Title: Pecha v. Smith, Keller & Associates

State: wyoming

Issuer: Wyoming Supreme Court

Document:

Pecha v. Smith, Keller & Associates1997 WY 88942 P.2d 387Case Number: 96-87, 96-86Decided: 07/14/1997Supreme Court of Wyoming

Stephen H. PECHA; Steven K. Bentley, P.C.; Steven K. 
Bentley; Mark Dorr;

and Barbara Elizabeth Dorr, Appellants 
(Defendants),

v.

SMITH, KELLER &

ASSOCIATES, a Wyoming general partnership, Appellee 
(Plaintiff).

 

SMITH, KELLER & ASSOCIATES, a Wyoming general 
partnership; and Thomas M.

Hogan, as Bankruptcy Trustee for Dorr & 
Associates, a partnership,

Appellants (Plaintiffs),

v.

DORR, BENTLEY & PECHA, a partnership; 
Dorr,

Bentley & Pecha, Certified Public Accountants, a 
Limited Liability

Company; Steven K. Bentley; Steven K. Bentley P.C.; 
Mark Dorr; Dorr,

Bentley & Pecha, P.C.; Dorr, Bentley & Pecha, 
a CPA Network; Barbara

Elizabeth Dorr; and Stephen H. Pecha, Appellees 
(Defendants).

 

                              

 

Appeal from District Court of Laramie County, 
Nicholas Kalokathis, J.

   

 

Greg L. Goddard, of Goddard, 
Perry & Vogel, Buffalo, for Appellants in No. 96-86 and Appellees in No. 
96-87.

 

Don W. Riske, of Riske & 
Arnold, P.C., Cheyenne; Patrick Vellone, of Vinton, Nissler, Allen & 
Vellone, P.C., Denver, CO; and G. Kevin Keller (argued), Cheyenne, for Smith, 
Keller & Associates.

 

Ernest W. Halle, Cheyenne, 
for Chapter 7 Trustee for Dorr & Associates.

 

Before THOMAS, GOLDEN, LEHMAN, 
JJ., VOIGT, District Judge, and KAUTZ, District Judge.
 

     THOMAS, 
Justice. 

  [¶1]       These appeals are taken from a 
Trial Decision/Order entered by the trial court after the case had been remanded 
for further proceedings by this Court. The case represents a third effort by the 
partners (actually two partnerships) in an accounting firm, Dorr, Keller, 
Bentley & Pecha (DKBP), to have this Court adjust the obligations flowing from the dissolution of the 
accounting partnership. The first efforts are represented by our opinions in 
Dorr, Keller, Bentley & Pecha v. Dorr, Bentley & Pecha, 841 P.2d 811 
(Wyo. 1992) (Dorr I) and Smith, Keller & Associates v. Dorr & 
Associates, 875 P.2d 1258 (Wyo. 1994) (Dorr II). The focal issue of this case is 
the right of Smith, Keller & Associates (SKA), or the Trustee in Bankruptcy 
for Dorr & Associates (Trustee) to recover damages from Stephen H. Pecha; 
Steven K. Bentley, P.C.; Steven K. Bentley; Mark Dorr; and Barbara Elizabeth 
Dorr (collectively the Dorr Faction) for breach of their fiduciary duty, owed to 
DKBP, by violating a covenant not to compete. Additional issues raised by the 
parties include the enforceability of arbitration awards against the Dorr 
Faction, and a ruling that the Trustee failed to raise claims against the new 
firm within the statutory period of time. The District Court awarded judgment in 
favor of SKA against the Dorr Faction in 
the amount of $112,716.00 for breach of a fiduciary duty owed to DKBP and 
$1,451.96 for the value of work in process. It denied all other relief in 
accordance with its opinion letter, specifically incorporated by reference in 
the Judgment. We hold that any damages attributable to any violation of the 
covenant not to compete were included in the damage award made by the 
arbitrators on August 24, 1989, and the judgment for $112,716.00 for breach of a fiduciary duty must be 
reversed. We affirm the district court in all other 
respects.

 

 [¶2]         In the Brief of Appellants 
in No. 96-86 and Appellees in No. 96-87, filed on behalf of the Dorr Faction, 
the issues are set forth as follows:

 

ISSUE ONE

 

            
What is the effect of the court's ruling in Dorr 
II?

 

ISSUE TWO

 

            
Can a covenant-not-to-compete be imputed by the court where none 
otherwise exists?

 

ISSUE THREE

 

            Assuming, arguendo, 
that the Dorr Faction is subject to a covenant-not-to-compete, what are 
the damages, pursuant to Hopper, 
for a violation of the covenant?

 

   In the Brief of Appellee in No. 
96-86: Smith Keller & Associates, two issues are 
identified:

 

            I. Whether 
the Wyoming Supreme Court has jurisdiction to determine matters regarding the 
Dorr, Keller, Bentley & Pecha 
partnership in contravention to the arbitration process and the three (3) 
resultant awards.

 

            II. Whether 
the district court correctly found that removal of the covenant not to compete 
from the Dorr & Associates 
partnership agreement just prior to filing bankruptcy resulted in a fraudulent 
conveyance rendering the partnership 
insolvent and unable to pay its creditors, specifically Smith, Keller & 
Associates and the Dorr, Keller, Bentley & Pecha partnership but failed to 
award the full amount of damages.

 

   The Reply of Brief of Appellants 
(96-86), filed on behalf of the Dorr Faction, sets forth two additional 
issues:

 

ISSUE ONE

 

            With regard to SKA, did 
the trial court actually find a fraudulent conveyance?

 

ISSUE TWO

 

            Is there a valid 
covenant-not-to-compete in this case binding all of the Dorr 
defendants?

 

[¶3]           In the Brief of 
Appellants: Smith Keller & Associates and Thomas M. Hogan, Trustee for Dorr 
& Associates, filed in Case No. 96-87, these issues are 
recited:

 

I. Whether the district court exceeded its 
jurisdiction by determining that there is no enforceable covenant not to compete 
in the Dorr,      Keller, Bentley 
& Pecha partnership agreement in direct contravention to the specific language of the 
confirmed, unappealed arbitration awards.

 

            II. Whether 
the district court erred by ruling that the second and third confirmed, 
unappealed arbitration awards rendered 
in the firm name of Dorr & Associates, a Wyoming general partnership, were 
unenforceable against the individual partners of Dorr & 
Associates.

 

            III. 
Whether the district court erred in determining that the Bankruptcy Trustee 
failed to raise the claims of Dorr 
& Associates within the statutory period of time.

 

In the Brief of Appellees 
(No. 96-87), the Dorr Faction identifies the issues, in the appeal by SKA and 
the Trustee, as these: 

 

ISSUE ONE

 

            Did the district court 
exceed its jurisdiction by determining that there is no 
enforceable covenant-not-to-compete?

 

ISSUE TWO

 

            Did the district court 
correctly rule that the third arbitration award could not be applied 
against the Dorr Faction 
individually when there was no hearing and they were not allowed to 
participate?

 

ISSUE THREE

 

            Did the district court 
correctly rule that the Bankruptcy Trustee failed to raise claims of Dorr 
& Associates within the 
statutory period of time?

 

 [¶4]         We summarize, briefly, the 
facts as they have been reflected in Dorr I and Dorr II. On January 1, 1988, 
DKBP was formed by two general partnerships, Dorr & Associates and SKA, and 
that partnership then was comprised of the parties now known as the Dorr Faction 
of Gillette, and SKA, a general partnership operating in Cheyenne. The partnership agreement 
contained a covenant not to compete. It also provided a specific procedure for 
dissolution within the first twenty-four months of the partnership. The 
partnership agreement provided that SKA or Dorr & Associates could dissolve 
the partnership without the consent of 
the other by providing thirty days notice. If dissolution was accomplished by 
this procedure, the DKBP partnership agreement provided: "In this case only, 
each party shall take back those assets and/or liabilities it brought to the 
partnership." SKA invoked this provision of the DKBP partnership and dissolved 
the partnership on May 4, 1989. Further 
in accordance with the terms of their agreement, SKA and Dorr & Associates 
entered into arbitration to settle their affairs.

 

 [¶5]         The first arbitration 
culminated in an award made on August 24, 1989 pursuant to which Dorr & 
Associates (Dorr Faction) was to pay SKA $105,163.78 in unpaid compensation and 
damages. Following the award, the Dorr 
Faction, as Dorr & Associates, rescinded its own covenant not to compete, 
previously binding among the members of the partnership, so that the individuals 
could be free to form new entities. In 
February of 1990, Dorr & Associates declared a Chapter 11 bankruptcy, which 
later became a Chapter 7 bankruptcy.  
A trustee was appointed by the bankruptcy court to represent solely the 
now defunct Dorr & Associates entity, while the Dorr Faction formed new 
entities and essentially continued business as usual. At that juncture, SKA 
continued the arbitration proceedings with the Trustee representing Dorr & 
Associates, but without any 
representation of the individual members of the Dorr Faction, to settle 
additional questions about the dissolution of DKBP. The arbitrators announced a 
second award on July 30, 1990, which held the members of the Dorr Faction liable 
for additional damages to SKA. After that, the arbitrators announced a third award in favor of SKA on August 22, 
1994, against the members of the Dorr Faction, but based, like the July 30, 1990 
order, only on participation from SKA and the Trustee in bankruptcy. The 
arbitration proceedings then merged into actions to have the district court 
enforce the arbitration awards.

 

  [¶6]       The parties are now visiting this 
Court for the third time regarding their dissolution. The first opinion was 
filed in this Court in 1992, in Dorr I. In that first case, we held, among other 
rulings, that full effect had not been given to the arbitration awards dated 
August 24, 1989 and October 1, 1989 (a nunc pro tunc order). In the second case 
before this court, Dorr II, we held that the arbitration did not terminate the 
DKBP partnership. We ruled that termination occurs only after the partnership 
affairs have been wound up following dissolution.  With respect to this case, Dorr II specifically 
decided that SKA was entitled to an award for work in process during the winding 
up stage of DKBP.

 

 [¶7]         Following the decision in 
Dorr II and the third arbitration, the parties revisited the district court. SKA 
and the Trustee in bankruptcy sought confirmation of the third arbitration 
award, and they endeavored to renew claims against the Dorr Faction for the 
breach of a fiduciary duty, that is violation of a covenant not to compete found in the original DKBP agreement 
and for fraudulent conveyance of assets. The fraudulent conveyance related to 
the Cheyenne client base, originally brought into the DKBP partnership by SKA. 
The Dorr Faction appeared to defend both old and new claims by SKA and the 
Trustee in bankruptcy.

 

  [¶8]       The district court ruled that only 
the partnership (Dorr & Associates) was represented by the Trustee in 
bankruptcy in the second and third arbitration proceedings. The court held that 
the individuals originally comprising the partnership of Dorr & Associates 
(the Dorr Faction) were not furnished notice or an opportunity to be heard, and they were not bound by 
any agreements or arbitration award under the circumstances. The district court 
also ruled that the dissolution of DKBP on May 4, 1989 did away with any 
covenant not to compete found in the DKBP agreement. The district court further 
held that, while the Dorr Faction had 
taken over the Cheyenne client base, this was not a fraudulent 
conveyance.

 

 [¶9]         The issue that the district 
court ruled upon that resulted in this appeal by the Dorr Faction relates to its 
finding that the deletion by the Dorr Faction of the covenant not to compete 
clause in their own partnership agreement, while that partnership was involved 
in the dissolution of DKBP (approximately one month prior to declaring bankruptcy), constituted a breach 
of a fiduciary duty to DKBP. The district court held that SKA, as a liquidating 
partner of DKBP, could enforce the fiduciary duty owed by the Dorr Faction. With 
respect to the fraudulent conveyance claim asserted by the Bankruptcy Trustee, 
however, the court ruled that those claims against the Dorr Faction were barred 
by the four year statute of limitations.

 

 [¶10]      The issue of whether the 
arbitrators exceeded their authority primarily is a question of law. JBC of 
Wyoming Corp. v. City of Cheyenne, 843 P.2d 1190, 1194 (Wyo. 1992). A question 
of law is reviewed de novo by this Court 
as an exercise of its plenary authority, and no deference is given to the 
determination by the trial court that grounds existed for vacating the 
arbitration award. As a general rule, this Court is reluctant to disturb an 
arbitrator's resolution of a controversy. As we said in JBC of Wyoming, 843 P.2d 
at 1194:

 

            Because of 
its voluntary, informal nature, awards made in arbitration are subject to less 
intensive scrutiny than are, for 
example, the orders of administrative agencies. See W.S. 16-3-114. 
The reviewing court must observe 
the principle that arbitrators are free to fashion forms of relief 
which could not be ordered by a 
court in law or equity.  W.S. 
1-36-114(a)(v). Furthermore, we are reluctant to disturb an arbitrator's just solution to a 
controversy, even if it differs from the resolution            we might 
have chosen, had we been in the arbitrator's place.

 

  [¶11] 
   Our cases hold that 
due process of law is guaranteed to any party who has a legitimate property 
interest at stake in any proceeding by virtue of the Fourteenth Amendment of the 
Constitution of the United States and Article 1, Section 6 of the Constitution 
of the State of Wyoming. Loghry v. Loghry, 920 P.2d 664, 668 (Wyo. 1996); Barker Bros., Inc. v. 
Barker-Taylor, 823 P.2d 1204, 1208 (Wyo. 1992). Notice and the opportunity to be 
heard are touch stones of this due process of law. See Loghry, 920 P.2d  at 668; Barker Bros., 823 P.2d  at 1208; 
Bjugan v. Bjugan, 710 P.2d 213, 219 (Wyo. 1985); Tanner v. Tanner, 482 P.2d 443, 
445 (Wyo. 1971); State ex rel. Blonder v. Goodbrod, 77 Wyo. 126, 307 P.2d 1073, 
1075 (1957). The Dorr Faction, as the members of Dorr & Associates, one of 
the original contracting parties in the 
DKBP agreement, had a legitimate property interest that was impacted by the 
awards by the arbitration panel. The Dorr Faction had notice of and participated 
in the first arbitration which antedated any bankruptcy filings. There is no 
question that the first arbitration order applies to and binds the Dorr 
Faction.

 

 [¶12]      In the second and third 
arbitrations, however, the Dorr Faction was neither furnished with notice nor 
given any opportunity to be heard. The only parties noticed with respect to 
those arbitration proceedings were SKA 
and the Trustee in bankruptcy. The Dorr Faction challenged the validity of those 
arbitration awards, and the district court sustained their position, voiding the 
awards in the second and third arbitrations. We hold that the second and third 
arbitration proceedings are void so far as the Dorr Faction is concerned and they are not bound by those awards. 
While we did say in Dorr I, 841 P.2d  at 818, that "a debtor (D & A) is not 
entitled to notice of the trustee's actions regarding conduct of litigation 
involving the bankruptcy estate * * *," that comment did not extend to a 
proceeding that would address the individual members of the bankrupt firm. No arbitration 
proceeding can be invoked to circumvent the basic rights of due process and 
directly bind any individual, like the unrepresented members of the Dorr 
Faction. The second and third arbitrations, as the district court correctly 
held, cannot be enforced against the Dorr Faction.

 

 [¶13]      The final question concerns 
the award by the trial court of damages to SKA as the liquidating partner of 
DKBP against the Dorr Faction for breach of the fiduciary duty. In Dorr I, 841 P.2d  at 818, we adopted language from Waddell v. Shriber, 465 Pa. 20, 348 A.2d 96, 101 (1975), and we said, "[w]hen parties create a contractual relationship which includes a 
broad arbitration agreement, they intend to include within the scope of 
arbitration any dispute arising from the termination of that contractual 
relationship unless they clearly evidence a purpose to exclude such disputes." 
The partnership agreement between Dorr & Associates and SKA contained a broad 
arbitration provision.1 By that provision, the parties 
agreed to arbitration to settle all 
their differences upon the dissolution of the DKBP partnership. That was the 
purpose and focus of the first arbitration proceeding. The arbitration panel 
considered testimony and evidence, conducted an accounting, and entered an 
award. In Dorr I, we advised that the first arbitration award settled all disputes between the parties and that 
those issues could not be relitigated. See Dorr I, 841 P.2d  at 814. The phrase "all disputes" included a fair 
division of the assets valued by the arbitrators which in effect included an 
award to SKA for their Cheyenne client base.

 

  [¶14] 
   The claim by SKA that 
the Dorr Faction had violated its own covenant not to compete, and therefore had 
breached a fiduciary duty to DKBP, is without merit because any damage suffered 
by SKA or DKBP which resulted from that 
action of the Dorr Faction was included within the arbitration award to SKA. We 
decided in Dorr II that SKA was entitled to an accounting and award for work in 
process during the dissolution proceeding. While it may be somewhat awkward to 
find the salient portion of the decision in a footnote, we allude to footnote 5 of Dorr II, 875 P.2d  at 1265, where we pointed out that the client base was more accurately 
described as goodwill. In its opinion letter in the case before us, the district 
court stated that the asset with which it was concerned was the client base. We 
are satisfied that this is the same asset for which SKA was awarded recovery in 
the first arbitration proceeding. Any further award to SKA, beyond that of 
the first arbitration proceeding, for 
the value of or return of any assets of DKBP, would result in a double recovery 
for SKA.  That double recovery would 
work a fundamental injustice to the Dorr Faction.

 

  [¶15] 
   We hold that the 
first arbitration proceeding and the award there made for the damages included 
any claim that SKA now is seeking to enforce against the Dorr Faction. Each 
member of the Dorr Faction is jointly and severally liable for that arbitration 
award. See WYO. STAT. § 17-13-307 (1987). We agree with the trial court that this liability is imposed upon Mark 
Dorr. The result is that the SKA claims for fraudulent conveyance and breach of 
the Dorr & Associates covenant not to compete are res judicata in this case. 
The only claim available was for work in process, and the district court 
correctly decided that the amount owed was $1,451.96.

 

 [¶16]      The district court correctly 
ruled that the claim by the Trustee in bankruptcy against the Dorr Faction for 
fraudulent conveyance of the Dorr & Associates client base was barred by the 
four year statute of limitations. This issue also is a question of law receiving 
de novo review under our plenary authority.  See Union Pacific Resources Co. v. 
State, 839 P.2d 356, 367 (Wyo. 1992). Upon review, we agree with the conclusion 
of the district court that the Trustee 
in bankruptcy clearly filed his action too late, and his claim is 
barred.

 

  [¶17] 
   In summary, we 
reverse the district court with respect to the award to SKA of $112,716.00 for 
breach of any fiduciary duty owed by the Dorr Faction to DKBP. We affirm the 
district court in all other respects. This case is reversed in part and remanded 
to the district court for the purpose of entering a judgment consistent 
with this opinion.

 

   

FOOTNOTES

1 The 
partnership agreement stated in part:

 

                 
ARTICLE XII. ARBITRATION

 

     Any controversy 
arising out of or relating to this partnership agreement shall be settled 
by arbitration by 
three members of the state knowledgeable in business affairs. The first 
two arbitrators 
selected, one by each of part to the controversy, and the third arbitrator 
mutually agreed upon and 
selected by the first two arbitrators.  
Majority decision of the arbitrators will constitute arbitrated 
settlement, and judgment on the award rendered may be entered by any court 
having jurisdiction. 
The arbitrated settlement shall be made by arbitrators within 60 days of 
selection of the third 
arbitrator. Arbitration shall be the exclusive remedy of 
controversy. 

   Dorr I, 841 P.2d. at 818, n. 9, 
(emphasis added).