COMPELLING ARBITRATION WITH EMPLOYMENT CONTRACTS

Shield Security and Patrol LLC v. Lionheart Security & Consulting LLC, et. al., 1 CA-CV 16-0678 (Ariz. App. October 31, 2017) – Memorandum

Defendant Lionheart Security & International Consulting, LLC (“Lionheart”), is an Arizona limited liability company that provides security services. Defendants Colin Michael Morrison, Logan Collman, Joshua Hocieniec, Adam Leigh, and Frank Sheldone are members and/or directors of Lionheart.

Shield Security and Patrol, LLC (“Shield”) is an Arizona limited liability company that provides security services. In 2014, Defendant Morrison was hired by Shield’s predecessor-in-interest. His employment agreement contained a binding arbitration clause. The remaining defendants were also Shield employees or contractors, but their agreements did not contain an arbitration clause.

In 2016, defendants resigned from Shield. According to Shield, this caused other employees to leave. Shield also alleged defendants’ actions were detrimental because they informed other employees Shield changed its name to Lionheart, misrepresented the name change, misrepresented to clients Lionheart and Shield were one and the same, and used Shield’s resources to benefit Lionheart.

Shield filed a complaint against the defendants alleging breach of contract and tortious interference with contract, breach of fiduciary duty, unjust enrichment, civil conspiracy, and direct officer liability. Defendants filed a motion to compel arbitration based on Morrison’s employment agreement. Defendants argued Arizona Revised Statute (A.R.S.) § 12-3003(B)(1), makes the Arizona Revised Uniform Arbitration Act (“AZ-RUAA”) inapplicable in employment agreements because it is preempted by the Federal Arbitration Act (“FAA”). Despite acknowledging only defendant Morrison was bound by the employment agreement, defendants sought to compel arbitration as to all parties. Shield opposed the motion. The superior court denied the motion to compel arbitration. Defendants appealed.

On appeal, the Court of Appeals affirmed the superior court’s ruling. The Court of Appeals first analyzed the application of the FAA. Noting the FAA applies to commercial employment contracts, defendants failed to establish defendant Morrison’s employment agreement involves interstate commerce. The party seeking to compel arbitration under the FAA bears the burden of proving the existence of a contract containing an arbitration clause in a transaction substantially affecting interstate commerce. Ex parte Greenstreet, Inc., 806 So.2d 1023, 1027 (Ala. 2001). The Court of Appeals ruled defendants also failed to prove the agreement substantially affects interstate commerce.

Next, the Court of Appeals rejected defendants’ argument the arbitration clause is enforceable as a common law contract term. The defendants did not make the argument in their motion to compel, and only inserted a brief sentence in their reply of the term being enforceable as a common law contract term. No legal authority or factual support was presented.

A.R.S. § 12-341.01(A) ATTORNEY FEES

Buxton Arlington Pet, LLC, et al., v. Ronald H. Butler, et al., 1 CA-CV 16-0260 (Ariz. App. October 31, 2017) – Memorandum

From 2006 to 2008, defendant Ronald Butler (“Butler”) was the president and CEO of Pet Resorts, Inc. (“PRI”). In 2007 and 2008, PRI and Buxton Arlington Pet, LLC, (“Buxton”) entered into multiple contracts for Buxton to construct several new pet resorts and lease them to PRI.

In meetings before the agreements were finalized, Buxton’s representatives expressed concern about PRI’s financial condition and recommended Buxton not sign a development agreement without additional financial backing. According to Buxton, Butler explained PRI had a line of credit which would be available to cover operational shortfalls and rent payments. Buxton claimed this assurance was “essential” to the decision to enter the initial agreement with PRI.

In March 2011, PRI defaulted on its leases with Buxton. According to Buxton, in April 2012, it learned of the restrictions on the line of credit which were undisclosed by Butler. Buxton also alleged at the same time PRI used the line of credit for other development purposes. In June 2012 PRI filed for bankruptcy.

In August 2014, Buxton filed a lawsuit against Butler alleging fraud in the inducement, negligent misrepresentation, and aiding and abetting fraud in the inducement and negligent misrepresentation. Butler filed a motion for summary judgment on all claims. The superior court granted the motion finding the statute of limitations had run on each of Buxton’s claims. Butler moved for an award of attorney fees arguing Buxton’s claim arose out of a contract under A.R.S. § 12-3431.01(A). The superior court denied the motion and Butler timely appealed.

A.R.S. § 12-341.01(A) provides the court discretion to award the successful party reasonable attorney fees in any contested action arising out of a contract, express or implied. Butler argued since Buxton could not assert a breach of contract claim against PRI, Butler could be awarded attorney fees. The Court of Appeals affirmed the superior court’s denial.

The Court of Appeals looked to the ruling in Morris v. Achen Constr. Co., which the superior court analyzed in its denial of the motion. 155 Ariz. 512 (1987). In Morris, the Arizona Supreme Court held the litigants must also be the parties to the contract giving rise to the tort as fraudulently inducing one to enter into a contract with a third party is not a type of tort falling within realm of A.R.S. § 12-3431.01(A). Id. at 514.

Buxton alleged Butler was personally liable for fraud in the inducement, negligent misrepresentation, and aiding and abetting. Butler does not dispute he was not a party to the relevant contracts, and thus, not a party to the contracts. Hence, the lawsuit did not allow for an award of attorney fees under A.R.S. § 12-3431.01(A).

SUMMARY JUDGMENT AND USURPING THE JURY’S FUNCTION

The Forest Highlands Association v. Clifford E. Alexander, III; and Jeanne Fisher, 1 CA-CV 16-0714 (Ariz. App. November 9, 2017) – Memorandum

In 2005, defendants Clifford E. Alexander III and Jeanne Fisher (“Alexanders”) bought real property in The Forest Highlands Association (“Association”). On May 29, 2014, Mr. Alexander was involved in an incident. According to the Association, Mr. Alexander intimidated a group of children. The Coconino County Sheriff’s Office responded and arrested Mr. Alexander. Based on the incident, the Forest Highlands Association Board of Directors (“Board”) charged Mr. Alexander with violating Forest’s code of conduct. A notice was issued to Mr. Alexander and a hearing was set. The Alexanders faced potential fines and assessments.

After the hearing, the Alexanders were assessed a $250 fine and $2,707.90 in attorneys’ fees and costs associated with investigating the violation. The Alexanders refused to pay and stopped paying their regular monthly homeowner association fee assessments. The Association eventually recorded a lien against the Alexanders’ property. Next, the Association sued the Alexanders alleging breach of contract and seeking damages in the amount of the Alexanders’ outstanding balances, and in the alternative, alleged unjust enrichment based on membership benefits the Alexanders received without paying their dues.

The Alexanders answered the complaint admitting the property was subject to the Association’s Covenants, Conditions, and Restrictions (“CC&Rs”), Mr. Alexander was a part of the incident, and acknowledged the violations but contested the hearing’s legality. The Alexanders disputed the grant of attorneys’ fees as a special assessment in investigating the violation and challenged the calculation of past due regular assessments owed. They also requested a jury trial.

The Association moved for summary judgment, which the superior court granted. The Alexanders timely appealed.

On appeal, the Alexanders challenged the superior court not granting them a jury trial pursuant to their request under the Seventh Amendment of the United States Constitution, and the court violated the Alexanders’ due process rights by granting summary judgment without any further proceedings.

The Court of Appeals upheld the superior court’s ruling. The Court of Appeals analyzed Orme School v. Reeves, 166 Ariz. 301, 308-09 (1990). In Orme the Court ruled by granting a superior court judge the power to enter judgment without trial, it did not usurp the jury’s function and did not interfere with the constitutional right to a jury trial. The right to a jury trial only attaches if the case presents a genuine factual question, and hence summary judgment operates as an efficient instrument expediting the business of the court without the necessity of trial. Id. at 305, 308.

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