Paul D. Melnuk v. Thomas J. Hillman ( 2020 )

In the Missouri Court of Appeals
Eastern District
DIVISION TWO
PAUL D. MELNUK, ) No. ED108006
)
Respondent, ) Appeal from the Circuit Court of
) St. Louis County
vs. )
) Honorable Kristine A. Kerr
THOMAS J. HILLMAN, )
)
Appellant. ) Filed: January 28, 2020
Introduction
Thomas J. Hillman appeals the trial court’s denial of his motion to compel arbitration of
claims for damages brought by Paul D. Melnuk, his former business partner. He argues the trial
court erred in denying his motion to compel arbitration because two agreements between the
parties contained delegation clauses requiring threshold questions of arbitrability be submitted to
an arbitrator. He further argues Melnuk’s claims for damages were not raised and their
arbitrability was not decided in a prior arbitration. Alternatively, Hillman argues, even if the
delegation clauses were invalid, the trial court erred in not finding Melnuk’s claims should be
arbitrated because they “touch[ ] matters covered by the parties’ contract[s].” We find the trial
court erred in denying Hillman’s motion to compel arbitration. Accordingly, the trial court’s
order overruling Hillman’s motion to compel arbitration is reversed. The trial court shall stay the
case and order the parties to proceed to arbitration.
Factual and Procedural Background
Melnuk and Hillman were business partners who each owned a one-half interest in FTL
Capital, LLC (“FTL Capital”).1 Melnuk and Hillman were the sole Members and Managers of
FTL Capital. FTL Capital had an operating agreement (“Operating Agreement”), which
included a “Buy and Sell Option” provision under which one Member could propose to sell his
one-half interest in FTL Capital or buy the other Member’s one-half interest in FTL Capital at a
price in the proposal. The non-proposing Member could opt to be the buyer or the seller. On
February 17, 2015, Melnuk submitted a written proposal to Hillman, offering to either buy
Hillman’s interest or sell his own interest in FTL Capital. On April 8, 2015, Hillman notified
Melnuk he wished to purchase Melnuk’s one-half interest in FTL Capital. On April 30, 2015,
Melnuk and Hillman executed a “Membership Interest Buy/Sell Agreement of FTL Capital,
LLC” (“Buy/Sell Agreement”).
The Buy/Sell Agreement provided Hillman would pay Melnuk $23.3 million (“Purchase
Price”) for his one-half interest in FTL Capital. The Buy/Sell Agreement provided that, at the
closing, Hillman would pay Melnuk an amount equal to 5% of the Purchase Price from funds
held in escrow and execute and deliver a promissory note (“Promissory Note”) for $22,135,000,
subject to certain contingent liability adjustments. One such adjustment was for payments made
to certain employees under the FTL Capital Phantom Option Plan (“Phantom Option Plan”).
FTL Capital adopted the Phantom Option Plan, which became effective on September 1,
2014. The Phantom Option Plan provided incentives to key employees of FTL Capital and
certain FTL Capital affiliates by offering them the right to share in the appreciation of FTL
1
Melnuk and Hillman held their ownership interests in FTL Capital through trusts they controlled. Therefore, the
named parties in this case are Paul D. Melnuk, Trustee of the Paul D. Melnuk Revocable Trust Dated March 8, 2012
and Melnuk Family Dynasty Trust Dated December 19, 2012 and Thomas J. Hillman, Individually and as Trustee of
the Thomas J. Hillman Living Trust Dated May 18, 1993.
2
Capital through phantom option bonus awards. The Phantom Option Plan provided FTL Capital
would pay phantom option bonus awards to enrolled employees upon a “change of control.” The
Phantom Option Plan defined “change of control” as “any sale, transfer or issuance or series of
sales, transfers and/or issuances of greater than fifty percent (50%) of the voting Membership
Units of the Company or by the owner(s) of such Membership units.” (emphasis added). The
Phantom Option Plan provided amendments and revisions to its terms must be approved by FTL
Capital’s Members “if the amendment would . . . materially increase the benefits accruing to
Participants under the [Phantom Option] Plan.”
In early 2015, before Melnuk and Hillman executed the Buy/Sell Agreement, an
employee enrolled in the Phantom Option Plan requested the definition of “change of control” be
changed under the Phantom Option Plan so phantom option bonus awards would be due upon
any sale, transfer, or issuance of fifty percent or more of the voting Membership units rather than
any sale, transfer, or issuance of greater than fifty percent of the voting Membership units. The
requested change would require FTL Capital to pay phantom option bonus awards to enrolled
employees if either Melnuk or Hillman sold his interest in FTL Capital, as Melnuk and Hillman
were the sole Members. Melnuk did not agree to the amendment.
Melnuk alleged that, without Melnuk’s knowledge or permission, Hillman changed the
definition of “change of control” within the Phantom Option Plan to require payment upon “any
sale, transfer or issuance or series of sales, transfers and/or issuances of fifty percent (50%) or
more of the voting Membership Units of the Company or by the owner(s) of such Membership
units.” (emphasis added). Melnuk alleged Hillman, assisted by FTL Capital’s Chief Financial
Officer Megan Lane, effectuated this change by affixing Melnuk’s signature, without Melnuk’s
knowledge or permission, to an amended version of the Phantom Option Plan. Hillman paid
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over $586,000 to employees enrolled in the Phantom Option Plan, including over $60,000 to
Lane. Hillman then notified Melnuk he intended to reduce the principal amount under the
Promissory Note by $287,167 as a contingent liability adjustment under the Buy/Sell Agreement,
which represented half the amount FTL Capital paid enrolled employees under the Phantom
Option Plan. Hillman asked Melnuk to execute an amendment to the Promissory Note reducing
the principal amount under the Promissory Note by $287,167. Melnuk refused, arguing the
$287,167 was not an authorized contingent liability adjustment under the Buy/Sell Agreement.
Both the Operating Agreement and the Buy/Sell Agreement contained arbitration clauses.
The arbitration clause in the Operating Agreement provided:
Any claim or dispute regarding the interpretation, application or enforcement of
this Agreement shall be resolved exclusively by arbitration in St. Louis before a
single arbitrator in accordance with the rules then in effect of the American
Arbitration Association for commercial disputes, and any judgment rendered
thereon shall be enforced in the state or federal courts located in St. Louis,
Missouri.
The arbitration clause in the Buy/Sell Agreement provided:
With the exception of injunctive relief, any controversy or claim arising out of or
relating to this Agreement, or the breach thereof, shall be settled by arbitration
administered by the American Arbitration Association under its Expedited
Procedures, and judgment on the award rendered by the arbitrator(s) may be
entered in any court having jurisdiction thereof. The arbitrator may not award
punitive or consequential damages and the prevailing party shall be awarded its
attorney fees.
The Phantom Option Plan contained no arbitration clause. In 2016, Hillman initiated
arbitration (the “2016 Arbitration”), seeking a declaratory judgment that certain contingent
liability adjustments were valid under the Buy/Sell Agreement. Specifically, Hillman sought a
declaratory judgment that the contingent liability adjustment for the phantom option bonus
awards was valid under the Buy/Sell Agreement and that the principal amount under the
Promissory Note should be reduced by $287,167. Melnuk challenged the validity of several
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contingent liability adjustments under the Buy/Sell Agreement. He denied the contingent
liability adjustment for the phantom option bonus awards was valid and instead claimed the
adjustment was not authorized by the Buy/Sell Agreement. Melnuk asserted two counterclaims.
The first sought a declaratory judgment that the principal amount under the Promissory Note
should be increased by $121,884 based on certain adjustments. The second sought acceleration
of Hillman’s payment of the principal amount under the Promissory Note because of Hillman’s
alleged failure to make certain interest payments on the Promissory Note.
A four-day arbitration hearing was held in June 2016. The arbitrator entered his award
on July 12, 2016 (the “2016 Arbitration Award”). The 2016 Arbitration Award stated the issues
presented in the 2016 Arbitration were “ten potential adjustments” of the principal amount
Hillman owed Melnuk under the Promissory Note. The 2016 Arbitration Award concluded the
phantom option bonus awards “met the contractual definition of a contingent liability
adjustment” and, thus, resulted in a reduction of the principal amount owed under the Promissory
Note. The 2016 Arbitration Award also stated:
In so finding, I express no opinion as to whether [Melnuk] might have a claim
against [Hillman] for breach of fiduciary duty or other cause of action relating to
[Hillman’s] alleged improper modification of the “change of control” provision of
the [Phantom Option] Plan. Any such claim is beyond the scope of this
arbitration.
The trial court confirmed the 2016 Arbitration Award on February 13, 2018.2 On January
4, 2019, Melnuk filed his petition (“Petition”) in the St. Louis County Circuit Court, asserting
claims for damages against both Hillman and Lane for breach of fiduciary duty, fraud, and
conspiracy regarding their unauthorized amendment of the “change of control” provision in the
Phantom Option Plan. In addition, Melnuk asserted a claim for damages against Hillman for
2
See Paul D. Melnuk, Trustee of the Paul D. Melnuk Revocable Trust dated March 8, 2012, et al. v. Thomas J.
Hillman, Trustee of the Thomas J. Hillman Living Trust dated May 18, 1993, Cause No. 17SL-CC01782.
5
breach of the Phantom Option Plan and against Lane for unjust enrichment. Melnuk’s Petition
prayed for damages totaling $287,167, which represented the reduction of the principal amount
under the Promissory Note attributable to the phantom option bonus awards adjustment.
On April 18, 2019, Hillman and Lane moved to compel arbitration. Hillman and Lane
argued the parties agreed to delegate threshold issues of arbitrability of “any claim or dispute
regarding the interpretation, application, or enforcement of” the Operating Agreement and “any
controversy or claim arising out of or relating to” the Buy/Sell Agreement. Therefore, Hillman
and Lane argued the trial court should compel arbitration of Melnuk’s claims for damages rather
than allow them to proceed in trial court. In response, Melnuk argued the 2016 Arbitration
Award determined his claims for damages relating to Hillman’s and Lane’s alleged unauthorized
amendment of the “change of control” provision were beyond the scope of the arbitration clauses
in the Operating Agreement and Buy/Sell Agreement and must be brought in trial court. On
June 11, 2019, the trial court entered its order granting Lane’s application to compel arbitration
and denying Hillman’s application to compel arbitration.
Hillman’s appeal follows.
Standard of Review
“Whether arbitration should be compelled is a question of law, which we review de
novo.” Esser v. Anheuser-Busch, LLC, 567 S.W.3d 644, 648 (Mo. App. E.D. 2018) (citing
Jackson v. Higher Educ. Loan Auth. of Mo., 497 S.W.3d 283, 287 (Mo. App. E.D. 2016)).
Discussion
In his first point, Hillman argues the trial court erred in denying his application to compel
arbitration because the parties’ agreements to arbitrate in the Operating Agreement and the
Buy/Sell Agreement contained delegation clauses requiring threshold questions of arbitrability
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be submitted to an arbitrator. Hillman also argues Melnuk’s claims for damages were not raised
in the 2016 Arbitration and their arbitrability was not decided in the 2016 Arbitration Award. He
argues the 2016 Arbitration only resolved the arbitrability of claims related to which contingent
liability adjustments were valid under the Buy/Sell Agreement, not claims related to possible
damages Melnuk suffered because of Hillman’s unauthorized amendment of the “change of
control” provision in the Phantom Option Plan. He argues, because Melnuk never pled claims
for damages arising from Hillman’s alleged unauthorized amendment of the “change of control”
provision in the Phantom Option Plan in the 2016 Arbitration, arbitrability of those claims could
not have been decided by the 2016 Arbitration Award. Thus, he argues he cannot be collaterally
estopped by the 2016 Arbitration Award from compelling arbitration of Melnuk’s claims for
damages. Regardless, he argues an arbitrator, rather than a court, must decide whether he is
collaterally estopped from compelling a second arbitration.
Melnuk does not dispute the Operating Agreement and the Buy/Sell Agreement
contained delegation clauses requiring threshold questions of arbitrability be submitted to an
arbitrator. Rather, Melnuk argues he raised issues relating to Hillman’s alleged unauthorized
amendment of the “change of control” provision “at every step” of the 2016 Arbitration and the
2016 Arbitration Award concluded Melnuk’s claims for damages were beyond the scope of the
arbitration clauses in the Operating Agreement and the Buy/Sell Agreement. Thus, Melnuk
argues Hillman is collaterally estopped by the 2016 Arbitration Award from compelling
arbitration of his claims for damages. He argues the court, rather than an arbitrator, must decide
whether Hillman is collaterally estopped from compelling a second arbitration.
“Arbitration is a matter of contract under the Federal Arbitration Act” (“FAA”). Soars v.
Easter Seals Midwest, 563 S.W.3d 111, 114 (Mo. banc 2018) (internal citations omitted). “An
7
arbitrator’s authority over a particular dispute exists only ‘because the parties have agreed in
advance to submit such grievances to arbitration.’” Id. (quoting AT&T Techs., Inc. v. Commc’ns
Workers of Am., 475 U.S. 643, 648-49 (1986)). “[T]he first task of a court asked to compel
arbitration of a dispute is to determine whether the parties agreed to arbitrate that dispute.”
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985). The
United States Supreme Court has recognized “parties can agree to arbitrate ‘gateway’ questions
of ‘arbitrability,’ such as whether the parties have agreed to arbitrate or whether their agreement
covers a particular controversy,” through a delegation clause. Rent-A-Center, West, Inc. v.
Jackson, 561 U.S. 63, 68-69 (2010). See Am. Arbitration Ass’n, AAA Commercial Arbitration
Rule R-7(a) (2013) (delegating to an arbitrator “the power to rule on his or her own jurisdiction,
including any objections with respect to the existence, scope, or validity of the arbitration
agreement or to the arbitrability of any claim or counterclaim”).
Courts presume the parties intend courts, not arbitrators, to decide threshold disputes
about arbitrability, unless the parties “clearly and unmistakably” provide otherwise. State ex rel.
Pinkerton v. Fahnestock, 531 S.W.3d 36, 45 (Mo. banc 2017) (internal quotations omitted).
Where parties express their intent to arbitrate any dispute under the American Arbitration
Association (“AAA”) commercial arbitration rules, “clear and unmistakable” intent to delegate
threshold issues of arbitrability to an arbitrator is established. Id. at 48. Here, Melnuk and
Hillman do not dispute they delegated threshold issues of whether a claim, dispute, or
controversy related to the Operating Agreement or the Buy/Sell Agreement is arbitrable to an
arbitrator, as their agreements contain arbitration clauses that incorporate the AAA commercial
arbitration rules by reference. See id.
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Melnuk and Hillman dispute whether the arbitrability of Melnuk’s claims for damages
related to Hillman’s unauthorized amendment of the “change of control” provision in the
Phantom Option Plan was decided in the 2016 Arbitration Award so Hillman is collaterally
estopped from compelling a second arbitration. “Collateral estoppel, [or] issue preclusion,
‘precludes relitigation of an issue previously decided and incorporated into an earlier
judgment.’” Johnson v. Mo. Dep’t of Health & Senior Servs., 174 S.W.3d 568, 580 (Mo. App.
W.D. 2005) (quoting Sexton v. Jenkins & Assocs., Inc., 152 S.W.3d 270, 273 (Mo. banc 2004)).
“For purposes of collateral estoppel, an arbitration award may constitute a final judgment on the
merits.” Graybar Elec. Co., Inc. v. Fed. Ins. Co., 567 F. Supp. 2d 1116, 1123 (E.D. Mo. 2008)
(internal citations omitted).
Melnuk and Hillman dispute who—an arbitrator or the court—determines whether
Hillman’s second arbitration demand is collaterally estopped by the 2016 Arbitration Award.
Hillman argues, because the parties have agreed through the delegation clauses in the Operating
Agreement and the Buy/Sell Agreement to arbitrate threshold questions of arbitrability, an
arbitrator must decide whether he is collaterally estopped from compelling a second arbitration
of Melnuk’s claims for damages. Melnuk argues a court must determine whether Hillman is
collaterally estopped from compelling a second arbitration of his claims for damages.
Missouri courts have not addressed who—an arbitrator or the court—determines the
collateral estoppel effect of a prior arbitration award. Because this is an issue of first impression,
we look to federal decisions for guidance. In AT&T Techs., Inc., 475 U.S. at 649, the Supreme
Court held that, “in deciding whether the parties have agreed to submit a particular grievance to
arbitration, a court is not to rule on the potential merits of the underlying claims.” In Howsam v.
Dean Witter Reynolds, Inc., 537 U.S. 79, 84-85 (2002) (quoting John Wiley & Sons, Inc. v.
9
Livingston, 376 U.S. 543, 557 (1964)), the Supreme Court held “‘procedural’ questions which
grow out of the dispute and bear on its final disposition,’” including disputes regarding whether a
condition precedent to arbitrability has been fulfilled, are presumptively for an arbitrator to
decide. The Court held it is for an arbitrator to rule on allegations of “defense[s] to arbitrability,”
such as “time limits, notice, laches, [and] estoppel.” Id. at 84. (internal citations, quotations, and
alterations omitted) (emphasis added).
The District of Columbia Circuit applied the rules announced in AT&T Techs., Inc. and
Howsam to one party’s allegation that another party was collaterally estopped from demanding a
second arbitration by a prior arbitration award in W&T Travel Services, LLC v. Priority One
Servs., Inc., 69 F. Supp. 3d 158 (D.D.C. 2014). In W&T Travel Services, LLC, the District of
Columbia Circuit ruled that whether a second demand for arbitration is collaterally estopped
because the issues were decided in a prior arbitration award is for an arbitrator to decide. Id. at
171-72. The court reasoned collateral estoppel is an “affirmative defense[ ] directed to the
merits” of the underlying claims presented in the demand for arbitration. Id. at 171. Citing
AT&T Techs., Inc., 475 U.S. at 649 and Howsam, 537 U.S. at 84-85, the District of Columbia
Circuit decided it would be improper for the court to address whether a second arbitration
demand was collaterally estopped by a prior arbitration award, as to do so “would constitute a
rul[ing] on the potential merits of the underlying claims.” Id. at 171-72 (internal quotations
omitted) (alteration in original). Accordingly, the court held the merits of an argument
challenging the scope of the issues resolved in a prior arbitration award “must be presented to
and resolved by [a] . . . second arbitration proceeding.” Id. at 171.
Just as in W&T Travel Services, LLC, any claim by Melnuk that the 2016 Arbitration
Award collaterally estops Hillman from compelling a second arbitration cannot be properly
10
considered by a court. Whether the 2016 Arbitration resolved Melnuk’s claims for possible
damages arising from Hillman’s unauthorized amendment of the “change of control” provision
in the Phantom Option Plan, as Melnuk contends, or just those claims regarding which of the
contingent liability adjustments in the Buy/Sell Agreement were valid, as Hillman contends, is a
merits issue. Therefore, we leave any evaluation of Melnuk’s collateral estoppel defense to
Hillman’s second arbitration demand to an arbitrator so as not to “rul[e] on the potential merits
of the underlying claims.” Id. at 172.
The District of Columbia Circuit’s holding in W&T Travel Services, LLC’s is consistent
with other federal circuit courts that have addressed this issue. See Citigroup, Inc. v. Abu Dhabi
Inv. Auth., 776 F.3d 126, 131 (2d Cir. 2015) (holding the claim and issue preclusive effect of
prior arbitration awards are not questions of arbitrability because they, like other affirmative
defenses, are legal defenses to the opposing party’s claims and are themselves a component of
the dispute on the merits); Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1128 (9th
Cir. 2000) (holding the res judicata effect of a prior arbitration award on a subsequent arbitration
is an issue to be determined by an arbitrator “because res judicata is a legal defense that is
necessarily intertwined with the merits”); John Hancock Mut. Life Ins. Co. v. Olick, 151 F.3d
132, 140 (3d Cir. 1998) (holding that a “res judicata objection based on [a] prior arbitration is an
issue to be arbitrated and is not to be decided by the courts.”); Emp’rs Ins. Co. of Wausau v.
OneBeacon Am. Ins. Co., 744 F.3d 25, 27 (1st Cir. 2014) (internal citations, quotations, and
alterations omitted) (“there is broad agreement among the circuit courts that the effect of an
arbitration award on future awards is properly resolved through arbitration.”); Indep. Lift Truck
Builders Union v. NACCO Materials Handling Grp., Inc., 202 F.3d 965, 968 (7th Cir. 2000)
(internal citations and quotations omitted) (“[T]he preclusive effect of the first arbitrator’s
11
decision is an issue for a later arbitrator to consider.”); Oil, Chem. & Atomic Workers Int’l
Union, Local 4-367 v. Rohm & Haas, Tex. Inc., 677 F.2d 492, 494 (5th Cir. 1982) (internal
citations and quotations omitted) (“Whether [a prior arbitration] award can be given an effect
akin to res judicata or stare decisis with regard to future disputes that may arise between the
parties” is not for the courts to decide. “If the parties do not agree, that issue itself is a proper
subject for arbitration.”).
The cases Melnuk cites are easily distinguishable. Melnuk cites Cooper v. Yellow
Freight Sys., Inc., 589 S.W.2d 643, 645 (Mo. Ap. E.D. 1979) and Pratt v. Purcell Tire & Rubber
Co., Inc., 846 S.W.2d 230, 233 (Mo. App. E.D. 1993) to argue a party is barred from asserting a
claim identically presented and determined in a prior arbitration proceeding. He also cites and
Macomber v. MacQuinn-Tweedie, 834 A.2d 131, 136-37 (Me. 2003) for the proposition that
arbitration “is not intended to afford a litigant the opportunity to use arbitration to revisit a
dispute that has been previously resolved.” Here, by contrast, Hillman claims the 2016
Arbitration Award declined to consider and resolve Melnuk’s claims for damages.3 Melnuk also
cites New York State Ass’n for Retarded Children, Inc. v. Carey, 456 F. Supp. 85, 96 (E.D.N.Y.
1978) to argue the collateral estoppel effect of a prior arbitration award “is a question for the
court, not for the arbitrator before whom the point is sought to be relitigated.” However, to the
extent Melnuk claims Carey broadly stands for the proposition that the court can rule on the
merits of the plaintiff’s affirmative defense in determining arbitrability, that reading is foreclosed
by the Supreme Court’s decision in AT&T Techs. Inc., 475 U.S. at 649 that a court should not
rule on the merits of underlying claims when deciding whether the parties agreed to submit a
3
We note Macomber v. MacQuinn-Tweedie, 834 A.2d 131, 136-37 (Me. 2003) did not even involve the application
of issue preclusion principles to a prior arbitration award; rather, it involved the application of issue preclusion
principles to a prior judgment entered by a trial court following a trial.
12
dispute to arbitration and Howsam, 537 U.S. at 84-85 that procedural questions bearing on a
dispute’s final disposition must be decided by an arbitrator. Further, none of the cases Melnuk
cites involved interpretation of the FAA or AAA commercial arbitration rules.
An arbitrator must decide whether Hillman is collaterally estopped by the 2016
Arbitration Award from compelling arbitration of Melnuk’s claims for damages not because the
parties agreed to submit threshold questions of arbitrability to an arbitrator but because
evaluating Melnuk’s collateral estoppel defense is a “‘procedural’ question[ ] which grow[s] out
of the dispute and bear[s] on its final disposition.” See Howsam, 537 U.S. at 84-85. Thus, the
merits of Melnuk’s argument regarding the scope of the 2016 Arbitration Award and,
specifically, whether the 2016 Arbitration Award resolved Melnuk’s claims for damages relating
to Hillman’s unauthorized amendment of the “change of control” provision in the Phantom
Option Plan must be presented to an arbitrator and resolved by a second arbitration proceeding.
Having decided an arbitrator must determine the collateral estoppel effect of the 2016 Arbitration
Award, we decline to address the merits of Melnuk’s collateral estoppel defense as to why
Hillman should not prevail in the second arbitration and instead leave that matter to an arbitrator.
Point I granted.
Point II
In his second point, Hillman argues, even if the arbitration agreements contained no valid
delegation clauses, Melnuk’s claims should be arbitrated because the Operating Agreement and
the Buy/Sell Agreement contain broad arbitration clauses and Melnuk’s claims “touch[ ] matters
covered by” those contracts. Because we find an arbitrator must determine the collateral
estoppel effect of the 2016 Arbitration Award, we need not address the issue raised in Hillman’s
second point.
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Point II is denied.
Conclusion
The trial court’s order overruling Hillman’s motion to compel arbitration is reversed, and
the trial court shall stay the case and order the parties to proceed to arbitration.
_______________________________
Philip M. Hess, Presiding Judge
Kurt S. Odenwald, J. and
Lisa P. Page, J. concur.
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