rulings must be
vacated, pursuant to the Federal Arbitration Act, 9 U.S.C.
§ 10(a), because the Arbitrator exceeded his powers and was
guilty of misconduct that prejudiced the Donnellys’ rights.
(Petitioners’ Mem. Supp. Mot. at 23-33, ECF No. 30.)
28
1.
The Arbitrator Acted Within The Scope of His
Authority in Interpreting and Implementing the
Operating Agreement’s Valuation Formula
The Donnellys claim that the Arbitrator’s procedure for
valuing the underlying the Jewel of Kahana, LLC Real Property,
including the denial of their request for an evidentiary hearing,
was “completely irrational” because it violated the plain terms
of the Operating Agreement’s Valuation Formula.
Once the Donnellys filed the Demand for Arbitration, the
Arbitrator possessed authority to determine the value of the
Donnellys’ withdrawal distribution, in compliance with the
Operating Agreement’s Valuation Formula. The Valuation Formula
provides the procedure for determining the final valuation of a
withdrawing member’s interest in the Jewel of Kahana, LLC.
An arbitrator exceeds his powers, requiring vacatur, only if
the arbitrator’s decision “exhibits a manifest disregard of the
law” or is “completely irrational.” Kyocera Corp. v. PrudentialBache Trade Serv., Inc., 341 F.3d 987, 997 (9th Cir. 2003)(en
banc), cert. denied, 130 S.Ct. 1522 (2010). Absent “manifest
disregard of the law” or “complete irrationality,” neither
erroneous legal conclusions nor unsubstantiated factual findings,
provide grounds for vacating an arbitrator’s ruling, even when
such errors are serious. Id.; Biller, 668 F.3d at 662.
A decision “exhibits a manifest disregard of the law” when
the arbitrator clearly recognizes applicable law and then ignores
29
it. Biller, 668 F.3d at 665. The law must be “well defined,
explicit, and clearly applicable.” Collins v. D.R. Horton, Inc.,
505 F.3d 874, 879-80 (9th Cir. 2007). An arbitrator’s error in
the law or failure to understand and apply the law does not
constitute manifest disregard. Id.
The “completely irrational” standard generally applies in
the context of an arbitrator’s contract interpretation. A
decision is “completely irrational” only when it is not derived
from, or determined in light of, the language and context of the
agreement between the parties and the parties’ intentions.
Biller, 668 F.3d at 665. So long as the arbitration decision
draws its essence from the parties’ agreement, a court does not
review whether an arbitrators’ contract interpretation was
correct. Bosack v. Soward, 586 F.3d 1096, 1106 (9th Cir. 2009).
Inaccuracies or internal inconsistencies in the arbitrator’s
findings of fact do not provide a ground for vacatur. Id.
The
question of whether an arbitrator’s findings are supported by the
record is beyond the scope of the reviewing court. Lagstein, 607
F.3d at 642-43. So long as the arbitrator’s interpretation of the
contract is plausible, the award cannot be vacated. Id.
The Arbitrator plausibly interpreted the Operating Agreement
and acted within his powers by determining that real estate
appraisal should be part of the process in reaching the value of
the Jewel of Kahana, LLC. The Arbitrator expressly relied on the
30
Valuation Formula in determining the appropriate procedure,
including his denial of the Donnellys’ request for an evidentiary
hearing.
The Donnellys’ allegations that the Arbitrator ignored the
plain language of the Valuation Formula by requiring the neutral
business appraiser to use the middle real estate appraisal is
without foundation.
Unless a contract expressly states otherwise, an arbitrator
has authority to interpret matters of procedure in a contract
when determining the merits of a contractual dispute. Lagstein,
607 F.3d at 643. An arbitrator’s interpretation of a procedural
issue is subject to the same “completely irrational” standard for
vacatur as a substantive issue. Id.
The cases relied on by the Donnellys are not applicable
here. The cases involve arbitrators’ decisions that violated the
express terms of a contract provision. In United Food &
Commercial Workers Union, Local 1119, AFL-CIO v. United Markets,
Inc., 784 F.2d 1413, 1415-16 (9th Cir. 1986), the arbitrator’s
interpretation was implausible. The contract required the loss of
certain benefits after two contract violations. The arbitrator
decided that the loss of those benefits would not be permanent
until the third violation, contrary to the express terms of the
agreement. Id.
31
Similarly, in
Western Employers Insurance Co. v. Jefferies
& Co., Inc., 958 F.2d 258, 262 (9th Cir. 1992), the contract
required that the arbitrators’ award include a statement of their
findings of facts and conclusions of law. The arbitrators
exceeded their authority by issuing an award that did not provide
any such statement. Id.
The Arbitrator here, unlike those in United Food and Western
Employers, did not violate the express terms of the Jewel of
Kahana, LLC Operating Agreement.
When contract terms plausibly give rise to ambiguity, the
arbitrator has authority to interpret the contract. Metzler
Contracting Co. LLC v. Stephens, 774 F. Supp. 2d 1073, 1082 (D.
Haw. 2011), aff'd, 479 F.Appx’ 783 (9th Cir. 2012). The Jewel of
Kahana, LLC Operating Agreement did not specify how the Jewel of
Kahana, LLC Real Property should be valued in arriving at a final
business valuation. The Operating Agreement required
interpretation by the Arbitrator in determining how the Jewel of
Kahana, LLC Real Property should be valued. The decision of the
Arbitrator to have qualified real estate appraisers provide the
Parties with valuation of the Jewel of Kahana, LLC Real Property
was a rational action. The Arbitrator’s interpretation of the
Operating Agreement was plausible. Lagstein, 607 F.3d at 634.
The Donnellys’ conduct also supports the Court’s finding
that the Arbitrator acted properly and had authority to determine
32
the specific procedure for valuing the underlying real estate.
Tristar, 160 F.3d at 540; Nghiem v. NEC Electronics, Inc., 25
F.3d 1437, 1440 (9th Cir. 1994). The Donnellys only claim that
the Arbitrator lacked authority to determine the appropriate
procedure upon receipt of an unfavorable valuation. (Petitioners’
Mot. Ex. E, E-mail from Donnellys’ Counsel at 49, Sept. 1, 2010.)
The Arbitrator acted within the scope of his authority in
determining the value of the Donnellys’ interest in the Jewel of
Kahana, LLC was zero dollars.
2.
The Appraisers’ Actions Did Not Transform Them
Into Arbitrators
The Donnellys claim that their rights were prejudiced by the
real estate appraisers’ actions, requiring the Arbitration Order
to be vacated, pursuant to the Federal Arbitration Act, 9 U.S.C.
§§ 10(a)(3) and 10(a)(4). The Donnellys contend that the
appraisers acted as arbitrators, rather than appraisers. The
Donnellys continue their theory that the appraisers were
arbitrators by alleging that the “arbitrators” did not comply
with their legal obligation to issue a final and definite award
and to allow the parties an opportunity to present evidence. The
Court finds no support for the theory that the appraisers were in
fact “additional arbitrators.”
33
3.
No Ex Parte Communication
The Donnellys also object to the meeting of the three real
estate appraisers at which they attempted to reconcile their
valuations. The Donnellys claim such a meeting constituted
improper ex parte communication that prejudiced the Donnellys’
rights. (Petitioners’ Mem. Supp. Mot. at 26-32, ECF No. 30.)
The Arbitrator’s jurisdiction and arbitral procedures are
controlled by the agreement between the parties. See StoltNeilson, 559 U.S. at 1773-74. The Jewel of Kahana, LLC Operating
Agreement’s Valuation Formula specifically provided that the
business appraisers should meet and confer in an attempt to
reconcile their valuations. The Valuation Formula does not
specify a procedure for finalizing the appraisers’ valuation.
The Operating Agreement provides for both the general method
for valuation of the business and that any disputes be settled by
arbitration. In executing his role as arbitrator, it was
appropriate for the Arbitrator to use the general business
Valuation Formula and terms in determining valuation of the real
estate at issue. It was also appropriate for the Arbitrator to
determine that the middle real estate appraisal from the December
13, 2010 meeting of the real estate appraisers was final and
should provide the real estate value in the neutral business
appraiser’s valuation. (Respondents’ Mot. Ex. 19, Arb. Order,
Feb. 9, 2011, ECF No. 31.) The Valuation Formula of the Operating
34
Agreement contemplated that it be executed by the Arbitrator, not
through evidentiary hearings.
The Court has reviewed the Operating Agreement and the
Arbitrator’s actions. The Court finds that the real estate
appraisers’ meeting on December 13, 2010 complied with the terms
of the Operating Agreement. The meeting was attended by each
Party’s real estate appraiser and the neutral appraiser. The
appraisers’ meeting was an effort to facilitate agreement, not an
improper ex parte communication. The Arbitrator’s rulings and the
actions of the real estate appraisers were appropriate actions
that complied with the Operating Agreement. There was no
violation of arbitration law.
The Donnellys also allege that the JKL Parties’ business
appraiser engaged in improper ex parte communication with the
neutral business appraiser. The allegation is based on the
January 28, 2010 notation in the JKL Parties’ business
appraiser’s billing statement. They request an evidentiary
hearing to determine what communications took place among the
three appraisers. (Petitioners’ Mem. Supp. Mot. at 32-33, ECF No.
30.)
Actual ex parte presentation of evidence to an arbitrator
could provide grounds for vacating an arbitration award when it
disadvantages the parties’ rights to submit and rebut evidence.
See Pac. Reins. Mgmt. Corp. v. Ohio Reins. Corp., 935 F.2d 1019,
35
1025 (9th Cir. 1991). There was no ex parte communication in the
case before the Court here.
The JKL Parties’ business appraiser filed an Affidavit,
explaining the billing notation in question:
My January 28, 2010 time entry incorrectly describes my
services that day as “review file, call with [neutral
business appraiser] regarding info.” A better
description would have been “review file in preparation
for call with [the neutral business appraiser]
regarding info.” Again, there was no ex parte
communication between [the neutral business appraiser]
and me.
(Respondents’ Mot. Decl. of Kimo Todd, Oct. 10, 2012, ECF No. 319.) The Court is satisfied that there was no improper
communication. The Donnellys’ interpretation of the billing
notation was in error. See Ardalan v. Macy’s Inc., No. 09-cv04894, 2012 WL 2503972, at *4 (N.D. Cal. June 28,
2012)(allegations of ex parte communications sufficiently refuted
by responsive affidavit). The Donnellys are not entitled to an
evidentiary hearing on the real estate appraisal.
The Arbitrator’s rulings and appraisers’ conduct in valuing
the Donnellys’ interest in the Jewel of Kahana, LLC were proper.
The Donnellys’ motion to vacate the Arbitrator’s rulings on
the valuation issue is DENIED.
36
II.
THE JKL PARTIES’ MOTION TO VACATE THE ARBITRATOR’S RULING
THAT THERE WAS NO PREVAILING PARTY AS TO THE VALUATION ISSUE
The JKL Parties argue that Paragraph 3 of the Arbitrator’s
Final Order, finding that there was no prevailing party on the
valuation issue, should be vacated. Respondents maintain that the
ruling exceeded the Arbitrator’s authority and showed evident
partiality and misconduct prejudicing the rights of the JKL
Parties. The JKL Parties claim they are the prevailing party and
must be awarded attorneys’ fees and costs, according to the
Operating Agreement. (Respondents’ Mem. Supp. Mot. at 30-31, ECF
No. 31.)
A.
The Arbitrator Had the Authority to Determine That
There Was No Prevailing Party as to the Valuation Issue
The Arbitration Clause of the Operating Agreement provides:
In the event a dispute is submitted to arbitration
pursuant to this Article, the prevailing party shall be
entitled to the payment of its reasonable attorneys’
fees and costs, as determined by the arbitrator.
(Operating Agreement § 12.1.2.)
The Arbitrator ruled that there was no prevailing party on
the valuation issue because the valuation was governed by the
formula set forth in the Operating Agreement, and was not a
matter that was litigated. The JKL Parties rely on the
Arbitrator’s finding that the Donnellys’ share was worth zero
37
dollars to reach the conclusion that they are a prevailing party.
(Arb. Final Order at ¶ 3, Feb. 13, 2012.)
The Operating Agreement’s Arbitration Clause does not
require the designation of a prevailing party. Indeed, it grants
authority to the Arbitrator to determine when it is appropriate
to award fees and costs. The Arbitrator’s determination that the
valuation issue did not result in a prevailing party is a
plausible interpretation of the Operating Agreement.
The Court can only vacate the Arbitration Award if the
Arbitrator’s interpretation of the Operating Agreement was not
plausible or if the Arbitrator clearly recognized and ignored
applicable law. Tristar Pictures, Inc. v. Director’s Guild of
Am., Inc., 160 F.3d 537, 540-411 (9th Cir. 1998); Kyocera, 341
F.3d at 997. Even an arbitrator’s mistake of fact or application
of law is not grounds for vacatur. Biller, 668 F.3d at 662.
The Arbitrator concluded that Petitioners prevailed on the
only actual litigation before the Arbitrator. The Arbitrator’s
determination was based on his interpretation of the Operating
Agreement and the Hawaii “prevailing party test,” set forth in
the cases of Food Pantry, Ltd. V. Waikiki Business Plaza, Inc.,
575 P.2d 869, 879 (Haw. 1978) and MFD Partners v. Murphy, 850
P.2d 713, 716 (Haw.Ct.App. 1992). (Arb. Award at 29-33, Aug. 16,
2011.)
38
The Arbitrator found the valuation issue was not litigation,
but a process of applying the terms of the Operating Agreement to
find valuation. There is no basis upon which the Court could
vacate the Arbitrator’s decision.
B.
Tristar, 160 F.3d at 540-41.
The JKL Parties’ Claim of Partiality in the
Arbitrator’s Finding That There Was No Prevailing Party
on the Valuation Issue Is Without Foundation
An award may be vacated when there is evident partiality or
misconduct on the part of the arbitrator. The party moving to
vacate an award based on an arbitrator’s partiality, pursuant to
the Federal Arbitration Act, 9 U.S.C. § 10(a)(2), has the burden
of establishing an arbitrator’s partiality by presenting evidence
of actual bias or undisclosed facts that show a reasonable
impression of partiality. Schmitz v. Zilveti, 20 F.3d 1043, 1046
(9th Cir. 1994). Bias has been shown in cases where an arbitrator
fails to disclose his financial interest in the arbitration, had
a familial relationship with an involved party, and when an
arbitrator’s former employment by one of the parties was not
disclosed. Ardalan v. Macy’s Inc., No. 09-cv-04894, 2012 WL
2503972, at *3 (N.D. Cal. June 28, 2012)(providing examples of
awards vacated based on an arbitrator’s partiality). A party
moving to vacate an award for an arbitrator’s misconduct,
pursuant to the Federal Arbitration Act, 9 U.S.C. § 10(a)(3),
39
must show that the misconduct denied them a fair hearing. Id. at
*6.
The JKL Parties, in moving to vacate the award based on bias
and misconduct, present no facts, but rather state their
dissatisfaction with the Arbitrator’s ruling and interpretation
of the Operating Agreement. (Respondents’ Mem. Supp. Mot. at 2931, ECF No. 31.) A party moving to vacate an award for bias or
misconduct must provide some evidence supporting their
allegations. Schmitz, 20 F.3d at 1046 (9th Cir. 1994). The JKL
Parties’ vague allegations are insufficient.
The JKL Parties’ motion to vacate the ruling that there was
no prevailing party on the valuation issue is DENIED.
III. THE JKL PARTIES’ MOTION TO VACATE ARBITRATOR’S RULING THAT
THE INDIVIDUAL JEWEL OF KAHANA, LLC MEMBERS AND MANAGERS ARE
JOINTLY AND SEVERALLY LIABLE
The JKL Parties object to the Arbitrator’s finding that the
Members and Managers of the Jewel of Kahana, LLC are personally
liable for attorneys’ fees and costs on the Counterclaim. The
Jewel of Kahana, LLC Managers and Members take the position that
they did not agree to arbitration and that the Hawaii Limited
Liability Company Law (Haw. Rev. Stat. Ch. 428) and the Operating
Agreement bar any award of individual liability. Additionally,
they claim that the finding of personal liability resulted from
40
an improper broadening of the scope of the August 2011 Final
Award. (Respondents’ Mem. Supp. Mot. at 15-25, Nov. 15, 2012, ECF
No. 31.)
A.
The Arbitrator Did Not Exceed His Authority in Finding
the Individual Jewel of Kahana, LLC Members and
Managers Jointly and Severally Liable
Both the Jewel of Kahana, LLC and its Members and Managers,
named as individuals, filed a Counterclaim against the Donnellys
for breach of fiduciary duties. The JKL Parties alleged that the
Donnellys “acts and omissions and breaches of fiduciary duties to
Jewel have caused and will continue to cause damage to Jewel and
its individual members.” (Petitioners’ Mot. Ex. A, Answer and
Counterclaim at ¶ 32, Jan. 5, 2009, ECF No. 30.)
The Arbitrator found that the Donnellys prevailed on the
Counterclaim, as the JKL Parties did not establish the breach of
fiduciary duty claim. The Arbitrator awarded the Donnellys
attorneys’ fees and costs, based on the Operating Agreement’s
Arbitration Clause. The Arbitration Clause grants the Arbitrator
the authority to award reasonable attorneys’ fees and costs to a
prevailing party in the Arbitration. (Operating Agreement §
12.1.2.)
An arbitrator’s jurisdiction is based on the agreement of
the parties and may be implied from the conduct of the parties in
the arbitration. George Day Const. Co., Inc. v. United Broth. of
41
Carpenters & Joiners of Am., Local 354, 722 F.2d 1471, 1474-75
(9th Cir. 1984).
The individual Jewel of Kahana, LLC Members and Managers
submitted to the Arbitrator’s jurisdiction by filing their
Counterclaim and requesting attorneys’ fees and costs. They
cannot now claim that they did not agree to arbitrate or that the
Arbitrator lacked authority to find the Managers and Members
individually liable for attorneys’ fees and costs. Tristar, 160
F.3d at 541; Metzler 774 F.Supp.2d at 1087.
The monetary judgment against the individual Jewel of
Kahana, LLC Members and Managers on the Counterclaim was within
the Arbitrator’s power. The Arbitrator’s award of attorneys’ fees
and costs arose from the Operating Agreement’s Arbitration
Clause, which allows the Arbitrator to determine a prevailing
party’s entitlement to attorneys’ fees and costs. (Operating
Agreement § 12.1.2.)
The JKL Parties point to provisions in the Operating
Agreement that limit the liability of the Jewel of Kahana, LLC’s
Members and Managers. The provisions referred to are not broad.
They limit the liability of Members and other interest holders in
the context of withdrawal distributions and return of capital
contributions. (Respondents’ Mem. Supp. Mot. at 21-25, ECF No.
31.)
42
The JKL Parties also point to the Hawaii Limited Liability
Company Law’s provision that contains a prohibition on the
liability of members and managers for a company debt or
obligation. (Id.) The JKL Parties presented the same arguments to
the Arbitrator in their Pre-Hearing Brief. (Respondents’ Mot. Ex.
8, Pre-Hearing Brief at 19-20, Aug. 20, 2009, ECF No. 31.)
Neither the Operating Agreement nor the Hawaii Limited
Liability Company Law expressly limits the Arbitrator’s ability
to award attorneys’ fees and costs to the Donnellys for
prevailing on the Counterclaim brought by both the Jewel of
Kahana, LLC and its individual Members and Managers. The
Arbitrator plausibly interpreted the Operating Agreement to allow
both the Jewel of Kahana, LLC and its individual Members and
Managers to be liable for the Donnellys’ attorneys’ fees and
costs, as they had counterclaimed as individuals. Vacatur is not
permissible. Tristar, 160 F.3d at 540-41; Kyocera, 341 F.3d at
997.
B.
The Provision Imposing Joint and Several Liability on
Individual Members and Managers of the Jewel of Kahana,
LLC Was Not a Modification of a Final Award
The JKL Parties claim that the ruling in the Final Order
that the Jewel of Kahana, LLC and the individual Jewel of Kahana,
LLC Members and Managers are jointly and severally liable for
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attorneys’ fees and costs on the Counterclaim was an improper
modification of the August 2011 Arbitration Award.
It is true that an arbitrator’s authority terminates once a
final award is issued. See Int'l Bhd. of Teamsters, Chauffeurs,
Warehousemen & Helpers of Am., Local 631 v. Silver State Disposal
Serv., Inc., 109 F.3d 1409, 1411 (9th Cir. 1997); Arbitration of
Bd. of Dirs. of Ass’n of Apartment Owners of Tropicana Manor, 830
P.2d 503, 507 (Haw. 1992). Although an arbitrator cannot change a
final award, an arbitrator may complete an incomplete arbitration
award, correct a mistake that is facially apparent, and clarify
an ambiguity in the award. Int’l Bhd. of Teamsters, 109 F.3d at
1411.
The Arbitrator’s Final Order, dated February 13, 2012, did
not modify the finding of the liability of the individual Jewel
of Kahana, LLC Members and Managers. The pleadings had already
established who the Parties were. The Counterclaim was filed by
the Jewel of Kahana, LLC and each of the individual Jewel of
Kahana, LLC Members and Managers. The November 30, 2009
Arbitration Award on the Counterclaim clearly refers to the
Counterclaim as brought by each of the individual Jewel of
Kahana, LLC Members. The August 16, 2011 Award stated that the
Donnellys were the prevailing parties against the JKL Parties on
the Counterclaim and entitled to related attorneys’ fees and
costs. (Arb. Award at 31, 45-46, Aug. 16, 2011.)
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The Final Order set forth the actual amounts owed and
included the names of each of the parties, Jewel of Kahana, LLC,
and its individual Members and Managers. The inclusion of the
Jewel of Kahana, LLC’s Members and Managers’ names in the
definitive order on attorneys’ fees and costs was not a
broadening of the scope of liability. Nor did it alter the August
16, 2011 Award. See Int’l Bhd. of Teamsters, 109 F.3d at 1411.
The JKL Parties’ motion to vacate the Arbitrator’s ruling
that the individual Jewel of Kahana, LLC Members and Managers are
each jointly and severally liable for the attorneys’ fees and
costs on the Counterclaim is DENIED.
IV.
THE DONNELLYS’ MOTION TO CONFIRM THE ARBITRATOR’S RULINGS ON
THE COUNTERCLAIM
The Donnellys seek to confirm the Arbitrator’s rulings on
the Counterclaim, including the JKL Parties’ joint and several
liablity for the Donnellys’ attorneys’ fees and costs amounting
to $283,093.97. The JKL Parties request an entry of final
judgment in accordance with the Federal Arbitration Act, 9 U.S.C.
§ 13, incorporating and confirming the rulings of the Arbitrator.
An arbitration award must be confirmed if it has not been
modified, corrected, or vacated. See 9 U.S.C. § 9.
The Arbitrator’s Final Order, having not been modified,
corrected, or vacated, is CONFIRMED.
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CONCLUSION
Petitioners Mark Donnelly, Chrissy Donnelly, and Hang 10
Investments, LLC’s Statement of Relief Requested in Their Motion
to Confirm in Part and Vacate in Part Arbitration Award, filed on
July 25, 2012 (ECF No. 30) is:
GRANTED with respect to the Motion to Confirm the
Arbitrators rulings that:
(1)
The Donnellys (Mark Donnelly, Chrissy Donnelly,
and Hang 10 Investments, LLC) are the prevailing
parties against the JKL Parties (Jewel of Kahana,
LLC, Meritage Investments, LLC, Aubery Family
Limited Partnership, Jeff Aubery, Patty Aubery,
James LeCron, Karen LeCron, Melinda Walsh, and
Michael Walsh) on the Counterclaim;
(2)
The Donnellys (Mark Donnelly, Chrissy Donnelly,
and Hang 10 Investments, LLC) are entitled to
recover the award of attorneys’ fees and costs
related to the Counterclaim from the JKL Parties
(Jewel of Kahana, LLC, Meritage Investments, LLC,
Aubery Family Limited Partnership, Jeff Aubery,
Patty Aubery, James LeCron, Karen LeCron, Melinda
Walsh, and Michael Walsh), jointly and severally;
and
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(3)
The Donnellys (Mark Donnelly, Chrissy Donnelly,
and Hang 10 Investments, LLC) shall recover from
the JKL Parties (Jewel of Kahana, LLC, Meritage
Investments, LLC, Aubery Family Limited
Partnership, Jeff Aubery, Patty Aubery, James
LeCron, Karen LeCron, Melinda Walsh, and Michael
Walsh), jointly and severally, the total amount of
$283,093.87, which includes:
(a)
$201,323.12 in attorneys’ fees and
$29,677.00 in costs,
(b)
$14,000.00 as and for American
Arbitration Association fees incurred by
the Donnellys (Mark Donnelly, Chrissy
Donnelly, and Hang 10 Investments, LLC)
up to and including November 30, 2010,
and
(c)
$38,093.75, as and for ADR Services,
Inc. fees and costs up to and including
November 30, 2012; and
DENIED with respect to the Motion to Vacate the Arbitrator’s
ruling related to the valuation of the Donnellys’ interest
in Jewel of Kahana, LLC.
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Respondents Jewel of Kahana, LLC, Meritage Investments, LLC,
Aubery Family Limited Partnership, Jeff Aubery, Patty Aubery,
James LeCron, Karen LeCron, Melinda Walsh, and Michael Walsh’s
Motion to Vacate in Part Arbitration Award (ECF No. 31) is
DENIED.
The Clerk of the Court is directed to enter a Final
Judgment, incorporating and confirming the Arbitrator’s Final
Order, issued on February 13, 2012 and served on May 16, 2012,
and close the case.
IT IS SO ORDERED.
DATED: March 28, 2013, Honolulu, Hawaii.
/S/ Helen Gillmor
Helen Gillmor
United States District Judge
Mark Donnelly, Chrissy Donnelly, and Hang 10 Investments, LLC v.
Jewel of Kahana, LLC, Meritage Investments, LLC, Aubery Family
Limited Partnership, Jeff Aubery, Patty Aubery, James LeCron,
Melinda Walsh, and Michael Walsh, CV 12-00347-HG-KSC and CV 1200-419-HG-KSC, ORDER CONFIRMING ARBITRATION AWARD.
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