Opinion
No. 335989
11-21-2017
TIM COOK, TONYA COOK, and DAVID STEFFEY, Plaintiffs-Appellants, v. RICHARD C. HERMANN, Defendant-Appellee, and TAMARACK DEVELOPMENT ASSOCIATES, LLC, Defendant.
UNPUBLISHED Grand Traverse Circuit Court
LC No. 14-030615-CK Before: SWARTZLE, P.J., and SAWYER and MARKEY, JJ. PER CURIAM.
Plaintiffs appeal by right the trial court's October 11, 2016 order vacating the portion of an August 28, 2016 arbitration award of $1,002,543.70 for breach of contract in plaintiffs favor against defendant Richard C. Hermann on his July 14, 2005 personal guaranty "of payment of the Priority Income Return and the Priority Return of Capital within 36 months of the date herein and as set forth in the Operating Agreement. . . ." Hermann, the president and controlling member of defendant Tamarack Development Associates, LLC (Tamarack), sold $2,075,000 Class A memberships $50,000 per unit; the Cooks purchased 10.84% and Steffey purchased 2.41% of Class A memberships in Tamarack. The trial court's order also entered judgment on an identical award in plaintiffs' favor against Tamarack for breach of the operating agreement. Tamarack's cross-appeal of that part of the judgment is closed for the reason Tamarack is in bankruptcy proceedings. For the reasons discussed hereafter, we reverse the circuit court to the extent that it refused to enforce the arbitrator's award against defendant Hermann on the guaranty and remand for entry of judgment in plaintiffs' favor.
I. STANDARD OF REVIEW
The operating agreement provides for arbitration of disputes and with respect to an arbitrator's award, "judgment may be entered in any state or federal court having jurisdiction over the parties." Consequently, the operating agreement provided for statutory arbitration. See Fette v Peters Const Co, 310 Mich App 535, 541; 871 NW2d 877 (2015). The Uniform Arbitration Act, MCL 691.1681 et seq., which became effective on July 1, 2013, "governs an agreement to arbitrate whenever made." MCL 691.1683. The circuit court may vacate an arbitrator's award when the "arbitrator exceeded the arbitrator's powers." MCL 691.1683(1)(d); see also MCR 2.603(J)(2)(c) (providing that the grounds for vacating an arbitration award include "the arbitrator exceeded his or her powers[.]").
A trial court's decision to enforce, vacate or modify an award is reviewed de novo. Nordlund & Assoc, Inc v Hesperia, 288 Mich App 222, 226; 792 NW2d 59 (2010). The trial court's review of an arbitration award is extremely limited. Fette, 310 Mich App at 541. " 'A court may not review an arbitrator's factual findings or decision on the merits. Rather, a court may only decide whether the arbitrator's award 'draws its essence' from the contract.' " Id., quoting Police Officers Ass'n of Mich v Manistee Co, 250 Mich App 339, 343, 645 NW2d 713 (2002). An arbitrator exceeds his powers when he acts beyond the material terms of the contract from which he draws his authority, or in contravention of controlling principles of law. Detroit Auto Inter-Insurance Exch v Gavin, 416 Mich 407, 434; 331 NW2d 418 (1982); Nordlund & Assoc, Inc, 288 Mich App at 228. But the reviewing court may not substitute its judgment for that of the arbitrator with respect to fact-finding and the merits of the arbitrator's decision. Gordon Sel-Way, Inc v Spence Bros, 438 Mich 488, 497; 475 NW2d 704 (1991); Gavin, 416 Mich at 429 ("the arbitrator's findings of fact are unreviewable").
II. DISCUSSION
We conclude that the circuit court erred by vacating the arbitrator's award to plaintiffs on the guaranty. The circuit court substituted its judgment for that of the arbitrator that plaintiffs had either satisfied the majority enforcement provisions of the guaranty agreement or that defendant Hermann had by his actions waived performance of the condition precedent. Gordon Sel-Way, 438 Mich at 497; Gavin, 416 Mich at 429. Accordingly, we reverse that part of the circuit court's order and remand to that court for entry of judgment in plaintiffs' favor against defendant Hermann on his July 14, 2005 guaranty in the amount awarded by the arbitrator.
The operating agreement defined "Priority Income Return" for Class A members as "that amount which will result in such Member having received a 25% annual return, not compounded, on such Member's net amount of Net Invested Capital from time to time." The operating agreement also provided in ¶ 4.05 that "R.C. Hermann has agreed to guaranty to each Class A Member the Member's Priority Income Return and the Priority Return of Capital within 36 months from the date of investment." The separate July 14, 2005 personal guaranty of Hermann provided in pertinent part:
B. The Owners purchased Class A/ Mezzanine Units in Tamarack in reliance upon the Guarantor's unconditional guarantee of payment of the Priority Income Return and the Priority Return of Capital within 36 months of the date herein and as set forth in the Operating Agreement ("Priority Returns").
* * *
1. Guarantor hereby irrevocably and unconditionally guarantees to the Owners and their permitted successors and assigns the full and prompt payment and performance when due of the Priority Returns within 36 months of the date herein. This Guaranty of the Priority Returns shall be enforceable against the Guarantor regardless of whether such Priority Returns are held to be unenforceable, void or of no effect against Tamarack. In addition to the Priority Returns, this Guaranty covers all costs, expenses and fees, including reasonable attorney fees, arising in connection with the collection or enforcement of any or all amounts due from Tamarack to the Owners with respect to the Priority Returns. Guarantor acknowledges and agrees that this Guaranty may be enforced by the Owners of a majority of the Class A Units ("Majority Owners").
Plaintiffs never received any "priority returns" on their Class A memberships. They filed a multi-count complaint in circuit court against defendants on October 31, 2014, alleging, pertinent to this case, in Count (I) breach of the operating agreement and in Count (II) Hermann's breach of the personal guaranty.
On February 2, 2015, the circuit court dismissed plaintiffs' initial complaint and remanded the matter to arbitration to determine "all claims/defenses of the parties" but the circuit court retained jurisdiction to "enter a judgment on the arbitration award." Subsequently, after submission of evidence, briefs and arguments, the arbitrator ruled in plaintiffs favor on the parties' motions for summary disposition. In a November 14, 2015 ruling, the arbitrator determined that plaintiffs were entitled, based on the undisputed facts, to judgment as a matter of law on Count I against defendant Tamarack (breach of operating agreement) and Count II against defendant Hermann (breach of the guaranty). The arbitrator, on February 16, 2016, issued identical, non-cumulative awards in the amount of $1,002,543.70 on each count.
Defendants moved in the circuit court to vacate the arbitrator's ruling on the motion for summary disposition. The circuit court, without addressing the fact that the arbitrator had already ruled concerning damages, on June 2, 2016, concluded that defendants "have failed to demonstrate that the Arbitrator: (1) exceeded his authority; (2) failed to hear material evidence; and (3) committed an error of law when he failed to address whether all necessary parties were joined in the action." But the circuit court remanded the case to the arbitrator to rule on damages and whether fewer than all Class A members could enforce the guaranty.
On remand, the arbitrator issued an opinion and ruling on August 28, 2016, again issuing awards to plaintiffs of $1,002,543.70 on both counts I and II. Defendant argued below and on appeal that "by ignoring express and unambiguous contract terms" requiring a majority of Class A members to enforce the guaranty, the arbitrator exceeded his powers. Gavin, 416 Mich at 434. "Since arbitrators derive their authority from the parties' contract and arbitration agreement, they are bound to act within those terms. Stated otherwise, the parties' contract is the law of the case." Gordon Sel-Way, 438 Mich at 496 (Citations omitted). But, contrary to defendant's argument, the arbitrator did not ignore or disregard the term of the contract "that [the] Guaranty may be enforced by the Owners of a majority of the Class A Units . . . ."
The arbitrator specifically addressed the part of the guaranty that required the approval of a majority of Class A members to enforce its terms and concluded it did not preclude entry of judgment in favor of plaintiffs. The arbitrator found as a factual matter that at the time of his ruling, plaintiffs possessed approval of only 42% of the Class A members to enforce the guaranty. But the arbitrator also found that for a time, plaintiffs did have the approval of a majority of Class A members. Further, the arbitrator ruled that the attempted revocation of approval by a significant minority group of Class A members (the Webster group owning 19.28% of Class A memberships, apparently controlled by Dr. Daniel Webster), was ineffective. The arbitrator found as fact and ruled: "Dr. Webster actually and voluntarily executed his approval in affidavits. Under the particular circumstances of this matter, I find Dr. Webster's revocation of those affidavits ineffective to destroy the majority approval held by [plaintiffs]."
In addition, the arbitrator found that "Mr. Hermann waived the majority requirement he now seeks to use as a shield." The arbitrator applied the principle of waiver of a condition precedent discussed in Harbor Park Market Inc v Gronda, 277 Mich App 126, 131-132; 743 NW2d 585 (2007). "Where a party prevents the occurrence of a condition, the party, in effect, waives the performance of the condition." Id. The Court observed that generally for this principle to apply, "a party must prevent the condition from occurring by either taking some affirmative action, or by refusing to take action required under the contract, before a court will find a waiver of a condition precedent." Id.
The arbitrator reviewed the affirmative actions that defendant Hermann had taken to make the exercise of enforcing the guaranty more difficult. The arbitrator noted those actions included "transferring his personal assets to the corporate entity following the execution of the Guaranty backed by those assets, without notice to the investors." Defendant Hermann "sought to increase the majority requirement to a super majority of 70%, but was unsuccessful." Defendant Hermann "also attempted to engineer a tolling agreement to delay enforcement of the Guaranty . . . [and] attempted to vitiate the Guaranty agreement through the issuance of the AA and AAA shares." Indeed, these actions form a part of the factual basis for the arbitrator's ruling as to Court I concerning breach of the operating agreement.
In addition, the arbitrator found evidence to support that defendant Hermann interfered with plaintiffs' efforts to garner the majority support necessary from Class A members. The arbitrator found that "the evidentiary record strongly suggests that Mr. Hermann was active in attempts to prevent a majority from forming for collection purposes in December 2015 and January 2016." Specifically, that defendant Hermann made "efforts to preclude Dr. Webster from either being able or being inclined to join any such majority . . . ." The arbitrator concluded "that the lack of a majority of Class A shares approving of the instant action is a direct result of [Hermann's] affirmative and bad-faith acts to interfere with the existence of any such majority. The fact that petitioners actually had a majority at one point merely reinforces this conclusion."
In refusing to enforce (vacating) the arbitrator's award to plaintiffs on the guaranty, the circuit court did not rule that the arbitrator had acted "in contravention of controlling principles of law," Gavin, 416 Mich at 434, with respect to the principle that a party to a contract may by its actions waive the enforcement of a condition precedent to the other party's performance. Indeed, the circuit court recognized that with respect to the performance of a condition precedent, "[t]here can be some exceptions", [o]ne would guess waiver, [or] estoppel . . . ." But the circuit court went on to base its ruling on its mistaken belief that the guaranty required unanimous approval of Class A members to enforce its terms. The court stated it did not "see a basis [to enforce the guaranty] short of 100 percent participation of these members to pursue the guaranty." When advised the guaranty provided only for a majority approval for enforcement, the circuit court retorted that plaintiffs didn't "have a majority and you need a majority because that's what the agreement requires."
The circuit court did not address the arbitrator's alternative factual findings that plaintiffs had achieved majority approval and that either the attempted revocation of approval by some Class A members was ineffectual or that defendant Hermann by his actions had waived performance of the majority enforcement condition precedent. Harbor Park Market, 277 Mich App at 131-132. Likely, this is because the arbitrator's factual determinations are unassailable. Fette, 310 Mich App at 541 ("A court may not review an arbitrator's factual findings or decision on the merits.") (Citation omitted). Even where there is a fine line between the arbitrator's findings of fact and an alleged error of law, "the award should be upheld since the alleged error of law cannot be shown with the requisite certainty to have been the essential basis for the challenged award and the arbitrator's findings of fact are unreviewable." Gavin, 416 Mich at 429 (Emphasis added). Under Michigan law, "as long as the arbitrator is even arguably construing or applying the [arbitration] contract and acting within the scope of his authority, a court may not overturn the decision even if convinced that the arbitrator committed a serious error." Ann Arbor v AFSCME Local 369, 284 Mich App 126, 144; 771 NW2d 843 (2009) (Citations and quotation marks omitted).
Similarly, defendant Hermann makes scant argument regarding the arbitrator's findings that either plaintiffs satisfied the majority requirement or that defendant by his actions waived the requirement. Defendant argues that the arbitrator's finding that he prevented fulfillment of the condition precedent is a "red herring" because the record shows no "evidence to support the contention of unlawful interference." The circuit court appears to have accepted this argument when it mused whether "the lobbying efforts of Mr. Hermann . . . [were] an improper interference? The arbitrator seems to feel that it was." But, as noted, an arbitrator's findings of fact are not reviewable. Gavin, 416 Mich at 429; Fette, 310 Mich App at 541. Consequently, it is meritless to claim that an arbitrator's award is against the great weight of the evidence or was not supported by sufficient evidence. Donegan v Mich Mut Ins Co, 151 Mich App 540, 549; 391 NW2d 403 (1986). The circuit court may not substitute its judgment for that of the arbitrator. Gordon Sel-Way, 438 Mich at 497; AFSCME Local 369, 284 Mich App at 144.
We reverse the part of the circuit court's order refusing to enforce the arbitrator's award to plaintiffs for breach of the guaranty and remand for entry of judgment in plaintiffs' favor against defendant Hermann on his July 14, 2005 guaranty in the amount awarded by the arbitrator. We do not retain jurisdiction. Plaintiffs may tax their costs under MCR 7.219.
/s/ Brock A. Swartzle
/s/ David H. Sawyer
/s/ Jane E. Markey