Facts

As found by panel: Bernard Bunning, respondent, was involved with several businesses, including Ares Capital Advisors, Inc., Bunning Borst Enfield & Klein, LLP (BBEK) and Tax & Financial Professional Center, Inc., (TFPC). Bunning also owned a number of companies. Negotiations took place between Bunning's companies, including BBEK and TFPC, and Tim Smith and Philip Mottini, claimants. Ares Capital Advisors Inc., represented by Bunning, entered into a Memorandum of Terms (MOT) with claimant Timothy Smith, regarding establishing a new company and assets from both parties were to be given to the new company, Valliance Capital Advisors. The MOT was non-binding.

On Dec. 10, 2004, claimant and respondent's son, Michael Bunning, signed the Operating Agreement of Valliance. On Dec. 23, 2004, a second Operating Agreement was presented for signature. This agreement contained two changes: ownership of the name Valliance was to be owned by Bunning and his son, and BBEK was to be a new member. Claimants testified there was no agreement to add BBEK as a new member.

Overall, there was no agreement between the parties on who owned Valliance, the percentages of ownership, split of profits, the operation of the company, or the ownership of the name Valliance. There were no ownership certificates and the documents, even if valid, lacked substance. The agreement between claimants and respondent was more of an informal business relationship where clients would be sold additional securities and insurance products, and the commissions would be shared. On March 27, 2005, claimants moved out of the Bunning Group facility, but continued to operate under the Valliance name.

CLAIMANTS' CONTENTIONS:
Claimants alleged that the parties entered into a non-binding MOT regarding the development of Valliance. Claimants also alleged that the parties entered into a written Operating Agreement showing that they had an ownership percentage in Valliance. They made the following claims against respondent: fraudulent misrepresentation, breach of contract, breach of fiduciary duty, unfair business practices, breach of implied covenant, and breach of settlement agreement. Claimants also denied respondent's counterclaims.

RESPONDENT'S CONTENTIONS:
Respondent denied claimants' allegations and asked the Panel to dismiss all the claims as not proper for arbitration. Respondent made the following counterclaims against claimants: conversion, slander per se, breach of contract, breach of fiduciary duty, accounting against Valliance and claimants, permanent injunction, judicial dissolution of LLC, fraud and misrepresentation against Smith, tortious interference with contract, breach of the implied covenant of good faith and fair dealing, Business and Professions Code Section 17200 violations against Smith, negligent misrepresentation, and unfair competition.

Damages

Claimants sought a declaration between claimants and respondent and his agents that all rights and obligations were terminated. They also requested the following: an order allowing claimants to collect all outstanding commissions on Valliance work without deduction; an order directing respondent to pay monetary damages to claimants of approximately $100,000; an order directing BBEK to pay off or remove claimants as guarantors on the business line of credit; an order directing BBEK to sign over to claimants all ownership interest in Valliance; a declaration stating that claimants owned the rights to the Valliance name; and an order directing BBEK to indemnify Valliance and its members against any claims arising out of advice given to any third party by BBEK or any actions by BBEK that would affect Valliance or claimants directly. Respondent requested that claimants' claims be denied and dismissed due to lack of jurisdiction over Valliance and other indispensable parties, and the fact that these indispensable parties are inextricably interwoven in this same dispute, such that FINRA arbitration is inappropriate by his amended counter-claim. Respondent requested damages against claimants that collectively exceeded $1 million. Respondent also requested that attorney fees be assessed against complainants, that respondent be awarded costs, and that claimants not be allowed to continue to use the Valliance trade.

Result

The Panel found that respondent breached the oral contract between the parties by failing to reimburse Smith for costs advanced to build office space. Respondent was ordered to pay Smith damages in the amount of $42,500. Respondent was also sanctioned in the amount of $10,000, payable to claimants, for his willful failure to produce discoverable documents. The Panel denied and dismissed with prejudice all other causes of action by claimants and respondent. Each party had to bear their own costs, including attorney fees.

Other Information

On or about March 31, 2006, the Panel reviewed and denied respondent's Motion to Dismiss, Motion to Strike Pleadings, and Demurrer. On Jan. 6, 2007, claimants' Motion to file the First Amended Complaint was granted. On Jan. 15, 2007, the Panel ordered the subject matter of the amendment to be heard before the hearing on the merits. The Panel issued an Interim Award, denying claimants' claim that an enforceable settlement agreement existed. Following the hearing on the merits, the claimants moved to amend the Statement of Claim to assert a claim for attorney fees, the respondent moved to withdraw three claims from his amended counterclaims. The Panel denied claimants' request to amend. The Panel also denied respondent's request to withdraw the counterclaims. Judson Henry, an attorney for respondent (not of record in this arbitration), contended that the panel exceeded its lawful authority in making its award because, as the foundation of its award and in order to rule as it did, the panel ruled that Valliance is not a genuine "legal entity." In the panel's own words, "[t]here was no credible evidence that the business relationship between Claimants and Respondent was ever structured or operated as a genuine, profit-making legal entity ..." FINRA Dispute Resolution, Arbitration No. 05-02206, Award, p. 13, 4. According to attorney Henry, it was respondent's position that the finding by the panel, while written as a finding of "fact," was in actuality a finding of law, namely that legal status of a California limited liability company. The determination of a legal status is always a finding of law, and a forum must have in rem jurisdiction to make such a finding lawfully. Because Valliance is not and never was itself a FINRA member, because Valliance was and is a California limited liability company in good standing at all times from its date of organization through the present, and because California Corporations Code § 17003 confers upon California limited liability companies all the rights held by natural persons, FINRA lacks jurisdiction to rule on Valliance's status, e.g. whether or not Valliance was ever "structured as a legal entity," and in doing so without proper jurisdiction, the panel exceeded its lawful authority in making its award. Because the entirety of the specific findings and dollar amount award was based upon an unlawful (for lack of jurisdiction) foundation, the award in its entirety was invalid. Respondent has filed a Petition to Vacate, Correct, and/or Abate this award in California state court, based in part on his contention the panel exceeded its authority, as well as on other improprieties. Respondent filed an action in state court back in 2005, which included all the parties to and issue of this arbitration, plus Valliance and a number of other entities and natural persons, plus a number of other issues not addressed at arbitration. This arbitration began only after petitioners successfully compelled arbitration. Attorney Henry contended that all of the issues, and involvement therein by all parties, were so inextricably interwoven that all issues, and therefore the rights and obligations of all involved parties, can only be resolved together, simultaneously, within one case inside a single forum. Because California state court is the only forum that may constitutionally and otherwise lawfully assert in personum jurisdiction over all parties (entities and natural persons), in rem jurisdiction over the status of all entities and the status of natural persons therein, and subject matter jurisdiction over all issues, only a state court action can fully and finally resolve this dispute. Attorney Henry contended and it is respondent's position that the state court in 2005, in its desire to further the policy that favors arbitration, erred in that it failed to consider that this case cannot be resolved in arbitration and so failed to note that, despite the general policy, this is an instance of a case that should not have been compelled to arbitration. Attorney Henry pointed out the panel itself noted the existence of at least one unaddressed issue and party. FINRA Dispute Resolution, Arbitration No. 05-02206, Award, p. 9, footnote 2. Further, the panel itself described the extensive number of witnesses (20), exhibits ("hundreds of pages"), and hearing sessions "9 days" (FINRA Dispute Resolution, Arbitration No. 05-02206, Award, p. 6, 8), and yet in the end, the panel issued its actual dollar award on nothing other than "an oral contract between Claimants and Respondent and that Respondent breached that contract by failing to reimburse Claimant Tim Smith for costs advanced to build out office space for the business enterprise and the partial pay off the VFA line of credit. Accordingly, respondent is liable to and shall pay Claimant Tim Smith damages in the amount of $42,500.00." FINRA Dispute Resolution, Arbitration No. 05-02206, Award, p. 14, Award 2 (enumerated). Attorney Henry contended the award itself read as if petitioners loaned respondent some cash for some office improvements, such as cubicles, and petitioners initiated arbitration to get paid back. Obviously, based on the arbitration record and award as well as the associated state court record, all amassed from 2005 through the present, the underlying dispute in this case involved substantially more than payment for some cubicles. This arbitration has clearly not resolved the underlying dispute, and has not even come anywhere close, and this very clearly illustrated the unavoidable fact that the FINRA arbitration forum simply lacks the jurisdictional authority that is necessary in this case to truly and fully resolve the underlying dispute with finality. For these reasons, as well as other reasons not discussed for this article, pending the outcome of his Petition to Vacate, Correct, and/or Abate the Arbitration Award, respondent in all likelihood will appeal any unfavorable ruling on his current Petition, and at the same time appeal the 2005 ruling that compelled arbitration. ARBITRATORS: Joseph A. Lasky, public arbitrator, presiding chair; Robert A. Bleicher, public arbitrator; Gerald Joseph Wilfley, non-public arbitrator.