Court Opinion

ID: 4184786
Source: CourtListenerOpinion
Date Created: 2017-07-10 17:01:28.536249+00
Date Added: 2024-06-11T07:47:01.881977
License: Public Domain

FILED
                                                    United States Court of Appeals
                      UNITED STATES COURT OF APPEALS        Tenth Circuit

                            FOR THE TENTH CIRCUIT                          July 10, 2017
                        _________________________________
                                                                       Elisabeth A. Shumaker
                                                                           Clerk of Court
A. KERSHAW, P.C.,

      Petitioner - Appellant,

v.                                                          No. 16-1483
                                                  (D.C. No. 1:16-CV-01351-MEH)
SHANNON L. SPANGLER, P.C.,                                   (D. Colo.)

      Respondent - Appellee.
                      _________________________________

                            ORDER AND JUDGMENT*
                        _________________________________

Before MATHESON, PHILLIPS, and McHUGH, Circuit Judges.
                  _________________________________

      Knowledge Strategy Solutions, LLC (KSS) was a Missouri limited liability

company with two members—the respective professional corporations of

Shannon Spangler and Anne Kershaw. A dispute over the dissolution of KSS led to

arbitration, and the arbitrator ruled in favor of Shannon L. Spangler, P.C. (Spangler

PC). The district court confirmed the arbitration award. A. Kershaw, P.C. (Kershaw

PC) now appeals. Exercising jurisdiction under 28 U.S.C. § 1291, we affirm.

      *
        After examining the briefs and appellate record, this panel has determined
unanimously to honor the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
submitted without oral argument. This order and judgment is not binding precedent,
except under the doctrines of law of the case, res judicata, and collateral estoppel. It
may be cited, however, for its persuasive value consistent with Fed. R. App. P. 32.1
and 10th Cir. R. 32.1.
                                  I. BACKGROUND

      In 2013, Spangler PC and Kershaw PC formed KSS to provide consulting

services regarding data, records and knowledge management, e-discovery and related

matters. In the spring of 2014, however, Ms. Spangler’s health caused Spangler PC

to seek to withdraw from KSS.

      The parties negotiated the withdrawal between May and June 2014, but the

process was not amicable. Although the parties agreed that the effective withdrawal

date would be June 30, 2014, on June 26 Ms. Kershaw filed Articles of Termination

for KSS and a Notice of Winding Up with Missouri’s Secretary of State. The

Secretary of State issued a Certificate of Termination certifying that KSS ceased its

existence that same day.

      Ms. Kershaw did not inform Ms. Spangler of these filings, and instead of

tendering to Spangler PC its capital account or any other part of KSS’s monetary or

intangible assets, Kershaw PC retained all of KSS’s assets. On July 28, 2014,

Ms. Kershaw created a New York limited liability company, also called Knowledge

Strategy Solutions, LLC (KSS-New York). Kershaw PC placed the assets it had kept

after KSS’s dissolution into KSS-New York.

      In August 2014, Spangler PC sued Kershaw PC, KSS, and KSS-New York in

Missouri state court. It alleged the following six claims for relief:

            Count I (against Kershaw PC and KSS)—breach of the KSS Operating

              Agreement by, among other things, using and transferring KSS’s assets;

                                          -2-
           Count II (against Kershaw PC and KSS) —breach of the KSS Operating

              Agreement for failure to pay monthly draws in June and July 2014;

           Count III (against Kershaw PC and KSS) —breach of the KSS Operating

              Agreement for failure to distribute Spangler PC’s capital account to

              Spangler PC upon dissolution of KSS;

           Count IV (against Kershaw PC) —breach of fiduciary duties;

           Count V (against KSS-New York) —tortious interference with contract;

              and

             Count VI (against all defendants) —appointment of a receiver.

The defendants moved to compel arbitration under an arbitration provision in the

KSS Operating Agreement.

      In October 2014, the Missouri court concluded that Counts I, III, and IV fell

within the arbitration provision and ordered Kershaw PC and Spangler PC to arbitrate

those claims. It did not order KSS or KSS-New York into arbitration, however,

because they were not parties to the Operating Agreement. The Missouri court

retained jurisdiction over Count II because the Operating Agreement excluded

“controversies regarding the compensation of Members” from the arbitration

provision, Aplt. App. at 37, and it also retained jurisdiction over Counts V and VI.

      The two PCs initiated arbitration in October 2014, but the proceeding was

delayed when KSS-New York filed for bankruptcy protection in New York in August

2015. In October 2015, the bankruptcy court lifted the automatic stay as to the

                                          -3-
arbitration. Its lift-stay order, however, allowed the arbitration to go forward only so

long as the proceeding did not involve any avoidance claims.

      The arbitration hearing took place in Denver, Colorado, in November and

December 2015. During the arbitration, Kershaw PC asserted that Spangler PC had

forfeited its share of KSS’s assets by withdrawing from KSS and that KSS and

KSS-New York were the same legal entity. For its part, Spangler PC offered the

testimony of Ms. Spangler as to the damages it suffered, including the value of its

capital account.

      In April 2016, the arbitrator entered his final award. Applying Missouri law,

he found Ms. Kershaw’s June 26, 2014, filings dissolved KSS and the parties should

have gone through a proper wind-up procedure. After rejecting Kershaw PC’s

positions regarding the alleged forfeiture upon withdrawal and the alleged

relationship between KSS and KSS-New York, the arbitrator ruled in favor of

Spangler PC on the three counts referred by the Missouri state court.1 With regard to

Count I, he concluded that Kershaw PC had breached the KSS Operating Agreement

by improperly handling KSS’s assets. And with regard to Counts III and IV, he

concluded that Kershaw PC had breached the Operating Agreement by refusing to

distribute Spangler PC’s capital account and had breached its fiduciary duties to

Spangler PC.

      1
         The arbitrator also decided three counterclaims Kershaw PC made in the
arbitration, but the parties’ arguments do not concern the counterclaims and they
therefore are not relevant to this appeal.

                                          -4-
      The arbitrator accepted Ms. Spangler’s testimony about the value of Spangler

PC’s capital account and ordered an award of $97,041.09 to Spangler PC. He further

ruled that the breach of the Operating Agreement “[gave] rise to in personam liability

against Kershaw P.C. in the amount quantified.” Aplt. App. at 100. In addition, he

valued Spangler PC’s 50% share of KSS’s intangible assets at $45,200, but declined

to order any award for those assets because they were in the possession of KSS-New

York, which remained in bankruptcy. Finally, he awarded to Spangler PC and

against Kershaw PC nearly $40,000 for reallocated arbitration fees, arbitrator

compensation, and costs.

      Under the Federal Arbitration Act (FAA), 9 U.S.C. §§ 9 and 10(a), Kershaw

PC applied to the District of Colorado to vacate the arbitration award. Spangler PC

opposed the application to vacate and filed its own application to confirm the award.

The district court (a magistrate judge presiding with the consent of the parties under

28 U.S.C. § 636(c)) denied Kershaw PC’s application and granted Spangler PC’s

application. Kershaw PC now appeals.

                                   II. DISCUSSION

                                  A. Legal Standards

1. Standard of Review

      In assessing the district court’s confirmation of the arbitration award, “we

review legal questions de novo and factual findings for clear error.” CEEG

(Shanghai) Solar Sci. & Tech. Co. v. LUMOS LLC, 829 F.3d 1201, 1205 (10th Cir.

2016). “An error is clear if the district court’s findings lack factual support in the

                                          -5-
record or if, after reviewing all the evidence, we have a definite and firm conviction

that the district court erred.” Id. at 1205-06 (internal quotation marks omitted).

      Although “[w]e do not owe deference to the district court’s legal conclusions,”

“we afford maximum deference” to the arbitrator’s decision. Id. at 1206 (internal

quotation marks omitted). Consequently, we must determine whether the district

court correctly followed the restrictive standard that governs judicial review of an

arbitrator’s award, which we have described as “strictly limited,” Bowen v. Amoco

Pipeline Co., 254 F.3d 925, 932 (10th Cir. 2001); “extremely limited,” Dominion

Video Satellite, Inc. v. Echostar Satellite L.L.C., 430 F.3d 1269, 1275 (10th Cir.

2005); and “among the narrowest known to the law,” ARW Expl. Corp. v. Aguirre,

45 F.3d 1455, 1462 (10th Cir. 1995) (internal quotation marks omitted).

2. Grounds for Reversal

      It has long been the rule that “the courts play only a limited role when asked to

review the decision of an arbitrator.” United Paperworkers Int’l Union, AFL-CIO v.

Misco, Inc., 484 U.S. 29, 36 (1987). Under the FAA, when presented with an

application for an order confirming an arbitration award, “the court must grant such

an order unless the award is vacated, modified, or corrected as prescribed in sections

10 and 11.” 9 U.S.C. § 9. In turn, FAA section 10(a), codified at 9 U.S.C. § 10(a),

sets forth four statutory grounds for vacating arbitral awards. The first three grounds

encompass various types of “corruption, fraud, or undue means” and arbitrator

misconduct. Id. § 10(a)(1)-(3). The fourth ground, the one that is relevant to this

appeal, is “where the arbitrators exceeded their powers, or so imperfectly executed them

                                          -6-
that a mutual, final, and definite award upon the subject matter submitted was not made.”

Id. § 10(a)(4).

       “A party seeking relief under [FAA section 10(a)] bears a heavy burden.”

Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2068 (2013). “It is not enough

to show that the arbitrator committed an error—or even a serious error.” Id.

(alterations and internal quotation marks omitted). “The courts are not authorized to

reconsider the merits of an award even though the parties may allege that the award

rests on errors of fact or on misinterpretation of the contract.” United Paperworkers,

484 U.S. at 36; see also ARW Expl. Corp., 45 F.3d at 1463 (“An arbitrator’s

erroneous interpretations or applications of law are not reversible.”). “[A]s long as

the arbitrator is even arguably construing or applying the contract and acting within

the scope of his authority, that a court is convinced he committed serious error does

not suffice to overturn his decision.” United Paperworkers, 484 U.S. at 38; see also

Oxford Health Plans, 133 S. Ct. at 2068 (describing “the sole question” for courts as

“whether the arbitrator (even arguably) interpreted the parties’ contract, not whether

he got its meaning right or wrong”).

       In addition to the grounds set forth in FAA § 10, this court has recognized a

“handful of judicially created reasons” for vacating an arbitration award. Denver &

Rio Grande W. R.R. v. Union Pac. R.R., 119 F.3d 847, 849 (10th Cir. 1997). Among

these reasons is “manifest disregard of the law,” which requires “willful

inattentiveness to the governing law.” ARW Expl. Corp., 45 F.3d at 1463 (internal

quotation marks omitted). The “manifest disregard” ground’s viability has been

                                          -7-
uncertain, however, since the Supreme Court’s decision in Hall Street Associates,

L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008). There, the Court held that the § 10

grounds are the exclusive grounds for vacatur, id. at 584, and it questioned whether

“manifest disregard” names a new ground for review or refers to the § 10 grounds

collectively, id. at 585. It then emphasized that “expanding the detailed categories

would rub too much against the grain of the § 9 language, where provision for

judicial confirmation carries no hint of flexibility.” Id. at 587.

                                      B. Analysis

1. Disregard of the Bankruptcy Court’s Order

      Kershaw PC’s first argument involves the bankruptcy court’s lift-stay order.

Relying on the arbitrator’s finding that all of KSS’s assets—monetary as well as

intangible—ultimately were transferred to KSS-New York, Kershaw PC argued that

in assessing damages for the value of Spangler PC’s capital account, the arbitrator

actually made an award of the property of KSS-New York, thereby exceeding his

authority. But the district court concluded that the damages award did not require the

distribution of any KSS-New York assets.

      The fact that the arbitrator quantified damages based on the capital
      account’s value does not mean that he awarded [KSS-New York] assets
      paid to Spangler. This is especially true, because the capital account was an
      asset on the books of KSS . . . , not [KSS-New York]. Therefore, not only
      did the arbitrator award the value of Spangler’s capital account against
      Kershaw personally, but the underlying asset that led to the valuation was
      never an asset of [KSS-New York].

                                           -8-
Aplt. App. at 289 (citation omitted). The district court further held that “the

arbitrator’s refusal to award distribution of [KSS’s] intangible assets demonstrates

his attentiveness to his jurisdictional limits.” Id. at 288.

       Kershaw PC further argues, again pointing to the arbitrator’s finding that all

assets were transferred to KSS-New York, that the district court erred in (1) stating

that the capital account was not an asset of KSS-New York, and (2) confirming the

arbitrator’s decision that the capital account was not entitled to bankruptcy

protection, even though the intangible assets were entitled to such protection. “In its

quest to meet the high level of deference to be afforded arbitration awards, the

District Court confirmed liability assessments within the Final Award that contradict

factual findings with the Final Award . . . .” Aplt. Br. at 12. Kershaw PC further

takes issue with the in personam nature of the award, stating that it “allowed the

arbitrator to unlawfully circumvent the Lift Stay Order and federally mandated

bankruptcy protections.” Id. at 13. It concludes that “[t]he Final Award must be

vacated as a clear excess of the arbitrator’s powers and constitutes a manifest

disregard of a court order of which he was well aware.” Id.2

       2
         Kershaw PC also summarily asserts at the end of this argument section that
“[l]etting the Final Award stand would, without question, open an unprecedented
avenue for creditors seeking to avoid the protections of bankruptcy law.” Aplt. Br. at
13. This statement appears to relate to the third issue listed in the “Statement of
Issues,” which posits that an affirmance of “the imposition of in personam liability
on a business debt [would] open the floodgates for parties seeking to circumvent
debtor protection under principals [sic] of corporate separateness and bankruptcy
law[.]” Id. at 2. This policy argument regarding the bankruptcy court order,
however, is waived. First, a conclusory, unsupported statement in a brief does not
                                                                             (continued)
                                           -9-
      We disagree with Kershaw PC. The district court correctly held that the

arbitrator’s damages award did not violate the bankruptcy court’s order and therefore

did not exceed his authority. Further, to the extent the manifest disregard exception

may still be viable, the arbitrator’s decision did not display manifest disregard of the

bankruptcy court’s lift-stay order.

      Kershaw PC’s position rests on a faulty premise. Although the arbitrator

found that Kershaw PC retained KSS’s assets and eventually transferred them to

KSS-New York, that factual finding was not inconsistent with the arbitrator’s

determination that he could award damages for the value of the undistributed capital

account. Spangler PC sought to recover a sum of money, not the specific dollars

Kershaw PC deposited into the accounts of KSS-New York. Given that money is

fungible, it is irrelevant that Kershaw PC placed the money it took from KSS into

KSS-New York. It could have spent the money in a myriad of ways. Whatever

Kershaw PC did with the money, however, the liability for the undistributed capital

account remained with it, not with any later recipient of those exact funds.

preserve an issue for this court’s consideration. See Reedy v. Werholtz, 660 F.3d
1270, 1274-75 (10th Cir. 2011). Second, it is not apparent that Kershaw PC ever
raised this policy argument in the district court, and it fails to seek plain-error review
in this court. “[E]ven if [the appellant’s] arguments were merely forfeited before the
district court, [its] failure to explain in [its] opening appellate brief . . . how they
survive the plain error standard waives the arguments in this court.” McKissick v.
Yuen, 618 F.3d 1177, 1189 (10th Cir. 2010); see also ARW Expl. Corp., 45 F.3d at
1463 (“Failure to raise an argument to the district court in support of vacating . . . an
arbitrator’s award precludes raising the argument on appeal.”).

                                          - 10 -
       Unlike money, however, KSS’s intangible assets are not fungible. At the time

of the arbitration award, KSS-New York, the bankrupt entity, had possession of those

assets. In light of the bankruptcy court’s jurisdiction over KSS-New York and the

limitations in the lift-stay order, the arbitrator appropriately refrained from awarding

the intangible assets, or any portion of them, to Spangler PC. Far from illustrating

how the arbitrator exceeded his authority, the differential treatment of the capital

account and the intangible assets indicate that the arbitrator paid close attention to the

limits of his authority.

       Finally, assuming (without deciding) that the “manifest disregard” exception

remains available, that ground “[r]equir[es] more than error or misunderstanding of

the law”; “a finding of manifest disregard means the record will show the arbitrators

knew the law and explicitly disregarded it.” Bowen, 254 F.3d at 932; see also ARW

Expl. Corp., 45 F.3d at 1463 (characterizing the “manifest disregard” standard as

“willful inattentiveness to the governing law” (internal quotation marks omitted)).

For the same reasons that the arbitrator did not clearly exceed his authority in

awarding the value of the capital account, he did not act in manifest disregard of the

bankruptcy court’s lift-stay order.

2. Disregard of the Missouri Court’s Order

       Kershaw PC’s next argument rests on the Missouri state court’s order

requiring arbitration for Counts I, III, and IV, but retaining jurisdiction over

Counts II, V, and VI. In district court, Kershaw PC asserted that the arbitrator’s

damages assessment violated the order compelling arbitration because the arbitrator

                                          - 11 -
improperly included as “revenue” amounts that actually were “compensation,” which

was the subject of Count II and which the Missouri court had held exempt from the

arbitration provision. The district court held that this argument challenged the

arbitrator’s interpretation of the term “compensation” and thus was insufficient to

vacate the decision.

       Before this court, Kershaw PC argues that “[b]y including ‘accounts

receivable’ and ‘work in progress’ in the calculation of ‘revenue,’ the arbitrator

changed the meaning of these ordinary terms to mean ‘revenue.’ . . . At some point

‘interpretation’ goes too far and becomes factual revision instead of interpretation.”

Aplt. Br. at 16.

       We agree with the district court that Kershaw PC’s argument impermissibly

attempts to challenge the arbitrator’s legal conclusions and factual findings.

Kershaw PC identifies no authority establishing that review of alleged error is

appropriate in these circumstances. To the contrary, the Supreme Court has made it

clear that it is not the district court’s function to decide whether the arbitrator was

right or wrong. “The courts are not authorized to reconsider the merits of an award

even though the parties may allege that the award rests on errors of fact or on

misinterpretation of the contract.” United Paperworkers, 484 U.S. at 36. “Because

the parties bargained for the arbitrator’s construction of their agreement, an arbitral

decision even arguably construing or applying the contract must stand, regardless of

a court’s view of its (de)merits.” Oxford Health Plans, 133 S. Ct. at 2068 (internal

quotation marks omitted). In short, in asserting that the arbitrator wrongly

                                          - 12 -
interpreted terms such as “revenue” and “compensation,” Kershaw PC argues

“nothing more than [an] alleged error[] of law [that] need not, and should not, be

considered at length.” ARW Expl. Corp., 45 F.3d at 1463 (rejecting “argument that

the arbitrator incorrectly concluded that the joint venture interests were ‘securities’

within the meaning of the federal securities acts”).

       Focusing on “the sole question for us,” which “is whether the arbitrator (even

arguably) interpreted the parties’ contract,” Oxford Health Plans, 133 S. Ct. at 2068,

we conclude the arbitrator was at least arguably interpreting the Operating

Agreement, particularly Article Three (capital, distributions, and allocation of profit),

Article Four (rights and obligations upon dissolution or withdrawal of a member) and

Schedule A (capital contributions and allocation of revenue). The district court

therefore did not err in affording deference to and confirming the arbitrator’s

decision.

3. Disregard of Missouri Statute

       Kershaw PC’s final argument concerns the arbitrator’s decision to omit a

portion of a Missouri statute in a quotation. It argued that the omission shows a

manifest disregard of the law. The district court held that Kershaw PC had not

presented any evidence that the omission was willful, and even if it was, the statute

pertained only to an alternative finding.

       Before this court, Kershaw PC argues that the district court erred in concluding

that it was required to present some evidence beyond the omission itself to establish

willful inattentiveness. It suggests that “it is, in fact, fair to assume that when an

                                            - 13 -
arbitrator omits a section of quotation in an opinion [that] he has written, that the

omission was willful and intentional.” Aplt. Br. at 19. It acknowledges that the

arbitrator’s discussion was an alternative finding, and thus even a favorable ruling

would be insufficient to overturn the arbitral decision. But it urges this court to

address the issue because “this case might be subject to a second arbitration if the

Final Award is vacated, together with the fact that other parties and arbitrators would

benefit from a ruling on the point.” Id.3

      Again assuming (without deciding) that the “manifest disregard” exception

remains available, we decline to decide this issue. Even a favorable ruling would not

require reversal of the district court’s judgment. The arbitrator discussed the statute

in the alternative, and that alternative holding is not applicable because the primary

holding remains undisturbed. Kershaw PC effectively asks this court for an advisory

opinion, which we are not authorized to do under Article III of the Constitution.

See Preiser v. Newkirk, 422 U.S. 395, 401 (1975) (“[A] federal court has neither the

power to render advisory opinions nor to decide questions that cannot affect the

rights of litigants in the case before them.” (internal quotation marks omitted));

Pub. Serv. Co. of Colo. v. U.S. EPA, 225 F.3d 1144, 1148 n.4 (10th Cir. 2000) (“This

court would violate Article III’s prohibition against advisory opinions were it to

[decide a question of law] without ordering some related relief.”).

      3
         To the extent that Kershaw PC’s argument advocates for a legal presumption,
it is waived. It did not argue for creating a presumption in the district court, and it
does not argue for plain-error review in this court. See McKissick, 618 F.3d at 1189;
ARW Expl. Corp., 45 F.3d at 1463.

                                            - 14 -
                                   III. CONCLUSION

         Kershaw PC has not satisfied the exceptional showing required to upset the

finality of arbitration. We affirm the district court’s order confirming the arbitrator’s

award.

                                               ENTERED FOR THE COURT,

                                               Scott M. Matheson, Jr.
                                               Circuit Judge

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