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Finn v. Ballentine Partners, LLC

Supreme Court of New Hampshire

June 14, 2016



          Argued: January 27, 2016

          Hage Hodes, P.A., of Manchester (Jamie N. Hage on the brief), and Cohan Rasnick Myerson Plaut LLP, of Boston, Massachusetts (Robert D. Cohan on the brief and orally), for the plaintiff.

          McLane Middleton, Professional Association, of Manchester (Wilbur A. Glahn, III, Michael A. Delaney, and Nicholas F. Casolaro on the brief, and Mr. Glahn orally), for the defendants.

          LYNN, J.

         The plaintiff, Alice Finn, appeals an order of the Superior Court (McNamara, J.) denying her motion to affirm and granting the motion of the defendants, Ballentine Partners, LLC (BPLLC), Ballentine & Company, Inc., Roy C. Ballentine, Kyle Schaffer, Claudia Shilo, Andrew McMorrow, and Gregory Peterson, to vacate a final arbitration award in part pursuant to RSA 542:8 (2007). Because we conclude that the trial court did not err in ruling that RSA 542:8 is not preempted by the Federal Arbitration Act (FAA), see 9 U.S.C. §§ 2, 9-11 (2012), and in ruling, pursuant to RSA 542:8, that the arbitration panel committed a plain mistake of law by concluding that res judicata did not bar Finn's claim, we affirm.


         The record supports the following facts. Ballentine and Finn founded Ballentine Finn & Company, Inc. (BFI), a New Hampshire subchapter S corporation, in 1997. Each owned one half of the company's stock, and Finn served as the Chief Executive Officer. Later, four other individuals became shareholders of BFI. In 2008, Ballentine and the other shareholders forced Finn out of the corporation and terminated her employment. BFI asserted that the termination was for cause, and exercised its right to purchase Finn's shares at the price assigned to "for cause" terminations pursuant to the Shareholder Agreement (Agreement). At the time of her termination, Finn held 37.5% of the shares of BFI. BFI gave Finn a promissory note in the amount of $4, 635, 684, which represented 1.4 times earnings for her shares for the 12 months before her termination. This amount was below the fair market value of Finn's shares.

         Pursuant to the Agreement, Finn challenged her termination before an arbitration panel in 2009.[1] This first arbitration panel found that Finn's termination was unlawful and awarded her $5, 721, 756 for the stock that BFI forced her to sell and $720, 000 in lost wages. The panel recognized that BFI likely did not have sufficient liquidity to pay the award immediately, so it authorized BFI to make periodic payments through December 31, 2012.

         After the first panel award, BFI formed BPLLC, contributed all of its assets and some of its liabilities to BPLLC, and became its sole member. BFI then changed its name to Ballentine & Company (Ballentine & Co.). After the reorganization, Ballentine & Co. sold 4, 000 preferred units, a 40% membership interest in BPLLC, to Perspecta Investments, LLC (Perspecta). Perspecta paid $7, 000, 000 to Ballentine & Co. and made a $280, 000 capital contribution to BPLLC. The defendants asserted that the membership interest had to be sold in order to raise funds to pay the arbitration award to Finn.

         In 2013, Finn filed a complaint and a motion to compel arbitration in superior court, alleging that she was entitled to relief under the "Claw Back" provision of the Agreement. That provision provides, in essence, that if a founding shareholder of BFI sells shares back to the corporation and those shares are resold at a higher price within eight years, the founder is entitled to recover a portion of the additional price paid for the shares. The defendants moved to dismiss Finn's complaint, arguing that it was barred by res judicata. The trial court did not rule on the motion to dismiss; instead, it stayed the court proceedings and granted Finn's motion to compel arbitration, concluding that the issue of res judicata must be decided by arbitration in the first instance.

         A second arbitration panel held a five-day hearing to decide Finn's new claims, which included breach of contract and unjust enrichment. It ruled that "[t]he findings of the first panel essentially resolve[d] Finn's contract claim for 'Claw Back' benefits because the predicate facts needed to support a contractual 'Claw Back' claim were found against Finn by that panel."[2] The second panel concluded, however, that Finn was entitled to an award based upon her unjust enrichment claim. Although it agreed with the defendants' argument that a party cannot be awarded relief under a theory of unjust enrichment when "there is an available contract remedy identified, " the panel stated that this "legal principle cannot equitably pertain where the breaching party has, because of its wrongdoing, effectively eliminated the opposing party's contractual remedy, as happened here."[3] Therefore, the panel concluded that the defendants had been unjustly enriched by the sale of shares to Perspecta. Using the "Claw Back" provision in the Agreement as a guide only, the second panel awarded Finn $600, 000 in equitable relief.

         Returning to court, Finn moved to affirm, and the defendants moved to vacate in part, the second arbitration award. Applying the plain mistake standard of review found in RSA 542:8, the trial court ruled that the second panel's award of additional damages to Finn on her unjust enrichment claim was barred, under settled principles of res judicata, by the award of damages she received from the first panel.

         Finn moved for reconsideration, arguing that the FAA applied to this case because the Agreement affected interstate commerce. Therefore, she argued, the trial court should have applied the more deferential FAA standard in reviewing the arbitration award because the FAA preempts state law. The trial court denied the motion, and this appeal followed.


         On appeal, Finn asserts that the trial court erred in applying RSA 542:8 to review the second arbitration panel's award because state law is preempted by the FAA. Alternatively, she argues that, even if RSA 542:8 applies, the trial court erred because it did not afford sufficient deference to the panel's findings of fact and rulings of law. Finally, she argues that the trial court misapplied the doctrine of res judicata to her unjust enrichment claim. We examine her arguments in turn.[4]


         Finn argues that the trial court erred in reviewing the second panel's award under RSA 542:8 instead of §§ 9 and 10 of the FAA. Relying primarily upon the decision of the United States Supreme Court in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), she asserts that RSA 542:8 is impliedly preempted by the FAA because the Agreement is a contract affecting interstate commerce, [5] to which the FAA applies, and that failing to employ the more deferential federal standard of judicial review of arbitration awards "foils the objective Congress seeks to advance with the FAA." "Because the trial court's determination of federal preemption is a matter of law, our review is de novo." N.H. Attorney Gen. v. Bass Victory Comm., 166 N.H. 796, 801 (2014).

         The federal preemption doctrine effectuates the Supremacy Clause of the United States Constitution. State v. Exxon Mobil Corp., 168 N.H. 211, 229 (2015). It ensures that federal law "shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the Constitution or laws of any state to the contrary notwithstanding, " U.S. CONST. art. VI, by invalidating state laws that conflict with federal legislation. Exxon Mobil Corp., 168 N.H. at 229. Congress may expressly preempt a state law, or it may implicitly preempt a state law through "field" preemption or "conflict" preemption. See id.

         The Supreme Court has held that "[t]he FAA contains no express pre-emptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration." Volt Info. Sciences v. Leland Stanford Jr. U., 489 U.S. 468, 477 (1989). Therefore, Finn presses conflict preemption, which "arises when compliance with both federal and state regulations is a physical impossibility, or when state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Exxon Mobil Corp., 168 N.H. at 229 (quotation omitted).

         The trial court reviewed the second panel's award pursuant to RSA 542:8, which creates a procedure for parties to seek confirmation, modification, or vacatur of an arbitral award:

At any time within one year after the award is made any party to the arbitration may apply to the superior court for an order confirming the award, correcting or modifying the award for plain mistake, or vacating the award for fraud, corruption, or misconduct by the parties or by the arbitrators, or on the ground that the arbitrators have exceeded their powers. Where an award is vacated and the time within which the agreement required the award to be made has not expired, the court may in its discretion, direct a rehearing by the arbitrators or by new arbitrators appointed by the court.

         We have construed this statute to grant a court the authority to vacate an award for plain mistake if it "determine[s] that an arbitrator misapplied the law to the facts." Sherman v. Graciano, 152 N.H. 119, 120 (2005). Similarly, the FAA creates "mechanisms for enforcing arbitration awards: a judicial decree confirming an award, an order vacating it, or an order modifying or correcting it." Hall Street, 552 U.S. at 582.

Section 2 of the FAA provides:
A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

9 U.S.C. § 2. Thus, the FAA applies to state courts insofar as § 2 prohibits state courts from refusing to enforce agreements to arbitrate. Southland Corp. v. Keating, 465 U.S. 1, 14-16 (1984).

         Finn's argument relies upon §§ 9, [6] 10[7] and 11[8] of the FAA. In Hall Street, the Supreme Court held that the listed grounds for vacation, correction or modification of an arbitral award by a federal court, as set forth in §§ 10 and 11 of the FAA, may not be supplemented by the terms of the arbitration agreement entered into by the parties. Hall Street, 552 U.S. at 590. These provisions provide much more limited grounds for review of an arbitration award than does "plain mistake" review under RSA 542:8.

         We do not agree with Finn's first argument that the FAA is the exclusive method by which to review the second panel's award because we conclude that §§ 9-11 of the FAA apply only to arbitration review proceedings commenced in federal courts. As we have already noted, the FAA creates some substantive rules that apply to arbitration agreements in both federal and state courts when the contract to arbitrate affects commerce. Southland Corp., 465 U.S. at 14-16. Section 2 of the act applies in state courts to prevent anti-arbitration laws from invalidating otherwise lawful arbitration agreements. Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 281 (1995). However, it does not follow that the FAA applies to state courts in its entirety. In fact, the Supreme Court has suggested that some of the statute's provisions apply only in federal courts. See Volt, 489 U.S. at 477 n.6. In considering whether other sections of the FAA apply in state courts, the Court noted that it has "never held that §§ 3 and 4, which by their terms appear to apply only to proceedings in federal court, . . . are nonetheless applicable in state court." Id. This comment clearly contemplates that the Court considers the application to the states of each section individually, rather than the application of the Act as a whole. Therefore, we consider whether §§ 9-11 of the FAA also use language that limits their application to federal courts.

         The sections at issue in Volt made reference to either "the courts of the United States" or "any United States district court." Id.; see Southland Corp., 465 U.S. at 29 n.18 (O'Connor, J., dissenting) (explaining that "courts of the United States" is a term of art designating federal, not state courts). Likewise, §§ 10 and 11, the sections that establish the limited grounds upon which arbitration awards may be upset, reference only the federal courts. 9 U.S.C. §§ 10, 11. Although § 9 of the FAA could be read to encompass state courts as well as federal courts, and to contemplate that state courts reviewing covered arbitration awards (i.e., those involving contracts affecting interstate commerce) must utilize exclusively the standards set forth in §§ 10 and 11, the Court has not interpreted the FAA in this fashion. In Hall Street, the Court not only acknowledged the potential for review of arbitration awards under state law, see Hall Street, 552 U.S. at 590, but even noted the possibility of a federal court reviewing an arbitration award under its "case management authority independent of the FAA, " id. at 592.[9] If the FAA were, in all circumstances, the exclusive grounds for review of arbitration awards subject to the FAA, these possible alternative paradigms of judicial review that the Court described would have been completely foreclosed. Indeed, the Texas Supreme Court has specifically recognized the limited applicability of the FAA to state courts: "The mere fact that a contract affects interstate commerce, thus triggering the FAA, does not preclude enforcement under [state law] as well." Nafta Traders, Inc. v. Quinn, 339 S.W.3d 84, 98 (Tex. 2011).

         Here, the FAA applied to the extent that it required the parties to arbitrate their dispute, as the trial court noted when it referred Finn's claim to the second arbitration panel. That does not mean that all aspects of the FAA are applicable to this proceeding. Based upon our review of the pertinent case law, we conclude that neither Hall Street, nor any other precedents by which we are bound, requires that we accept plaintiff's position ...

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