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In construing a statute governing limited liability companies (LLC's), the Utah Supreme Court held that an arbitrator has authority to remove members and managers of an LLC if the company's operating agreement contains an arbitration clause that covers the dispute.
In Duke v. Graham, 158 P.3d 540 (Utah 2007), Ted Duke, Maria Cardenas, Randal Graham, and David Graham were members of an LLC called Way Cool Dirt Cheap (WCDC). Duke was also a manager of WCDC.
There was a conflict pitting Duke and Cardenas against the Grahams, and the parties submitted the dispute to arbitration in accordance with the company's operating agreement. After several hearings, the arbitrator issued an award removing Duke and Cardenas as members of WCDC and removing Duke as manager. The trial court confirmed the award.
On appeal, Duke and Cardenas argued that the arbitrator exceeded his authority by removing them from their positions in WCDC. Specifically, Duke and Cardenas maintained that under the Utah LLC Act, only a court may remove a member or manager of an LLC. This argument presented the Court with a question of statutory interpretation: namely, whether the Utah LLC Act permits an arbitrator to remove an LLC member or manager.
The Court concluded that the Utah LLC Act does permit an arbitrator to remove an LLC member or manager. The Court gave two reasons for this interpretation. First, the Utah LLC Act permits removal in the manner specified by the company's operating agreement, which the Court construed as including removal via an arbitration agreement. Second, the Utah Arbitration Act allows arbitration of any controversy and authorizes arbitrators to grant any remedy.
In addition to upholding confirmation of the award, the Court awarded attorney fees to the Grahams pursuant to section 78-31a-126(3) of the Utah Arbitration Act, which authorizes a court to award attorney fees incurred in litigating the validity of an arbitration award. The Court awarded attorney fees based on its finding that the appeal had "little legal support."
By construing the Utah LLC Act in a manner that gave full effect to the parties' arbitration agreement, the Court avoided an interesting and largely uncharted question regarding the scope of preemption under the Federal Arbitration Act (FAA). Namely, where the parties have agreed that an arbitrator may award any relief available in court, see, e.g., National Arbitration Forum Code of Procedure, does the FAA preempt state laws that would preclude the arbitrator from awarding a form of relief available in court?
In Wisconsin Auto Title Loans, Inc. v. Jones, 696 N.W.2d 214 (Wis. Ct. App. 2005), aff'd, 714 N.W.2d 155 (Wis. 2006), the Wisconsin Court of Appeals raised this question sua sponte but did not address it since neither party had raised the issue. Specifically, the court noted that "[t]he argument might be made that the legislature has run afoul of the Federal Arbitration Act by exempting a certain class of cases [i.e., replevin actions] from arbitration." Id. at 220 n. 3.
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