Court Opinion

ID: 3146711
Source: CourtListenerOpinion
Date Created: 2015-10-22 18:20:53.338436+00
Date Added: 2024-06-11T12:06:16.283275
License: Public Domain

FOURTH DIVISION
                                                      May 10, 2007

1-05-3556

FIRST MERIT REALTY SERVICES, INC.,      )      Appeal from the
AND FIRST MERIT VENTURE,                )      Circuit Court of
                                        )      Cook County.
           Plaintiffs-Appellees,        )
                                        )
                v.                      )
                                        )
AMBERLY SQUARE APARTMENTS, L.P.,        )
ASHWOOD APARTMENTS, L.P., BRITTANY      )
APARTMENTS, L.P., EASTPOINTE APARTMENTS,)
L.P., GREEN OAKS AT PALOS HILLS, L.P., )
KETTERING SQUARE APARTMENTS, L.P.,      )
PINE ISLAND APARTMENTS, L.L.C.,         )
SOUTHMOOR HILLS APARTMENTS, L.P.,       )      Honorable
WOODVIEW APARTMENTS LLC, AND COMMUNITY )       Julia M. Nowicki
ECONOMIC REDEVELOPMENT CORPORATION OF   )      Judge Presiding.
WISCONSIN,                              )
           Defendants-Appellants.       )

                     MODIFIED UPON REHEARING

     PRESIDING JUSTICE QUINN delivered the opinion of the court:

     Defendants Amberly Square Apartments, L.P. (Amberly),

Ashwood Apartments, L.P. (Ashwood), Brittany Apartments, L.P.

(Brittany), Eastpointe Apartments, L.P. (Eastpointe), Green Oaks

at Palos Hills, L.P. (Green Oaks), Kettering Square Apartments,

L.P. (Kettering), Pine Island Apartments, L.L.C. (Pine Island),

Southmoor Hills Apartments, L.P. (Southmoor), Woodview
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Apartments, L.L.C. (Woodview), and Community Economic

Redevelopment Corporation of Wisconsin (CERC) appeal the circuit

court's order confirming the arbitration award granted to

plaintiffs First Merit Realty (FMR) and First Merit Venture

(FMV).     On appeal, defendants contend that the arbitrators

exceeded their authority by "reforming" the parties' written

agreements and that Illinois public policy precludes the

confirmation of the arbitration award.

                              BACKGROUND

     Plaintiffs, FMR and FMV, are property management businesses.

FMR is wholly owned by Gary Baxter.     FMV is a limited partnership

of which Baxter is part owner.     Josyln Development Company, of

which Baxter is president, is FMV's corporate general partner.

Baxter has been in the real estate business since 1966.

     Defendants are business entities that own apartment

complexes in various locations across the United States.     Scott

Canel is associated with each of the defendants in some capacity.

He is also a lawyer who has been winding up his legal practice to

primarily focus on real estate.     As a lawyer, Canel has

represented Baxter and entities owned or controlled by Baxter in

tax and transactional matters.1

     1
         Plaintiffs filed a separate lawsuit against Canel for legal

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     Beginning in 1996 and continuing through 2002, Baxter,

through his business entities, sold a series of 10 properties.

Each property was sold to one of the defendants.    Prior to the

sales, FMV or another Baxter business entity managed the

properties.    After the sale of each of the first nine properties,

FMR was retained to manage them.    FMV was retained to manage the

tenth property, the Southfield property owned by CERC, but was

replaced by FMR shortly thereafter.    The management of each of

the 10 properties was governed by identical management

agreements.    Further, each property was either directly or

indirectly subject to the rules of the United States Department

of Housing and Urban Development (HUD).

     On March 31, 2003, defendants sent plaintiffs a letter

informing them that they were terminating their management

agreements effective April 30, 2003.    Defendants terminated the

agreements pursuant to section 15.1 of the management agreements,

which provided in pertinent part:

            "It is expressly understood and agreed by and

            between the parties hereto that the Owner as

            well as the Agent shall have the right to

            terminate the Agreement at the end of any

            calendar month, without penalty, on thirty

malpractice.

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            (30) days' advance written notice to the

            Agent."

     Subsequently, defendants appointed Ten South Management

Company (Ten South), which is controlled by Canel, to manage the

10 properties.    In addition, Canel hired Richard Price, who had

been president of FMR and vice president of Josyln Development

Company, to work for Ten South.

     On July 16, 2003, plaintiffs filed a demand for arbitration

with the American Arbitration Association (AAA) pursuant to

section 18 of the management agreements, which provided:

            "The [AAA] shall be the final arbitrator of

            all unresolved disputes between [defendants]

            and [plaintiffs] and the parties hereto agree

            to abide by the decision of the Arbitrator in

            such case made."

On July 22, 2003, defendants filed counterclaims to which

plaintiffs responded on August 22, 2003.    Following defendants'

filing of an amended counterclaim and plaintiffs' filing of a

response and affirmative defenses, plaintiffs filed a statement

of claim on January 19, 2004.    Therein, plaintiffs (1) sought

reformation of the management contracts; (2) alleged that

defendants through Canel committed fraud; (3) alleged that

defendants aided and abetted Canel's alleged legal misconduct;

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(4) alleged that defendants aided and abetted Price's misconduct;

and (5) alleged conspiracy between defendants, Canel, Price, and

Ten South.     Defendant answered the statement of claim on February

12, 2004.2

     The arbitration panel, which consisted of three neutral

lawyers-arbitrators, proceeded to oversee discovery and motion

practice proceedings, followed by a nine-day evidentiary hearing

in September 2005.     During the hearing, Baxter testified that he

consulted Canel as to how to sell the concerned properties while

retaining management of them.     Canel allegedly suggested that

Baxter sell the 10 properties to Canel's business entities,

defendants, with the understanding that plaintiffs, Baxter's

business entities, would be retained as management companies of

those properties so long as Canel controlled them.     Baxter

testified that he never told anyone about this deal, including

Price, other limited partners, and attorneys.     Baxter further

testified that he relied on Canel, who was one of his lawyers, to

represent his interests.     He denied ever having read the

management agreements, which the record shows Price signed on

behalf of plaintiffs.

     Conversely, Canel denied that an oral agreement existed in

     2
         Baxter and Canal were not parties to the management

agreements and thus were not parties to the arbitration.

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which he promised that plaintiffs could manage the 10 properties

so long as defendants controlled them.   However, Canel conceded

on cross-examination that it was his intention that plaintiffs

would manage the properties so long as they did a reasonable job.

In addition, Canel read from a February 18, 2003, memo he wrote

to Baxter that stated in pertinent part, "We also orally agreed

that you would retain management of the properties as long as you

did a reasonable job."

     Following the evidentiary hearing, the arbitration panel

delivered an unreasoned ruling, due to defendant's failure to

file a timely request for a reasoned ruling.   The panel awarded

plaintiffs $66,000 against Amberly, $125,000 against Ashwood,

$126,000 against Eastpointe, $255,000 against Great Oaks,

$125,000 against Kettering, $69,000 against CERC, $155,000

against Southmoor, $123,000 against Woodview, and nothing against

Brittany or Pine Island.   With respect to defendants'

counterclaims, the panel awarded Brittany $1,395.84 and $1,249.46

against FMR for overcharges and cell phone use, respectively.

The panel also awarded $1,421.43 each to CERC and Green Oaks

against FMR.

     Thereafter, defendant Amberly filed a motion to vacate the

award in the circuit court of Cook County, and plaintiffs filed a

motion to confirm the arbitration award and deny defendants'

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request to vacate the award.    Following arguments, the circuit

court entered a written order on October 14, 2005, in which it

granted plaintiffs' motion and denied defendants' motion.      In

making its ruling, the circuit court determined that the

arbitrators did not exceed their authority in granting the award

and held that the award did not violate public policy.    On

October 24, 2005, pursuant to plaintiffs' motion, the circuit

court entered its final judgment affirming the arbitration award.

Defendants appealed.

                               ANALYSIS

      We initially observe that the arbitrators delivered an

unreasoned award.   The record shows that the arbitrators'

decision merely set forth a procedural history of the case and

the monetary awards provided to each party, but did not provide a

reasoned analysis for the arbitrators' decision to deliver those

awards.

     As, plaintiffs assert, however, Commercial Arbitration Rule

42(b) provides that arbitrators need not render a reasoned award

unless the parties request such an award prior to the appointment

of the arbitrators or if the arbitrators deem it appropriate.

American Arbitration Association, Commercial Arbitration Rules

and Mediation Procedures, Rule 42(b), as amended and effective

September 15, 2005, (http://www.adr.org/sp.asp?id=22440#R42).       As

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such, whereas, here, the parties did not timely request a

reasoned award, the arbitrators did not err rendering an

unreasoned award.

     Turning to the substantive issues before this court, we note

that review of an arbitration award is more limited than review

of a trial court's decision.   Galasso v. KNS Cos., 364 Ill. App.
3d 124, 130 (2006).   Where parties have agreed to settle their

dispute via an arbitrator, they have agreed to accept the

arbitrator's view, and thus, a reviewing court should not

overrule an award simply where its interpretation differs from

that of the arbitrator.   Galasso, 364 Ill. App. 3d at 130.   That

said, section 12(a) of the Uniform Arbitration Act (Act) (710

ILCS 5/12(a) (West 2004)) does set forth limited circumstances

under which a reviewing court may modify or vacate an arbitration

award: (1) the award was maintained by corruption or fraud; (2)

the arbitrator was not impartial; (3) the arbitrator exceeded his

authority; (4) the arbitrator unreasonably refused to postpone

the hearing or hear material evidence; or (5) there was no

arbitration agreement.

     In the case at bar, defendants contend that the arbitrators

exceeded their authority by providing an award that resulted from

their decision to ignore the clear and unambiguous language of

the management agreements.   Specifically, defendants claim that

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the arbitrators ignored the language of section 15.1 of the

management agreement, which explicitly provided that either party

had a "right to terminate the Agreement at the end of any

calendar month, without penalty, on thirty (30) days' advance

written notice to the Agent."

     There is no dispute that on March 31, 2003, defendants sent

a letter to plaintiffs informing them that they were going to

terminate the relationship on April 30, 2003, in accordance with

the management agreements.    As such, the record shows that

defendants complied with the language of the management

agreements when they sought to terminate their business

relationship with plaintiffs.    Nevertheless, the arbitrators

ruled for plaintiffs and awarded them monetary damages.

     Plaintiffs argue that defendants should not be allowed to

challenge that award where, under the management agreements, the

parties agreed to abide by the final ruling of the arbitrators.

Plaintiffs further argue that the award in this case was proper

pursuant to Commercial Arbitration Rule 43(a), which provides

that the arbitrators could have granted "any remedy or relief

that [they] deem[] just and equitable and within the scope of the

agreement of the parties, including, but not limited to, specific

performance of a contract."    American Arbitration Association,

Commercial Arbitration Rules and Mediation Procedures, Rule

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43(a), as amended and effective September 15, 2005,

(http://www.adr.org/sp.asp?id=22440#R43).

     A presumption does exist that the arbitrators did not exceed

their authority, and as a reviewing court, we should construe

their award, if possible, so as to uphold its validity.     Galasso,

364 Ill. App. 3d at 130.   We lack the authority to determine the

merits of an award simply where we disagree with the arbitrators'

interpretation of the contract at issue.    Galasso, 364 Ill. App.
3d at 130.   Further, we cannot set aside an award on the ground

that it is illogical or inconsistent nor can we invalidate an

award because of errors in judgment or mistake of law or fact.

Galasso, 364 Ill. App. 3d at 130.

     We can, however, set aside an award if the arbitrators'

errors in judgment are apparent on the face of the award.

Shearson Lehman Brothers, Inc. v. Hedrich, 266 Ill. App. 3d 24,

28 (1994), citing Rauh v. Rockford Products Corp., 143 Ill. 2d
377, 393 (1991).   "The arbitrators' authority is limited by the

unambiguous contract language."     Hedrich, 266 Ill. App. 3d at 29.

As such, arbitrators do not have the authority to ignore the

plain language of the contract and to alter the agreement, as the

ultimate award must be grounded on the parties' contract.

Hedrich, 266 Ill. App. 3d at 29.

     In Hedrich, three former employees commenced an arbitration

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proceeding against Shearson Lehman Brothers, Inc. (Shearson), for

compensation they alleged was owed to them under Shearson's

deferred compensation plan (plan).      The arbitration panel

subsequently awarded each employee a lump sum as owed under the

plan.   Hedrich, 266 Ill. App. 3d at 25.     Thereafter, the circuit

court denied Shearson's petition to vacate or modify the award.

Hedrich, 266 Ill. App. 3d at 25.       Shearson appealed.

     On appeal, this court observed that the plan contained

provisions with explicit percentages to use to calculate the

employees' compensation.    Hedrich, 266 Ill. App. 3d at 26-27.

Despite those explicit provisions, however, the arbitration panel

utilized different percentage calculations to award the

employees.    Hedrich, 266 Ill. App. 3d at 27.    Although the

employees argued that the parties had agreed to abide by the

arbitrators' decision, this court found that the arbitration

panel exceeded its authority in awarding the employees

compensation that was "clearly not based upon the precise and

unambiguous mathematical formulas provided in the deferred

compensation agreements."    Hedrich, 266 Ill. App. 3d at 29.    As

such, this court vacated the arbitration panel's award and

ordered Shearson to pay the employees compensation as provided in

the plan.    Hedrich, 266 Ill. App. 3d at 31.

     Like Hedrich, the arbitrators' error is apparent on the face

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of the award in this case.   As stated, defendants clearly

complied with section 15.1 of the management agreements where

they provided 30 days' advance written notice at the end of a

calendar month to sever their business relationship with

plaintiffs.   Yet, the arbitrators ruled against defendants.   In

doing so, we find that the arbitrators clearly ignored the

explicit language of the written agreements and thus exceeded

their authority in awarding damages to plaintiffs.

     Nonetheless, plaintiffs argue that the arbitrators did not

ignore the written agreement between the parties but, rather,

merely reformed the agreement based on an alleged oral agreement

between the parties that was formed subsequent to the written

agreements.   Plaintiffs contend that the award for the plaintiffs

was proper given that oral agreement.

     Due to the lack of the arbitration panel's reasoning in the

written award, plaintiffs surmise that the arbitrators' ruling

hinged on Baxter's and Canel's testimony before the arbitration

panel.   The record shows that Baxter testified that when he

consulted Canel about selling the 10 concerned properties, Canel

suggested that Baxter sell the properties to Canel's business

entities.   Baxter further testified that Canel agreed that

Baxter's business entities would retain management control over

the 10 properties so long as Canel's business entities controlled

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them.   Although Canel acknowledged that he intended for

plaintiffs to manage the properties so long as they did a

reasonable job, which he stated in a February 13, 2003, memo to

Baxter, he refuted that any such oral agreement existed between

Baxter and himself.

     In this court, plaintiffs argue that in analyzing the

testimony of Baxter and Canel, the arbitrators likely considered

that Canel had a conflict of interest in this case where he acted

as Baxter's attorney despite being a party to the "opposite side"

of the transaction.   As plaintiffs assert, such conduct was in

contravention of Rule 1.8 of the Illinois Code of Professional

Responsibility (134 Ill. 2d R. 1.8) where Canel allegedly neither

disclosed the conflict of interest nor obtained Baxter's consent

with respect to the dealings.   Given the arbitration panel's

award, the plaintiffs argue that the arbitrators found that

Baxter provided the more credible testimony and thus determined

that an oral agreement existed between the parties, which

provided that plaintiffs would manage the concerned properties as

long as Canel had an ownership interest in them.

     Based on the arbitration panel's determination that an oral

agreement existed between Baxter and Canel subsequent to the

written management agreements, plaintiffs contend that the

arbitrators acted properly where they reformed the written

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agreements to conform with the alleged oral agreement.

Plaintiffs, however, cite no cases to support the arbitrators'

ability to reform a written contract.   Rather, the only cases

upon which they rely for such a proposition, Zannini v. Reliance

Insurance Co., 147 Ill. 2d 437, 457 (1992), and La Salle National

Bank v. 850 De Witt Place Condominium Ass'n, 257 Ill. App. 3d 540

(1994), involved reformation of contracts by the circuit court,

not an arbitration panel's reformation of a contract.

     Given the facts of this case and the lack of case law to

support an arbitrator's reformation of a contract, we cannot

agree with the arbitrators' ruling where they evidently

considered parol evidence and reformed the written agreements

despite the clear and unambiguous language of those written

agreements.   Although we recognize that the management agreements

between the parties contained an arbitration clause in which the

parties agreed to abide by the final ruling of the American

Arbitration Association, we find that, by ignoring the clear

language of the agreements and relying on an alleged oral

agreement, the arbitrators exceeded their authority in ruling for

plaintiffs.

     As defendants note, plaintiffs appear to recognize that the

arbitrators in this case exceeded the scope of their authority as

plaintiffs suggest that this court should apply any finding that

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the arbitrators exceeded their authority prospectively.   We find

that argument to be without merit.   As noted above, there is no

case law stating that arbitrators have authority to reform

contracts in order to resolve disputes between parties.

Consequently, since we do not find the facts of this case to

allow for such a remedy, we are compelled to vacate the

arbitrators' ruling.

     Having determined that the arbitrators exceeded their

authority in awarding plaintiffs monetary damages, we need not

consider the parties' public policy arguments.

     Finally, we find no reason to disturb the arbitrators'

ruling on defendants' counterclaims where that ruling did not

stem from the improper reformation of the parties' contract.

                           CONCLUSION

     For the reasons stated above, we vacate the American

Arbitration Association's award.

     Vacated.

     NEVILLE and MURPHY, JJ., concur.

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