Edwards v. Carey , 397 P.3d 797 ( 2017 )

2017 UT App 73THE UTAH COURT OF APPEALS
JOSEPH EDWARDS,
Appellee,
v.
MICHAEL CAREY AND WENDY CAREY,
Appellants.
Opinion
No. 20151096-CA
Filed May 4, 2017
Third District Court, Salt Lake Department
The Honorable Mark S. Kouris
No. 150905215
Andrew G. Deiss, Diana F. Bradley, Shannon Z.
Peterson, and Alejandro E. Moreno, Attorneys
for Appellants
Peter W. Billings, Timothy K. Clark, Richard F.
Ensor, and Michael C. Barnhill, Attorneys
for Appellee
JUDGE STEPHEN L. ROTH authored this Opinion, in which JUDGES
GREGORY K. ORME and J. FREDERIC VOROS JR. concurred.
ROTH, Judge:
¶1 Michael Carey and Wendy Carey (collectively, the
Careys)1 appeal the district court’s order denying their motion to
compel Joseph Edwards to arbitrate his claims against them. We
affirm.
1. When referring to the Careys individually, we use their first
names for clarity.
Edwards v. Carey
¶2 In 1985, Edwards and Michael founded Seirus Innovative
Accessories Inc. (Seirus). Each owned fifty percent of the
company’s stock. And since 1985, Edwards, Michael, and Wendy
served together as the only members of the Seirus Board of
Directors (the Board).
¶3 Each of the three directors also served as officers of the
company. Michael was the president and, later, chief executive
officer; Wendy served as its chief operations officer, and, later,
its chief financial officer, secretary, and treasurer; and Edwards
appears to have been the co-president, secretary, and treasurer.
As officers of the company, each signed an employment
agreement with Seirus. The employment agreements contained
an arbitration provision:
Employer and Employee agree that any dispute or
controversy arising out of or relating to any
interpretation, construction, performance, or
breach of this Agreement shall be settled and
decided by arbitration conducted by the American
Arbitration Association . . . .
Michael’s agreement also expressly stated that his ‚duties as
CEO are independent and in addition to any other position
[Michael] may hold with Employer from time to time.‛
¶4 In 2015, disputes arose between the parties regarding the
interest rates on certain shareholder promissory notes Edwards
held representing his loans to the company, which culminated
with Edwards filing suit against Seirus to recover interest he
alleged was due under the notes. Subsequently, Michael
determined, ‚in his business judgment as President and CEO,‛
that Edwards’ actions rendered him incapable of ‚neutrally
serving as an Officer of *Seirus+‛ and recommended to the Board
that Edwards be removed from his positions as co-president and
secretary. In a board meeting on July 27, 2015 (the Meeting),
Michael, the Board’s chair, proposed that Edwards be removed
as an officer of Seirus. Michael and Wendy voted to approve the
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proposal, while Edwards voted to oppose it. The proposal was
therefore approved by a majority of the Board, and Edwards was
removed from management. Nonetheless, Edwards remained a
director and member of the Board.
¶5 During the Meeting, Michael also proposed that the Board
approve an Equity Exchange Offering (the Equity Exchange)
through which the shareholders—Michael and Edwards—could
choose to convert the debt Seirus owed them into equity shares
in the company. As of the date of the Meeting, Seirus owed its
two shareholders over $6.8 million, and Michael advised the
Board that the exchange plan would ‚allow Seirus to capitalize
itself without having to raise funds to repay the debt, increasing
cash flow, decreasing expenses and increasing profits by
eliminating interest payments.‛ Again, Michael and Wendy
voted in favor, while Edwards voted against, and the proposal
was thereby approved. Subsequently, Michael, acting as a
shareholder, elected to cancel nearly $4 million of debt owed to
him by Seirus, which increased his shares in the company.
Edwards did not elect to cancel any debt. As a result, Michael’s
shareholder interest in the company increased to 55.44%, while
Edwards’ interest decreased proportionally to 44.56%.
¶6 Edwards filed suit two days after the Meeting. In his
complaint, as later amended, Edwards alleged that the Careys
‚engaged in efforts to remove *him+ from the Company’s
management and to minimize his ownership position in the
Company.‛ Edwards identified two corporate actions in
particular that led to his removal and minimized his ownership
position—that during the Meeting, the Careys proposed and
voted to terminate him as an officer and employee, ‚provid*ing+
false reasons . . . and purported reasons that were over fifteen
years old and had never been raised and discussed with *him+,‛
and that they also proposed and voted to approve the Equity
Exchange, which was ultimately exercised by Michael in his
shareholder capacity to reduce Edwards’ ownership in the
company’s stock.
20151096-CA 3 2017 UT App 73Edwards v. Carey
¶7 Edwards’ claims for relief focused on these two corporate
actions. He claimed that Michael and Wendy, acting as directors,
had conflicts of interest that justified setting aside the actions
they took by vote in the Meeting; that Michael and Wendy
breached the fiduciary duties they owed to Seirus and to
Edwards as a shareholder; that removal of Michael and Wendy
as directors was ‚in the best interest of the Company‛; and that
Michael and Wendy, as directors, did not provide him with a
fair opportunity to ‚exercise his preemptive rights‛ related to
acquisition of stock shares, which resulted in a dilution of ‚his
percentage ownership of the Company’s outstanding shares.‛ In
his prayer for relief, Edwards requested that the court declare
void his termination and the adoption of the Equity Exchange as
well as ‚any other stock issuances‛; that Michael and Wendy be
removed as directors; and that he be awarded a monetary
judgment on his breach of fiduciary duty claims.
¶8 Michael and Wendy filed a motion to compel arbitration
and stay the proceeding in the district court. They claimed
arbitration was mandatory because ‚Edwards’ claims against the
Careys relate directly to the performance of their duties as
officers and employees of Seirus‛ and were therefore governed
by the arbitration clauses in Michael’s and Wendy’s employment
agreements. Recognizing that the arbitration provisions applied
only to disputes between Seirus and the Careys and that
Edwards was not a party to their employment agreements, the
Careys asserted that Edwards’ claims against them were
‚derivative claims belonging to Seirus‛ and not to Edwards
individually.
¶9 The district court denied the Careys’ motion. It identified
two questions essential to the determination of whether
Edwards’ claims were subject to mandatory arbitration:
(1) whether the Careys’ actions were ‚within the scope of the
employment agreements,‛ and, if so, (2) whether Edwards’
claims were derivative claims belonging to Seirus rather than to
Edwards himself. The court determined that, while ‚the
management structure and *the Careys’+ overlapping roles as
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directors and officers‛ may at times make it ‚difficult to
precisely determine which hat they were wearing at different
times,‛ Edwards’ claims ‚are primarily asserted against the
Careys for actions they took as directors of the Company,‛ not as
officers. The court also noted that ‚Edwards has affirmatively
stated that he is only pursuing claims against the Careys for their
actions as directors.‛ The court then concluded that ‚the
employment agreements do not govern Edwards’ claims‛
because ‚the Careys concede*d+ that the employment
agreements only ‘govern the performance of their duties as
officers’‛ of Seirus and ‚the allegations of the Amended
Complaint clearly focus on the Careys’ actions as directors.‛
Because the court decided that Edwards’ claims were not subject
to the arbitration provisions of the employment agreements, it
determined that the subsidiary question of whether Edwards’
claims belonged to the corporation need not be addressed.
¶10 The Careys appeal, asking that we reverse the district
court’s decision and order the case to arbitration. ‚Whether a
trial court correctly decided a motion to compel arbitration is a
question of law which we review for correctness, according no
deference to the district judge.‛ MacDonald Redhawk Investors v.
Ridges at Redhawk, LLC, 2006 UT App 491, ¶ 2, 153 P.3d 787(brackets, citation, and internal quotation marks omitted).
¶11 The arbitration provision of the Careys’ employment
agreements provides that ‚any dispute or controversy arising
out of or relating to any interpretation, construction,
performance, or breach of this Agreement shall be settled and
decided by arbitration.‛ Thus, as the district court recognized,
for Edwards’ claims to be subject to arbitration, (1) the Careys
must demonstrate that the actions Edwards complains of fell
within the scope of their employment as corporate officers, and
(2) because the agreements were between Seirus and Michael
and Wendy as employees and officers of the company, the
Careys must show that Edwards’ claims belong to the
corporation rather than Edwards himself. We agree with the
district court that Edwards’ claims are not subject to the
20151096-CA 5 2017 UT App 73Edwards v. Carey
arbitration provision, and as a result, like the district court, we
do not reach the question of whether the claims belong to
Edwards or Seirus.
¶12 The Careys essentially contend that they acted as both
officers and directors in the Board actions of which Edwards
complains. For example, they assert that Michael, acting in his
role as CEO and president, ‚decided to recommend that Seirus
terminate Edwards as an officer only after repeatedly observing
Edwards put his own self-interest ahead of the interests of the
company.‛ And they allege that, in the same capacity, Michael
also ‚determined it was necessary for the company to retire its
debts to the stockholders,‛ and therefore recommended the
Equity Exchange to the Board. Similarly, the Careys assert that
Wendy, acting as secretary, treasurer, and CFO, was ‚intimately
involved in the details‛ of the Equity Exchange, which involved
‚issu*ing+ additional stock to any stockholder electing to
participate‛ in the plan; ‚updat*ing] and manag[ing] the
company’s stock ledger after Michael elected to convert the
entirety of the debt owed to him by the company into equity‛;
and ‚act*ing] as the face of the company in its interactions with
its primary banker.‛ They therefore argue that Edwards’ claims
of wrongdoing, and the allegations and facts supporting them,
necessarily relate to their conduct as officers as well as directors
and board members. And, they assert, because the claims and
allegations necessarily relate to their conduct as officers, the
policy favoring arbitration ‚compels the conclusion that
Edwards’ claims must be arbitrated.‛
¶13 The Careys are correct that there is a strong policy
favoring arbitration. See, e.g., Mariposa Express, Inc. v. United
Shipping Solutions, LLC, 2013 UT App 28, ¶¶ 16–17, 295 P.3d
1173. However, because ‚‘[a]rbitration is a matter of
contract[,] . . . a party cannot be required to submit to arbitration
any dispute which he has not agreed so to submit.’‛ Cade v. Zions
First Nat’l Bank, 956 P.2d 1073, 1076–77 (Utah Ct. App. 1998)
(quoting AT & T Tech., Inc. v. Communications Workers of America,
475 U.S. 643, 648 (1986)). Thus, ‚the presumption in favor of
20151096-CA 6 2017 UT App 73Edwards v. Carey
arbitration does not create a presumption in favor of finding that
an agreement to arbitrate actually exists.‛ Kenny v. Rich, 2008 UT
App 209, ¶ 28, 186 P.3d 989. Rather, ‚policies supporting liberal
enforcement of arbitration agreements inhere only once the
arbitration agreement is established.‛ Id. (citation and internal
quotation marks omitted). In other words, ‚*o+nly when such
[an] agreement on arbitration exists may we encourage
arbitration by liberal interpretation of the arbitration provisions
themselves.‛ Cade, 956 P.2d at 1077 (citation and internal
quotation marks omitted); cf. Howard v. Ferrellgas Partners, LP,
748 F.3d 975, 977 (10th Cir. 2014) (‚Everyone knows the Federal
Arbitration Act favors arbitration. But before the Act’s heavy
hand in favor of arbitration swings into play, the parties
themselves must agree to have their disputes arbitrated.‛).
¶14 We agree with the district court that no agreement to
arbitrate applies to Edwards’ claims. In particular, we reject the
Careys’ contention that, because they wear different hats within
the company, it is not possible to distinguish their actions as
directors from their actions as officers. Rather, we agree with the
district court that a review of Edwards’ amended complaint
demonstrates that it plainly focused on the Careys’ actions as
directors of Seirus, not as officers and employees, and that, as a
result, the arbitration provisions in the Careys’ employment
agreements do not come into play.
¶15 The actions from which Edwards seeks relief are ‚the
termination of Edwards as an employee and officer of the
Company‛ and the adoption of ‚the plan to convert shareholder
debt to additional shareholder equity (or any other stock
issuances).‛ Edwards alleged in his amended complaint that
these actions were taken at ‚the Company’s July 27 Board of
Directors meeting‛ where Michael and Wendy ‚voted in favor of
terminating Edwards as an employee and officer‛ and
‚converting . . . shareholder debt to equity,‛ with only Edwards
‚vot*ing+ against the proposed corporate action.‛ Thus, Edwards
challenges decisions the Careys made as members of the Board.
Michael was elected Chairman of the Board for the Meeting, and
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he proposed the allegedly wrongful actions to the Board in that
capacity. Both actions were officially adopted only when
Michael and Wendy, acting as directors and board members,
out-voted Edwards.
¶16 And even if Michael made recommendations to the Board
as CEO and president or Wendy took certain actions as
treasurer, secretary, and CFO to bring the recommendations to
the Board, the effect of any recommendation or employee action
Michael or Wendy might have made to facilitate either action
before the Meeting or to implement the changes after the
Meeting depended entirely upon the Board’s decisions adopted
on their majority votes as Board members. And Michael’s later
decision to actually convert his loan to Seirus into shares of the
company, which changed the relative percentages of share
ownership to Edwards’ disadvantage, was necessarily a function
of his position as a Seirus shareholder and creditor, not as
president and CEO of the company.
¶17 Further, the amended complaint’s factual allegations
focused on the Careys’ actions as directors (and, in Michael’s
case, as a shareholder). Edwards alleged, for example, that the
Careys ‚engaged in efforts to remove *him+ from the Company’s
management and to minimize his ownership position in the
Company.‛ These efforts included calling the Meeting;
proposing ‚corporate action‛ at the Meeting to oust him as an
employee and an officer and to adopt the stock conversion plan;
voting to approve both proposed actions; approving terms of the
Equity Exchange that permitted Michael but not Edwards to
gain more than 50% ownership in the company; and proposing
and approving the challenged actions ‚to benefit themselves
exclusively‛ in retaliation for Edwards’ past conduct.
¶18 Moreover, most of Edwards’ causes of action refer only to
the Careys’ actions as directors. For example, the first cause of
action asked the court to ‚void the July 27, 2015 corporate
actions‛ terminating ‚Edwards as an officer and employee of the
Company‛ and approving ‚the conversion of shareholder debt
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to shareholder equity program‛ on the basis that Michael and
Wendy had a conflict of interest as directors. The third cause of
action sought to have Michael and Wendy removed ‚as directors
of the Company,‛ due to their ‚dishonest conduct and/or . . .
gross abuse of discretion‛ ‚in regard to the Company and/or
Edwards.‛ The fourth cause of action alleged that Utah law
requires that ‚the board of directors must provide shareholders
possessing preemptive rights with a ‘fair and reasonable
opportunity’ to exercise‛ those rights and that the Careys ‚did
not provide Edwards‛ with that opportunity. And the fifth claim
requested a declaratory judgment that both the decision to oust
Edwards as an officer and approve the Equity Exchange are ‚of
no force and effect,‛ that ‚*a+ny action taken by *the Careys+ to
take ownership or control over more than fifty percent (50%) of
the stock of the Company is of no force and effect,‛ and that the
Careys ‚are removed as Directors of the Company.‛ All of these
claims requested relief on the basis of the Careys’ actions as
directors of Seirus (or in Michael’s case as a shareholder and
creditor), not as officers or employees.
¶19 Edwards’ second claim for relief—breach of fiduciary
duty—began by asserting generally that Wendy and Michael, as
Seirus’ ‚only officers and as directors, owe a fiduciary duty to
*Seirus+ and its shareholders‛ and that ‚no director or officer can
place himself or herself in a position that would subject him [or
her] to conflicting duties or engage in self-dealing.‛ But when
viewed in the context of the complaint as a whole, Edwards’
specific claims are limited to the Careys’ actions as directors and
Michael’s decision as creditor and shareholder to convert the
debt to equity. Cf. Geros v. Harries, 236 P. 220, 222 (Utah 1925)
(explaining that, rather than considering certain paragraphs of a
complaint in isolation, the complaint is to be construed ‚as a
whole‛); McNair v. State, 2014 UT App 127, ¶ 14, 328 P.3d 874.
¶20 The second claim for relief was worded in broad, general
terms—it stated that the Careys ‚breached their fiduciary duty
to [Edwards] by repeatedly acting (in unison) in ways to
intentionally damage [him], by actively utilizing their power on
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the Company’s board of directors to gain an advantage over
[him], and by together, refusing to act honestly and fairly with
[him].‛ But Edwards specified only two corporate actions in the
amended complaint from which he sought relief: the Careys’
decisions ‚to remove Edwards from the Company’s
management and to minimize his ownership position in the
Company‛ through the adoption of the Equity Exchange. Both of
those decisions were made in the Meeting as a result of the
Careys voting ‚in unison‛ as directors against Edwards. Thus,
although the second claim for relief included generic references
to fiduciary duties arising from the Careys’ roles as corporate
officers, in the context of the amended complaint as a whole, the
claim does not seek relief related to the Careys’ performance of
their duties as corporate officers.
¶21 In sum, even if the Careys wear different hats in the
company, and even if as officers they made recommendations to
the Board that led to the harm Edwards alleges, we agree with
the district court that the Careys wore only the attire of corporate
directors during the Meeting where they acted as a majority of
the Board in deciding to terminate Edwards’ employment and
adopt the Equity Exchange that resulted in a dilution of
Edwards’ ownership interest in Seirus. As a result, this is not a
case when the policy favoring arbitration comes into play. See
Kenny v. Rich, 2008 UT App 209, ¶ 28, 186 P.3d 989 (‚*T]he
presumption in favor of arbitration does not create a
presumption in favor of finding that an agreement to arbitrate
actually exists.‛).
¶22 Accordingly, we affirm the district court’s denial of the
motion to arbitrate. We conclude, as did the district court, that
Edwards’ claims do not implicate the employment agreements,
and as a result, we need not reach the question of whether
Edwards’ claims are derivative.
20151096-CA 10 2017 UT App 73