Solid Q Holdings v. Arenal Energy , 362 P.3d 295 ( 2015 )

2015 UT App 272THE UTAH COURT OF APPEALS
SOLID Q HOLDINGS LLC,
Appellee,
v.
ARENAL ENERGY CORPORATION, RICHARD REINCKE,
AND ERIC JOHNSON,
Appellants.
Memorandum Decision
No. 20140252-CA
Filed November 12, 2015
Fourth District Court, Provo Department
The Honorable Lynn W. Davis
No. 130401096
Paul W. Jones, Attorney for Appellants
Patrick J. Ascione, Attorney for Appellee
JUDGE KATE A. TOOMEY authored this Memorandum Decision, in
which JUDGES J. FREDERIC VOROS JR. and MICHELE M.
CHRISTIANSEN concurred.
TOOMEY, Judge:
¶1 Arenal Energy Corporation, Richard Reincke, and Eric
Johnson appeal from the district court’s order denying their
motion to compel arbitration in their dispute with Solid Q
Holdings LLC (Solid Q). We affirm.
¶2 In July 2012, Solid Q extended a loan to Arenal Energy
Corporation, for which the two entities executed a promissory
note (the Note). Reincke and Johnson, who established Arenal
Energy Corporation, each personally guaranteed the Note.
Although the Note contained an integration clause, it did not
include any provision that would require the parties to arbitrate
Solid Q Holdings v. Arenal Energy
claims arising from it. The parties subsequently amended the
Note several times but never added an arbitration clause.
¶3 Meanwhile, Arenal Energy Corporation entered into
separate contracts with Solid Q’s principals, Shaun and Brittni
Shelton, for their individual consulting services (the Consulting
Agreements).1 These agreements had integration clauses. But,
unlike the Note and its various amendments, the Consulting
Agreements contained arbitration clauses which provided that
Arenal Energy Corporation and the Sheltons ‚agree*d+ to submit
any dispute pertaining to [the Consulting Agreements] to
arbitration prior to commencing any legal action.‛
¶4 Arenal Energy Corporation eventually defaulted on the
Note. Consequently, Solid Q initiated this lawsuit against Arenal
Energy Corporation, Reincke, and Johnson (collectively, Arenal)
on the Note, raising claims of breach of contract, breach of
contract on personal guarantees, civil conspiracy, and fraud. In
response, Arenal filed a motion to stay the proceedings and
compel arbitration, asking the district court to enforce the
arbitration clause in the Consulting Agreements and to order
Solid Q’s claims to arbitration. Arenal asserted that even though
Solid Q was not a signatory to an agreement with an arbitration
provision, the arbitration clause in the Consulting Agreements
applied to Solid Q’s lawsuit because Arenal’s breach-of-contract
claims against the Sheltons were ‚based entirely on the same
facts, relationships and . . . disputes‛ as Solid Q’s claims arising
on the Note. Solid Q countered that the Note did not have an
arbitration provision and that the Note and the Consulting
Agreements were wholly unrelated.
1. By its terms, the Note is governed by Utah law. In contrast, the
Consulting Agreements indicate that they are governed by Texas
law.
20140252-CA 2 2015 UT App 272Solid Q Holdings v. Arenal Energy
¶5 The district court denied Arenal’s motion to compel
arbitration without prejudice. It reasoned that ‚there is an
insufficient basis to compel arbitration where [Solid Q] has not
executed an arbitration agreement, and where [Arenal admits]
that *Solid Q+ has signed no arbitration agreement.‛ Arenal now
appeals in accordance with Utah Code section 78B-11-129(1)(a).
I. Motion to Compel Arbitration
¶6 Arenal challenges the district court’s decision to deny its
motion to compel arbitration. ‚*W+hen a district court denies a
motion to compel arbitration based on documentary evidence
alone,‛ we review that decision for correctness. ASC Utah, Inc. v.
Wolf Mountain Resorts, LC, 2010 UT 65, ¶ 11, 245 P.3d 184. But to
the extent Arenal contends the district court should have
equitably estopped Solid Q from avoiding arbitration, we
generally afford deference to the district court’s decision
whether to apply equitable estoppel principles to the facts of a
case. See Glew v. Ohio Sav. Bank, 2007 UT 56, ¶ 19, 181 P.3d 791.
¶7 As in the district court, Arenal admits on appeal that
‚Solid Q Holdings is not itself *a+ signatory to an arbitration
provision‛ but argues Solid Q is estopped from refusing to
arbitrate. According to Arenal, Solid Q’s claims on the Note and
Arenal’s counterclaims under the Consulting Agreements ‚are
based entirely on the same facts, relationships and inseparable
disputes.‛ In essence, it contends that, as a signatory to an
arbitration agreement, it has the right to compel arbitration with
Solid Q, which is a nonsignatory to the arbitration agreement
and which originally brought suit against Arenal under a
separate contract.
¶8 ‚The general rule of arbitration agreements is that one
who has not manifested assent to an agreement to arbitrate
cannot be required to submit to arbitration.‛ Ellsworth v.
American Arbitration Ass’n, 2006 UT 77, ¶ 19, 148 P.3d 983. But,
‚under certain circumstances, a nonsignatory to an arbitration
20140252-CA 3 2015 UT App 272Solid Q Holdings v. Arenal Energy
agreement can enforce or be bound by an agreement between
other parties.‛ Id. In particular, Arenal relies on the estoppel
exception recognized in Ellsworth, in which the Utah Supreme
Court determined a signatory can enforce an arbitration
provision of a contract if a nonsignatory sues under the contract
or seeks to benefit from that contract. Id. ¶¶ 19 & n.11, 20 & n.12,
22.2 The Ellsworth court ultimately held that ‚the nonsignatory
estoppel exception does not apply to . . . a nonsignatory who is
not suing on the contract and who has not received direct
benefits from the contract.‛ Id. ¶ 20. The rationale behind this
exception is to prohibit a nonsignatory from having it both
ways—seeking to benefit from an agreement while attempting to
avoid the duties imposed by that same agreement. See id.
¶9 The nonsignatory estoppel exception does not apply here
for two reasons. First, Solid Q is not suing based on the
Consulting Agreements. Instead, Solid Q is suing Arenal for
claims arising on the Note—an instrument without an
2. The Ellsworth court also identified other rationales for binding
a nonsignatory to an arbitration agreement. See Ellsworth v.
American Arbitration Ass’n, 2006 UT 77, ¶ 19 n.11, 148 P.3d 983.
These rationales include incorporation by reference, assumption,
agency, veil-piercing or alter-ego, and third-party beneficiary. Id.Because Arenal does not argue in its opening brief that these
other rationales apply to this case, we do not consider them. In
its reply brief, Arenal cites Texas case law in an apparent effort
to argue that Solid Q should be compelled to arbitrate based on
agency principles. But because an argument initially raised in an
appellant’s reply brief is generally considered waived, we will
not address this argument further. See Brown v. Glover, 2000 UT
89, ¶ 23, 16 P.3d 540 (explaining that issues first raised in the
reply brief are considered waived ‚to prevent the resulting
unfairness to the respondent‛ where ‚the respondent had no
opportunity to respond‛).
20140252-CA 4 2015 UT App 272Solid Q Holdings v. Arenal Energy
arbitration provision. Second, beyond pointing out that the
Sheltons—who are signatories to the Consulting Agreements—
own Solid Q, Arenal has not alleged that Solid Q has received
direct benefits from the Consulting Agreements.
¶10 Nevertheless, relying on a variation of the estoppel
exception in other jurisdictions, Arenal contends that ‚when a
non-signatory Plaintiff’s claims are ‘intertwined’ with claims
under another agreement[] containing a broad arbitration clause,
all of the Plaintiff’s claims are arbitrable.‛ But, even under this
variation, Arenal’s arguments are misplaced.
¶11 Assuming, without deciding, that this variation would
comport with Utah law, the cases Arenal identifies do not
support the proposition that this version of equitable estoppel
could apply to estop a nonsignatory from avoiding arbitration.
Rather, the cited cases indicate only that a nonsignatory can
force a signatory to arbitrate pursuant to a contract when
‚the signatory plaintiff sues a nonsignatory defendant on the
contract but seeks to avoid the contract-mandated arbitration by
relying on the fact that the defendant is a nonsignatory.‛ Id. ¶ 20
n.12 (citing Bridas S.A.P.I.C. v. Government of Turkm., 345 F.3d
347, 360–61 (5th Cir. 2003)).3 Indeed, the Fifth Circuit has
3. See, e.g., Bridas S.A.P.I.C. v. Government of Turkm., 345 F.3d 347,
360–61 (5th Cir. 2003) (stating that the ‚simple fact that *the
signatory’s+ claims against . . . *the nonsignatory+ are inextricably
intertwined . . . is insufficient, standing alone, to justify the
application of equitable estoppel‛ to the nonsignatory); Javitch v.
First Union Sec., Inc., 315 F.3d 619, 628–29 (6th Cir. 2003) (‚When
only an indirect benefit [from the contract containing the
arbitration provision] is sought, . . . it is only a signatory that
may be estopped from avoiding arbitration with a nonsignatory
when the issues the nonsignatory is seeking to resolve in
arbitration are intertwined with the underlying contract.‛);
Grigson v. Creative Artists Agency, LLC, 210 F.3d 524, 526–28 (5th
(continued…)
20140252-CA 5 2015 UT App 272Solid Q Holdings v. Arenal Energy
acknowledged that the version of estoppel that Arenal’s
argument depends upon
applies only to prevent a signatory from avoiding
arbitration with a nonsignatory when the issues the
nonsignatory is seeking to resolve in arbitration are
intertwined with the agreement that the estopped party
has signed. [B]ecause arbitration is guided by
contract principles, the reverse is not also true: a
signatory may not estop a nonsignatory from
avoiding arbitration regardless of how closely
affiliated that nonsignatory is with another signing
party.
Bridas, 345 F.3d at 361 (alteration in original) (citations and
internal quotation marks omitted). This rule ‚makes sense
because the parties resisting arbitration had expressly agreed to
arbitrate claims of the very type that they asserted against the
nonsignatory.‛ Id. Thus, the cases Arenal cites are inapposite.4
(…continued)
Cir. 2000) (estopping a signatory plaintiff from relying upon the
defendants’ status as nonsignatories to prevent the defendants
from compelling arbitration).
4. Arenal also cites two cases for the proposition that ‚a claim
against a non-signatory ‘that is based upon the same operative
facts and is inherently inseparable from the claims against a
signatory will always contain issues referable to arbitration
under an agreement in writing.’‛ (Quoting Hill v. G E Power Sys.,
Inc., 282 F.3d 343, 347 (5th Cir. 2002).) The cited discussions in
these two cases, however, address whether a nonsignatory with
inherently inseparable claims brought against it is entitled to a
stay pending the outcome of a signatory’s arbitration under the
(continued…)
20140252-CA 6 2015 UT App 272Solid Q Holdings v. Arenal Energy
¶12 In sum, because the estoppel exceptions that Arenal relies
on apply only to prevent a signatory’s attempt to avoid
arbitration, see id., or to prevent a nonsignatory’s attempt to
benefit from an agreement while seeking to avoid that same
agreement’s arbitration provision, estoppel does not apply here,
see Ellsworth, 2006 UT 77, ¶ 20. Solid Q did not sign the
Consulting Agreements containing the arbitration provision and
never sued Arenal on those agreements. Moreover, Arenal has
not alleged that Solid Q even benefitted from the Consulting
Agreements. Accordingly, we decline Arenal’s invitation to
apply equitable principles to this case and thus we affirm the
district court’s order denying Arenal’s motion to compel
arbitration.
II. Attorney Fees On Appeal
¶13 Solid Q seeks an award of attorney fees pursuant to
rule 33 of the Utah Rules of Appellate Procedure because, it
argues, this appeal was frivolous and only brought for delay.
Arenal does not respond to Solid Q’s rule 33 argument.
¶14 Rule 33 allows this court to award ‚just damages‛ to the
prevailing party, which may include reasonable attorney fees, if
it determines that an appeal ‚is either frivolous or for delay.‛
Utah R. App. P. 33(a). ‚*A+ frivolous appeal . . . is one that is not
grounded in fact, not warranted by existing law, or not based on
a good faith argument to extend, modify, or reverse existing
law.‛ Id. R. 33(b). An appeal is brought for delay if it ‚is one
interposed for any improper purpose such as to harass, cause
needless increase in the cost of litigation, or gain time that will
benefit only the party filing the appeal.‛ Id. The Utah Supreme
(…continued)
Federal Arbitration Act. See Hill, 282 F.3d at 347–48; Harvey v.
Joyce, 199 F.3d 790, 795–96 (5th Cir. 2000). These cases therefore
do not lend support to Arenal’s position.
20140252-CA 7 2015 UT App 272Solid Q Holdings v. Arenal Energy
Court has indicated that the imposition of rule 33 sanctions ‚is a
serious matter and only to be used in egregious cases, lest the
threat of such sanctions should chill litigants’ rights to appeal
lower court decisions.‛ Redd v. Hill, 2013 UT 35, ¶ 28, 304 P.3d
861. Thus, sanctions under rule 33 are ‚appropriate for appeals
obviously without merit, with no reasonable likelihood of
success, and which result in the delay of a proper judgment.‛ Id.(citation and internal quotation marks omitted).
¶15 We conclude that Arenal’s appeal is not an egregious case
and therefore sanctions are not appropriate. As the district court
observed, ‚the Ellsworth case appears to have opened the door
for Utah courts to consider [estoppel and] the other non-
signatory exceptions‛ to the general arbitration rule. Even
though Arenal’s arguments to extend existing law are unavailing
on appeal, the issues it raises are neither frivolous nor brought
solely for delay. Accordingly, we decline to award Solid Q
attorney fees under rule 33.
CONCLUSION
¶16 Arenal has not demonstrated that Solid Q is a
nonsignatory that may be bound by an arbitration agreement
between other parties. We therefore affirm the district court’s
order refusing to compel arbitration. Because we affirm the
district court’s order, Solid Q is entitled to its costs. See Utah R.
App. P. 34(a) (‚*I+f a judgment or order is affirmed, costs shall be
taxed against appellant . . . .‛). But an award of attorney fees
incurred on appeal to Solid Q is not merited under rule 33 of the
Utah Rules of Appellate Procedure.
20140252-CA 8 2015 UT App 272