COMSTOCK BANK v. RAYMOND GRABER II (2001)

ORDER OF REVERSAL AND REMAND

These are consolidated appeals from a district court order confirming in part, vacating in part, and modifying in part an arbitration award and awarding attorney fees.

When this dispute developed, Raymond B. Graber, II, was the primary shareholder of a closely held Nevada corporation known as Outdoor Poster, Inc. Graber acted as the guarantor for three separate loan agreements between Outdoor Poster and Comstock Bank. When Outdoor Poster defaulted on these loans, a dispute arose between Graber and Comstock concerning the enforceability of the loan agreements. The case was submitted to arbitration pursuant to a provision in one of the separate loan agreements. In 1994, the district court confirmed the arbitrator's award without reviewing the arbitration record. This court reversed the district court's order and remanded the case for a review of the arbitration record.¹

On remand, the district court found that one portion of the arbitrator's award (namely, the arbitrator's denial of rescission as to the third loan agreement) was a manifest disregard of the law. Having so found, the district court vacated that portion of the arbitrator's award, confirmed the remainder, ordered rescission of the third agreement, and awarded attorney fees to Graber. Comstock appeals from the order, contending that the district court did not have the authority to modify the award on the merits of the case or to award attorney fees, and that the arbitrator did not manifestly disregard the law by denying rescission.

The review of arbitration awards

Judicial review of arbitration awards is controlled by both statutory authority and case law.

The purpose of Nevada's Uniform Arbitration Act ² (the “Act”) is to prevent courts from intervening when parties have contractually agreed to handle disputes by way of arbitration.³ This purpose promotes efficient grievance resolution and reduces the civil backlog of our trial courts.

To vindicate this policy, the Act provides that the parties may turn the arbitrator's award into an enforceable judgment by applying for confirmation with the district court.⁴ Under the Act, the district court must confirm the arbitrator's award, except in specific enumerated situations when it must modify or vacate the award.⁵

NRS 38.155 recites the Act's grounds for modifying or correcting an arbitrator's award.

1. Upon application made within 90 days after delivery of a copy of the award to the applicant, the court shall modify or correct the award where:

(a) There was an evident miscalculation of figures or an evident mistake in the description of any person, thing or property referred to in the award;

(b) The arbitrators have awarded upon a matter not submitted to them and the award may be corrected without affecting the merits of the decision upon the issues submitted; or

(c) The award is imperfect in a matter of form, not affecting file merits of the controversy.

The district court must vacate the arbitrator's award when:

(a) The award was procured by corruption, fraud or other undue means;

(b) There was evident partiality by an arbitrator ․ ;

(c) The arbitrators exceeded their powers;

(d) The arbitrators refused to postpone the hearing ․ or refused to hear evidence material, to the controversy or otherwise so conducted the hearing, ․ as to prejudice substantially the rights of a party; or

(e) There was no arbitration agreement and the issue was not adversely determined in proceedings under NRS 38.045 and the party did not participate in the arbitration hearing without raising the objection.

But the fact that the relief was such that it could not or would not be granted by a court of law or equity is not ground for vacating or refusing to confirm the award.  6

Simply put, the Act does not provide the district court with the authority to substitute its award for that of the arbitrator, on the contrary, the Act proscribes it. Thus, we conclude that the district court exceeded its statutory authority by altering the arbitrator's award.

We also conclude that reversal is mandated under common law principles governing arbitration awards. With respect to the district court's authority to alter the arbitrator's award, the Act conforms with the common law. “The general rule [is] that the courts will, not substitute their judgment for that of the arbitrators. [ ] At common law, the court will ordinarily set aside or vacate the award rather than modify or correct it ․ except under power conferred by statute or by the parties.”⁷

The common law adds one important vehicle for reviewing an arbitrator's award, to wit: the district court must vacate an arbitrator's award if it is based upon decisions made in manifest disregard of the law.⁸ As we stated in Graber I, “[r]eview under the manifest disregard standard does not entail plenary judicial review.”⁹

Instead, when searching for a manifest disregard for the law, a court should attempt to locate arbitrators who appreciate the significance of clearly governing legal principles but decide to ignore or pay no attention to those principles. The governing law ․ must be well-defined, explicit, and clearly applicable. Further, courts are not at liberty to set aside arbitration awards because of an arguable difference regarding the meaning or applicability of laws.10

In performing a “manifest disregard” review, the district court may not step into the shoes of the arbitrator, therefore, we conclude that the district court erred in fashioning its own remedy.

In Graber I, we remanded the matter to the district court so that it could review the arbitration record for manifest disregard of governing legal principles. Unfortunately, our Graber I opinion lead the district court to conclude that we believed the arbitrator's award was suspect. We did not intend to convey that message. Our intent was simply to remand the matter to the district court so that it could have the opportunity to conduct a “manifest disregard” review. Because the arbitrator has made specific factual findings and the district court has comprehensively examined the record, we are now able to conclude that the arbitrator's decisions were not made in manifest disregard of the law.

A decision is made in manifest disregard of the law when the arbitrator “appreciate[s] the significance of clearly governing legal principles but decide[s] to ignore or pay no attention to those principles. The governing law alleged to have been ignored must be well-defined, explicit, and clearly applicable.”  ¹¹

Graber contends that he was entitled to rescission because money damages would not provide him with an adequate remedy. Without citing any authority, Graber maintains that the arbitrator did not have discretion to award damages to him in lieu of rescission and therefore, manifestly disregarded the law.¹² We disagree.

Rescission is an equitable remedy, awarded when there is no adequate remedy at law.¹³ There is no entitlement to equitable remedies; thus, the granting or withholding of such remedies is within the court's (or arbitrator's) discretion - depending on what is reasonable under the circumstances of the case.¹⁴

We conclude that the arbitrator did not manifestly disregard the law in exercising his discretion to deny Grader's request for rescission of the 1989 agreement. The arbitrator's denial was based upon two grounds. First, the arbitrator concluded that, because Graber would not and could not offer restitution in connection with his request for rescission, rescission could not be properly granted. We conclude that this is not a manifest disregard of any applicable rule of law.

In granting rescission, a court must attempt to restore the parties to their positions before the contract was formed.¹⁵ However, “'[w]here acts of the other party render a restoration of the status quo impossible, restoration need be made only as nearly as circumstances will permit.'”¹⁶ Here, Comstock's actions did not prevent the parties from restoration to the status quo ante, it was Graber's failure to offer restitution and his inability to do so. Thus, the arbitrator did not disregard any well-defined, explicit, and clearly applicable rules of law in denying rescission of the 1989 agreement on this ground.

Second, while the arbitrator did not explicitly state that he was denying rescission “due to the availability of an adequate remedy at law,” it is clear that this was another ground for the denial. The arbitrator determined that Graber was not damaged by the 1989 agreement beyond the costs associated with the suit because the payments were applied to reduce his prior obligation as guarantor on the 1984 agreement. The arbitrator accordingly awarded damages on that basis. Because it is proper to deny rescission when there is an adequate remedy at law,¹⁷ the arbitrator did not ignore any well-defined, explicit rules of law by denying rescission of the 1989 agreement on this second ground.

The district court apparently believed that it was obliged to grant rescission as a matter of right in this case. It also appears that the court felt compelled to rescind the 1989 agreement by dictum in Graber I discussing Graber's former wife's guaranty obligation.¹⁸ Although this dictum could arguably suggest that a vacation of the arbitrator's award was mandatory upon a finding that Graber's former wife's guaranty obligation was de minimis, that was not our intent.

Certainly, if the sole reason the arbitrator denied rescission was that complete restoration was not possible, the denial would have been in manifest disregard of the law. The arbitrator has now made specific factual findings, and it is clear that his denial rested upon Graber's refusal and/or inability to offer any restitution and the availability of an adequate legal remedy. Because these grounds are sound, the arbitrator's denial of Graber's request for rescission is not in manifest disregard of the law.¹⁹ Accordingly, the district court should have confirmed the arbitrator's award.

Attorney fees

The district court awarded attorney fees to Graber based upon NRS 18.010(2)(b), which authorizes a fee award to the prevailing party “when the court finds that the claim, counterclaim, cross-claim or third-party complaint or defense of the opposing party was brought without reasonable ground or to harass the prevailing party.” The award, on this basis, is erroneous because NRS 18.010(2)(b) does not apply to fees and costs associated with arbitration.²⁰ Instead, an award of costs and fees is controlled by specific provisions of the Act.²¹

The Act prohibits the district court from awarding attorney fees incurred during arbitration unless the parties expressly agree to the contrary.²² Here, it does not appear that such an agreement exists. Therefore, the district court's award of attorney fees to Graber based upon efforts expended in arbitration is in error.

The Act does permit the district court to award costs, including attorney fees, incurred in obtaining an order confirming the arbitrator's award.²³ In this case, Comstock was the party that repeatedly sought an order confirming the arbitrator's award, yet Graber was awarded attorney fees. Thus, an attorney fee award to Graber based upon NRS 38.165 is also in error.

We also note that the district court does not have the authority to award attorney fees incurred on appeal.²⁴ The authority to award attorney fees on appeal rests with this court, and fees are only available when an appeal is taker, frivolously or has been prosecuted in a frivolous manner.²⁵

Thus, in this case, attorney fees incurred during the arbitration proceedings may be awarded to the parties only insofar as provided for in the 1989 agreement. However, the district court may use its discretion to award expenses, including attorney fees, to Comstock for efforts exerted in obtaining confirmation of the arbitrator's award, save fees incurred on appeal. We decline to award fees incurred by these parties while on appeal to this court.

CONCLUSION

We conclude that the district court did not possess the authority to modify the arbitrator's award by rescinding the 1989 loan agreement. We further conclude that the arbitrator's award was not made in manifest disregard of the law. Thus, we affirm the district court's order of judgment insofar as it confirms the arbitrator's award, reverse the portion that modifies the arbitrator's award, and remand the matter for confirmation of the arbitrator's award. finally, we conclude that NRS 18.010(2)(b) does not support an attorney fee award for efforts expended in arbitration and, accordingly, we reverse the attorney fee award to Graber and remand to the district court for reconsideration of an attorney fee award for efforts expended in obtaining confirmation of the arbitrator's award. We hereby ORDER the judgment of the district court REVERSED AND REMAND this matter to the district court for proceedings consistent with this order.

Young, J.

Shearing, J.

Becker, J.

FOOTNOTES

1.   See Graber v. Comstock Bank, 111 Nev. 1421, 905 P.2d 1112 (1995) (“Graber I”).

2.   NRS 38.015 et seq.

3.   Phillips v. Parker, 106 Nev. 415, 417, 794 P.2d 716, 718 (1990) (citing Lane-Tahoe, Inc. v. Kindred Const. Co., 91 Nev. 385, 383, 536 P.2d 491, 493 (1975)).

4.   NRS 38.135.

5.   Id. The Act also permits, on motion of a party or the court, arbitrator-made corrections and clarifications to an award pending confirmation. See NRS 38.115

6.   NRS 38.145(1) (emphasis added).

7.   4 Am. Jur. 2d Alternative Dispute Resolution § 256 (1995).

8.   See Graber I, 111 Nev. at 1126, 905 P.2d at 1115 (citing Wilko v. Swan, 346 U.S. 127 (1953)).

9.   Id. at 1428, 905 P.2d at 1116.

10.   Id. (citing Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933-31 (2nd Cir. 1986)).

11.   Id. at 14 28, 905 P.2d at 1116 (citation omitted).

12.   Graber also contends that an award of damages “flies in the face of this court's holding in Graber I ․ [because] this court did not suggest that, even if rescission were warranted, the district court could rule that the damage award was sufficient.” The primary issue in Graber I was whether the district court could confirm an arbitrator's award without reviewing the record for manifest disregard of the law. We held that it could not, and remanded the case to the district court to review the record prior to confirming or vacating the award. Graber I, 111 Nev. at 1431, 905 P.2d at 1117-18. We did not hold that the district court must award rescission if it is it is warranted.

13.   See 13 Am. Jur. 2d Cancellation of Instruments § 3 (2000); see also Las Vegas Valley Water v. Curtis Park, 98 Nev. 275, 646 P.2d 549, 551 (1082); Harmon v. Tanner Motor Tours, 79 Nev. 4, 16, 377 P.2d 622, 629 (1963).

14.   See 13 Am. Jur. 2d Cancellation of Instruments § 4; see also Bowman v. Seymour, No. 03A01-9904-CH-00158, 1999 WL 1068691, at *2 (Tenn. Ct. App. Nov. 24, 1999) (“The equitable remedy of rescission ․ is not enforceable as a matter of right, but rests within the sound discretion of the trial court”) (Citing Vakil v. Idnani, 748 S.W.2d 196 (Term. Ct. App. 1987)).

15.   See Graber I, 111 Nev. at 1429, 905 P.2d at 1116-17; see also Bergstrom v. Estate of DeVoe, 109 Nev. 575, 578, 854 P.2d 860, 862 (1993).

16.   Mackintosh v. California Fed. Sav., 113 Nev. 393, 407, 935 P.2d 1154, 1163 (1997) (quoting 17A C.J.S. Contracts § 438 (1963) (footnotes omitted) (emphasis added)).

17.   See 13 Am. Jur. 2d Cancellation of Instruments § 3 (2000); see also Las Vegas Valley Water, 98 Nev. at 275, 646 P.2d at 551; Harmon, 79 Nev. at 16, 377 P.2d at 629.

18.   In the October 1997 order requesting findings from the arbitrator, the district court laid out the three areas it would review. With respect to the third, it stated, “Whether the inability of Graber to restore the obligation of his former wife as guarantor justified the denial of rescission. It seems the Supreme Court has already answered this question.”

19.   Because we conclude that the district court must confirm the arbitrator's award, we do not reach Comstock's other arguments in support of the arbitrator's award.

20.   See County of Clark v. Blanchard Constr. Co., 98 Nev. 488, 492, 653 P.2d 1217, 1220 (1982).

21.   Id.

22.   NRS 38.125 provides in full: “Unless otherwise provided in the agreement to arbitrate, the arbitrators' expenses and fees, together with other expenses, not including counsel fees, incurred in the conduct of the arbitration, shall be paid as provided in the award.”

23.   NRS 38.165; Blanchard, 98 Nev. at 492, 653 P.2d at 1220.

24.   See Bobby Berosini, Ltd. v. PETA, 114 Nev. 1348, 1356-57, 971 P.2d 383, 387 (1998).

25.   Id. (citing NRAP 38(b)).