#26730, #26749-aff in pt, rev in pt & rem-JKK

2014 S.D. 68

                             IN THE SUPREME COURT
                                     OF THE
                            STATE OF SOUTH DAKOTA

                                      ****
BLACK HILLS SURGICAL
PHYSICIANS, LLC,                                Plaintiff and Appellant,

      v.

REUBEN C. SETLIFF, III,                         Defendant and Appellee.

                                      ****
                   APPEAL FROM THE CIRCUIT COURT OF
                     THE SEVENTH JUDICIAL CIRCUIT
                   PENNINGTON COUNTY, SOUTH DAKOTA
                                ****
                     THE HONORABLE CRAIG A. PFEIFLE
                                Judge
                                      ****

STEPHEN C. HOFFMAN
HEATHER LAMMERS BOGARD
JESS M. PEKARSKI of
Costello Porter Hill Heisterkamp
 Bushnell & Carpenter, LLP
Rapid City, South Dakota                        Attorneys for plaintiff
                                                and appellant.

MICHAEL C. LOOS of
Clayborne, Loos, & Sabers, LLP
Rapid City, South Dakota                        Attorneys for Larry
                                                Teuber, MD.

KENT R. CUTLER
KIMBERLY R. WASSINK
JOSEPH M. DYLLA of
Cutler & Donahoe, LLP
Sioux Falls, South Dakota                       Attorneys for defendant
                                                and appellee.
                                      ****
                                                CONSIDERED ON BRIEFS
                                                ON FEBRUARY 18, 2014
                                                OPINION FILED 09/24/14
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KONENKAMP, Justice

[¶1.]         In this appeal seeking to vacate an arbitration award, we examine

whether the arbitrator exceeded her powers.

                                     Background

[¶2.]         In May 2012, Dr. Rueben C. Setliff, III, brought suit in circuit court

against Drs. Larry Teuber, Pat Tlustos, Jim Shea, Jim Scherrer, Lew Papendick,

and Jay Hammerquist (Managers) individually and in their capacities as members

of the management committee of Black Hills Surgical Physicians, LLC (BHSP). 1

Setliff cast his claim as a derivative action under SDCL chapter 47-34A (2012). 2 He

alleged that the Managers breached their fiduciary duties under BHSP’s Operating

Agreement. He sought reimbursement of his expenses and attorney’s fees, removal

and replacement of the Managers, redemption of Teuber’s membership interests,

and an award of damages to BHSP, including repayment to BHSP of certain

distributions to Teuber.

[¶3.]         Relying on the provisions of the Operating Agreement, BHSP applied

to the circuit court to compel Setliff to arbitrate his claims. The Operating

Agreement provides, in part, that “[a]ny dispute or difference arising between a

Member and [BHSP] whether as a result of this Agreement or otherwise, shall be

subject to binding arbitration.” BHSP asserted that as a derivative action against




1.      Dr. Hammerquist was later dismissed from the proceedings.

2.      In 2013, SDCL chapter 47-34A was amended and renumbered. 2013 S.D.
        Sess. Laws ch. 233, § 44.

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the Managers, Setliff was the “Company” and the Managers were the “Member,”

and, therefore, the suit was between “a Member” and BHSP.

[¶4.]        The circuit court ruled that the dispute was subject to arbitration.

Setliff then filed his claim against the Managers with the American Arbitration

Association. BHSP brought a counterclaim requesting that Setliff be expelled from

the company. The parties stipulated that no record of the arbitration proceeding

would be made. An attorney was selected as the arbitrator, who in accordance with

a requirement in the Operating Agreement had “significant experience in the

medical practice management field.”

[¶5.]        After a four-day evidentiary hearing in December 2012, the arbitrator

issued her award in a twelve-page, single-spaced decision. She analyzed the

testimony and evidence presented and detailed her findings on both BHSP’s and

Setliff’s claims. She concluded that removal of the Managers was not warranted,

even if she had the authority to do so. She also denied forced redemption of

Teuber’s membership interests and any repayment for prior distributions to him.

On BHSP’s counterclaim for Setliff’s expulsion, the arbitrator ruled such action

unwarranted.

[¶6.]        Citing SDCL 47-34A-1104 (2012), the arbitrator found that Setliff’s

claim was a “derivative action.” She ordered that Setliff recover “attorney’s fees and

costs” against the Managers. In turn, she ruled that the Managers were “all

entitled to be indemnified” by BHSP under the Operating Agreement, Section 4.2.

She further ordered that “the attorneys’ fees and costs incurred by each party

herein shall be borne by each party, respectively,” subject to her award of attorney’s


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fees to Setliff. Subject also to company indemnification, the Managers were to bear

the administrative fees and expenses of the American Arbitration Association

totaling $18,800 and the compensation and expenses of the arbitrator totaling

$52,479.18. Because Setliff previously incurred expenses and fees of $40,439.59 on

behalf of BHSP, the arbitrator ordered the Managers, subject to indemnification, to

reimburse Setliff.

[¶7.]         BHSP applied to the circuit court to vacate the arbitrator’s attorney’s

fees and expenses award, asserting that the arbitrator exceeded her powers. See

SDCL 21-25A-24(3). 3 For his part, Setliff requested confirmation of the award. In

its oral ruling, the circuit court expressed doubts about the standard of review

because, in some of this Court’s decisions, we have said that whether arbitrators

exceed the scope of their authority is a question of law, reviewable de novo. In other

cases, the circuit court remarked, our standard of review was extremely deferential.

Deciding to give a “very deferential” review of the arbitrator’s award, the circuit

court ruled that “the arbitrator arguably was within the scope of her authority in

making the award of fees and costs,” considering her “finding that this was a

derivative claim[.]” Thus, the court confirmed Setliff’s award of “attorney’s fees,

costs, and disbursements in the amount of $258,196.93,” with “interest at the

statutory rate of 10% per annum from December 21, 2012 until the date of

payment.” The court also granted BHSP’s request to seal the unredacted portions of

the record.



3.      SDCL 21-25A-24(3) provides: “Upon application of a party, the court shall
        vacate an award where: . . . (3) The arbitrators exceeded their powers[.]”

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[¶8.]          BHSP appeals on the ground that the circuit court erred when it

concluded that the arbitrator had not exceeded her powers. 4 Setliff, by notice of

review, appeals the order sealing portions of the record.

                                            I.

               A. Arbitration Agreement

[¶9.]          BHSP contends that the arbitrator exceeded her powers under SDCL

21-25A-24(3) when she awarded Setliff attorney’s fees and expenses in violation of

the arbitration provision in BHSP’s Operating Agreement. Setliff, conversely, relies

on the deferential review standard we give to arbitration awards and argues that an

arbitrator’s even barely colorable contract interpretation must stand.

[¶10.]         Arbitrators exceed their powers when they decide matters not properly

before them, and here the arbitrator’s powers derived from the arbitration

agreement. See Aamot v. Eneboe, 352 N.W.2d 647, 649 (S.D. 1984). Thus, the



4.       Setliff argues that because the attorneys for BHSP and Teuber did not object
         to Setliff’s request for attorney’s fees and expenses during the arbitration
         proceeding, the issue was waived for appeal purposes. For this proposition,
         Setliff cites City of Fostoria v. Ohio Patrolman’s Benevolent Association, 833
         N.E.2d 720, 726 (Ohio 2005). That case involved far more than a failure to
         object. The Fostoria court found that the city could “not be permitted to take
         advantage of an error which [the City] invited or induced” the arbitrator to
         make, when the city arbitrated multiple grievances in the same proceeding
         and later complained that each grievance had to be heard individually. See
         id. at 723. In contrast, nothing in the record here supports a conclusion that
         BHSP or Teuber induced or invited the arbitrator to conclude that an award
         of attorney’s fees to Setliff was within her powers. More importantly, in
         South Dakota, to determine whether arbitrators exceeded their powers, we
         examine (1) the submission or agreement and (2) the award. Spiska Eng’g,
         Inc., v. SPM Thermo-Shield, Inc., 2007 S.D. 31, ¶ 12, 730 N.W.2d 638, 643.
         We do not review arbitration proceedings as we would trial proceedings, with
         their formal rules for preserving a record for appeal, because arbitration is an
         informal, non-judicial process.

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question is whether the arbitrator’s award conforms to the agreement. BHSP’s

Operating Agreement contained the following provisions on arbitration:

             Any dispute or difference arising between a Member and
             [BHSP] whether as a result of this Agreement or otherwise,
             shall be subject to binding arbitration.
                    ***
                    B. The Member and [BHSP] agree to equally divide the
                    cost and expense of the arbitration except that each shall
                    pay their own attorney’s fees.
                    ***
                    F. Any judgment or order entered by the arbitrator may
                    be entered in any court having jurisdiction thereof.


(Emphasis added.)

[¶11.]       In the arbitrator’s decision, though she acknowledged that she was

designated to act under the parties’ arbitration agreement, she did not analyze or

interpret the costs and attorney’s fees provision in deciding to award Setliff

attorney’s fees. Characterizing Setliff’s dispute as “a derivative action” on behalf of

BHSP, she ruled that Setliff “shall recover” his “attorneys’ fees and costs[.]”

[¶12.]       This award can be viewed in two ways, depending on our level of

deference. On the one hand, we might conclude that, while the arbitration

agreement mandates that the parties pay their own attorney’s fees, the arbitrator

may not have considered the dispute to be one in which the attorney’s fees provision

applied because she found that Setliff’s claim was a “derivative action.” As in

typical derivative claims, the request for relief Setliff submitted was couched on

behalf of the company, BHSP. In such case, should we defer to the arbitrator’s

implied contract interpretation allowing an award of attorney’s fees?



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[¶13.]         On the other hand, we could conclude that in the face of an express

provision requiring the parties to pay their own attorney’s fees, a Member cannot

thwart that provision by employing a “cause of action” (here a derivative action)

that would allow an attorney’s fees award. Did the Members not contract away a

right to recover such fees in “any dispute or difference arising between a Member

and [BHSP]”? (Emphasis added.) Would the language “any dispute or difference”

include a derivative action? And if it does, did the arbitrator exceed her powers by

contravening the attorney's fees provision? To answer these questions, we must

delve into the nature of arbitration and the appropriate standard of review.

               B. Standard of Review

[¶14.]         Commercial arbitration is a nonjudicial form of alternative dispute

resolution. It touts the advantages of flexibility, efficiency, and finality. 5 Those

who voluntarily make arbitration agreements assuredly bargain for these

advantages, and a deferential standard of review protects such contractual

arrangements. Moncharsh v. Heily & Blase, 832 P.2d 899, 903-04 (Cal. 1992). A

full-court review of arbitration decisions would render arbitration a mere prologue

to the more burdensome and time consuming judicial process. W. Cas. & Sur. Co. v.

Gridley, 362 N.W.2d 100, 102 (S.D. 1985) (citations omitted). Consistent with this

policy, our Legislature enacted laws strictly limiting when courts may vacate an

arbitration award. Unless one of the statutory subsections in SDCL 21-25A-24

applies, an arbitrator’s award is not subject to judicial vacation. Azcon Constr. Co.,



5.       See generally Raymond G. Bender, Jr., “Just and Accurate”: Confronting
         Limited Appeal Rights in Arbitration, 30 Alt. to High Cost Litig. 146 (2012).

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Inc. v. Golden Hills Resort, Inc., 498 N.W.2d 630, 635 (S.D. 1993) (quoting W. Cas.

& Sur. Co, 362 N.W.2d at 102); see also Thunderstik Lodge, Inc. v. Reuer, 1998 S.D.

110, ¶ 12, 585 N.W.2d 819, 822.

[¶15.]       Having only limited statutory authority to vacate awards, we accord

them extraordinary deference on review. Vold v. Broin & Assocs., Inc., 2005 S.D.

80, ¶ 10, 699 N.W.2d 482, 486 (citation omitted). We will confirm arbitration

awards even when we deem them erroneous, as long as the arbitrators were

arguably interpreting and acting under the agreement. Id. (citation omitted). We

are not free to second-guess arbitrators’ findings of fact, conclusions of law, or

contract interpretation.

[¶16.]       But on the question whether arbitrators exceeded their powers, we

have long held a less deferential standard of review. “Arbitrators derive their

authority from, and must comply with, the arbitration agreement.” Azcon Constr.

Co., Inc., 498 N.W.2d at 633; see also Peska Constr. Co., Inc. v. Portz Inv., LLP, 2003

S.D. 136, ¶ 16, 672 N.W.2d 483, 487 (citation omitted); Aamot, 352 N.W.2d at 649.

Whether arbitrators exceeded their powers as conferred by an arbitration

agreement or submission “is an issue for judicial resolution.” Azcon Constr. Co.,

Inc., 498 N.W.2d at 633; Peska, 2003 S.D. 136, ¶ 16, 672 N.W.2d at 488 (citation

omitted). In deciding whether arbitrators have exceeded their powers, courts “‘need

only examine the submission and the award to determine whether the award

conforms to the submission.’” Spiska Eng’g, Inc., 2007 S.D. 31, ¶ 12, 730 N.W.2d at

643 (citation omitted). Furthermore, when a circuit court vacates or confirms an

arbitration award, we review any findings of fact for clear error, but take plenary


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review of the court’s conclusions of law. See Vold, 2005 S.D. 80, ¶ 10, 699 N.W.2d at

485 (citation omitted). Thus, the circuit court’s decision here that the arbitrator did

not exceed her authority under SDCL 21-25A-24(3) is reviewed de novo.

             C. Award Rationally Drawn From the Agreement

[¶17.]       Did the award the arbitrator selected conform to the arbitration

provisions in the Operating Agreement? “The critical question with regard to

remedies is not whether the arbitrator has rationally interpreted the parties’

agreement, but whether the remedy chosen is rationally drawn from the contract as

so interpreted.” Advanced Micro Devices, Inc. v. Intel Corp. (AMD), 885 P.2d 994,

1003 (Cal. 1994). As the United States Supreme Court explained, when arbitrators’

awards derive from their construction of the agreement, even an erroneous

construction, then such awards are within their authority. United Steelworkers of

Am. v. Enter. Wheel & Car Corp., 363 U.S. 593, 597-99, 80 S. Ct. 1358, 1361-62, 4 L.

Ed. 2d 1424 (1960). Awards must be upheld if they were even arguably based on

the contract. Id. Only when arbitrators “must have based” their awards “on some

body of thought, or feeling, or policy, or law that is outside the contract” are such

awards deemed in excess of the arbitral powers delegated in the parties’ agreement.

Ethyl Corp. v. United Steelworkers of Am., 768 F.2d 180, 184-85 (7th Cir. 1985)

(Federal Arbitration Act case dealing with “exceeded their powers” language).

[¶18.]       Here, the arbitrator did resort to an extraneous source to make her

attorney’s fees award: the derivative action statutes in South Dakota’s Uniform

Limited Liability Company Act. See SDCL ch. 47-34A-1101. As Setliff framed his

arbitration claim, it was brought on behalf of BHSP against its management


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committee, comprised of five individual members. Yet, under the Operating

Agreement Section 15.11, this was still a “dispute or difference arising between a

Member [here multiple members] and [BHSP] whether as a result of [the]

Agreement or otherwise. . . .” And the circuit court’s original ruling that this matter

was subject to arbitration under this provision stands unchallenged. As to

attorney’s fees, the arbitration provision states in part that “[t]he Member and

[BHSP] agree to equally divide the cost and expense of the arbitration except that

each shall pay their own attorney’s fees.” Operating Agreement, Section 15.11(B)

(emphasis added). It is immaterial, therefore, whether Setliff was acting

derivatively as BHSP or as a “Member” — the agreement unambiguously required

each side to pay their own attorney’s fees. 6

[¶19.]         As one court noted, how a violation of an express restriction on an

arbitrator’s power can be rationally drawn from an interpretation of the agreement

is difficult to comprehend. AMD, 885 P.2d at 1006 (quoting Hecla Mining Co. v.

Bunker Hill Co., 617 P.2d 861, 869 (Idaho 1980)). By contrast, in Spiska, we

declined to vacate an award because we could not “say with positive assurance that

the Agreement [was] not susceptible of the arbitrator’s interpretation.” 2007 S.D.

31, ¶ 26, 730 N.W.2d at 646. But here the award was plainly beyond the scope of



6.       BHSP also contends that even if the remedies applicable to derivative actions
         can contravene the attorney’s fees limitation in the arbitration agreement,
         the arbitrator exceeded her authority when she awarded fees because she
         ruled that “no one was really the victor[.]” See SDCL 47-34A-1106(b) (2012)
         (fees may be awarded to the plaintiff “from the recovery of the limited
         liability company” when the derivative action is successful in whole or in
         part). We need not reach this issue in view of our conclusion that the
         arbitration agreement precluded the award of attorney’s fees.

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available remedies. We conclude that the arbitrator exceeded her powers in

awarding Setliff his attorney’s fees and expenses in direct violation of BHSP’s

Operating Agreement. We reverse the circuit court’s order affirming the award. In

view of this decision, we need not reach BHSP’s other arguments.

                                          II.

[¶20.]       By notice of review, Setliff appeals the circuit court’s decision to seal a

portion of the arbitration award. He contends that the information in the

arbitration award is not the type of material entitled to protection and that BHSP

failed to identify an overriding interest or a narrowly-tailored remedy to justify

sealing part of the award. In response, BHSP contends that the circuit court only

sealed that portion of the award unrelated to the attorney’s fees dispute. Moreover,

BHSP claims that Setliff stipulated to the entry of a Confidentiality Order in the

arbitration proceedings and is “estopped from his ‘gamesmanship’ in raising his

‘public access’ arguments now.”

[¶21.]       We review the court’s order to seal the record for an abuse of

discretion. Rapid City Journal v. Delaney, 2011 S.D. 55, ¶ 9, 804 N.W.2d 388, 392.

In sealing a portion of the arbitration award, the court recognized that BHSP only

placed before it the issue of the arbitrator’s award of attorney’s fees and expenses.

Secrecy in judicial proceedings is disfavored, but the issue in this proceeding was

whether the arbitrator exceeded her authority. That issue could be resolved by

review of the redacted award. The circuit court did not abuse its discretion when it

sealed part of the award unrelated to the limited issue before the court.

[¶22.]       Affirmed in part, reversed in part, and remanded.


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[¶23.]      GILBERTSON, Chief Justice, and ZINTER, SEVERSON, and

WILBUR, Justices, concur.




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