The Spaulding LLC v Miller et al (D1 12.22.20)

When parties contractually agree to a broad arbitration clause to resolve “all disputes of every kind and nature” one party cannot later complain about the chosen forum when things go south. Basically, the parties formed an LLC called Dynamite and bought a vacant lot in Scottsdale. The loan was personally guaranteed by Miller who is the managing member. Things do not quite work out as envisioned and Dynamite defaults on the loan. Before the sale, Miller personally pays off the debt, and Dynamite keeps the lot. Miller then quitclaimed the property to another entity he owns and that entity quitclaimed the property to yet another entity he owns. Plaintiff was not told about either transfer. Three years later, Plaintiff learned another restaurant was closing and talked to Miller about developing the lot as a restaurant. Miller liked the idea and agreed to increase Plaintiff’s share in Dynamite to 8.6% if it was successful. Plaintiff was able to rezone the lot from residential to commercial. This increased the value of the lot from $300,000 to $5 million. Plaintiff then first learned Dynamite no longer owned the property and sued Miller. Plaintiff won at arbitration and was awarded 8.6% interest in the property.

In superior court, Miller contested the arbitration claiming Plaintiff’s claim was a “derivative action” and Plaintiff was required to follow the Arizona statute which he had not done. Because of this failure, he argued, the arbitrator lacked “subject matter jurisdiction.” He loses because subject matter jurisdiction involves a court’s jurisdiction and is not a defense to an arbitration clause. Miller further complained the arbitrator did not follow the rules. Without telling us what the rules are, the court cites and footnotes a dead-end link to AAA arbitration rules. Thus, the court ends with highlighting an unaddressed problem as to what rules and law apply. AAA makes its own rules and arbitrators are given considerable discretion in interpreting and applying substantive law. Many years ago we were told by the courts that arbitrators may do what no other judge has a right to do; an arbitrator may intentionally decide contrary to law and still have the arbitrator’s judgment stand. If there was a substantive defense here, it was lost in Miller’s quibbling over jurisdiction.

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