Court Opinion

ID: 9890094
Source: CourtListenerOpinion
Date Created: 2023-10-12 15:04:24.074815+00
Date Added: 2024-06-11T13:03:56.054995
License: Public Domain

NOTICE: NOT FOR OFFICIAL PUBLICATION.
  UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
                  AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

                                     IN THE
              ARIZONA COURT OF APPEALS
                                 DIVISION ONE

                 DMS COMPANIES, INC., Plaintiff/Appellee,

                                         v.

      CHRISTOPHER A. HERNANDEZ, et al., Defendants/Appellants.

                              No. 1 CA-CV 23-0028
                               FILED 10-12-2023

            Appeal from the Superior Court in Maricopa County
                           No. CV2022-052534
               The Honorable Timothy J. Thomason, Judge

                                   AFFIRMED

                                    COUNSEL

Titus Brueckner Spitler & Shelts PLC, Scottsdale
By David A. Fitzgerald
Counsel for Plaintiff/Appellee

Quarles & Brady LLP, Phoenix
By Jimmie W. Pursell, Jr., David J.F. Peabody
Counsel for Defendants/Appellants
               DMS COMPANIES v. HERNANDEZ, et.al.
                      Decision of the Court

                      MEMORANDUM DECISION

Judge Maria Elena Cruz delivered the decision of the Court, in which
Presiding Judge David D. Weinzweig and Judge Michael S. Catlett joined.

C R U Z, Judge:

¶1           Christopher A. Hernandez, Michelle Hernandez, Denise
Hernandez, HC Companies, Inc., and CD Enterprises, LLC (collectively
“Hernandez”) appeal from the superior court’s order denying their motion
to compel arbitration. For the following reasons, we affirm.

              FACTUAL AND PROCEDURAL HISTORY

¶2            In 2021, Hernandez agreed to sell to DMS Companies, Inc.
(“DMS”) substantially all of their construction, project management,
facilities maintenance, and general contracting business for $3,800,000,
subject to a purchase price adjustment to be made under the parties’ Asset
Purchase Agreement (“APA”). The parties also entered into a Transition
Services Agreement (“TSA”), under which Hernandez would provide
services to DMS to assist in the transfer of the business.

¶3           Section 1.02 of the APA, entitled “Accounting Terms,”
provided that all accounting terms and determinations, and all financial
statements and calculations, would be prepared in accordance with
generally accepted accounting principles (“GAAP”).

¶4          Section 2.06     of   the    APA,   entitled   “Purchase     Price
Adjustment,” provided:

      If the parties are unable to come to agreement on the Working
      Capital1 on or before the period ending at 11:59 p.m. local time

1      The APA defined “Working Capital” as “an amount equal to,
without duplication, the sum of Accounts Receivable, Inventory, prepaid
expenses, vendor rebates receivable, retentions and holdbacks and other
current assets (but excluding any tax receivables, tax refunds and other tax
assets (including any deferred tax assets) and cash, except to the extent
transferred to Buyer) of the Company as of a specified date, less the
combined accounts payable, accrued expenses, and other current Liabilities

                                     2
                DMS COMPANIES v. HERNANDEZ, et.al.
                       Decision of the Court

       on Thursday, January 20, 2022, then each of Seller’s Principals
       and Buyer shall submit on or before Monday, January 24th at
       11:59 p.m., local time, or such other time as directed to the
       parties by the Third Party Auditor (as defined below) a
       Working Capital statement they reasonably believe to be true
       and correct with supporting detail to Grant Thornton (the
       “Third Party Auditor”) for review.

       ....

       On or before the end of the Third Party Auditor Review
       Period, the Third Party Auditor shall determine the
       prevailing Working Capital statements. Fifty percent (50%)
       of the fees charged by the Third Party Auditor shall be paid
       by Buyer and the other fifty percent (50%) shall be paid by
       Seller’s Principal[s].    The “Finalized Working Capital
       Statement” shall mean (i) the prevailing Working Capital
       statement determined by the Third Party Auditor; (ii) the
       Initial Working Capital Statement if not objected to by Buyer
       prior to expiration of the Working Capital Review Period; or,
       if objections are made by Buyer during the Working Capital
       Review Period and the parties are able to resolve the
       objections in a manner acceptable to Buyer within the
       applicable review period, then (iii) the Working Capital
       statement agreed upon by Buyer and Seller’s Principals.

¶5             Section 7.10 of the APA limited the available remedies for a
breach of the APA to indemnity provisions but excluded section 2.06 and
certain tort and equitable claims from its limitations. Section 8.10(b) of the
APA, a forum selection clause, provided that any legal action arising out of
the APA or TSA would be brought in “federal or state courts” in Maricopa
County.

¶6           Escrow for the sale of the business closed in August 2021.
After closing, Hernandez submitted two Initial Capital Working
Statements, both of which DMS objected to on the basis that they had not
been prepared in accordance with GAAP. After the parties were unable to
agree on the working capital number, they were unable to come to an

of the Company not to be repaid as of the Closing (excluding any deferred
tax liability established to reflect timing differences between book and tax
income, any amounts owing with respect to any borrowed monies).
Working Capital shall be calculated in accordance with GAAP.”

                                      3
                DMS COMPANIES v. HERNANDEZ, et.al.
                       Decision of the Court

agreement with “Third Party Auditor” Grant Thornton to engage its
services.

¶7              In late 2022, DMS filed a complaint and amended complaint
in superior court against Hernandez raising claims of breach of the APA
and TSA, breach of the covenant of good faith and fair dealing, unjust
enrichment, misrepresentation, negligent misrepresentation, negligence,
violation of Arizona’s consumer fraud statutes, indemnity, and set off.
Among other things, DMS alleged Hernandez failed to provide it with
software, a $90k deposit, and books and records, failed to pay liabilities it
was obligated to pay including employee salaries and benefits, failed to
terminate employees, and failed to disclose liabilities it was required to
disclose, including substantial accounts payable. In addition, DMS alleged
Hernandez altered accounting records, failed to prepare its Initial Capital
Working Statements in accordance with GAAP, did not make reasonable
efforts to work with DMS to resolve the working capital dispute, failed to
provide an adequate reserve for bad debt, and conveyed equipment and
vehicles to it that were in disrepair or had expired registration.

¶8           Hernandez did not file an answer or counterclaims. Instead,
it moved to compel arbitration of two of DMS’ claims pursuant to Arizona
Revised Statutes (“A.R.S.”) section 12-3007(A) and stay all of the
proceedings. DMS opposed the motion, and, after oral argument, the
superior court denied it.

¶9            Hernandez timely appealed. We have jurisdiction pursuant
to A.R.S. § 12-2101.01(A)(1).

                               DISCUSSION

¶10           It is undisputed that the APA did not contain a general
provision to arbitrate. However, Hernandez argues the superior court
erred by denying the motion to compel arbitration because section 2.06 was
an arbitration provision.

¶11            “The trial court’s review on a motion to compel arbitration is
limited to the determination as to whether an arbitration agreement exists.”
Est. of Decamacho ex rel. Guthrie v. La Solana Care & Rehab, Inc., 234 Ariz. 18,
20, ¶ 8 (App. 2014) (citation and internal quotation marks omitted). See also
A.R.S. § 12-3006(B) (superior court “shall decide whether an agreement to
arbitrate exists or a controversy is subject to an agreement to arbitrate.”);
A.R.S. § 12-3007(C) (“If the court finds that there is no enforceable
agreement, it may not order the parties to arbitrate . . . .”). “We must defer,
absent clear error, to the factual findings upon which the trial court’s

                                       4
                DMS COMPANIES v. HERNANDEZ, et.al.
                       Decision of the Court

conclusions are based.” Decamacho, 234 Ariz. at 20, ¶ 8 (citation and internal
quotation marks omitted). “To the extent the issues require us to consider
and interpret legal principles and statutes, our review is de novo.” Id.
(citation and internal quotation marks omitted).

¶12            Arizona law deems valid any “agreement contained in a
record to submit to arbitration any existing or subsequent controversy
arising between the parties to the agreement . . . .” A.R.S. § 12-3006(A). The
terms “agreement to arbitrate” and “arbitration” are not defined by
Arizona’s Revised Uniform Arbitration Act (“RUAA”). See A.R.S §§ 12-
3001 to -3029. However, in Arizona, “’[a]rbitrator’ means an individual
who is appointed to render an award, alone or with others, in a controversy
that is subject to an agreement to arbitrate.” A.R.S. § 12-3001(2).

¶13           Public policy favors arbitration as the preferred means of
dispute resolution. Stevens/Leinweber/Sullens, Inc. v. Holm Dev. & Mgmt.,
Inc., 165 Ariz. 25, 29 (App. 1990). “However, that same public policy
presupposes the existence of a valid agreement to arbitrate.” Id. at 30.
“Although it is commonly said that the law favors arbitration, it is more
accurate to say that the law favors arbitration of disputes that the parties
have agreed to arbitrate.” S. Cal. Edison Co. v. Peabody W. Coal Co., 194 Ariz.
47, 51, ¶ 11 (1999). “In general, a party is bound to arbitrate only those
disputes which it has contractually agreed to arbitrate, and is not bound to
arbitrate disputes it has not specifically agreed to arbitrate.” Dueñas v. Life
Care Ctrs. of Am., Inc., 236 Ariz. 130, 139, ¶ 26 (App. 2014) (citations and
internal quotation marks omitted). See also Granite Rock Co. v. Int’l
Brotherhood of Teamsters, 561 U.S. 287, 299 (2010) (“Arbitration is strictly a
matter of consent, and thus is a way to resolve those disputes—but only those
disputes—that the parties have agreed to submit to arbitration.”) (citations
and internal quotation marks omitted).

¶14            When interpreting a contract, the superior court must
“attempt to ascertain and give effect to the intention of the parties at the
time the contract was made if at all possible.” Taylor v. State Farm Mut. Auto.
Ins. Co., 175 Ariz. 148, 153 (1993) (citation and internal quotation marks
omitted). “[A] contract must be construed as a whole, and each and every
part must be read in the light of the other parts.” Goodman v. Newzona Inv.
Co., 101 Ariz. 470, 473 (1966) (citation omitted).

¶15           Noting that DMS had argued it was not pursuing any claim
necessitating a determination of working capital under Section 2.06, the
superior court first concluded it had no authority to order the parties to
arbitrate the working capital issue for that reason.

                                      5
                DMS COMPANIES v. HERNANDEZ, et.al.
                       Decision of the Court

¶16           Next, the superior court concluded that section 2.06 did not
contain an agreement to arbitrate. The court reasoned that, although it may
not be necessary for the parties to use the word “arbitration” for an
arbitration agreement to exist,

      there are words that should have been used to make it clear
      that the parties were agreeing to a mandatory dispute
      resolution proceeding that would be binding in court. No
      such words were used. In fact, the [APA] is not clear as to
      whether the decision of the Third Party Auditor would be
      binding in subsequent litigation.

      The Third Party Auditor provisions can certainly be
      reasonably understood to be a mechanism to assist parties to
      complete the transaction. Contracts often contain provisions
      discussing the retention of experts to help resolve issues,
      which may not be intended to be binding in litigation.

      ....

      [T]he Court does not find Section 2.06 to be an agreement to
      arbitrate. That provision provides a mechanism for the
      parties to resolve disagreements about working capital. If the
      parties intended for that section to constitute an agreement to
      arbitrate, they should have simply referred to the process as
      an arbitration or used some language that could be
      reasonably construed as an arbitration agreement. They did
      not do so.

¶17           Even if the amended complaint placed section 2.06 in dispute,
as Hernandez argues, section 2.06 did not require arbitration. In section
2.06 of the APA, the parties referred to accountant Grant Thornton as a
“Third Party Auditor” rather than an “arbitrator,” “judge,” or “sole
adjudicator,” and referred to the work to be performed by Grant Thornton
as a “review”2 rather than an “arbitration,” “adjudication,” or “dispute
resolution.” Nor does section 2.06 refer to an “award.” See Penton Bus.

2      A “review” is a form of attest service performed by a certified public
accountant. See A.R.S. § 32-701(3)(b) (attest services include “[r]eviews of
financial statements to be performed in accordance with the statements on
standards for accounting and review services adopted by the American
institute of certified public accountants.”).

                                     6
                DMS COMPANIES v. HERNANDEZ, et.al.
                       Decision of the Court

Media Holdings, LLC v. Informa PLC, 252 A.3d 445, 458 (Del. Ch. 2018) (“An
expert determination—whether by an appraiser, an auditor, or a different
type of expert—is not an arbitration unless the parties specifically designate
that expert as an arbitrator for that purpose, thereby invoking the body of
law governing arbitrators.”) (citation and internal quotation marks
omitted); Sapp v. Indus. Action Svcs. LLC, 75 F.4th 205, 212 (3d Cir. 2023)
(when parties’ purchase agreement contained an agreement to submit
narrow disputes to an accounting firm, they agreed to an expert
determination, not arbitration).

¶18            Hernandez argues section 2.06 should be construed as an
arbitration provision because the parties used the word “final” as a
substitute for “binding.” Although section 2.06 repeatedly refers to Grant
Thornton’s anticipated “Finalized Working Capital Statement,” and once
refers to a “final, agreed-upon statement,” use of such language does not
evidence an agreement that Grant Thornton serve as an arbitrator or permit
the superior court to order the parties to arbitrate under RUAA. Although
we agree the words “arbitration” or “arbitrate” need not necessarily be
used, the language of this contract shows that the parties designated Grant
Thornton as an expert accounting firm for the limited purpose of resolving
factual disputes about working capital and the purchase price adjustment
by applying accounting principles. Our holding that there was no
agreement to arbitrate does not render section 2.06 superfluous. Section
2.06 is still an enforceable contractual provision. If DMS remains in
violation of section 2.06, Hernandez may bring an action for specific
performance in the superior court. The superior court did not err by
denying Hernandez’ motion to compel arbitration.

¶19           Hernandez requests an award of attorneys’ fees pursuant to
A.R.S. § 12-341.01, under which we may award reasonable fees to the
successful party in an action arising out of contract. We deny the request.
See Austin v. Austin, 237 Ariz. 201, 210-11, ¶ 34 (App. 2015) (when appeal
involved superior court’s ruling denying motion to compel arbitration no
decision on the merits had been made so parties’ requests for attorneys’ fees
pursuant to A.R.S. § 12-341.01 were denied).

                                      7
        DMS COMPANIES v. HERNANDEZ, et.al.
               Decision of the Court

                     CONCLUSION

¶20   For the foregoing reasons, we affirm.

                  AMY M. WOOD • Clerk of the Court
                  FILED:    JT

                               8