McEnery v. McEnery

Background

John P. McEnery and Defendants Tom McEnery, Martin Menne, and MCM Diversified held ownership interests in Urban Markets, LLC and Urban Markets Entertainment, LLC. Through those companies, the parties operated San Pedro Square Market in San Jose. The companies’ operating agreements required a member seeking to sell an interest to notify the other members, who had a right of first refusal.

After the Market effectively shut down for a time during the COVID-19 pandemic, the companies made capital calls instead of distributions. In approximately July 2020, McEnery decided to sell his interests. The parties disputed the process and price for the sale. In July 2021, Defendants demanded arbitration, arguing that McEnery had attempted to sell his interests to a third party without allowing Defendants to exercise their right of first refusal.

McEnery later filed this federal action, asserting one claim for intentional interference with prospective economic relations based on Defendants’ alleged interference with his efforts to sell his interests. The court compelled arbitration and stayed the federal case. The arbitrator allowed McEnery to add that claim to his arbitration cross-claims.

After an evidentiary hearing, the arbitrator issued an Interim Award on March 8, 2023. The arbitrator found that McEnery breached the operating agreements and concluded that MCM Diversified was entitled to specific performance, meaning an order requiring the promised transaction to occur. McEnery was required to sell, convey, and transfer all of his interests in the companies to MCM Diversified for $726,667.67. The arbitrator later issued a Final Award finding MCM Diversified and Tom McEnery to be the prevailing parties and awarding them attorneys’ fees and costs. A corrected Final Award followed on June 12, 2023.

McEnery filed a petition in Santa Clara Superior Court seeking to vacate, or set aside, the corrected award. That court denied the petition to vacate on February 27, 2024, and denied Defendants’ request to confirm the award without prejudice because the federal case had been stayed and the federal court should consider confirmation first. Defendants then moved in this court to confirm the award.

Challenge to the Arbitration Award

Under Section 9 of the Federal Arbitration Act, a court generally must confirm an arbitration award unless it has been vacated, modified, or corrected. Section 10(a) provides limited grounds for vacating an award, including corruption or fraud, evident partiality by the arbitrator, serious misconduct involving the hearing or evidence, or the arbitrator’s exceeding of his powers.

McEnery argued that the award should be vacated under Section 10(a)(3) because the arbitrator failed to reopen the hearing to consider a valuation he obtained after the Interim Award. The court stated that the request appeared untimely because the Federal Arbitration Act requires notice of a motion to vacate, modify, or correct an award within three months after the award is delivered or filed. The court also questioned whether it could reconsider challenges that McEnery had raised in the state-court proceeding, where Judge Frederick S. Chung had rejected them. McEnery did not respond to Defendants’ timeliness argument.

The court nevertheless addressed the substance of the challenge. It concluded that the arbitrator had considered McEnery’s new evidence, including the declaration from his appraiser, but rejected McEnery’s request to modify or reconsider the Interim Award. The court stated that McEnery’s disagreement with the arbitrator’s decision was not a proper basis for vacating the award. The court therefore held that controlling law required confirmation.

Attorneys’ Fees and Costs

Defendants also requested additional attorneys’ fees and costs incurred after the corrected award, including work opposing McEnery’s state-court petition to vacate and filing the federal motion to confirm. The court found that the operating agreements authorized recovery by the prevailing party for fees connected with the arbitration. It determined that the work opposing the petition and seeking confirmation was connected with the arbitration.

Defendants requested $111,244 in fees and $2,451.10 in costs. The court deducted $2,759 for 17.80 hours billed for work performed by Shaela Prince before her admission to the State Bar of California. It declined to reduce the award for the challenged billing practices and internal conferences. It also declined to award additional fees for work in 2022 that Defendants did not show was incurred in connection with the arbitration.

Disposition

The court GRANTED the motion to confirm the arbitration award. It awarded Defendants $108,485 in additional attorneys’ fees and $2,451.10 in additional costs. The Clerk was directed to enter judgment for Defendants against McEnery. The case remained closed, and the court TERMINATED AS MOOT the motion to lift the stay.