The Tenth Circuit recently affirmed a district court’s confirmation of an arbitration award in a dispute regarding the dissolution of Knowledge Strategy Solutions, LLC (“KSS”). KSS was a partnership between the professional corporations of Anne Kershaw (“Kershaw”) and Shannon Spangler (“Spangler”). On less than amicable terms, the two negotiated a withdrawal from KSS effective June 30, 2014, but Kershaw filed the necessary paperwork terminating the corporation four days early without Spangler’s knowledge. Kershaw did not tender to Spangler PC its share of KSS’s capital account or other assets, and instead created a new LLC (“KSS-New York”) and placed KSS’s assets into that company, prompting Spangler to file suit.
Kershaw moved to compel arbitration, which a Missouri state court ordered for some of the claims regarding the alleged breach of KSS’s operating agreement and breach of fiduciary duties, but retained jurisdiction over other counts. Arbitration was temporarily delayed when KSS-New York filed for bankruptcy and a bankruptcy court issued an automatic stay, but after the stay was lifted the arbitrator issued an award in Spangler’s favor. The award encompassed Spangler’s share of KSS’s capital account, but did not include any award for KSS’s intangible assets which were then in possession of KSS-New York in bankruptcy. A district court confirmed the arbitral award, and Kershaw appealed.
On appeal, the Tenth Circuit affirmed the district court’s confirmation over Kershaw’s three objections: that the district court’s decision demonstrated (1) disregard for the bankruptcy court’s order, (2) disregard for the Missouri state court’s order, and (3) disregard of a Missouri statute.
First, the appeals court upheld the lower court’s finding that the arbitrator did not exceed the scope of his arbitral authority by awarding Spangler its value of KSS’s capital account upon termination. Despite Kershaw’s argument that the capital account money was transferred to KSS-New York and thus subject to bankruptcy protection, the court explained that money is fungible and Kershaw retained liability for the undistributed capital account even though it transferred the actual money to KSS-New York. Unlike money, however, KSS’s intangible assets now in KSS-New York’s possession were not fungible and the arbitrator thus appropriately refrained from awarding any part of those assets subject to bankruptcy protection. The Tenth Circuit specifically noted that this differential treatment of monetary and intangible assets demonstrated the arbitrator was aware of the limits of his authority imposed by the bankruptcy proceeding and fastidiously adhered to those limits.
Second, the court rejected Kershaw’s argument that the arbitrator disregarded the state court’s order compelling arbitration by improperly including compensation in the arbitral award. Inclusion of compensation via revenue, Kershaw argued, encroached upon the Missouri court’s retention of jurisdiction over compensation-based claims, which were excluded from the arbitration provision. The Tenth Circuit affirmed the district court’s holding that this argument impermissibly challenged the arbitrator’s legal conclusions and factual findings.
Third, the appeals court declined to decide whether Kershaw’s argument that the omission of a statute’s complete language in a quotation by the district court was manifest disregard of the law. The court noted that the lower court’s statutory analysis was an alternative finding, and thus even a favorable ruling for Kershaw would not require reversal of the award’s confirmation, because the lower court’s primary holding is undisturbed.
A. Kershaw, P.C. v. Shannon L. Spangler, P.C., No. 16-1483 (10th Cir. July 10, 2017).
This post written by Thaddeus Ewald .
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