Shastri v. Patel

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UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL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

RAJENDRA SHASTRI, et al., Plaintiffs/Appellants,

v.

AMRUT PATEL, et al., Defendants/Appellees.

No. 1 CA-CV 24-0186
FILED 01-09-2025

Appeal from the Superior Court in Maricopa County
No. CV2022-015215
The Honorable M. Scott McCoy, Judge

AFFIRMED IN PART; VACATED IN PART

COUNSEL

Fennemore Craig, PC, Phoenix
By Kevin J. Bonner, Nyla Knox
Counsel for Plaintiffs/Appellants

Clark Hill, PLC, Scottsdale
By Sean M. Carroll, Jarin Kiel Giesler, Ryan J. Lorenz
Counsel for Defendants/Appellees
 SHASTRI, et al. v. PATEL, et al.
Decision of the Court

MEMORANDUM DECISION

Judge Angela K. Paton delivered the decision of the Court, in which
Presiding Judge Cynthia J. Bailey and Judge Anni Hill Foster joined.

P A T O N, Judge:

¶1 Rajendra Shastri, Anita Shastri, Chandravadan K. Shastri,
Pushpa C. Shastri, Vijay K. Shastri, and Bhagwatiben V. Shastri (the
“Shastris”) appeal from the superior court’s judgment affirming its order
dismissing the Shastris’ complaint and compelling arbitration and
subsequent order confirming an arbitration award for Amrut and Pushpa
Patel (the “Patels”). For the following reasons, we affirm the portion of the
superior court’s judgment compelling the second arbitration but vacate its
confirmation of the arbitration award.

FACTS AND PROCEDURAL HISTORY

¶2 The Shastris and the Patels entered into an agreement
(“Operating Agreement”) in 1996 to form Sri Krsna Investments, L.L.C. (the
“Company”) to operate a hotel in Safford, Arizona. The Operating
Agreement mandates arbitration “[i]f any Member disputes any matter
under this Agreement.” A party initiates arbitration by “giv[ing] a written
notice of demand for arbitration,” referred to as the “Initial Notice,” to the
other party which must contain a proposed resolution, called the “Initial
Resolution.” All notices “shall be in writing and shall be given by hand
delivery, facsimile transmission or by certified mail, return receipt
requested, at the last known address of the Member.” The respondent has
30 days to respond, or the Initial Resolution becomes effective as an
arbitration award.

¶3 In June 2019, the Patels emailed the Shastris to express an
interest in retiring and offered to sell them their share of the hotel. The
Shastris responded to the Patels with a September 2021 letter purporting to
confirm the sale of the Patels’ interest in the Company. The Patels signed
the letter and the Shastris refer to it as the “Sales Agreement.” The
Company-hired appraiser valued the Patels’ interest at $972,000 in
November 2021, and the Shastris sent the Patels a check payment of 25% of
the appraisal amount, with the remaining balance payable in monthly
installments as they believed the Operating Agreement required. The

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Patels hired a different appraiser who concluded the total business value
was $4.9 million. The Patels did not deposit the Shastris’ initial payment
check.

¶4 On September 16, 2022, the Patels’ attorney sent an Initial
Notice for Arbitration to the Company’s California attorney, whom they
apparently believed to also be the Shastris’ attorney. The Patels sought
arbitration on various issues, including judicial dissolution, declaratory
relief, accounting, breach of the Operating Agreement, breach of the duty
of good faith and fair dealing, and a preliminary injunction. They also
sought to arbitrate derivative claims asserted in the name of the Company.
The Initial Notice identified an arbitrator and provided the Patels’ Initial
Resolution as the Operating Agreement required.

¶5 The Shastris did not respond within 30 days, but on October
27, 2022, their attorney sent a letter to the arbitrator objecting to the
arbitration on their behalf. The Shastris asserted the arbitration would be
invalid because the Patels were no longer members of the Company as a
result of the purported sale of their interest in the Company and they
therefore no longer had rights under the Operating Agreement. The
Shastris’ letter did not object to the sufficiency of the Initial Notice. The
next day, the arbitrator entered an arbitration award in favor of the Patels
due to the Shastris’ “failure to timely respond to the Initial Notice,”
referring to the 30-day period set forth in the Operating Agreement. The
arbitration award adopted the Patels’ Initial Resolution in its entirety as the
Operating Agreement required. The arbitrator later supplemented it to
award fees and costs to the Patels.

¶6 In November 2022, the Shastris filed a complaint in the
superior court against the Patels seeking declaratory relief and alleging
breach of contract and breach of the covenant of good faith and fair dealing
regarding the Sales Agreement. The Patels moved to dismiss the complaint
and compel a second arbitration on the Shastris’ complaint because it is
“subject to the [Operating Agreement’s] mandatory arbitration provision.”
In April 2023, the court granted the Patels’ motion to compel the second
arbitration and dismissed the Shastris’ complaint without prejudice.

¶7 The Patels then applied to confirm the arbitration award, and
the Shastris moved to vacate it. In September 2023, the court granted the
Patels’ motion to confirm the arbitration award and denied the Shastris’
motion to vacate the award. In January 2024, the court entered judgment
confirming its April 2023 and September 2023 orders that dismissed the
Shastris’ complaint and compelled a second arbitration and confirmed the

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arbitration award (the “Judgment”). The Judgment resolved all pending
matters before the court.

¶8 The Shastris timely appealed. We have jurisdiction under
Arizona Revised Statutes (“A.R.S.”) Section 12-2101.01(A)(6).

DISCUSSION

¶9 The Shastris contend that the superior court erred by
confirming the arbitration award both because the Patels failed to provide
proper notice of the arbitration to the Shastris and the arbitrator exceeded
his powers by issuing relief for the Patels against the Company. They also
argue the superior court erred by confirming the arbitration award, as well
as dismissing their complaint and compelling a second arbitration, because
there was no agreement to arbitrate between the parties because the Patels
sold their interest in the Company. They ask us to reverse the Judgment,
vacate the arbitration award and order compelling the second arbitration,
and remand to the superior court to conduct proceedings on their
complaint.

I. The superior court erred by confirming the arbitration award
because proper notice was not given.

¶10 The Shastris first argue that the superior court erred by
confirming the arbitration award because the Patels failed to provide them
with notice of the arbitration “in the agreed manner” as required by Section
12-3009(A). The Patels do not dispute that they did not provide proper
notice, but respond that the form of notice is unimportant because the
Shastris knew about the arbitration as evidenced by the fact that they sent
an objection letter to the arbitrator before he issued the arbitration award.

¶11 We review the superior court’s ruling in the light most
favorable to affirming the confirmation of the arbitration award and will
affirm absent an abuse of discretion. RS Indus., Inc. v. Candrian, 240 Ariz.
132, 135, ¶ 7 (App. 2016). “An abuse of discretion occurs when a court
commits a legal error by misinterpreting or misapplying the law.” Voice of
Surprise v. Hall, 255 Ariz. 510, 513, ¶ 11 (2023).

¶12 “The superior court may reject an arbitration award only on
narrow statutorily enumerated grounds.” Nolan v. Kenner, 226 Ariz. 459,
461, ¶ 5 (App. 2011). Section 12-3023(A) provides those grounds, one of
which is lack of proper notice:

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On motion to the court by a party to an arbitration
proceeding, the court shall vacate an award made in the
arbitration proceeding if any of the following applies: … The
arbitration was conducted without proper notice of the
initiation of an arbitration as required in § 12-3009 so as to
prejudice substantially the rights of a party to the arbitration
proceeding.

A.R.S. § 12-3023(A)(6) (emphasis added). Section 12-3009 provides in
relevant part that “[a] person initiates an arbitration proceeding by giving
notice in a record to the other parties to the agreement to arbitrate in the
agreed manner between the parties.” A.R.S. § 12-3009(A) (emphasis added).

¶13 Arbitration agreements are a creature of contract law. Chang
v. Siu, 234 Ariz. 442, 447, ¶ 19 (App. 2014). We therefore interpret an
arbitration agreement using general contract law principles. Id. We
interpret the provisions of a contract de novo. Dunn v. FastMed Urgent Care
PC, 245 Ariz. 35, 38, ¶ 10 (App. 2018). Our purpose in interpreting a
contract is to ascertain and enforce the parties’ intent, id., which requires us
to “look to the plain meaning of the words as viewed in the context of the
contract as a whole.” Earle Invs., LLC v. S. Desert Med. Ctr. Partners, 242 Ariz.
252, 255, ¶ 14 (App. 2017) (citation omitted). If the contract language is
clear, we give effect to it as written. VEREIT Real Est., LP v. Fitness Int’l,
LLC, 255 Ariz. 147, 152, ¶ 11 (App. 2023).

¶14 Under the Operating Agreement, “[i]n order to initiate an
arbitration[,]” a party must “give a written notice of demand for
arbitration” to the other party. This is the “Initial Notice.” The Initial
Notice must be given “by hand delivery, facsimile transmission or by
certified mail, return receipt requested, at the last known address of the
Member.” Thus, the Patels were required to send the Initial Notice to the
Shastris in writing and either hand deliver, fax, or send by certified mail
with returned receipt requested to the Shastris’ last known address.

¶15 But the Patels did not send the notice in this agreed upon
manner; instead, they sent it to the Company’s California attorney through
certified mail and electronic mail because they believed he was the Shastris’
attorney. The Patels do not contend that they provided notice in the agreed
upon manner; rather, they argue that “[h]ow [the Shastris] got notice is
immaterial” because the Shastris eventually learned of its existence as
evidenced by their attorney sending a letter objecting to the arbitration. The
Patels further argue that providing notice to the Company’s California
lawyer meant that the Shastris were also noticed. But the manner in which

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the Patels sent notice was not proper under the Operating Agreement they
agreed to follow and, thus, they did not properly initiate arbitration under
Section 12-3009.

¶16 Because the Patels did not provide proper notice under
Section 12-3009, we next must consider whether this lack of notice
substantially prejudiced the Shastris’ rights. A.R.S. § 12-3023(A)(6). We
conclude that it did. The Shastris suffered substantial prejudice as a result
of the improper notice because they had no opportunity to engage in the
merits of the arbitration. They would therefore be subject to an arbitration
award that adopts the Patels’ Initial Resolution in its entirety despite the
Patels not adhering to the Operating Agreement notice provision. Under
the Operating Agreement, if a party does not respond to the Initial Notice
within 30 days, then that party must “suffer the consequences” of the Initial
Resolution becoming the arbitration award. This was an agreed upon
consequence by the parties, but one that is dependent upon properly
receiving notice in the agreed upon manner.

¶17 In confirming the arbitration award, the superior court
acknowledged that “the notice [the Patels] provided … technically does not
strictly follow the parties’ agreed-upon method of notice.” But it reasoned
that the Shastris “at least had some notice that an arbitration was afoot”
because “they sent a letter to the arbitrator objecting.” But Section 12-3009
requires notice in the agreed manner, not just “some notice” and thus the
court erred by not applying the statute. See Do v. Ariz. Bd. of Regents, 256
Ariz. 370, 374, ¶¶ 17-19 (App. 2023). Here, the Operating Agreement
prescribed how to provide Initial Notice to initiate arbitration and Section
12-3009 states that the Operating Agreement provision governs. And,
under these circumstances, Section 12-3023 requires a court to vacate an
arbitration award if proper notice was not given. Because the notice here
was not proper and the Shastris were prejudiced as a result, the court was
required to vacate the arbitration award.

¶18 We therefore vacate the portion of the superior court’s
Judgment confirming the arbitration award. Because we vacate the award
for lack of proper notice, we do not consider the Shastris’ arguments that
we should vacate because the arbitrator exceeded his powers or that an
agreement to arbitrate no longer existed between the parties.

II. The court did not err in compelling the second arbitration.

¶19 The Shastris next argue the superior court erred by dismissing
their complaint and compelling arbitration because the Patels sold their

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interest in the company to the Shastris, and therefore were no longer
“members” as defined in the Operating Agreement. And because the Patels
are no longer members, the Operating Agreement no longer governed their
interactions—including the requisite agreement to arbitrate disputes. The
Patels respond that the court properly found that the question of whether
they are still members subject to the Operating Agreement was subject to
arbitration.

¶20 We review a superior court’s decision to compel arbitration
de novo. Sun Valley Ranch 308 Ltd. P’ship ex rel. Englewood Props., Inc. v.
Robson, 231 Ariz. 287, 291, ¶ 9 (App. 2012). And we review a superior
court’s grant of a motion to dismiss a complaint de novo. Coleman v. City of
Mesa, 230 Ariz. 352, 355-56, ¶¶ 7-8 (2012).

¶21 “The court shall decide whether an agreement to arbitrate
exists or a controversy is subject to an agreement to arbitrate.” A.R.S. § 12-
3006(B). Thus, the court, not an arbitrator, decides the threshold issue of
whether parties have an existing agreement to arbitrate a particular dispute.
Duenas v. Life Care Ctrs. of Am., Inc., 236 Ariz. 130, 140, ¶ 31 (App. 2014).
This obligation can only be assigned to an arbitrator if the parties use clear
language to do so. Id. at ¶ 32. “[A]rbitration clauses should be construed
liberally and any doubts as to whether or not the matter in question is
subject to arbitration should be resolved in favor of arbitration.” Saguaro
Highlands Cmty. Ass’n v. Biltis, 224 Ariz. 294, 295-96, ¶ 5 (App. 2010).

¶22 The Shastris argue there is no longer an existing agreement to
arbitrate between the parties because the Patels gave up all rights under the
Operating Agreement when they sold their interest to the Company in the
Sales Agreement. They also incorrectly assert that the superior court did
not decide that an arbitration agreement applied to this dispute.

¶23 In its September 2023 order, the superior court decided there
was an agreement to arbitrate between the Shastris and the Patels. It noted:
“the Court … ha[s] previously determined that an agreement to arbitrate
controls this dispute. This is not the time to revisit that issue.”

¶24 The Operating Agreement states that “[i]f any Member
disputes any matter under this Agreement … such claim or dispute (the
“Claim”) shall be resolved by arbitration.” (emphasis added). And the
parties’ Sales Agreement invoked the Operating Agreement when it stated
that “the Company will purchase [the Patels’] membership interest as
provided in the Company’s Operating Agreement.” (emphasis added). The
issue of whether the Patels are members remains disputed because the Sales

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Agreement contains no closing date nor has the appraisal amount been paid
in full. Therefore, the ultimate issue of whether the Patels still have rights
under the Operating Agreement is a matter governed under the Operating
Agreement and thus one the parties agreed to arbitrate. See Saguaro
Highlands Cmty. Ass’n, 224 Ariz. at 295-96, ¶ 5 (noting that parties are bound
to arbitrate those issues which they clearly have agreed to arbitrate).

¶25 Because the parties’ dispute about whether the Patels are still
Members within the definition of the Operating Agreement is subject to an
agreement to arbitrate, we affirm the superior court’s order dismissing the
Shastris’ complaint and compelling the second arbitration.

ATTORNEYS’ FEES AND COSTS

¶26 The Shastris request attorneys’ fees and costs pursuant to
Arizona Rule of Civil Appellate Procedure (“ARCAP”) 21(a) and Section
12-341.01(A). In our discretion, we decline to award fees, but as the
partially successful party, the Shastris may recover their taxable costs upon
compliance with ARCAP 21. See Henry v. Cook, 189 Ariz. 42, 44 (App. 1996)
(“the party who obtains partial success is entitled to recover” all costs).

¶27 The Patels request attorneys’ fees and costs pursuant to
ARCAP 21(a) and Section 12-341.01(A). We decline their request.

CONCLUSION

¶28 We affirm the portion of the Judgment dismissing the
Shastris’ complaint and compelling arbitration but vacate the portion
confirming the arbitration award.

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

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