FOURTH DIVISION
May 10, 2007
1-05-3556
FIRST MERIT REALTY SERVICES, INC., ) Appeal from the
AND FIRST MERIT VENTURE, ) Circuit Court of
) Cook County.
Plaintiffs-Appellees, )
)
v. )
)
AMBERLY SQUARE APARTMENTS, L.P., )
ASHWOOD APARTMENTS, L.P., BRITTANY )
APARTMENTS, L.P., EASTPOINTE APARTMENTS,)
L.P., GREEN OAKS AT PALOS HILLS, L.P., )
KETTERING SQUARE APARTMENTS, L.P., )
PINE ISLAND APARTMENTS, L.L.C., )
SOUTHMOOR HILLS APARTMENTS, L.P., ) Honorable
WOODVIEW APARTMENTS LLC, AND COMMUNITY ) Julia M. Nowicki
ECONOMIC REDEVELOPMENT CORPORATION OF ) Judge Presiding.
WISCONSIN, )
Defendants-Appellants. )
MODIFIED UPON REHEARING
PRESIDING JUSTICE QUINN delivered the opinion of the court:
Defendants Amberly Square Apartments, L.P. (Amberly),
Ashwood Apartments, L.P. (Ashwood), Brittany Apartments, L.P.
(Brittany), Eastpointe Apartments, L.P. (Eastpointe), Green Oaks
at Palos Hills, L.P. (Green Oaks), Kettering Square Apartments,
L.P. (Kettering), Pine Island Apartments, L.L.C. (Pine Island),
Southmoor Hills Apartments, L.P. (Southmoor), Woodview
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Apartments, L.L.C. (Woodview), and Community Economic
Redevelopment Corporation of Wisconsin (CERC) appeal the circuit
court's order confirming the arbitration award granted to
plaintiffs First Merit Realty (FMR) and First Merit Venture
(FMV). On appeal, defendants contend that the arbitrators
exceeded their authority by "reforming" the parties' written
agreements and that Illinois public policy precludes the
confirmation of the arbitration award.
BACKGROUND
Plaintiffs, FMR and FMV, are property management businesses.
FMR is wholly owned by Gary Baxter. FMV is a limited partnership
of which Baxter is part owner. Josyln Development Company, of
which Baxter is president, is FMV's corporate general partner.
Baxter has been in the real estate business since 1966.
Defendants are business entities that own apartment
complexes in various locations across the United States. Scott
Canel is associated with each of the defendants in some capacity.
He is also a lawyer who has been winding up his legal practice to
primarily focus on real estate. As a lawyer, Canel has
represented Baxter and entities owned or controlled by Baxter in
tax and transactional matters.1
1
Plaintiffs filed a separate lawsuit against Canel for legal
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Beginning in 1996 and continuing through 2002, Baxter,
through his business entities, sold a series of 10 properties.
Each property was sold to one of the defendants. Prior to the
sales, FMV or another Baxter business entity managed the
properties. After the sale of each of the first nine properties,
FMR was retained to manage them. FMV was retained to manage the
tenth property, the Southfield property owned by CERC, but was
replaced by FMR shortly thereafter. The management of each of
the 10 properties was governed by identical management
agreements. Further, each property was either directly or
indirectly subject to the rules of the United States Department
of Housing and Urban Development (HUD).
On March 31, 2003, defendants sent plaintiffs a letter
informing them that they were terminating their management
agreements effective April 30, 2003. Defendants terminated the
agreements pursuant to section 15.1 of the management agreements,
which provided in pertinent part:
"It is expressly understood and agreed by and
between the parties hereto that the Owner as
well as the Agent shall have the right to
terminate the Agreement at the end of any
calendar month, without penalty, on thirty
malpractice.
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(30) days' advance written notice to the
Agent."
Subsequently, defendants appointed Ten South Management
Company (Ten South), which is controlled by Canel, to manage the
10 properties. In addition, Canel hired Richard Price, who had
been president of FMR and vice president of Josyln Development
Company, to work for Ten South.
On July 16, 2003, plaintiffs filed a demand for arbitration
with the American Arbitration Association (AAA) pursuant to
section 18 of the management agreements, which provided:
"The [AAA] shall be the final arbitrator of
all unresolved disputes between [defendants]
and [plaintiffs] and the parties hereto agree
to abide by the decision of the Arbitrator in
such case made."
On July 22, 2003, defendants filed counterclaims to which
plaintiffs responded on August 22, 2003. Following defendants'
filing of an amended counterclaim and plaintiffs' filing of a
response and affirmative defenses, plaintiffs filed a statement
of claim on January 19, 2004. Therein, plaintiffs (1) sought
reformation of the management contracts; (2) alleged that
defendants through Canel committed fraud; (3) alleged that
defendants aided and abetted Canel's alleged legal misconduct;
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(4) alleged that defendants aided and abetted Price's misconduct;
and (5) alleged conspiracy between defendants, Canel, Price, and
Ten South. Defendant answered the statement of claim on February
12, 2004.2
The arbitration panel, which consisted of three neutral
lawyers-arbitrators, proceeded to oversee discovery and motion
practice proceedings, followed by a nine-day evidentiary hearing
in September 2005. During the hearing, Baxter testified that he
consulted Canel as to how to sell the concerned properties while
retaining management of them. Canel allegedly suggested that
Baxter sell the 10 properties to Canel's business entities,
defendants, with the understanding that plaintiffs, Baxter's
business entities, would be retained as management companies of
those properties so long as Canel controlled them. Baxter
testified that he never told anyone about this deal, including
Price, other limited partners, and attorneys. Baxter further
testified that he relied on Canel, who was one of his lawyers, to
represent his interests. He denied ever having read the
management agreements, which the record shows Price signed on
behalf of plaintiffs.
Conversely, Canel denied that an oral agreement existed in
2
Baxter and Canal were not parties to the management
agreements and thus were not parties to the arbitration.
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which he promised that plaintiffs could manage the 10 properties
so long as defendants controlled them. However, Canel conceded
on cross-examination that it was his intention that plaintiffs
would manage the properties so long as they did a reasonable job.
In addition, Canel read from a February 18, 2003, memo he wrote
to Baxter that stated in pertinent part, "We also orally agreed
that you would retain management of the properties as long as you
did a reasonable job."
Following the evidentiary hearing, the arbitration panel
delivered an unreasoned ruling, due to defendant's failure to
file a timely request for a reasoned ruling. The panel awarded
plaintiffs $66,000 against Amberly, $125,000 against Ashwood,
$126,000 against Eastpointe, $255,000 against Great Oaks,
$125,000 against Kettering, $69,000 against CERC, $155,000
against Southmoor, $123,000 against Woodview, and nothing against
Brittany or Pine Island. With respect to defendants'
counterclaims, the panel awarded Brittany $1,395.84 and $1,249.46
against FMR for overcharges and cell phone use, respectively.
The panel also awarded $1,421.43 each to CERC and Green Oaks
against FMR.
Thereafter, defendant Amberly filed a motion to vacate the
award in the circuit court of Cook County, and plaintiffs filed a
motion to confirm the arbitration award and deny defendants'
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request to vacate the award. Following arguments, the circuit
court entered a written order on October 14, 2005, in which it
granted plaintiffs' motion and denied defendants' motion. In
making its ruling, the circuit court determined that the
arbitrators did not exceed their authority in granting the award
and held that the award did not violate public policy. On
October 24, 2005, pursuant to plaintiffs' motion, the circuit
court entered its final judgment affirming the arbitration award.
Defendants appealed.
ANALYSIS
We initially observe that the arbitrators delivered an
unreasoned award. The record shows that the arbitrators'
decision merely set forth a procedural history of the case and
the monetary awards provided to each party, but did not provide a
reasoned analysis for the arbitrators' decision to deliver those
awards.
As, plaintiffs assert, however, Commercial Arbitration Rule
42(b) provides that arbitrators need not render a reasoned award
unless the parties request such an award prior to the appointment
of the arbitrators or if the arbitrators deem it appropriate.
American Arbitration Association, Commercial Arbitration Rules
and Mediation Procedures, Rule 42(b), as amended and effective
September 15, 2005, (http://www.adr.org/sp.asp?id=22440#R42). As
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such, whereas, here, the parties did not timely request a
reasoned award, the arbitrators did not err rendering an
unreasoned award.
Turning to the substantive issues before this court, we note
that review of an arbitration award is more limited than review
of a trial court's decision. Galasso v. KNS Cos., 364 Ill. App.
3d 124, 130 (2006). Where parties have agreed to settle their
dispute via an arbitrator, they have agreed to accept the
arbitrator's view, and thus, a reviewing court should not
overrule an award simply where its interpretation differs from
that of the arbitrator. Galasso, 364 Ill. App. 3d at 130. That
said, section 12(a) of the Uniform Arbitration Act (Act) (710
ILCS 5/12(a) (West 2004)) does set forth limited circumstances
under which a reviewing court may modify or vacate an arbitration
award: (1) the award was maintained by corruption or fraud; (2)
the arbitrator was not impartial; (3) the arbitrator exceeded his
authority; (4) the arbitrator unreasonably refused to postpone
the hearing or hear material evidence; or (5) there was no
arbitration agreement.
In the case at bar, defendants contend that the arbitrators
exceeded their authority by providing an award that resulted from
their decision to ignore the clear and unambiguous language of
the management agreements. Specifically, defendants claim that
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the arbitrators ignored the language of section 15.1 of the
management agreement, which explicitly provided that either party
had a "right to terminate the Agreement at the end of any
calendar month, without penalty, on thirty (30) days' advance
written notice to the Agent."
There is no dispute that on March 31, 2003, defendants sent
a letter to plaintiffs informing them that they were going to
terminate the relationship on April 30, 2003, in accordance with
the management agreements. As such, the record shows that
defendants complied with the language of the management
agreements when they sought to terminate their business
relationship with plaintiffs. Nevertheless, the arbitrators
ruled for plaintiffs and awarded them monetary damages.
Plaintiffs argue that defendants should not be allowed to
challenge that award where, under the management agreements, the
parties agreed to abide by the final ruling of the arbitrators.
Plaintiffs further argue that the award in this case was proper
pursuant to Commercial Arbitration Rule 43(a), which provides
that the arbitrators could have granted "any remedy or relief
that [they] deem[] just and equitable and within the scope of the
agreement of the parties, including, but not limited to, specific
performance of a contract." American Arbitration Association,
Commercial Arbitration Rules and Mediation Procedures, Rule
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43(a), as amended and effective September 15, 2005,
(http://www.adr.org/sp.asp?id=22440#R43).
A presumption does exist that the arbitrators did not exceed
their authority, and as a reviewing court, we should construe
their award, if possible, so as to uphold its validity. Galasso,
364 Ill. App. 3d at 130. We lack the authority to determine the
merits of an award simply where we disagree with the arbitrators'
interpretation of the contract at issue. Galasso, 364 Ill. App.
3d at 130. Further, we cannot set aside an award on the ground
that it is illogical or inconsistent nor can we invalidate an
award because of errors in judgment or mistake of law or fact.
Galasso, 364 Ill. App. 3d at 130.
We can, however, set aside an award if the arbitrators'
errors in judgment are apparent on the face of the award.
Shearson Lehman Brothers, Inc. v. Hedrich, 266 Ill. App. 3d 24,
28 (1994), citing Rauh v. Rockford Products Corp., 143 Ill. 2d
377, 393 (1991). "The arbitrators' authority is limited by the
unambiguous contract language." Hedrich, 266 Ill. App. 3d at 29.
As such, arbitrators do not have the authority to ignore the
plain language of the contract and to alter the agreement, as the
ultimate award must be grounded on the parties' contract.
Hedrich, 266 Ill. App. 3d at 29.
In Hedrich, three former employees commenced an arbitration
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proceeding against Shearson Lehman Brothers, Inc. (Shearson), for
compensation they alleged was owed to them under Shearson's
deferred compensation plan (plan). The arbitration panel
subsequently awarded each employee a lump sum as owed under the
plan. Hedrich, 266 Ill. App. 3d at 25. Thereafter, the circuit
court denied Shearson's petition to vacate or modify the award.
Hedrich, 266 Ill. App. 3d at 25. Shearson appealed.
On appeal, this court observed that the plan contained
provisions with explicit percentages to use to calculate the
employees' compensation. Hedrich, 266 Ill. App. 3d at 26-27.
Despite those explicit provisions, however, the arbitration panel
utilized different percentage calculations to award the
employees. Hedrich, 266 Ill. App. 3d at 27. Although the
employees argued that the parties had agreed to abide by the
arbitrators' decision, this court found that the arbitration
panel exceeded its authority in awarding the employees
compensation that was "clearly not based upon the precise and
unambiguous mathematical formulas provided in the deferred
compensation agreements." Hedrich, 266 Ill. App. 3d at 29. As
such, this court vacated the arbitration panel's award and
ordered Shearson to pay the employees compensation as provided in
the plan. Hedrich, 266 Ill. App. 3d at 31.
Like Hedrich, the arbitrators' error is apparent on the face
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of the award in this case. As stated, defendants clearly
complied with section 15.1 of the management agreements where
they provided 30 days' advance written notice at the end of a
calendar month to sever their business relationship with
plaintiffs. Yet, the arbitrators ruled against defendants. In
doing so, we find that the arbitrators clearly ignored the
explicit language of the written agreements and thus exceeded
their authority in awarding damages to plaintiffs.
Nonetheless, plaintiffs argue that the arbitrators did not
ignore the written agreement between the parties but, rather,
merely reformed the agreement based on an alleged oral agreement
between the parties that was formed subsequent to the written
agreements. Plaintiffs contend that the award for the plaintiffs
was proper given that oral agreement.
Due to the lack of the arbitration panel's reasoning in the
written award, plaintiffs surmise that the arbitrators' ruling
hinged on Baxter's and Canel's testimony before the arbitration
panel. The record shows that Baxter testified that when he
consulted Canel about selling the 10 concerned properties, Canel
suggested that Baxter sell the properties to Canel's business
entities. Baxter further testified that Canel agreed that
Baxter's business entities would retain management control over
the 10 properties so long as Canel's business entities controlled
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them. Although Canel acknowledged that he intended for
plaintiffs to manage the properties so long as they did a
reasonable job, which he stated in a February 13, 2003, memo to
Baxter, he refuted that any such oral agreement existed between
Baxter and himself.
In this court, plaintiffs argue that in analyzing the
testimony of Baxter and Canel, the arbitrators likely considered
that Canel had a conflict of interest in this case where he acted
as Baxter's attorney despite being a party to the "opposite side"
of the transaction. As plaintiffs assert, such conduct was in
contravention of Rule 1.8 of the Illinois Code of Professional
Responsibility (134 Ill. 2d R. 1.8) where Canel allegedly neither
disclosed the conflict of interest nor obtained Baxter's consent
with respect to the dealings. Given the arbitration panel's
award, the plaintiffs argue that the arbitrators found that
Baxter provided the more credible testimony and thus determined
that an oral agreement existed between the parties, which
provided that plaintiffs would manage the concerned properties as
long as Canel had an ownership interest in them.
Based on the arbitration panel's determination that an oral
agreement existed between Baxter and Canel subsequent to the
written management agreements, plaintiffs contend that the
arbitrators acted properly where they reformed the written
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agreements to conform with the alleged oral agreement.
Plaintiffs, however, cite no cases to support the arbitrators'
ability to reform a written contract. Rather, the only cases
upon which they rely for such a proposition, Zannini v. Reliance
Insurance Co., 147 Ill. 2d 437, 457 (1992), and La Salle National
Bank v. 850 De Witt Place Condominium Ass'n, 257 Ill. App. 3d 540
(1994), involved reformation of contracts by the circuit court,
not an arbitration panel's reformation of a contract.
Given the facts of this case and the lack of case law to
support an arbitrator's reformation of a contract, we cannot
agree with the arbitrators' ruling where they evidently
considered parol evidence and reformed the written agreements
despite the clear and unambiguous language of those written
agreements. Although we recognize that the management agreements
between the parties contained an arbitration clause in which the
parties agreed to abide by the final ruling of the American
Arbitration Association, we find that, by ignoring the clear
language of the agreements and relying on an alleged oral
agreement, the arbitrators exceeded their authority in ruling for
plaintiffs.
As defendants note, plaintiffs appear to recognize that the
arbitrators in this case exceeded the scope of their authority as
plaintiffs suggest that this court should apply any finding that
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the arbitrators exceeded their authority prospectively. We find
that argument to be without merit. As noted above, there is no
case law stating that arbitrators have authority to reform
contracts in order to resolve disputes between parties.
Consequently, since we do not find the facts of this case to
allow for such a remedy, we are compelled to vacate the
arbitrators' ruling.
Having determined that the arbitrators exceeded their
authority in awarding plaintiffs monetary damages, we need not
consider the parties' public policy arguments.
Finally, we find no reason to disturb the arbitrators'
ruling on defendants' counterclaims where that ruling did not
stem from the improper reformation of the parties' contract.
CONCLUSION
For the reasons stated above, we vacate the American
Arbitration Association's award.
Vacated.
NEVILLE and MURPHY, JJ., concur.
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