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Edwards v. Carey

Court of Appeals of Utah

May 4, 2017

Joseph Edwards, Appellee,
Michael Carey and Wendy Carey, Appellants.

         Third District Court, Salt Lake Department The Honorable Mark S. Kouris No. 150905215

          Andrew G. Deiss, Diana F. Bradley, Shannon Z. Peterson, and Alejandro E. Moreno, Attorneys for Appellants

          Peter W. Billings, Timothy K. Clark, Richard F. Ensor, and Michael C. Barnhill, Attorneys for Appellee

          Judge Stephen L. Roth authored this Opinion, in which Judges Gregory K. Orme and J. Frederic Voros Jr. concurred.

          ROTH, Judge.

         ¶l Michael Carey and Wendy Carey (collectively, the Careys)[1] appeal the district court's order denying their motion to compel Joseph Edwards to arbitrate his claims against them. We affirm.

          ¶2 In 1985, Edwards and Michael founded Seirus Innovative Accessories Inc. (Seirus). Each owned fifty percent of the company's stock. And since 1985, Edwards, Michael, and Wendy served together as the only members of the Seirus Board of Directors (the Board).

         ¶3 Each of the three directors also served as officers of the company. Michael was the president and, later, chief executive officer; Wendy served as its chief operations officer, and, later, its chief financial officer, secretary, and treasurer; and Edwards appears to have been the co-president, secretary, and treasurer. As officers of the company, each signed an employment agreement with Seirus. The employment agreements contained an arbitration provision:

Employer and Employee agree that any dispute or controversy arising out of or relating to any interpretation, construction, performance, or breach of this Agreement shall be settled and decided by arbitration conducted by the American Arbitration Association . . . .

         Michael's agreement also expressly stated that his ''duties as CEO are independent and in addition to any other position [Michael] may hold with Employer from time to time.''

         ¶4 In 2015, disputes arose between the parties regarding the interest rates on certain shareholder promissory notes Edwards held representing his loans to the company, which culminated with Edwards filing suit against Seirus to recover interest he alleged was due under the notes. Subsequently, Michael determined, ''in his business judgment as President and CEO, '' that Edwards' actions rendered him incapable of ''neutrally serving as an Officer of [Seirus]'' and recommended to the Board that Edwards be removed from his positions as co-president and secretary. In a board meeting on July 27, 2015 (the Meeting), Michael, the Board's chair, proposed that Edwards be removed as an officer of Seirus. Michael and Wendy voted to approve the proposal while Edwards voted to oppose it. The proposal was therefore approved by a majority of the Board, and Edwards was removed from management. Nonetheless, Edwards remained a director and member of the Board.

         ¶5 During the Meeting, Michael also proposed that the Board approve an Equity Exchange Offering (the Equity Exchange) through which the shareholders-Michael and Edwards-could choose to convert the debt Seirus owed them into equity shares in the company. As of the date of the Meeting, Seirus owed its two shareholders over $6.8 million, and Michael advised the Board that the exchange plan would ''allow Seirus to capitalize itself without having to raise funds to repay the debt, increasing cash flow, decreasing expenses and increasing profits by eliminating interest payments.'' Again, Michael and Wendy voted in favor, while Edwards voted against, and the proposal was thereby approved. Subsequently, Michael, acting as a shareholder, elected to cancel nearly $4 million of debt owed to him by Seirus, which increased his shares in the company. Edwards did not elect to cancel any debt. As a result, Michael's shareholder interest in the company increased to 55.44%, while Edwards' interest decreased proportionally to 44.56%.

         ¶6 Edwards filed suit two days after the Meeting. In his complaint, as later amended, Edwards alleged that the Careys ''engaged in efforts to remove [him] from the Company's management and to minimize his ownership position in the Company.'' Edwards identified two corporate actions in particular that led to his removal and minimized his ownership position-that during the Meeting, the Careys proposed and voted to terminate him as an officer and employee, ''provid[ing] false reasons . . . and purported reasons that were over fifteen years old and had never been raised and discussed with [him], '' and that they also proposed and voted to approve the Equity Exchange, which was ultimately exercised by Michael in his shareholder capacity to reduce Edwards' ownership in the company's stock.

          ¶7 Edwards' claims for relief focused on these two corporate actions. He claimed that Michael and Wendy, acting as directors, had conflicts of interest that justified setting aside the actions they took by vote in the Meeting; that Michael and Wendy breached the fiduciary duties they owed to Seirus and to Edwards as a shareholder; that removal of Michael and Wendy as directors was ''in the best interest of the Company''; and that Michael and Wendy, as directors, did not provide him with a fair opportunity to ''exercise his preemptive rights'' related to acquisition of stock shares, which resulted in a dilution of ''his percentage ownership of the Company's outstanding shares.'' In his prayer for relief, Edwards requested that the court declare void his termination and the ...

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