In re the Matter of: Leon J. Simon, et al., Appellants, vs. John R. Rupp, et al., Respondents.

In re the Matter of: Leon J. Simon, et al., Appellants, vs. John R. Rupp, et al., Respondents. A06-475/476, Court of Appeals Unpublished, March 20, 2007.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2006).

 

STATE OF MINNESOTA

IN COURT OF APPEALS

A06-475
A06-476

 

 

In re the Matter of:

Leon J. Simon, et al.,

Appellants,

 

vs.

 

John R. Rupp, et al.,

Respondents.

 

 

Filed March 20, 2007

Affirmed
Crippen, Judge*

 

Ramsey County District Court

File Nos. C8-03-12265/CX-03-12266

 

 

Madge S. Thorsen, Thorsen Kaplan LLP, 310 Groveland Avenue, Minneapolis, MN 55403 (for appellants)

 

Charles E. Keenan, Christoffel & Elliott, P.A., 1111 Piper Jaffray Plaza, 444 Cedar Street, St. Paul, MN 55101 (for respondents)

 

            Considered and decided by Halbrooks, Presiding Judge, Ross, Judge, and Crippen, Judge.

U N P U B L I S H E D   O P I N I O N

CRIPPEN, Judge

            Appellants challenge the district court's confirmation of an arbitration award on the grounds that the arbitration panel exceeded its powers and the award violates public policy.  We affirm.         

FACTS

            In October 1992, the parties formed Minnesota Building, Inc. (MBI) for the purpose of buying, renting, and selling the Minnesota Building.  Appellants Leon Simon and Charles Eginton each contributed $10,000 in capital in exchange for a 25% ownership interest in MBI.  Respondent John Rupp contributed $20,000 in capital and holds a 50% interest in the corporation.  Respondent is the chief executive officer, chief financial officer, treasurer, and secretary of the corporation. 

            In addition to their capital contributions, appellants each loaned MBI $165,000.  Appellants' identical promissory notes required the outstanding principal balance to be "repaid to the holder no later than September 30, 1993."  By September 30, 1993, MBI had not paid any of the principal balance on the notes.  And six years later, when the statute of limitations ran,[1] appellants had not commenced an action to collect on the notes, but MBI continued to carry the two loans as due in its books and tax returns.

            In April 2003, MBI sold the Minnesota Building for profit and sought dissolution of the corporation.  The parties deadlocked over their respective ownership interests and the proper distribution of MBI proceeds.  The parties then stipulated to the resolution of their disputes through arbitration and identified several issues for the panel to decide.  As relevant to this appeal, those issues included the parties' respective ownership interests in MBI, the status of appellants' $165,000 promissory notes, and the question of whether respondent should be removed from his corporate positions.  Pursuant to the parties' stipulation, the district court ordered the appointment of an arbitration panel and set forth the scope of arbitration in its order. 

            In Phase I of the arbitration proceedings, the panel affirmed that appellants each held a 25% ownership interest in MBI, but in Phase II, the panel concluded that appellants' right to repayment for each of the $165,000 loans was time barred by the six-year statute of limitations.  The panel also found that no facts justified tolling the applicable statute.  At the parties' request, the panel appointed a receiver to wind-up the corporation; in closing, the panel determined that the receiver would finally resolve all other issues remaining within the panel's jurisdiction, absent further court orders or agreements of the parties.   

            Appellants moved to vacate the Phase II award, but the district court granted respondent's motion to confirm the award.  This appeal follows.

D E C I S I O N

            Arbitration awards are highly favored in Minnesota, and the standard of judicial review of an arbitration award under Minnesota law is "extremely narrow."  Hunter, Keith Indus., Inc. v. Piper Capital Mgmt., Inc., 575 N.W.2d 850, 854 (Minn. App. 1998).  "[We] must exercise every reasonable presumption in favor of the award's finality and validity," id. (quotation and citation omitted), and will vacate an arbitration award pursuant to the statutory grounds established by Minn. Stat. § 572.19, subd. 1 (2006).  Id. 

            Minn. Stat. § 572.19, subd. 1, provides, in part, that upon the parties' application, the court "shall" vacate an arbitration award on a showing of corruption, arbitrator partiality, or that the arbitrators "exceeded their powers.  Minn. Stat. § 572.19, subd. 1(1)-(3).  We will not vacate an arbitration award simply because we disagree with the panel's decision on the merits.  AFSCME Council 96 v. Arrowhead Reg'l Corrs. Bd., 356 N.W.2d 295, 299-300 (Minn. 1984).

            The arbitrator "is the final judge of both law and fact."  Cournoyer v. Am. Television & Radio Co., 249 Minn. 577, 580, 83 N.W.2d 409, 411 (1957).  Even when an arbitrator commits an error of law, that error does not provide a basis for vacating an arbitration award.  EEC Prop. Co. v. Kaplan, 578 N.W.2d 381, 387 (Minn. App. 1998), review denied (Minn. Aug. 31, 1998). 

1.

            Appellants have the burden to show, as they assert, that the arbitration panel exceeded its power.  Hilltop Constr., Inc. v. Lou Park Apartments, 324 N.W.2d 236, 239 (Minn. 1982).  "Unless there is a clear showing that arbitrators were unfaithful to their obligations, courts assume they did not exceed their powers."  EEC Prop. Co., 578 N.W.2d at 383.  When "a case is submitted to arbitration by order of a court, the scope of the issues submitted is controlled by the court's order."  Latenser v. John Latenser & Sons, Inc., 347 N.W.2d 486, 490 (Minn. 1984).  And "[w]hen parties voluntarily stipulate to an order to arbitrate, it is fair to hold them to a broad reading of the scope."  Morrison v. N. States Power Co., 491 N.W.2d 675, 677 (Minn. App. 1992) (quotation omitted), review denied (Minn. Jan. 15, 1993).  Appellants argue that the panel exceeded its powers by an omission, its failure to resolve the "legal implication[s]" of its conclusion that appellants' promissory notes were no longer enforceable. 

            Initially, we note two considerations that suggest cause to dismiss appellants' argument without reaching its merits.  First, the record does not clearly indicate that appellants raised the omitted-topic argument for the district court's consideration.  It is well established that this court will not review issues that were not first argued, considered, and decided in the court below.  Thiele v. Stich, 425 N.W.2d 580, 582 (Minn. 1988).  Appellants asserted to the district court that the panel "exceeded its authority," but they argued that the panel's award was not rationally based on the parties' organizational agreement, which was never formally entered into and deemed by the panel to have no legal effect.[2]  If appellants did make the omitted-topic argument, their assertion was implicit and unclear.  The district court never expressly considered the argument as formulated by appellants on appeal.     

            Second, the question of whether arbitrators "exceed[] their powers" by omitting issues before them is only settled in the federal courts.  Moreover, we note that in contrast to Minnesota's corresponding arbitration act, Minn. Stat. Ch. 572 (2006), the federal arbitration act permits vacation of an award "[w]here 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)(4) (2004); the federal directive that an arbitration award be "final" and "definite" is not contained in the text of the Minnesota statute.  Accordingly, the relevance of federal case law to our analysis of the panel's award under the Minnesota act is not clear. 

Notwithstanding these potential means to dismiss this issue, we address appellants' argument and conclude that it fails on the merits. 

            Based on our comparison of the court order governing the scope of the panel's jurisdiction with the panel's awards, it is evident that the arbitrators addressed the issues before them.  The initial order for arbitration, stipulated to by all parties and adopted by the district court, provided that the court-ordered arbitration was "intended only to address the issues as set forth [in the order]."  Furthermore, the order did not "preclude any party from bringing or pursuing any other claim or cause of action against any other party, in court or arbitration." 

            The issues set forth in the order were the respective ownership interests of the parties and seven others on which the board reached an impasse at a corporation shareholder meeting.  These other seven issues were identified by the incorporated board resolutions over which the parties reached a deadlock.  By the second phase of arbitration, only two of the seven issues remained in dispute, the enforceability of appellants' promissory notes, and whether respondent should be removed from his corporate positions. 

            In neither of the two disputed issues before the arbitration panel is it suggested, as appellants now propose, that in the event the panel decides against the enforceability of the notes, it must decide whether the notes become capital contributions or must analyze the tax consequences of the determination.  Neither the parties' stipulation to the panel's jurisdiction, the court order, nor the incorporated resolutions require the panel to analyze the potential legal implications of a non-enforceability determination.  The panel's interpretation of its jurisdictional scope was reasonable and based on the plain language of the court order and incorporated resolutions.  Appellants' argument is without merit, and the arbitrators did not "exceed[] their powers" under Minn. Stat. § 572.19, subd. 1(3).   

2.

            Appellants assert that enforcement of the panel's arbitration award violates Minnesota public policy protecting minority shareholders from fraud and oppression.  Even though appellants are 50% shareholders in the corporation, they argue that they are entitled to the equities enjoyed by minority shareholders and that it offends public policy to decide that their promissory notes are unenforceable in allegedly fraudulent circumstances where respondent carried the notes on the corporation's books and thereby represented that the notes were due.

            Once again we reach the issue despite our preliminary concerns.  First, it is not evident that appellants' public-policy argument was properly before the district court.  Appellants raised, and the district court addressed, alleged fraud only in the context of the assertion that the award is in "manifest disregard of the law," a standard Minnesota courts have not formally adopted as a ground for vacation of arbitration awards.  See Hunter, Keith Indus., 575 N.W.2d at 855 (refusing to adopt the doctrine of manifest disregard in Minnesota).  Moreover, appellants' submissions do not discuss the application of relevant legal standards on vacating an arbitration award on public policy grounds.

            Second, the applicability of the public-policy exception in Minnesota, and whether the supreme court will uphold the doctrine, remain questionable.  The only recent Minnesota case clearly applying the exception did so in the context of a collective-bargaining agreement that, as interpreted by the arbitrators, violated Minnesota's "well-defined" public policy "that imposes upon governmental units an affirmative duty . . . to prevent and to sanction sexual harassment and sexual misconduct by law enforcement officers."  City of Brooklyn Ctr. v. Law Enforcement Labor Servs., Inc., 635 N.W.2d 236, 242 (Minn. App. 2001), review denied (Minn. Dec. 11, 2001).  Here, there is no claim that the parties' agreement violates public policy, nor does this case present the exceptional circumstances of City of Brooklyn Ctr.  Moreover, the leading Minnesota Supreme Court case discussing the public-policy exception seems to recognize the exception's validity, but also states in a footnote, "[w]hile we refuse to invoke a public policy exception in the present case, we express no opinion on whether we would adopt such a public policy exception on a different set of facts."  State, Office of the State Auditor v. Minn. Ass'n of Prof'l Employees, 504 N.W.2d 751, 756-57, 758 n.9 (Minn. 1993). 

            Notwithstanding these preliminary concerns, we observe the failings of appellants' public-policy argument.  When we have applied the public-policy exception, we have recognized that "[t]he question of public policy is ultimately one for resolution by the courts, and therefore we need not show deference to the district court's conclusion."  City of Brooklyn Ctr., 635 N.W.2d at 241 (citation omitted).  But to benefit from the public-policy exception, appellants must identify a policy that is "‘well defined and dominant'"; such a policy "‘is to be ascertained by reference to the laws and legal precedents and not from general considerations of supposed public interests.'"  Id. at 241 (quoting W.R. Grace & Co. v. Local Union 759, Int'l Union of United Rubber Workers, 461 U.S. 757, 766, 103 S. Ct. 2177, 2183 (1983)).  When we have discussed the doctrine, we have been careful to observe that "[t]he public policy exception is . . . narrowly defined, and a court may set aside an arbitration award only if (1) the [] agreement contains terms which violate public policy, or (2) the arbitration award creates an explicit conflict with other laws and legal precedents."  Id. 

            Appellants argue that the arbitration award conflicts with Minnesota's well-defined public policy protecting minority shareholders from fraud, a policy embodied in Minnesota's business-corporation law.  But even if these laws constituted a "well defined and dominant" public policy supporting appellants' argument, the arbitrator's findings failed to establish a factual basis to support appellants' conclusory allegations of fraud.  In a clause not challenged by appellants, the panel determined that

while [appellants] have raised serious allegations about Respondent's potential self-dealing and usurpation of corporate opportunity, because [appellants] have elected not to pursue these claims at the Phase II hearing, but rather to reserve them for any subsequent proceeding . . . no change in the status of the current officers of the Corporation is presently appropriate . . . .

 

(Emphasis added.)  Moreover, appellants have made no showing and cited no legal authority for the proposition that respondent's reporting of the notes as due was improper.  Without factual findings that respondent engaged in fraud or breached his fiduciary duty with respect to the promissory notes, we cannot conclude that a breach of public policy occurred.  Finally, we note that appellants are free to raise further claims in a subsequent arbitration proceeding insofar as those claims are not barred by prior arbitration proceedings. 

            Because the arbitration panel did not exceed its powers and the arbitration award does not violate public policy, we affirm.

            Affirmed.   

 

* Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const. art. VI, § 10.

[1] See Minn. Stat. § 336.3-118(a) (2006).

[2] The arbitration panel observed that the parties initially contemplated converting appellants' $165,000 loans into capital contributions upon transformation of the business enterprise into a Limited Liability Company (LLC).  But as the panel noted, the contemplated LLC was never formed and the promissory notes continued to be carried on the books of the corporation.  The district court similarly observed the record that the parties at one time contemplated changing the notes into capital contributions but decided against it.  However, neither of these observations indicates that the status of the notes upon a determination of their non-enforceability was before the panel or the district court.