Mellcell v. Allen

NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

MELLCELL, LLC, Plaintiff/Appellee,

v.

LINDA ALLEN, et al., Defendants/Appellants.

No. 1 CA-CV 20-0530
FILED 5-17-2022

Appeal from the Superior Court in Maricopa County
No. CV2019-014220
The Honorable Danielle J. Viola, Judge

AFFIRMED

COUNSEL

Messner Reeves, LLP, Phoenix
By David A. Selden, Julie A. Pace, Daniel L. Marks
Counsel for Plaintiff/Appellee

McGill Law Firm, Scottsdale
By Gregory G. McGill
Counsel for Defendants/Appellants
 MELLCELL v. ALLEN et al.
Decision of the Court

MEMORANDUM DECISION

Judge Jennifer M. Perkins delivered the decision of the Court, in which
Presiding Judge David D. Weinzweig and Judge Brian Y. Furuya joined.

P E R K I N S, Judge:

¶1 Linda Allen and Michael Judy (collectively “Defendants”)
appeal the superior court’s ruling that confirmed an arbitration award in
favor of Preferred Spectrum Investments, LLC (“Preferred Investments”).
For the following reasons, we affirm.

FACTUAL AND PROCEDURAL BACKGROUND

¶2 Preferred Investments formed in 2009 to provide
telecommunications services and to fund a lawsuit against Preferred
Spectrum Communications, Inc. (“Preferred Communications”). Through
its operating agreement, Preferred Investments established a five-member
management committee (“Committee”) to conduct the corporation’s
affairs. Judy served as the Committee’s president from July 2009 to August
2014, and Allen served as treasurer from May 2010 to August 2014. Section
7.20 of the operating agreement enabled Committee members to receive
“reasonable compensation” for their services but only by agreements
“approved by a concurrent Majority-In-Interest vote of the Members.”

¶3 In September 2011, the Committee reduced its managers’
monthly salaries from $3,500 to $1,500. But the Committee voted to
continue paying Judy $5,000 per month, and Allen $3,500 per month. Three
months later, the Committee suspended all monthly salary payments “until
funds [became] available,” except for Judy, who continued to receive $5,000
per month.

¶4 In July 2014, the Committee’s secretary, Carole Downs, wrote
to all Preferred Investments members and identified a conflict of interest
from all managers owning investment interests in Preferred
Communications, which remained in litigation with Preferred Investments.
Downs recommended the Committee add two to three new managers who
held no investment in Preferred Communications to facilitate negotiations
between the two companies. Downs then called an annual meeting of
Preferred Investments’ members to elect new managers to the Committee.

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¶5 On August 6, 2014, the Committee met and approved
payment of its managers’ salaries from December 2011 through December
2012. The Committee also approved withholding manager salaries owed
from January 2013 through August 6, 2014, except Allen’s. On or after
August 7, 2014, Preferred Investments started issuing checks to managers.
Judy received $10,000, and Allen received $119,000. Downs returned her
$45,000 check because Section 7.20 of the operating agreement required a
majority of all shareholders to approve the Committee Members’
“reasonable compensation.”

¶6 Preferred Investments members elected four new managers
to the Committee in late August or early September 2014 and re-elected
Downs. Neither Allen nor Judy sought re-election. The Committee then
sought repayment of salaries paid pursuant to the August 6, 2014 meeting.
All former managers, except Defendants, settled with Preferred
Investments. Defendants refused to settle or repay the money they received.

¶7 Thereafter, Preferred Investments initiated arbitration,
claiming breach of contract, breach of fiduciary duty, breach of the duty of
care, breach of the duty of loyalty, and unjust enrichment. Defendants
asserted counterclaims for breach of contract, fraudulent concealment, and
negligent misrepresentation.

¶8 The arbitrator issued a final award (“Award”) on August 26,
2019, concluding Defendants breached Section 7.20 of the operating
agreement by compensating themselves without the requisite membership
approval. The Award required Judy to repay $10,000, and Allen $119,000,
to Preferred Investments and held Defendants jointly and severally liable
for $170,425.83 in arbitration fees and costs.

¶9 In October 2019, Preferred Investments applied to confirm the
Award in superior court. Defendants asked the court to dismiss the
application, vacate the Award, and set the matter for rehearing. Defendants
argued: (1) Preferred Investments obtained the Award through fraud and
other undue means; (2) the lengthy arbitration process violated “settled
principles of arbitration efficiency;” and (3) the arbitrator improperly
disregarded Delaware law.

¶10 The superior court confirmed the Award and ordered
Defendants to pay Preferred Investments’ attorneys’ fees and costs. The
court found, “the alleged fraud does not withstand scrutiny as a basis to
vacate the award.” Rejecting Defendants’ other arguments, the court found

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the length of the arbitration proceedings provided no valid basis to vacate
the Award, and the arbitrator did not ignore Delaware law.

¶11 Defendants timely appealed, and we have jurisdiction under
A.R.S. § 12-2101(A)(1). During the pendency of this appeal, Preferred
Investments filed for bankruptcy. MellCell, LLC (“MellCell”) bought
Preferred Investments’ assets, which included the Award and associated
judgment, and is now the real party in interest.

DISCUSSION

¶12 The legislature has substantially limited judicial review of an
arbitration award because of the state’s interest in supporting speedy and
inexpensive dispositions of disputes. Atreus Cmtys. Grp. of Ariz. v. Stardust
Dev., Inc., 229 Ariz. 503, 506, ¶ 13 (App. 2012). Defendants bear the burden
of proving the existence of any asserted statutory ground to vacate the
Award. See Fisher v. USAA Cas. Ins. Co., 245 Ariz. 270, 272, ¶ 9 (App. 2018).
We review the confirmation of the Award for an abuse of discretion. See id.

¶13 Arizona’s Revised Uniform Arbitration Act (the “Act”)
governs all arbitration agreements in the state. A.R.S. § 12-3003(A)(3).
Defendants essentially raise two statutory arguments: Preferred
Investments obtained the Award by fraud, § 12-3023(A)(1), and the
arbitrator exceeded his powers, § 12-3023(A)(4).

¶14 “A court may refuse to confirm an arbitration award because
of undue means only when the undue means are (1) not discoverable upon
the exercise of due diligence prior to the arbitration, (2) materially related
to an issue in the arbitration, and (3) established by clear and convincing
evidence.” Nolan v. Kenner, 226 Ariz. 459, 462, ¶ 7 (App. 2011) (cleaned up).

¶15 Defendants contend that Downs withheld necessary
information, namely her involvement in financial dealings with Preferred
Investments and Preferred Communications, and this information would
have revealed Downs acted out of self-interest—and not as a
whistleblower—when she reported her concerns about manager
compensation. But Downs’s alleged motivation was not materially related
to the issue in arbitration: whether the Committee violated Section 7.20 of
the operating agreement when its members paid themselves without first
receiving majority shareholder approval. The superior court thus correctly
determined Defendants failed to establish Preferred Investments obtained
the Award by fraud.

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¶16 Defendants’ other statutory ground for objecting to the
Award is that the arbitrator exceeded his authority by “refusing to apply
Delaware law” on the applicable statute of limitations and in interpreting
the contract. But the record establishes that the arbitrator explicitly applied
Delaware law. Defendants merely disagree with his conclusions. Judicial
review is not available on this basis. See Smitty’s Super-Valu, Inc. v.
Pasqualetti, 22 Ariz. App. 178, 180 (App. 1974) (within the boundaries of the
parties’ agreement, “the arbitrators’ decision is final both as to questions of
fact and law”).

¶17 The superior court did not abuse its discretion when it
confirmed the Award.

¶18 MellCell requests attorneys’ fees and costs on appeal under
the operating agreement, and A.R.S. §§ 12-349, 12-2106, and 12-3025.
MellCell also requests attorneys’ fees and costs incurred while preparing a
response to Defendants’ motion to supplement the record. Section 12.5 of
the operating agreement explicitly authorizes recovery of “reasonable
attorneys’ fees and court and other costs.” MellCell, as the prevailing party,
is entitled to its reasonable attorneys’ fees and costs on appeal, upon
compliance with ARCAP 21. Its recoverable fees and costs include
responding to Defendants’ motion to supplement the record.

CONCLUSION

¶19 We affirm.

AMY M. WOOD • Clerk of the Court
FILED: AA

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