Opinion
B156006.
7-31-2003
GLENN HIGHTOWER, Plaintiff and Appellant, v. DAN ODOWD, Defendant and Respondent.
Quinn Emanuel Urquhart Oliver & Hedges, LLP, Harold A. Barza, Edith Ramirez and Enoch Liang; Greines, Martin, Stein & Richland, LLP, Robin Meadow and Dana Gardner Adelstein for Plaintiff and Appellant. Greenberg Traurig, LLP and Frank E. Merideth, Jr. for Defendant and Respondent.
In this appeal we review the trial courts confirmation of the Final Award of an arbitrator enforcing the stock buyout provisions of a Shareholders Agreement between the two sole shareholders of a corporation. This is the third time that this dispute has come before us.
On July 1, 1999, we filed an unpublished opinion (Hightower v. ODowd (B126119) (Hightower I)) in which we affirmed a trial court order granting appellant Glen Hightowers request for a preliminary injunction to prevent respondent Daniel ODowd from going forward, pending completion of certain arbitration proceedings, with a stock buy out pursuant to the terms of their shareholder agreement. On February 9, 2001, we filed a published opinion (Hightower v. Superior Court (ODowd) (2001) 86 Cal.App.4th 1415 (Hightower II)) in which we concluded that the arbitrators adoption of an incremental award process whereby he filed a Partial Final Award (resolving some of the issues) and reserved jurisdiction to subsequently file a Final Award (resolving the remaining issues) was proper; we endorsed the proposition that the trial court could confirm the Partial Final Award and enter an interlocutory judgment thereon. That process has now been completed and we now have before us Hightowers appeal from the trial courts confirmation of the arbitrators Final Award and the final judgment entered thereon.
Our review of the record persuades us that the trial court properly confirmed the award and that the objections to the award raised by Hightower are without merit. We will therefore affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
The facts, which we recite, are either undisputed or are reflected by the findings of the arbitrator after consideration of an extensive evidentiary presentation.
We are very familiar with the facts and previously set them out in our opinion in Hightower II. We paraphrase that summary here and add the events that took place subsequent to the filing of that opinion.
In 1982, Hightower and ODowd jointly formed Green Hills Software, Inc., a Delaware Corporation (Green Hills). Until October 13, 2000, they each owned one-half of the stock and constituted the corporations board of directors and officers. ODowd was active in the day to day business affairs of Green Hills, while Hightower was not. ODowd and Hightower were parties to a written agreement that defined their rights as shareholders (Shareholders Agreement). It contained a buy-sell provision which allowed either shareholder to offer to sell his shares to the other. The shareholder who made the offer (the Offering Shareholder) would set a purchase price and deposit that price with the company. The other party (the Designated Shareholder) then had ninety days in which either to sell his shares to the Offering Shareholder at the price offered or to buy the Offering Shareholders shares at the same price.
Green Hills was originally formed as a California corporation, but later was reincorporated in the State of Delaware. There was also a third party involved who was later bought out. Thus, ODowd and Hightower were, at all relevant times, until October 13, 2000, Green Hills only shareholders and they each owned approximately fifty percent (50%) of the outstanding stock.
Hightower was the corporate Secretary and Chairman of the Board. ODowd served as President and Treasurer.
Once initiated, the buy-sell process was essentially self-executing. If the Designated Shareholder deposited the purchase price with the company within ninety days, the company was required to transfer the Offering Shareholders stock to the Designated Shareholder and pay the Offering Shareholder the purchase price. If the Designated Shareholder did not make the deposit, the reverse occurred (i.e., the company would transfer the Designated Shareholders stock to the Offering Shareholder and pay the Designated Shareholder the purchase price originally deposited by the Offering Shareholder). In addition, the Shareholders Agreement required that the purchase price be at least ten times Green Hills per-share earnings for the four previous fiscal quarters. This provision, and the Shareholders Agreements reciprocal nature, provided a check on one party making an unreasonably low offer for the others stock. Obviously, a shareholder who offered too little ran the risk that he might have to sell his own stock at that price.
ODowd decided some time in 1997 to make an offer to buy Hightowers shares. He informed Green Hills top management of his intent late in 1997 and announced his plan at a company-wide meeting on January 21, 1998. Hightower was informed the next day, on January 22, 1998, of ODowds intended buy-out, although no formal offer to buy Hightowers shares was made until June 26, 1998. On January 21, 1998, ODowd also announced that he would turn day-to-day management of the company over to Green Hills three Vice-Presidents so that he could devote his attention to raising the funds necessary to purchase Hightowers stock. ODowd told the Vice-Presidents, and later told the employees of Green Hills at the January 21, 1998 meeting, that it was his intent, after he acquired Hightowers shares, to sell them back to the company for his cost; the effect of this transaction would be to make the employees options worth almost twice as much as they otherwise would have been, because approximately one-half of the 65,000,000 shares of Green Hills would have been retired.
ODowd succeeded in obtaining financing for his offer and made a formal offer to purchase Hightowers shares for $ 47 million on June 26, 1998. Hightower received the offer on June 29, 1998, and immediately set out to obtain his own financing sufficient to buy ODowds shares for the $ 47 million price set by ODowds offer. When Hightowers financing group did their due diligence investigation, however, they learned that many, if not most, of the officers and employees of Green Hills were not supportive of Hightowers desire to acquire the company, and if he succeeded in doing so, they indicated that they would leave.
Apparently as a result of this discovery, Hightowers financing group declined to participate with Hightower in the financing of his buyout of ODowds shares and Hightower was therefore unable to do so. Hightower responded to these circumstances by making a written demand for arbitration on August 24, 1998, pursuant to the arbitration clause in the Shareholders Agreement. He also initiated litigation for the purpose of obtaining a preliminary injunction to preclude ODowd from going forward with the self-executing buy-out of Hightowers shares pursuant to his $ 47 million offer of June 26, 1998. Hightower contended that ODowd had improperly and unfairly created an atmosphere and environment which made it impossible for Hightower to obtain the financing needed to exercise his contractual right to purchase ODowds shares.
Hightower raised a number of claims in the arbitration. His primary claim, however, was that ODowd had, by his conduct, violated his fiduciary duties to Hightower and had breached the covenant of good faith and fair dealing which was implied in the Shareholders Agreement and thereby had deprived Hightower of a fair opportunity to meet ODowds stock purchase offer. Hightower accused ODowd of directly or indirectly inducing Green Hills officers and employees to threaten to quit if Hightower purchased ODowds shares and acquired control of Green Hills. Additionally, he alleged that ODowd induced certain officers to cause those who reported to them to make such threats and to sign a petition intended to discourage Hightowers financing from participating in the buy-out of ODowds shares.
Each of the claims and contentions raised by Hightower was considered and rejected by the arbitrator. After considering the very substantial documentary and testimonial evidence that had been presented to him during the extensive arbitration proceedings, the arbitrator concluded that nothing ODowd did or failed to do improperly contributed to Hightowers loss of his needed financial support.
As the arbitrator put it, "It is apparent that Hightowers failure to finance his purchase of ODowds shares was primarily caused by the actions of Green Hills employees which caused [Hightowers financing group] not to finance the purchase. In a business whose principal asset is its intellectual property created, marketed and serviced by its employees, the threat that many employees would depart en masse in the event of a change of ownership, or anything resembling such an eventuality, justifiably caused [Hightowers financing group] to rethink the wisdom of its proposed investment. If ODowd caused or induced that conduct, he would have violated the Agreement and his fiduciary duties to Hightower."
Specifically, the arbitrator concluded that ODowd did nothing wrong in publicly announcing his plans to make an offer to Hightower and advising company officers and employees of his intention to share with corporate employees any profit which might result to employee pension plans from the purchase and cancellation of Hightowers shares. Nor did ODowd improperly induce either his employees or the senior corporate officers to take action which had a negative impact on Hightowers efforts to obtain his own financing. The arbitrator concluded that ODowd had done nothing to induce such responses; rather they were the product of honestly held and apparently justified beliefs of corporate officers and employees.
The arbitrator thus concluded that Hightower simply had not proven his claims for breach of fiduciary duty, breach of the implied covenant, interference with contract or fraud and had proven no basis for either declaratory relief, an injunction or damages. Based upon this conclusion, the arbitrator determined that (1) ODowd had been legally entitled to complete the purchase of Hightowers shares on September 24, 1998 (i.e., 90 days after the June 26, 1998 offer) and (2) it was therefore necessary for the arbitrator to fashion a remedy that would give ODowd the "benefit of his bargain under the Shareholder/Agreement." The arbitrator emphasized that ODowds original financing arrangements were no longer available and that it was unclear whether he would be able now or in the future to make a comparable deal.
Therefore, the arbitrator, in a Partial Final Award, issued on April 25, 2000, stated, "The intent of this award is to provide [ODowd] the benefit of the prior deal as closely as that may now be approximated." (Italics added.)
In summary, the Partial Final Award provided that:
(1) ODowd was entitled to have the preliminary injunction lifted immediately because Hightower had failed to prevail on the merits of his claims.
(2) But for the breach by Hightower of the Shareholders Agreement, Hightowers legal or beneficial interest in Green Hills would have terminated on September 24, 1998; and after the retirement of Hightowers shares pursuant to the Shareholders Agreement,
ODowd would have been the legal and beneficial owner of 100 percent of the shares of Green Hills as of that date. Hightower was obligated on September 24, 1998 to tender those shares for $ 47 million, and ODowd was obligated as of September 24, 1998 to pay $ 47 million for those shares. Hightowers breach excused ODowd from performing his reciprocal obligations.
(3) ODowd had the right, but not the obligation, to pay or cause Green Hills to pay to Hightower the consideration for the shares required as of September 24, 1998, or $ 47 million. ODowd and Green Hills shall have the option to make that payment on certain specified conditions.
(4) ODowd was awarded the costs that he would have to incur in order to obtain the new financing needed to make the purchase; those costs were obviously unknown as of the date of the Partial Final Award (but could not exceed $ 1,276,843.07); the arbitrator reserved jurisdiction "to determine the extent to which such costs shall constitute an offset to the purchase price on the basis that they are comparable to the costs previously incurred in connection with the September 24, 1998 offer to purchase transaction."
(5) ODowd was the prevailing party and was entitled to an award of attorneys fees in the sum of $ 2,512,338.87, as of April 25, 2000, he also held that ODowd "may seek a supplemental award, to be included in the Final Award, for attorneys fees, costs, and expenses incurred in this proceeding through entry of the Final Award."
Hightowers response to the publication of the arbitrators "Partial Final Award" was to file, on May 16, 2000, a petition with the Superior Court to vacate the award pursuant to Code of Civil Procedure section 1286.2. Hightower urged, inter alia, that (1) the arbitrator had exceeded his powers "by retaining jurisdiction over potential future disputes that neither party has agreed to arbitrate" and (2) the "Partial Final Award" was, by its own terms, not final and therefore was in violation of section 1283.4.
Unless otherwise indicated, all statutory references are to the Code of Civil Procedure.
This petition was denied by the trial court on June 27, 2000. On Hightowers petition for a writ of mandate, we affirmed the trial courts ruling in Hightower II. We held that the arbitrators use of a Partial Final Award was proper in the context of the facts of this case. We filed our opinion on February 9, 2001, and remanded the matter back to the trial court with directions to enter an order confirming the arbitrators "Partial Final Award" and to enter an interlocutory judgment thereon. (Hightower II, supra, 86 Cal.App.4th at pp. 1441-1442.)
In the meantime, ODowd, went ahead and obtained the new financing needed to purchase Hightowers Shares. The preliminary injunction previously obtained by Hightower was lifted and ODowd tendered the sum of $ 41,585,388 on October 13, 2000. This payment was made by means of two separate checks drawn on a bank account maintained at Imperial Bank by Green Hills. The evidentiary record reflects that Imperial Bank guaranteed that the checks would be valid and sufficient funds would be available to cover the checks for a "period at least five days after October 13, 2000." The checks in fact cleared the bank on October 16, 2000. These sums were accepted by Hightower, albeit under a written protest submitted by his attorney. Also on October 13, 2000, Hightower voluntarily surrendered (subject to the aforesaid protest) his stock certificates with stock powers in blank as specified in the arbitrators Partial Final Award. The certificates were accompanied by a separate stock assignment document that left the line for the name of the assignee blank but named ODowd as the "attorney to transfer" the shares.
This sum represented the purchase price of $ 47 million less ODowds estimate of the offsets to which he believed he was entitled under the terms of the Partial Final Award. In his Final Award, the arbitrator determined that a relatively small additional sum was due to Hightower. (See fn. 8, post.)
ODowd, through his counsel, then requested, an immediate hearing before the arbitrator. Such request specified that a number of matters needed to be resolved. The arbitrator set the hearing for March 26, 2001, approximately six weeks after we filed our opinion in Hightower II affirming the arbitrators use of an incremental award process. Those hearings actually commenced on April 24, 2001, were continued to May 25 and finally concluded on June 11, 2001. Those hearings were not reported and involved the presentation of both testimonial and documentary evidence. Following the close of the evidence, each party submitted extensive post hearing briefs. ODowd also filed three separate applications for an award of attorneys fees and costs and additional briefing was submitted on this issue. The matter was finally submitted for decision on August 21, 2001, with an award to issue within 10 days. The arbitrator submitted that award (designated "Final Award") on August 29, 2001.
ODowds request for a hearing set out the following unresolved issues:
"1. Mr. ODowds claim that his tender on October 13, 2000 of $ 41,585,388 which was accepted by Mr. Hightower was effective to terminate any interest of Mr. Hightower in Green Hills Software, Inc.[.] . . .
"2. Mr. ODowds claim that Mr. Hightower, who was terminated as an officer and director of Green Hills Software, Inc. on October 13, 2000, is obligated to return to Green Hills Software, Inc. all original minutes, shareholders records and other original records obtained or created by him in his capacity as Secretary of the corporation. . . .
"3. Mr. O Dowds claim that Mr. Hightower must return to Green Hills Software, Inc. all propriety data, whether in written or electronic form that he obtained by reason of his position as a director and officer of that corporation. . . .
"4. Mr. Hightowers claim set forth in the letter from his counsel dated October 13, 2000, . . . that Mr. ODowds purchase of all of his shares in Green Hills Software, Inc. was under duress or some form of improper compulsion.
"5. Mr. ODowds claim for attorneys fees incurred after April 1, 2000."
The arbitrator expressly found that ODowd had tendered $ 41,585,388 to Hightower on October 13, 2001 and that Hightower had delivered his Green Hills shares to ODowd on the same day. Hightower deposited the tendered funds in a bank account in his own name (here they remained, at least through the date of the arbitrators award). ODowd then caused Green Hills to cancel Hightowers shares and terminate him as an officer and remove him as a director of Green Hills. Thereafter, Green Hills (1) terminated its close corporation status, (2) amended its articles and by-laws, (3) incurred debt to Imperial Bank, (4) merged into Green Hills Software Acquisition Corporation, (5) issued options, (6) issued shares for exercised options, (7) reported Subchapter S income and (8) took other corporate actions, all (according to the arbitrators findings) in reliance on Hightowers tender of his shares and his acceptance of the consideration and upon Green Hills cancellation of his shares.
The arbitrator then adjusted the amount due to Hightower in accordance with the provisions of the Partial Final Award relating to the (1) calculation of dividends payable on Hightowers shares and (2) ODowds right to an offset for the financing costs he had incurred in setting up the original financing for the stock purchase aborted by Hightowers failure to perform in accordance with the provisions of the Shareholders Agreement.
The arbitrator concluded that Hightower was "entitled to the further sum of $ 52,783 in excess of that which was tendered to him on October 13, 2000. In all other respects the tender was valid and effective. ODowds purchase of Hightowers shares was in compliance with the Partial Final Award and was effective October 13, 2000. The consideration so tendered belongs to Hightower without restriction or limitation." (Italics added.)
The arbitrator found that Hightower had blocked ODowds original purchase of Hightowers "shares in 1998 by filing an action in the Los Angeles Superior Court and obtaining a preliminary injunction. Thereafter, this arbitration was filed, and the Partial Final Award in this proceeding authorized the purchase of Hightowers shares by ODowd. Upon the denial of Hightowers petition to vacate that award, ODowd was first in a position to proceed with that transaction. [P] ODowd incurred financing and related expenses in connection with the initial offer, determined in the Partial Final Award to be $ 1,276,843.07: [ ODowd] shall be entitled to recover from [Hightower] any costs connected with the financing of the purchase of [Hightowers] shares as contemplated by the Partial Final Award, but not to exceed the sum of $ 1,276,843.07. The arbitrator reserves jurisdiction to determine the extent to which such costs shall constitute an offset to the purchase price on the basis that they are comparable to the costs previously incurred in connection with the September 24, 1998 offer to purchase transaction. (Italics added.) [P] [Hightower] argues that [ODowd] incurred unnecessary or excessive expense in procuring financing for the purchase of [Hightowers] shares in October of 2000. [Hightower] also argues that financing roughly comparable to that which was in place for the earlier, aborted transaction could have been procured for a fraction of what was later expended. The later financing arrangements were different than the earlier ones and were advantageous to [ODowd]. In effect, [ODowd] obtained a benefit for himself using [Hightowers] funds. [P] The purpose of [the] provisions in the Partial Final Award was, to the extent possible, to give [ODowd] the benefit of his bargain - the right to acquire [Hightowers] shares in 1998, not 2000. [ODowd] could not and was not required by the Partial Final Award to replicate the terms of the prior financing. For the same reason that [ODowd] was entitled to negotiate the best deal available to him in 1998 for the initial financing, he was entitled to negotiate the best deal available to him in 2000 for the later transaction. So long as he actually spent the full sum authorized as an offset (which he did [ ]), and so long as the expenditures were directly related to his efforts to procure financing for the purchase of the shares (they were), [ODowd] is entitled to the full offset." (Italics added.)
In light of the arguments made in the appeal before us, it is also appropriate to recite the arbitrators analysis of the principal contention raised by Hightower as to the validity of ODowds tender of funds to Hightower on October 13, 2000. The arbitrator stated:
There were other issues discussed by the arbitrator, but, except for the award of attorneys fees, Hightower makes no argument and raises no issue with respect thereto.
"[Hightowers Claim of Illegality: [Hightower] asserts that the repurchase of his shares by [ODowd] violated Cal. Corp. Code [,] § 500 (corporation may not make distribution to Shareholders unless retained earnings immediately prior thereto equal or exceed the amount of the proposed distribution and the sum of the assets of the corporation is at least 125% of its liabilities) and Delaware Corp. Law [sic] § 160 (corporation may not purchase its own shares for cash when such purchase would cause any impairment in the capital of the corporation).
"It is assumed for purposes of this discussion that the retained earnings of Green Hills immediately prior to the transaction were $ 26,018,628. [ ] [Hightower] suggests that he is potentially liable for violations of those provisions [ ]. It is also assumed for purposes of argument that California law would apply to Green Hills, which is a Delaware Corporation. [ ]
"The transaction is authorized by the Partial Final Award both as to [ODowd] and Green Hills. [Hightower] has no standing to assert this claim, as he is not a nonconsenting creditor. [ ]
"Under Delaware corporations law, a corporation may repurchase its own shares so long as its capital will not be impaired. The present value of Green Hills assets are relevant in determining impairment; [Hightower] has not offered evidence that the assets of Green Hills are impaired as a result of the acquisition of Hightowers shares. [ ]."
The Shareholders Agreement contained an attorneys fee clause: "In case legal action is taken by any party to enforce this Agreement, all costs and expenses, including reasonable attorneys fees, incurred by the prevailing party in exercising any of its [sic] rights or remedies hereunder or in enforcing any of the terms, conditions, or provisions hereof shall be paid by the other party."
The arbitrator held this to be a "broad grant of authority to allocate fees and costs incurred in exercising any of its [sic] rights or remedies hereunder or in enforcing any of the terms, conditions, or provisions hereof . . . . " In his Partial Final Award, the arbitrator held that ODowd was the prevailing party in that phase of the arbitration and was entitled to his fees and costs. "Such award of costs shall constitute an offset to the purchase price for the Shares if they are purchased and shall be recoverable as damages if the Shares are not purchased. Based on the evidence submitted by [ODowd], it is determined that as of this date, [ODowd] is entitled to attorneys fees, costs and expenses in the amount of $ 2,512,338.87. . . . [ODowd] may seek a supplemental award, to be included in the Final Award, for attorneys fees, costs and expenses incurred in this proceeding through entry of the Final Award."
The arbitrator also concluded that ODowd was the prevailing party in the second and final phase of the arbitration proceeding. He further expressed the view that, given our opinion in Hightower II upholding the incremental award process, "there was a basis under the Shareholders Agreement to award fees and costs, including reasonable attorneys fees, for all such activity, even that which did not occur before the arbitrator. For that reason, and in light of the determination of issues of first impression in this State, this award includes fees for the litigation phase because the Shareholders Agreement authorizes such an award in these circumstances. [ODowd] is legally entitled to reimbursement of those attorneys fees, costs and expenses in accordance with the parties Agreement [ ], the Partial Final Award and the decision in Hightower v. Superior Court (ODowd), 86 Cal.App.4th 1415 (2001). [ ] [P] If a reviewing court believes that such fees should not be awarded in this proceeding, and determines that this portion of the Final Award exceeds the arbitrators authority, the sum of $ 222,178.72 found to be attributable to those activities may be excised from the Final Award and may thereafter be determined and awarded by an appropriate court." (Italics added.)
After reviewing Hightowers multiple objections to ODowds separate fee and cost applications and making certain small adjustments for unrelated work and duplicative billing, the arbitrator ruled that ODowd had presented evidence "supporting the reasonableness and necessity for fees, costs and expenses in the amount of $ 604,105.30 and therefore is entitled to an award of attorneys fees, costs and expenses in accordance with the Shareholders Agreement and the Partial Final Award of $ 604,105,30."
The arbitrator then set forth his "Final Award":
"A. [ ] ODowds tender and purchase of Hightowers shares in Green Hills Software, Inc. ("Shares") the amount of $ 41,585,388 was in compliance with the Partial Final Award (except as delineated below) and was valid and effective on October 13, 2000. Hightowers acceptance of the tender was voluntary and without duress or compulsion. The consideration so tendered belongs to [ ] Hightower without restriction or limitation.
"B. [ ] Hightowers acceptance of the consideration for his Shares on October 13, 2000 terminated his interest in Green Hills Software, Inc. [ODowds] subsequent transfer of those Shares to Green Hills and its cancellation of those Shares and termination of [Hightower] as an officer and director of Green Hills were done in reliance of the validity of the tender and acceptance of the consideration for the Shares.
"C. With respect to the calculation of the sum due for the Shares in accordance with the Partial Final Award, [Hightower] is entitled to the further sum of $ 52,783.
"D. [ODowd] was entitled, by virtue of the Partial Final Award to offset any costs connected with the financing of the purchase of [Hightowers] Shares in an amount not to exceed the sum of $ 1,276,843.07. [ODowd] incurred expenses in excess of that amount in connection with the financing of the purchase of [Hightowers] Shares on October 13, 2000 and was therefore entitled to the offset that was made in the tender of consideration for [Hightowers] Shares. [Hightower] is not entitled to the return of any portion of that sum.
"E. [Hightower] has failed to establish his claim of entitlement to continued use of Green Hills technology from and after October 13, 2000.
"F. [ODowd] is the prevailing party in this proceeding and is entitled to his fees and costs. [ODowd] has presented evidence supporting the reasonableness and necessity for fees, costs and expenses in the amount of $ 604,105.30 and therefore is entitled to an award of attorneys fees, costs and expenses in accordance with the Shareholders Agreement and the Partial Final Award of $ 604,105.30.
"G. The net sum due to [ ] ODowd from [ ] Hightower is the sum of $ 551,322.30.
"H. [Hightower] is solely responsible for the payment of any remaining AAA fees and arbitrator compensation.
"This award resolves all claims between the parties submitted for decision in this proceeding." (Italics added.)
On September 21, 2001, ODowd filed a petition to confirm this Final Award. A judgment was entered on December 21, 2001 confirming the award. Hightower has filed this timely appeal.
The trial courts judgment tracked, almost identically, the Final Award.
CONTENTIONS OF THE PARTIES
In this appeal from the judgment entered upon the trial courts confirmation of the arbitrators Final Award, Hightower contends that the award exceeded the arbitrators powers in three respects and, under applicable law (see § 1286.2 (a)(4)), it was error for the trial court to grant ODowds petition for confirmation. The three bases for Hightowers contention are (1) the arbitrator exceed his powers by ordering an unlawful act, to wit: a distribution to a shareholder in violation of California Corporation Code section 500 and Delaware General Corporations Law, tit. 8, section 160; (2) the arbitrator exceeded his powers by awarding ODowd damages (in the sum of nearly $ 6 million) that resulted from the issuance of a preliminary injunction at the instance of Hightower and for which a bond of only $ 25,000 had been required; and (3) the arbitrator exceeded his powers by awarding ODowd attorneys fees that had been incurred in judicial proceedings.
Section 1286.2(a)(4) provides in relevant part: "Subject to section 1286.4 [not here relevant], the court shall vacate the award if the court determines any of the following: . . . [P] . . . (4) The arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted."
Hightower had raised additional substantive objections in the trial court to the arbitrators Partial Final and Final Awards, but these three are the only ones urged on appeal.
ODowd disputes each of these arguments by Hightower and specifically contends that (1) our decision in Hightower II is the law of the case as to the first two arguments raised by Hightower, (2) the argument that the arbitrator exceeded his powers is nothing more than a disguised claim that the arbitrator made a "legal error" which, under applicable law, is not judicially reviewable, (3) there was no illegality either in the Shareholders Agreement that led to the subject stock buyout or in the performance thereof as ordered by the arbitrator, (4) the arbitrators adjustment of the option price payable to Hightower for his shares did not amount to an improper award of damages for a wrongful issuance of a preliminary injunction and (5) the attorneys fees awarded to ODowd by the trial court were expressly authorized by the contractual provisions of the Shareholders Agreement.
DISCUSSION
1. Standard of Review
A judgment confirming an arbitration award is reviewed de novo, particularly where it is claimed, as it is here, that the arbitrator has exceeded his or her powers or authority. (Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 376, fn. 9, 885 P.2d 994; (Advanced Micro).) While determining whether an arbitrator has exceeded his powers the trial courts decision is reviewed de novo, substantial deference is given to the arbitrators own assessment of his contractual authority. (Jordan v. California Dept. Motor Vehicles (2002) 100 Cal.App.4th 431, 443; Ajida Technologies, Inc. v, Roos Instruments, Inc. (2001) 87 Cal.App.4th 534, 541.) "Ambiguities in the scope of arbitration are resolved in favor of arbitrability." (Social Services Union v. Alameda County Training & Employment Bd. (1989) 207 Cal. App. 3d 1458, 1464, 255 Cal. Rptr. 746.) "If parties contract to submit an issue of law to binding arbitration they may not as a matter of course reopen a final resolution of the issue on the ground the arbitrators exceeded their powers. " (Pacific Gas & Electric Co. v. Superior Court (1993) 15 Cal.App.4th 576, 588, disapproved on another point in Advanced Micro, supra, 9 Cal.4th at pp. 376-377.) "An arbitrator does not exceed his or her powers by making a legal or factual error or by giving erroneous reasons for an award." (Harris v. Sandro (2002) 96 Cal.App.4th 1310, 1313.)
The merits of the controversy submitted to arbitration are not subject to judicial review, which means that a court may not review the validity of the arbitrators reasoning, the sufficiency of the evidence supporting the award, or any alleged errors of fact or law that may be included in the award. (Harris v. Sandro, supra, 96 Cal.App.4th at p. 1313.) Additionally, the review of the remedies determined by the arbitrator is not de novo. Rather, in a contract case, the standard of review is whether the remedy chosen by the arbitrator has been rationally drawn from the contract as interpreted by the arbitrator. (Advanced Micro, supra, 9 Cal.4th at pp. 376-377.) An arbitration award may not be vacated or corrected under California law for errors of fact or law. (Advanced Micro, supra, 9 Cal.4th at pp. 376-377, fn. 10; Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 6, 832 P.2d 899 (Moncharsh).) Factual findings of the arbitrator are binding on the court and it must give deference to the arbitrators assessment of his or her contractual authority. (Oakland- Alameda County Coliseum Authority v. CC Partners (2002) 101 Cal.App.4th 635, 638; Ajida Technologies, Inc. v. Roos Instruments, Inc., supra, 87 Cal.App.4th at p. 541.) "Ensuring arbitral finality thus requires that judicial intervention in the arbitration process be minimized." (Moncharsh, supra, 3 Cal.4th at p. 10.)
Given these well settled principles, we must review the trial courts judgment confirming the arbitration awards de novo, but must accept the factual findings and legal reasoning of the arbitrator, even if erroneous. The arbitrators selected remedy is reviewed only to determine whether it has been rationally drawn from the contract.
2. Issue Resolved By Hightower II Was Narrow and Limited
The issue that was before us in Hightower II, and the one that was resolved by our decision, was narrow in scope and procedural in nature. It dealt with the propriety of the arbitrators use of an incremental award process. As we clearly stated, the question then before us was "whether an arbitrator, in order to provide a proper remedy for the prevailing party, may resolve certain critical areas of a dispute in a partial final award but reserve jurisdiction to later decide, by a final award, issues which will likely arise as a result of the implementation of that remedy." (Hightower II, supra, 86 Cal.App.4th at p. 1419.)
In accordance with our decision, the Partial Final Award was thereafter confirmed and an interlocutory judgment entered thereon. Such judgment, however, was obviously not final and thus it was not appealable. Hightower had raised several legal arguments in the trial court as to why such confirmation was improper; however, he could not test the validity of those arguments on appeal until a final judgment had been entered. Such a judgment had to await the submission of the arbitrators "Final Award" and the trial courts order confirming it. That has now been accomplished and Hightower has appealed from the final judgment that followed. This appeal that is now before us is the first opportunity Hightower has had to resolve the issues raised by his substantive (as opposed to procedural) objections to the arbitrators ruling in the Partial Final Award and the Final Award of the arbitrator.
We recognize that Hightower could have sought writ relief with respect to the interlocutory judgment confirming the Partial Final Award, but he was not compelled to do so and our consideration of the issue, unlike now, would have been discretionary.
Nothing in our decision in Hightower II precludes him from doing so. We did not even address, much less decide, the substantive issues that Hightower raises in this appeal. For this reason, we summarily reject the argument asserted by ODowd, that these issues have already been decided and that our decision in Hightower II forecloses, under the doctrine of law of the case, the arguments raised by Hightower.
3. General Principles Bearing Upon The Finality of Arbitration Awards
a. Limitations on Judicial Review of Arbitration Awards
California has a long established and well settled policy favoring arbitration as a speedy and inexpensive means of settling disputes. (Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 322, 197 Cal. Rptr. 581, 673 P.2d 251.) This policy is reflected in the comprehensive statutory scheme set out in the California Arbitration Act. ( § 1280, et seq.) The purpose of the Act is to promote contractual arbitration, in accordance with this policy, as a more expeditious and less expensive means of resolving disputes than by litigation in court. (Mercury Ins. Group v. Superior Court (1998) 19 Cal.4th 332, 342, 965 P.2d 1178.)
It is clearly the expectation of the parties to an arbitration agreement that the arbitrators decision will be both binding and final. (Moncharsh, supra, 3 Cal.4th at p. 9.) "This expectation of finality strongly informs the parties choice of an arbitral forum over a judicial one. The arbitrators decision should be the end, not the beginning of the dispute." (Id. at p. 10.) "Ensuring arbitral finality thus requires that judicial intervention in the arbitration process be minimized. [Citations.] Because the decision to arbitrate grievances evinces the parties intent to bypass the judicial system and thus avoid potential delays at the trial and appellate levels, arbitral finality is a core component of the parties agreement to submit to arbitration. Thus, an arbitration decision is final and conclusive because the parties have agreed that it be so. By ensuring that an arbitrators decision is final and binding, courts simply assure that the parties receive the benefit of their bargain." (Id. at p. 10, italics in original; fn. omitted.)
This principle of arbitral finality results in a broad authority to the arbitrator to decide cases in a way that might not be justified in a court of law. " Arbitrators, unless specifically required to act in conformity with rules of law, may base their decision upon broad principles of justice and equity, and in doing so may expressly or impliedly reject a claim that a party might successfully have asserted in a judicial action. [Citations.] As early as 1852, this court recognized that, The arbitrators are not bound to award on principles of dry law, but may decide on principles of equity and good conscience, and make their award ex aequo et bono [according to what is just and good]. [Citation.] As a consequence, arbitration awards are generally immune from judicial review. "Parties who stipulate in an agreement that controversies that may arise out of it shall be settled by arbitration, may expect not only to reap the advantages that flow from the use of that nontechnical, summary procedure, but also to find themselves bound by an award reached by paths neither marked nor traceable and not subject to judicial review." [Citation.] [Citation.]" (Moncharsh, supra, 3 Cal.4th at pp. 10-11.)
Based upon these legal authorities and principles, the Moncharsh court concluded that, with narrow exceptions not applicable here, "an arbitrators decision cannot be reviewed for errors of fact or law. In reaffirming this general rule, we recognize there is a risk that the arbitrator will make a mistake. That risk, however, is acceptable for two reasons. First, by voluntarily submitting to arbitration, the parties have agreed to bear that risk in return for a quick, inexpensive, and conclusive resolution to their dispute. . . . [P] . . . A second reason why we tolerate the risk of an erroneous decision is because the Legislature has reduced the risk to the parties of such a decision by providing for judicial review in circumstances involving serious problems with the award itself, or with the fairness of the arbitration process." (Moncharsh, supra, 3 Cal.4th at pp. 11-12; italics added.) To put it another way, even "an award reached by an arbitrator pursuant to a contractual agreement to arbitrate is not subject to judicial review except on the grounds set forth in sections 1286.2 (to vacate) and 1286.6 (for correction). Further, [even] the existence of an error of law apparent on the face of the award that causes substantial injustice does not provide grounds for judicial review." (Id. at p. 33; italics added.)
b. An Arbitrator Has Broad Power to Fashion an Appropriate Remedy
The limitations placed on judicial review and oversight of an arbitration award has resulted in a substantial deference to the arbitrators own assessment of his or her authority to resolve an issue. (Advanced Micro, supra, 9 Cal.4th at pp. 372-373.) "Courts should generally defer to an arbitrators finding that determination of a particular question is within the scope of his or her contractual authority." (Id. at p. 372.) Section 1283.4 states that an arbitrators written award shall determine all submitted questions "necessary to determine the controversy." It is, however, for the arbitrator to determine what issues are "necessary" to the ultimate decision. (Morris v. Zuckerman (1968) 69 Cal.2d 686, 690, 72 Cal. Rptr. 880, 446 P.2d 1000.)
The same deference extended to an arbitrators determination as to the scope of his or her authority also applies to the arbitrators choice of a remedy. (Advanced Micro, supra, 9 Cal.4th at p. 381.) "In providing for judicial vacation or correction of an award, our statutes (§§ 1286.2, subd. (d), 1286.6, subd. (b)) do not distinguish between the arbitrators power to decide an issue and their authority to choose an appropriate remedy; in either instance the test is whether the arbitrators have exceeded their powers. Because determination of appropriate relief also constitutes decision on an issue, these two aspects of the arbitrators authority are not always neatly separable." (Id. at p. 373.)
In Morris v. Zuckerman, supra, the Supreme Court upheld an arbitrators choice of relief against the argument that the relief granted exceeded the arbitrators contractual authority. The plaintiff had argued that the arbitrator had no authority to add conditions to a contract for the sale of jointly owned land. The court held that the arbitrator could do so if equity and the parties relationship, one to the other, required such relief. "In reaching this conclusion [Morris] applied a rule of substantial deference to the arbitrators jurisdictional determinations. (Morris v. Zuckerman, supra, 69 Cal.2d at p. 690.) Morris thus implies an arbitrators discretion to determine the extent of remedies is as great as his or her discretion to determine the related question of what issues are necessary to the decision." (Advanced Micro, supra, 9 Cal.4th at p. 374.)
"Deference to the arbitrator is also required by the character of the remedy decision itself. Fashioning remedies for a breach of contract or other injury is not always a simple matter of applying contractually specified relief to an easily measured injury. It may involve, as in the present case, providing relief for breach of implied covenants, as to which the parties have not specified contractual damages. It may require, also as in this case, finding a way of approximating the impact of a breach that cannot with any certainty be reduced to monetary terms. Passage of time and changed circumstances may have rendered any remedies suggested by the contract insufficient or excessive. As the United States Supreme Court explained in the leading case on review of arbitral remedies in the collective bargaining context, the arbitrator is required to bring his informed judgment to bear to reach a fair solution of a problem. . . . There the need is for flexibility in meeting a wide variety of situations. The [drafters] may never have thought of what specific remedy should be awarded to meet a particular contingency. [Citation.]" (Advanced Micro, supra, 9 Cal.4th p. 374; italics added.)
"The choice of remedy, then, may at times call on any decisionmakers flexibility, creativity and sense of fairness. In private arbitrations, the parties have bargained for the relatively free exercise of those faculties. Arbitrators, unless specifically restricted by the agreement to following legal rules, may base their decision upon broad principles of justice and equity . . . . [Citations.] . . . . Were courts to reevaluate independently the merits of a particular remedy, the parties contractual expectation of a decision according to the arbitrators best judgment would be defeated." (Advanced Micro, supra, 9 Cal.4th at pp. 374-375, fn. omitted; italics added.)
The Advanced Micro court cautioned, however, that it did not mean to suggest that an arbitrators exercise of discretion in ordering relief was unrestricted or unreviewable. "The powers of an arbitrator derive from, and are limited by, the agreement to arbitrate. [Citation.] Awards in excess of those powers may, under sections 1286.2 and 1286.6, be corrected or vacated by the court." (Advanced Micro, supra, 9 Cal.4th at p. 375.)
Thus, the Advanced Micro court concluded, the "principle of arbitral finality, the practical demands of deciding on an appropriate remedy for breach, and the prior holdings of this court all dictate that arbitrators, unless expressly restricted by the agreement or the submission to arbitration, have substantial discretion to determine the scope of their contractual authority to fashion remedies, and that judicial review of their awards must be correspondingly narrow and deferential." (Id. at p. 376; italics added.)
The question remained, however, as to the standard to be applied to such judicial review of a selected remedy. The Advanced Micro court noted that a number of California appellate cases have applied one of two tests. The arbitrators remedy selection would be sustained unless that remedy constituted an (1) "arbitrary remaking" or (2) a "completely irrational" construction of the contract. (Advanced Micro, supra, 9 Cal.4th at pp. 376-377.) In addition, the Advanced Micro court looked to several federal cases (primarily involving collective bargaining contracts and disputes), that had concluded an award was legitimate only so long as it drew "its essence" from the agreement. (See United Steelworkers of America v. Enterprise Wheel & Car Corp. (1960) 363 U.S. 593, 4 L. Ed. 2d 1424, 80 S. Ct. 1358.) "Judicial review of remedies as outlined in the Enterprise decision thus looks not to whether the arbitrator correctly interpreted the agreement, but to whether the award is drawn from the agreement as the arbitrator interpreted it or derives from some extrinsic source. As the court explained in a later labor case, where an arbitrator is authorized to determine remedies for contract violations, courts have no authority to disagree with his honest judgment in that respect. . . . As long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, that a court is convinced he committed serious error does not suffice to overturn his decision. [Citation.]" (Advanced Micro, supra, 9 Cal.4th at p. 378; initial italics in original; last italics added.)
After reviewing these authorities, the Advanced Micro court distilled what it believed was "a meaningful, workable and properly deferential framework for reviewing an arbitrators choice of remedies. Arbitrators are not obliged to read contracts literally, and an award may not be vacated merely because the court is unable to find the relief granted was authorized by a specific term of the contract. [Citation.] The remedy awarded, however, must bear some rational relationship to the contract and the breach. The required link may be [1] to the contractual terms as actually interpreted by the arbitrator (if the arbitrator has made that interpretation known), [2] to an interpretation implied in the award itself, or [3] to a plausible theory of the contracts general subject matter, framework or intent. [Citation.] The award must be related in a rational manner to the breach (as expressly or impliedly found by the arbitrator). Where the damage is difficult to determine or measure, the arbitrator enjoys correspondingly broader discretion to fashion a remedy. [Citation.]" (Advanced Micro, supra, 9 Cal.4th at p. 381; fn. omitted; italics added.) "In close cases the arbitrators decision must stand." (Ibid.; italics added.)
Thus, "the award will be upheld so long as it [is] even arguably based on the contract; it may be vacated only if the reviewing court is compelled to infer the award was based on an extrinsic source." (Advanced Micro, supra, 9 Cal.4th at p. 381.) Unless expressly restricted by the parties agreement, an arbitrator has the authority to fashion such relief as he or she considers just and fair under the circumstances existing at the time of the arbitration, "so long as the remedy may be rationally derived from the contract and the breach." (Id. at p. 383, italics added.) As the Supreme Court later put it, "an arbitrators choice of relief does not exceed his or her powers so long as it bears a rational relationship to the underlying contract as interpreted, expressly or impliedly, by the arbitrator and to the breach of contract found, expressly or impliedly, by the arbitrator [Citation.]" (Moshonov v. Walsh (2000) 22 Cal.4th 771, 777, 996 P.2d 699; italics added.)
With these principles in mind, we now turn to the three arguments raised by Hightower in this appeal.
4. The Arbitrator Did Not Exceed His Powers By Ordering Hightower To Deliver His Shares In Exchange For Tender of the Established
Purchase Price
Hightower argues that the arbitrator exceeded his powers by ordering that Hightower perform in accordance with the term of the Shareholders Agreement and the Partial Final Award. He bases this argument on the proposition that his shares were, in fact, purchased not by ODowd, but by Green Hills. As a result, he contends, the payment to him of $ 41,585,388 on October 13, 2000, constituted an illegal distribution from Green Hills to him in violation of Corporations Code section 500m and Delawares General Corporations Law.
Corporations Code section 500 provides in relevant part:
"Neither a corporation nor any of its subsidiaries shall make any distribution to the corporations shareholders (Section 166) except as follows:
"(a) The distribution may be made if the amount of the retained earnings of the corporation immediately prior thereto equals or exceeds the amount of the proposed distribution.
"(b) The distribution may be made if immediately after giving effect thereto:
"(1) The sum of the assets of the corporation (exclusive of goodwill, capitalized research and development expenses and deferred charges) would be at least equal to
1-1/4 times its liabilities (not including deferred taxes, deferred income and other deferred credits); and
"(2) The current assets of the corporation would be at least equal to its current liabilities or, . . . ."
Corporations Code section 166 (referred to in section 500) includes in the definition of the term "Distribution to its shareholders," a transfer of cash by the corporation for the purchase or redemption of its own shares.
Delaware Code Annotated, title 8, General Corporation Law, section 160, subdivision (a)(1) provides:
"(a) Every corporation may purchase, redeem, receive, take or otherwise acquire, own and hold, sell, lend exchange, transfer or otherwise dispose of, pledge, use and otherwise deal in and with its own shares; provided, however, that no corporation shall:
"(1) Purchase or redeem its own shares of capital stock for cash or other property when the capital of the corporation is impaired or when such purchase or redemption would cause any impairment of the capital of the corporation, except that a corporation may purchase or redeem out of capital any of its own shares which are entitled upon any distribution of its assets, whether by dividend or in liquidation, to a preference over another class or series of its stock, or, if no shares entitled to such a preference are outstanding, any of its own shares, if such shares will be retired upon their acquisition and the capital of the corporation reduced in accordance with §§ 243 and 244 of this title."
"A repurchase impairs capital if the funds used in the repurchase exceed the amount of the corporations surplus, defined by [Del. Code Ann. tit. 8, § 154] to mean the excess of net assets over the par value of the corporations issued stock." (Klang v. Smiths Food & Drug Centers, Inc. (Del. 1997) 702 A.2d 150, 153.) Delaware Code Annotated, title 8, General Corporation Law, section 154 provides, in relevant part: "Any corporation may, by resolution of its board of directors, determine that only a part of the consideration . . . received by the corporation for . . . its capital stock . . . shall be capital . . . . The excess . . . of the net assets of the corporation over the amount so determined to be capital shall be surplus. Net assets means the amount by which total assets exceed total liabilities. Capital and surplus are not liabilities for this purpose."
We believe this contention is without merit. Hightowers entire argument rests upon the factual predicate that his shares were purchased by Green Hills rather than ODowd. This is an assumption made by Hightower that is not conclusively established by the evidentiary record and is contrary to the express and implied factual findings of the arbitrator, determinations by which we are bound. (Moncharsh, supra, 3 Cal.4th at pp. 10-11.)
The record of this case clearly reflects that this dispute arose under the Shareholders Agreement pursuant to which both Hightower and ODowd sought to purchase the stock of the other in Green Hills. That Agreement anticipated and expressly provided for a process whereby one shareholder would sell and the other shareholder would purchase one-half of the outstanding stock and thus become the sole shareholder. There was no anticipation or provision for a purchase of any stock by the corporation itself. The record reflects that ODowd was successful in obtaining the necessary financing and that Hightower was not. As a result, ODowd earned the right to compel a sale to him of Hightowers stock. This was confirmed by the Partial Final Award. We discussed this matter at length in our prior opinion (Hightower, II, supra, 86 Cal.App.4th at pp. 1420-1430) and have summarized that history above.
In his Final Award, the arbitrator concluded that ODowd had purchased Hightowers stock by tendering the purchase price in accordance with the terms of the Partial Final Award. The arbitrator stated, in the Final Award, that ODowd had tendered to Hightower the sum of $ 41,585,388 on October 13, 2000 and that Hightower, on the same day had delivered his shares to ODowd endorsed in blank (by a separate assignment document in which Hightower left blank the assignee designation line). In reliance on this delivery, ODowd caused Green Hills to cancel Hightowers shares, terminated Green Hills close corporation status, amended its articles and by-laws, incurred debt to Imperial Bank and merged Green Hills into a new corporation, Green Hills Software Acquisition Corporation.
The exact purchase price was adjusted by the arbitrator in accordance with the terms of certain conditions spelled out in the Partial Final Award. That recalculation is not the subject of any dispute in this appeal.
Green Hills balance sheet as of October 31, 2000 reflects that this new debt to Imperial Bank was in the sum of $ 23,890,591. The record does not reflect the precise date prior to October 31, 2000 when this indebtedness was incurred. However, the fact that it existed at the end of October does not preclude the conclusion that it was related to post purchase arrangements between Green Hills and its sole shareholder, ODowd. (See fn. 20,post.)
The record reflects that the blank assignee designation line on Hightowers assignment document was filled in to read, "Green Hills Software Acquisition Corporation."
Contrary to Hightowers assumption, these circumstances do not compel the conclusion that Green Hills, rather than ODowd, was the purchaser of Hightowers shares; and it is clear that the arbitrator expressly and implicitly found otherwise. Indeed, the only "fact" that Hightower relies upon to support his assumption of a corporate stock purchase is that the two checks, by which the tender of the purchase price was made to him, on October 13, 2002, were drawn on the Green Hills account at Imperial Bank. At most, however, this demonstrates nothing more than the manner of payment. It provides no information as to the arrangements between ODowd, as the sole remaining shareholder, and Green Hills. We have no need to engage in speculation as to what those other arrangements might have been. The arbitrator concluded that ODowd, not Green Hills, was entitled to acquire Hightowers shares and that he did so. We cannot go behind that determination in order to provide a platform from which to attack the legal efficacy of the transaction. Moreover, Hightowers attack on the express and implied findings of the arbitration is really nothing more than an argument as to the claimed insufficiency of the evidence.
For example, the Shareholders Agreement itself contemplated that the purchase money would be deposited with Green Hills and then paid out to the selling shareholder. The use of the Green Hills checking account for this purpose by ODowd may have been nothing more than convenient variance on the agreed payment procedure and thus simply a vehicle for the transfer of the funds raised by ODowd by use of a credit line at Imperial Bank where Green Hills maintained its account.
Given this conclusion, there is no basis upon which Hightower can claim that an unlawful distribution of corporate assets has been made to him. We are not required to assume that his shares were purchased by the corporation; without such an assumption, no viable claim can be made that a violation of either Corporations Code section 500 or Delaware Law (Del. Code Ann. tit. 8, § 164) occurred. In this regard, we note that the arbitrator expressly considered this claim and rejected it.
The arbitrator concluded that Hightower had no standing to even assert such a claim as he was neither a preferred shareholder nor a non-consenting creditor. These are the only two classes of parties entitled, under Corporations Code section 506, subdivision (b), to bring an action on behalf of the corporation objecting to such a distribution. Moreover, Hightower provided no evidence that any such parties even existed or that any such action was threatened, or that any factual basis existed (beyond speculative assumption) upon which such a claim might be grounded.
The arbitrator also held that Hightower asserted no viable claim under Delaware law: "Under Delaware corporations law, a corporation may repurchase its own shares so long as its capital will not be impaired. The present value of Green Hills assets are relevant in determining impairment; [Hightower] has not offered evidence that the assets of Green Hills are impaired as a result of the acquisition of [his] shares. See Klang v. Smiths Food and Drug Centers, Inc., 702 A.2d 150 (Del. 1997)."
As with the other arguments raised by Hightower that we discuss below, we are bound to apply the principles laid down in Moncharsh and Advanced Micro. We cannot review an arbitrators decision for claimed errors of law or fact. (Moncharsh, supra, 3 Cal.4th at pp. 11-12.) In resting his entire argument as to the claimed illegality of the arbitrators awards upon a factual question determined contrary to his position, and for which the record provides no firm support, Hightower asks us to do just that. The arbitrator determined that ODowd not Green Hills purchased Hightowers stock. Hightowers argument that the evidence supporting that conclusion was insufficient or that the use of the Green Hills bank account to pay him for his stock compels a contrary conclusion constitutes nothing more than a request that we do what we cannot.
Finally, there is something unsettling about Hightowers present attack on the unwelcome conclusion of a process expressly established by an agreement that he voluntarily entered into and which resulted in an agreed $ 47 million value for 50% of Green Hills stock. There is no reason to believe that, had Hightower succeeded in acquiring ODowds stock, he would not have handled the mechanics of the transaction in much the same way as did ODowd. This was, after all, a transaction in which a shareholder became the sole owner of all of the outstanding stock and was thus free to manage and encumber the corporation in any way he saw fit.
Since both ODowd and Hightower sought to acquire the others 50% stock interest for this sum, we must conclude that both believed that it represented a fair price for one-half of the Green Hills stock.
5. The Arbitrator Had The Power To Fashion an Appropriate Remedy In Order To Make ODowd Whole
Hightower argues that the arbitrators awards, which were expressly intended to put ODowd in the position he would have been in had he been able to conclude the purchase transaction in September of 1998 under his original financing plan, provided for an excessive award of damages. He contends that ODowds damages should have been limited to the amount of the injunction bond ($ 25,000). This was the amount that Hightower was required to post in order to obtain a preliminary injunction precluding ODowd from going forward with the original purchase of Hightowers stock pending the outcome of the arbitration proceeding that Hightower had demanded under the terms of the Shareholders Agreement.
In the Partial Final Award, the arbitrator stated:
"Because [ODowd] was entitled to complete the purchase of [Hightowers] shares on September 24, 1998, a remedy must be fashioned that gives [ODowd] the benefit of his bargain under the Shareholders Agreement. . . . The intent of this award is to provide [ODowd] the benefit of the prior deal as closely as that may now be approximated."
The arbitrator confirmed this goal in his Final Award:
"The purpose of this (and other) provisions in the Partial Final Award was, to the extent possible, to give [ODowd] the benefit of his bargain-the right to acquire [Hightowers] shares in 1998, not 2000."
Hightower argues that the Code of Civil Procedure authorizes the superior court "in the county in which an arbitration proceeding is pending" to award provisional relief, including a preliminary injunction, to a party to arbitration. ( § 1281.8, subds. (a)-(b).) When it grants a preliminary injunction, "the court or judge" must require the plaintiff to post a bond "to the effect that the applicant will pay to the party enjoined any damages, not exceeding an amount to be specified, the party may sustain by reason of the injunction, if the court finally decides that the applicant was not entitled to the injunction." (§ 529,subd. (a).) The duty to require a bond "is mandatory, not discretionary," and an injunction does not become effective until the plaintiff posts the required bond. (ABBA Rubber Co. v. Seaquist (1991) 235 Cal. App. 3d 1, 10, 286 Cal. Rptr. 518.) Liability on the bond "may be enforced on motion made in the court." ( § 996.440, subd. (a).)
Hightower emphasizes that this statutory scheme thus establishes the courts authority to issue an injunction and award damages resulting from that injunction. A "court" may issue a preliminary injunction in aid of arbitration (§ 1281.8, italics added), upon issuing the injunction "the court or judge" must require a bond to compensate defendant for damages sustained as a result of the injunction (§ 529, subd. (a), italics added); and liability on the bond "may be enforced on motion made in the court" (§ 996.440, italics added). In contrast to that clear statutory authority, no statute authorizes an arbitrator to award damages resulting from an injunction. (See generally §§ 1280-1299.9.)
The right to recover damages caused by an improperly issued injunction is vindicated by an action on the bond (§§ 529, 535). "This statutory procedure, which provides for a separate trial against the surety, may be invoked after the decision on the injunction becomes final [Citation]. The right to recovery is then limited in amount to the value of the bond [Citation]." (Board of Medical Examiners v. Terminal-Hudson Electronics, Inc. (1977) 73 Cal. App. 3d 376, 389, 140 Cal. Rptr. 757; see also Allen v. Pitchess (1973) 36 Cal. App. 3d 321, 329, 111 Cal. Rptr. 658; Dickey v. Rosso (1972) 23 Cal. App. 3d 493, 497-498, 100 Cal. Rptr. 358.)
The rationale for so limiting the restrained partys recovery to the amount of the statutory bond was aptly summarized in the Dickey case: "In creating legal procedures for use of the provisional remedy of injunctive relief the state has two conflicting interests to balance-that of defendants, who should be compensated for damage caused by legal procedures whose use is later shown to have been unjustified; and that of honest plaintiffs, who should not be deterred from using the courts by fear of incurring unlimited liability from their use of the courts process. The state has established an entirely reasonable scheme for the use of injunctive relief, in that plaintiff is told in advance what his maximum summary liability will be for making use of the courts injunctive powers pending a determination of the merits of his cause, and defendant is provided an opportunity to make a showing what the amount of his damages is likely to be as a consequence of plaintiffs use of the remedy of injunctive relief. Thereafter the court fixes the amount of the undertaking in connection with the use of injunctive relief. If at a later time defendant discovers further possibilities of damages arising during the pendency of the litigation and makes a proper showing of the possibility of such damages, the court may require plaintiff to increase the amount of his undertaking as a condition of the continuance of injunctive relief. [Citation.] The possibility that damages might be inestimable, a possibility not apparent here, is outweighed by the need to provide honest plaintiffs with recourse to the courts." (Dickey v. Rosso, supra, 23 Cal. App. 3d at p. 496.)
The two awards issued by the arbitrator in this case, provided that ODowd was entitled to certain offsets against the $ 47 million purchase price. The arbitrator provided that he could reduce the total purchase price by $ 1,276,843 as the cost of replacing his 1998 financing arrangements in 2000; $ 1,625,421 as the amount of dividends and salary paid to Hightower after September 24, 1998; and $ 2,512,338 as attorneys fees. These totaled $ 5,414,612. When that sum was subtracted from the $ 47 million purchase price, it equaled the $ 41,585,388 that was in fact paid to Hightower on October 13, 2000.
As we have already noted, the arbitrator, in the Final Award, made certain adjustments to these numbers and allowed Hightower certain credits; in addition, he awarded further attorneys fees and costs ($ 604,105.30) to ODowd.
Obviously, these offsets greatly exceed the $ 25,000 bond posted by Hightower and which he contends is the full measure of his liability to ODowd. He points out that each type of the allowed offsets described above was previously cited by ODowd in 1998 as examples of the potential damages he would suffer if the preliminary injunction were granted and his purchase of Hightowers stock delayed. In that connection, ODowd had argued that the bond should be not less than $ 8.5 million. That request was rejected, the preliminary injunction was issued and a bond of only $ 25,000 was required. In Hightower I, we affirmed the trial courts ruling. Thus, Hightower concludes that ODowd cannot properly receive more than the amount of the bond since all of ODowds claimed damages appear to have resulted directly from the issuance of the injunction and the ensuing two year delay.
ODowd rejects these arguments and contends that, even if erroneous, the arbitrators awards were within his broad legal authority to grant. We agree.
We have already discussed at length the principle of arbitral finality. That principle results in a broad authority to the arbitrator to decide cases in a way that might not be justified in a court of law. " Arbitrators, unless specifically required to act in conformity with rules of law, may base their decision upon broad principles of justice and equity, and in doing so may expressly or impliedly reject a claim that a party might successfully have asserted in a judicial action. [Citation.]" (Moncharsh, supra, 3 Cal.4th at pp. 10-11; see also Advanced Micro, supra, 9 Cal.4th at p. 374.)
The "principle of arbitral finality, the practical demands of deciding on an appropriate remedy for breach, and the prior holdings of this court all dictate that arbitrators, unless expressly restricted by the agreement or the submission to arbitration, have substantial discretion to determine the scope of their contractual authority to fashion remedies, and that judicial review of their awards must be correspondingly narrow and deferential." (Advanced Micro, supra, 9 Cal.4th at p. 376, italics added.)
Hightowers argument that the arbitrator illegally awarded injunction damages in excess of the injunction bond and thereby usurped the courts power in doing so confuses a claim of error of fact or law with the claim of an illegal contract or statutory violation. The arbitrator made the express factual and legal findings that the damages awarded were calculated to give ODowd the benefit of his bargain. While Hightower takes issue with these factual and legal determinations, they do not exceed the scope of the arbitrators authority nor do they constitute an illegal act, statutory violation or violation of public policy. Courts have consistently enforced arbitration awards even though they may conflict with substantive law or are based on errors of fact. (See e.g., Kahn v. Chetcuti (2002) 101 Cal.App.4th 61, 67 [court may not review validity of arbitrators reasoning, sufficiency of evidence or any errors of fact or law that may be included in the award]; Nogueiro v. Kaiser Foundation Hospitals (1988) 203 Cal. App. 3d 1192, 1195-1196, 250 Cal. Rptr. 478 [arbitrators may base their decisions on broad principles of justice and equity, even if legally erroneous].)
Most of the cases relied upon by Hightower did not involve arbitrations. They did accurately state the law applicable in post preliminary injunction proceedings, but the rules articulated do not trump the principles of arbitral finality and remedy authority that we deem applicable and controlling in this matter. The cases cited by Hightower that did involve arbitrations are distinguishable. None involved the power of an arbitrator to fashion a monetary remedy that was intended to make whole the prevailing party in a breach of contract matter.
As we pointed out in Hightower II, relying on Advanced Micro, the "arbitrators remedy selection would be sustained unless that remedy constituted an (1) arbitrary remaking or (2) a completely irrational construction of the contract. [Citation.]" (Hightower II, supra, 86 Cal.App.4th at p. 1436.)
Given the broad authority possessed by the arbitrator, we are satisfied that he had the power to allow the offsets to the stock purchase price in pursuit of his stated and justifiable goal of placing ODowd in the position he would have been in on September 24, 1998, but for the actions of Hightower. If this was error in the sense that a court could not have properly provided such a remedy, then we still must sanction it on the ground that it is beyond our power to review it.
6. The Arbitrator Had The Authority To Award Attorneys Fees To ODowd
The Shareholders Agreement between ODowd and Hightower not only contained an arbitration clause, it also provided for an award of attorneys fees to the prevailing party in any legal action taken to enforce the Agreement. The clause provided in full: "In case legal action is taken by any party to enforce this Agreement, all costs and expenses, including reasonable attorneys fees, incurred by the prevailing party in exercising any of its [sic] rights or remedies hereunder or in enforcing any of the terms, conditions, or provisions hereof shall be paid by the other party." (Italics added.)
We agree with the arbitrator that this is a broad grant of authority. The arbitrator recognized that this was an unusual case as it involved multiple proceedings and two separate awards. The Final Award specifically noted that "a somewhat unique process was determined in the Partial Final Award to be necessary to effectuate the parties rights under the Shareholders Agreement. It necessarily entailed initial proceedings in arbitration, proceedings in court and a return to the arbitration forum for completion of the process (where the parties now find themselves). It can accurately be said that all of that process, including the court phase, was directly required to exercise . . . rights or remedies hereunder [to enforce] the terms, conditions, or provisions hereof . . . . " The arbitrator properly concluded that all proceedings involved in this unique case whether before him, or the court, were an appropriate basis for a fee award. The Final Award stated: "Given the Court of Appeals opinion upholding this process, there is a basis under the Shareholders Agreement to award fees and costs, including reasonable attorneys fees, for all such activity, even that which did not occur before the arbitrator. For that reason, and in light of the determination of issues of first impression in this State, this award includes fees for the litigation phase because the Shareholders Agreement authorizes such an award in these circumstances. Respondent is legally entitled to reimbursement of those attorneys fees, costs and expenses in accordance with the parties Agreement [ ], the Partial Final Award and the decision in Hightower v. Superior Court (ODowd) 86 Cal.App.4th 1415 (2001)."
These determinations and conclusions were certainly justified by the terms of the attorneys fee clause and, applying the principles of arbitral finality and remedy authority that we have already discussed, they were well within the power of the arbitrator to make. As one court recently put it, "we now recognize the obverse: that a contract provision that permits the recovery of fees in arbitration is broad enough to include fees in related judicial proceedings, including an appeal from the judgment confirming the award. This dispute was to enforce the terms of the contract; the arbitration award was to enforce the terms of the contract; and this action to confirm the award is also to enforce the terms of the contract. [The prevailing party] is entitled to a reasonable amount for its attorneys fees in this action . . . and this appeal. [Citations.] The rationale for the broad interpretation in these cases is to give meaning to the parties intentions in agreeing to an attorney fees clause. [Citation.]" (Ajida Technologies, Inc. v. Roos Instruments, Inc., supra, 87 Cal.App.4th at p. 552.)
To the extent that Hightower objects to the award of such fees as unauthorized damages arising from issuance of the preliminary injunction in 1998, we have already rejected the contention in our previous discussion. ODowd was clearly the prevailing party and was entitled to an award of attorneys fees. For all of the reasons set out above, we conclude that the arbitrator had the power and authority to make the award that was made.
DISPOSITION
The judgment is affirmed. ODowd shall recover his costs on appeal.
We Concur: KLEIN, P.J., ALDRICH, J.