Court Opinion

ID: 3132838
Source: CourtListenerOpinion
Date Created: 2015-10-20 16:01:21.293862+00
Date Added: 2024-06-11T11:53:54.778696
License: Public Domain

NOT RECOMMENDED FOR PUBLICATION
                                File Name: 15a0703n.06

                                          No. 14-2518

                          UNITED STATES COURT OF APPEALS
                               FOR THE SIXTH CIRCUIT
                                                                                     FILED
BERNARD J. SCHAFER; HENRY BLOCK,                        )                       Oct 20, 2015
                                                        )                  DEBORAH S. HUNT, Clerk
       Plaintiffs-Appellants,                           )
                                                        )
v.                                                      )       ON APPEAL FROM THE
                                                        )       UNITED STATES DISTRICT
MULTIBAND CORP.,                                        )       COURT FOR THE EASTERN
                                                        )       DISTRICT OF MICHIGAN
       Defendant-Appellee.                              )
                                                        )
                                                        )

BEFORE:        ROGERS, STRANCH, and DONALD, Circuit Judges.

       ROGERS, Circuit Judge. This appeal concerns the effect of our earlier decision in this

litigation, which held that an arbitrator did not manifestly disregard the law in concluding that

Bernard Schafer and Henry Block’s indemnification agreements with Multiband Corporation

were void. Schafer v. Multiband Corp., 551 F. App’x 814, 820–21 (6th Cir. 2014) (“Schafer I”).

Schafer I reversed the district court’s judgment vacating the arbitration award and remanded the

case for further proceedings. On remand, Schafer and Block argued that the district court was

required to rule on a second theory for vacating the arbitration award. The district court refused

to hear this claim, reasoning that Schafer I precluded the court’s review of the second argument.

Notwithstanding some unclear language in the opinion, however, Schafer I did not decide

Schafer and Block’s second argument for vacatur, and the district court should address that

argument in the first instance.
No. 14-2518
Schafer v. Multiband Corp.

       Schafer I sets forth in detail the facts giving rise to Schafer and Block’s arbitration

complaint. See id. at 815–18. The facts relevant to this appeal are summarized as follows.

       Schafer and Block had partial ownership interests in four companies in the satellite

television equipment business. In 2005, they created a parent company for the other companies,

DirecTECH Holding Company, Inc. (DTHC), and executed indemnification agreements with

DTHC in their capacities as directors and trustees of an employee stock ownership plan (ESOP)

and an employee stock ownership trust (ESOT). The agreements protected Schafer and Block

from all losses incurred in connection with their roles as directors and trustees, with the

exception of wrongful acts and gross negligence.       Each agreement contained a mandatory

arbitration clause.

       Soon after the creation of DTHC, the Department of Labor (DOL) began investigating

DTHC on the belief that its directors and trustees had breached their fiduciary duties in certain

stock transactions involving the ESOP and ESOT.         While the investigation was ongoing,

Multiband began negotiations to purchase DTHC. Multiband was fully informed of the DOL

investigation prior to its 2009 purchase of the company. As part of the purchase agreement,

Multiband agreed to indemnify Schafer and Block for any losses in connection with their roles as

directors and trustees, and also assumed DTHC’s indemnification agreements. In 2009, the DOL

filed suit against Schafer and Block for breach of fiduciary duty. The suits were eventually

settled for $1.45 million each. Schafer and Block then sought indemnification from Multiband,

but Multiband refused to honor the indemnification agreements.

       In 2011, Schafer and Block filed an arbitration complaint against Multiband, arguing

primarily that Multiband breached the indemnification agreements. Multiband countered that the

agreements were void under a provision of the Employee Retirement Income Security Act

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No. 14-2518
Schafer v. Multiband Corp.

(ERISA), 29 U.S.C. § 1110(a), which prohibits certain types of exculpatory agreements for

fiduciaries. Schafer and Block also brought alternative claims based on fraud and estoppel in

case the agreements were determined to be void.          The fraud claim argued that Multiband

fraudulently induced Schafer and Block to enter into agreements that it knew were void. The

estoppel claim asserted that Multiband could not argue that the agreements were void because of

its prior representations to Schafer and Block.          Schafer and Block claimed incidental,

consequential, and punitive damages for relief under the alternative claims. The alternative

claims also alleged that the purchase price for DTHC would have been higher if the purchase

agreement had not included the indemnification agreements.

       Prior to discovery in the arbitration, the parties agreed that the legal question of whether

the indemnification agreements were void could be determined on summary disposition based on

agreed-upon facts. This legal question did not include or refer to the alternative claims. In his

decision, the arbitrator stated that the only issue in the summary disposition was whether “the

indemnity agreements [are] invalidated by operation of ERISA.” The arbitrator did not give

notice that he would also be deciding the alternative claims and did not order briefing or hear

evidence on those claims. At a hearing on the ERISA issue, counsel for Schafer and Block

referred only briefly to the alternative claims at the end of their argument:

               We have a second claim here, a second series of claims associated with
       stock fraud . . . . [I]f Multiband later takes the position that promise I have gave
       you to induce you to sell me your stock was void when I gave it to you, ha, ha, ha.
       Then we’ve got a stock fraud case here, that is set forth in our complaint.
       ....
       And it may not be a – I haven’t fleshed out exactly, the fraud case, but it is a fraud
       case. So that’s where we are.

The arbitrator ruled against Schafer and Block, holding that the agreements were void under

ERISA and that the breach of contract claims therefore failed. Neither the arbitrator’s one-

                                                 -3-
No. 14-2518
Schafer v. Multiband Corp.

sentence judgment nor his analysis of the ERISA issue mentioned the alternative claims. The

arbitration service, however, dismissed the entire arbitration after the arbitrator rendered his

decision.

        Schafer and Block then filed a complaint and petition to vacate the arbitration award in

federal district court. The complaint asserted two grounds for relief. First, the complaint

asserted that the decision holding the agreements void was in manifest disregard of the law,

including Sixth Circuit precedent. Second, the complaint alleged that the arbitrator exceeded his

powers under § 10 of the Federal Arbitration Act (FAA) by failing to explain why his holding on

the ERISA issue precluded Schafer and Block’s alternative claims. On appeal, Schafer and

Block now explain that the second argument for vacatur is based on two subsections of 9 U.S.C.

§ 10.   The arbitrator’s decision violated § 10(a)(3), Schafer and Block argue, because the

arbitrator did not provide them “a full and fair hearing on [the alternative] claims” since he did

not provide notice that he was deciding the claims or allow the parties to present evidence. The

arbitrator also allegedly exceeded his powers under § 10(a)(4) because he did not state his reason

for dismissing the alternative claims, as was required by the parties’ indemnification agreements.

        The district court vacated the arbitrator’s award, holding that the decision on the ERISA

issue was in manifest disregard of the law. The court did not address the second argument for

vacatur based on the alternative claims. On appeal, this court reversed the district court. We

framed the issue in the following way:

        Schafer and Block filed suit in federal court, seeking to have the arbitrator’s
        decision vacated because “the Arbitrator expressly disregarded controlling federal
        law and held for the first time in American jurisprudence, that Section 1110
        categorically bars all private indemnification agreements between plan fiduciaries
        and third parties.” The court found that “manifest disregard of the law” survives
        as a basis for vacating an arbitrator’s decision, and held that the arbitrator
        committed more than “a mere error in interpretation or application of the law”
        when he decided that ERISA does not permit indemnification agreements.

                                               -4-
No. 14-2518
Schafer v. Multiband Corp.

        Instead, the arbitrator’s conclusions were, according to the court, “contrary to
        clearly established legal precedent” of which the arbitrator was aware, but chose
        to ignore. The district court therefore vacated the arbitrator’s decision.
        Multiband timely appeals.

Schafer I, 551 F. App’x at 818. We held that though the arbitrator’s decision was “an apparent

error of law, the arbitrator did not manifestly disregard the law.” Id. Accordingly, the judgment

of the district court was “reversed and remanded for further proceedings consistent with th[e]

opinion.” Id. at 821. Schafer and Block’s petition for a rehearing en banc was denied.

        Schafer and Block’s appellate brief in Schafer I focused almost exclusively on the

question of whether the arbitrator manifestly disregarded the law in deciding the ERISA issue.

One paragraph on the last page of the brief argued the second ground for vacatur, stating in part

that Schafer and Block “were not given the opportunity to present evidence or be heard on their

Alternative Claims.    Accordingly, the Arbitrator exceeded his powers and the Arbitration

Decision must be vacated.” Multiband did not address this issue in its principal brief but did so

in its reply brief.

        On remand, the parties filed cross-motions for summary judgment. Schafer and Block

argued that the district court should vacate the arbitration award under the second ground for

relief. Multiband argued that Schafer I had already rejected that argument. In affirming the

arbitration award, the district court “reluctantly” agreed with Multiband. The court noted that

Schafer and Block’s appellate brief raised the second argument for vacatur, and reasoned that

Schafer I dismissed that argument in its analysis of § 10 of the FAA. The district court relied in

particular on the following excerpt from our opinion:

        Under the FAA, “a court ‘must’ confirm an arbitration award ‘unless’ it is
        vacated, modified, or corrected ‘as prescribed’ in §§ 10 and 11. Section 10 lists
        grounds for vacating an award.” Hall St. Assocs. v. Mattel, Inc., 552 U.S. 576,
        582 (2008). These are:

                                               -5-
No. 14-2518
Schafer v. Multiband Corp.

                 (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
                 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. None of the first three bases is even arguably present here. There
          is also no argument that under the fourth ground the arbitrator exceeded his
          powers, apart from an argument that, by manifestly disregarding the law, the
          arbitrator exceeded his powers.

Schafer I, 551 F. App’x at 818. The district court also stated that Schafer I “necessarily decided”

the second argument because Schafer and Block presented both grounds for vacatur on appeal

and Schafer I’s judgment reversing the district court implicitly rejected the second argument.

Lastly, the district court found support for its conclusion in the order denying an en banc

rehearing, which stated “that the issues in [Schafer and Block’s] petition were fully considered

upon the original submission and decision of the case.”

          The district court therefore dismissed the complaint on the basis that Schafer I’s

purported ruling on the second argument for vacatur was the law of the case. Schafer and Block

appeal.

          Although some of our language was in retrospect misleading, we did not decide in

Schafer I the claim that the arbitration award should be set aside because the arbitrator

improperly disposed of Schafer and Block’s fraud and estoppel claims. When an appellate court

remands a case for further proceedings, “the trial court is free to consider any issues not decided

‘expressly or impliedly by the appellate court.’” Kavorkian v. CSX Transp., Inc., 117 F.3d 953,

                                                 -6-
No. 14-2518
Schafer v. Multiband Corp.

958–59 (6th Cir. 1997) (quoting Jones v. Lewis, 957 F.2d 260, 262 (6th Cir. 1992)). The district

court should therefore have addressed the alternative claims.

       Schafer I did not expressly decide whether the arbitration award should be vacated based

on the arbitrator’s failure to hear evidence on the alternative claims or his failure to explain his

dismissal of those claims. Indeed, at several points, the opinion explains that it was only

addressing the argument that the arbitrator’s ERISA holding was in manifest disregard of the

law. First, when describing the background of the case, the opinion never mentions that Schafer

and Block asserted alternative claims. See Schafer I, 551 F. App’x at 816–18. Nor does the

opinion mention the alternative claims in framing the issue for review. See id. at 818. Instead,

the opinion notes that the issues were whether the “manifest disregard of the law” standard

survived as a basis for vacating an arbitrator’s decision and whether the arbitrator’s decision

holding the agreements void satisfied this standard. Id. at 818–19. Moreover, the holding states

in full that “[n]otwithstanding an apparent error of law, the arbitrator did not manifestly

disregard the law in concluding that the indemnification agreement between Schafer and Block

and Multiband was void as against public policy.” Id. at 818. This holding, too, makes no

mention of the second argument for vacatur. Finally, the main policy reason supporting the

opinion’s holding is that arbitration avoids the expense of appeals based on legal errors. Id. at

820. This policy is only relevant where the question is whether an arbitrator committed a legal

error, a question not implicated by Schafer and Block’s second argument for vacatur.

       Even though the opinion does not explicitly mention the second argument for vacatur, the

district court reasoned that this court addressed that argument after listing the four bases for

vacatur of an arbitration award under § 10 of the FAA. Immediately following the quotation of

§ 10, the opinion states that “None of the first three bases [for vacatur] is even arguably present

                                                -7-
No. 14-2518
Schafer v. Multiband Corp.

here. There is also no argument that under the fourth ground the arbitrator exceeded his powers,

apart from an argument that, by manifestly disregarding the law, the arbitrator exceeded his

powers.” Id. at 818. The district court concluded that because Schafer and Block raised the

second argument for vacatur in their appellate brief, the opinion’s statement that none of the

bases for relief under § 10 applied is an explicit rejection of both arguments for vacatur.

       We regret the extent to which this language was misleading. The district court’s reading

of the language is understandable; however, the two sentences quoted above only analyzed

whether § 10 provided relief on the arbitrator’s ERISA holding. The mandate—which reversed

and remanded the case for further proceedings consistent with the opinion—and the background,

issue statement, holding, and analysis sections of the opinion indicate that Schafer I did not

“squarely decide[]” the second argument for vacatur. Kindle v. City of Jeffersontown, 589 F.

App’x 747, 753 (6th Cir. 2014) (quoting Perkins v. Am. Elec. Power Fuel Supply, Inc., 91 F.

App’x 370, 374 (6th Cir. 2004)). The opinion’s statement that “[n]one of the first three bases

[for vacatur] is even arguably present here” indicates that none of those bases applied to the

arbitrator’s ERISA holding, which is the issue that the rest of the opinion discusses. Schafer I,

551 F. App’x at 818. The same interpretation applies to the next sentence in the opinion, which

states in part that “[t]here is also no argument that under the fourth ground the arbitrator

exceeded his powers.” Id.

       Schafer I also did not necessarily decide the second argument for vacatur. It is true that

Schafer and Block argued the second ground for vacatur in their appellate brief. But this

argument—which occupied only four sentences in the brief—did not have to be decided by this

court. In vacating the arbitration award, the district court only decided the question of whether

the arbitrator manifestly disregarded the law. While we may affirm lower court judgments on

                                                -8-
No. 14-2518
Schafer v. Multiband Corp.

alternative legal grounds not relied upon by the district court, we are not required to do so, and if

we considered the possibility but rejected it on the merits—rather than just not addressing the

issue—it is unlikely that we would do so in such a cryptic fashion. Accordingly, the judgment

reversing the district court did not implicitly conclude that both arguments for vacatur were

meritless.

       The order denying Schafer and Block’s en banc rehearing also does not compel the

conclusion that the law of the case applied on remand. The district court noted that Schafer and

Block’s petition for a rehearing asserted that the panel did not explain why it had rejected the

second argument for vacatur. The district court also reasoned that the order denying a rehearing

addressed the second argument by stating “that the issues [raised] in the petition were fully

considered upon the original submission.” The main “issues” raised in the en banc petition,

however, were related to Schafer I’s holding that the arbitrator did not manifestly disregard the

law. The order merely explained that Schafer and Block’s repackaged arguments on that point

were unconvincing. Moreover, as explained earlier in this opinion, Schafer I only considered

issues related to the arbitrator’s legal error. This court was therefore not required to address the

second argument for vacatur in its order denying a rehearing. Lastly, the order denying a

rehearing is a standard order, like almost every other en banc denial that this court issues.

The brief order does not compel the conclusion that Schafer I resolved Schafer and Block’s

second argument for vacatur.

       We do not reach Multiband’s alternative argument for affirmance based on res judicata.

Our judgment today is limited to clarifying the limited scope of Schafer I’s judgment. Other

properly preserved arguments may be addressed on remand.

                                                -9-
No. 14-2518
Schafer v. Multiband Corp.

       The judgment of the district court is vacated, and the case is remanded for further

proceedings consistent with this opinion.

                                            -10-