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Salsitz v. Kreiss

IN THE SUPREME COURT OF THE STATE OF ILLINOIS


December 1, 2000

NEIL SALSITZ ET AL., APPELLANTS, V. FRITZ KREISS ET AL., APPELLEES.

The opinion of the court was delivered by: Justice Heiple

Agenda 29-September 2000.

Under Supreme Court Rule 307(a), does a party who fails to appeal from an order denying a stay of arbitration lose the opportunity to contest the arbitrability of the dispute in a subsequent appeal of the arbitration award? The answer is yes.

In 1996 and 1997, plaintiffs Neil Salsitz, Biago D'Ugo and New Horizons Productions, Ltd., participated in arbitration of a dispute they had with defendants Fritz Kreiss and Alternative Utility Services of IL, Inc., over a joint business venture. On August 8, 1997, plaintiffs filed a complaint in the circuit court of Cook County seeking an injunction to stay the arbitration on the grounds that the matter was not subject to arbitration. On August 19, 1997, the circuit court denied the request for injunction. Plaintiffs did not appeal this order. After due notice to plaintiffs, final arbitration hearings were held on December 10 and 11, 1997. Plaintiffs did not appear at these hearings. On January 10, 1998, an arbitration award of $3,761,174.40 in compensatory damages and $1,250,000 in punitive damages was entered in favor of defendants. Plaintiffs did not move to reopen the arbitration hearings. The circuit court confirmed the award of compensatory damages, but rejected the punitive damages award.

On appeal, plaintiffs argued that the circuit court erred in denying their request for a stay of arbitration because the dispute was not subject to arbitration. The appellate court held that it had no jurisdiction to entertain this argument because plaintiffs failed to file an interlocutory appeal from the circuit court's denial of their motion to stay arbitration. 311 Ill. App. 3d 590, 593. The appellate court then affirmed the circuit court's confirmation of the arbitration award. 311 Ill. App. 3d at 596.

Before this court, plaintiffs renew their contention that the dispute is not subject to arbitration, and assert that the appellate court erred in holding that it lacked jurisdiction to entertain this contention. Plaintiffs concede that Rule 307(a) authorizes the interlocutory appeal of a denial of a motion to stay arbitration, but argue that such an interlocutory appeal is not required in order to preserve the issue of nonarbitrability. Plaintiffs are incorrect. Rule 307(a) lists specific types of interlocutory orders which are immediately appealable, and provides that "the appeal must be perfected within 30 days from the entry of the interlocutory order ***." If no appeal is taken from one of the types of orders enumerated in Rule 307(a), the order becomes final and is not subject to subsequent challenge on appeal. To the extent they conflict with this holding, Anderson v. Financial Matters, Inc., 285 Ill. App. 3d 123, 135 (1996), and Alpine Bank v. Yancy, 274 Ill. App. 3d 766 (1995), are overruled. Because plaintiffs did not appeal the circuit court's denial of their motion to stay arbitration, they may no longer contest the arbitrability of the dispute.

Plaintiffs also raise several arguments contesting the arbitration award itself. First, plaintiffs contend that the arbitrator should not have proceeded with arbitration when plaintiffs failed to appear at the hearings on December 10, 1997. As the appellate court noted, however, the rules of the American Arbitration Association, which govern this dispute, specifically permit the arbitrator to proceed in the absence of any party who, after due notice, fails to obtain a postponement. 311 Ill. App. 3d at 594. Furthermore, after the close of the hearings, plaintiffs failed to file a motion to reopen the hearings. We find no error in the arbitrator's decision to proceed with the hearings.

Plaintiffs next argue that the arbitration award was unjustified because the contract between the parties was mutually rescinded when defendants returned plaintiffs' original monetary investment to plaintiffs prior to arbitration. Plaintiffs overlook, however, the fact that defendants' dispute with plaintiffs centered primarily on plaintiffs' use of confidential proprietary information concerning defendants' company. The mere return of plaintiffs' investment thus did not suffice to rescind the contract.

Plaintiffs also contend that alleged ex parte communications between plaintiffs and the arbitrator during the arbitration process are grounds for reversal of the award. Plaintiffs failed to disclose these alleged contacts, however, until after the award was entered, and have therefore waived any objection.

Finally, plaintiffs argue that the circuit court erred in failing to hold an evidentiary hearing on their complaint objecting to the arbitration award. As the appellate court noted, however, the circuit court was required, in considering defendants' motion to dismiss plaintiffs' complaint, to accept the allegations of the complaint as true. 311 Ill. App. 3d at 595. Because the circuit court in making its ruling viewed the allegations of the complaint as true, there was no need to hold an evidentiary hearing to ascertain their truth.

The judgment of the appellate court is affirmed.

Affirmed.

CHIEF JUSTICE HARRISON, dissenting:

The answer to the question posed by the majority at the outset of its opinion is not yes. It is no. A party who decides against bringing an immediate appeal of an interlocutory order denying a stay of arbitration does not lose the opportunity to contest the arbitrability of the dispute in a subsequent appeal of the arbitration award.

Orders of the circuit court to compel or stay arbitration are injunctive in nature and subject to interlocutory appeal under Supreme Court Rule 307(a)(1) (166 Ill. 2d R. 307(a)(1)). Notaro v. Nor-Evan Corp., 98 Ill. 2d 268, 271 (1983). Rule 307 confers on parties the right to appeal certain interlocutory orders before entry of final judgment. It does not, however, require them to take such appeals. Under the rule, parties have the option of waiting until after final judgment has been entered to seek review of the circuit court's interlocutory order. See Anderson v. Financial Matters, Inc., 285 Ill. App. 3d 123, 135 (1996); Alpine Bank v. Yancy, 274 Ill. App. 3d 766, 768 (1995); Davis v. Bughdadi, 120 Ill. App. 3d 236, 241 (1983).

The optional nature of Rule 307 is manifest from the language it employs. Rule 307 plainly states that an appeal "may" be taken to the appellate court from any of the enumerated interlocutory orders. 166 Ill. 2d R. 307. Use of the word "may" is generally regarded as indicating that action is permissive rather than mandatory. See People v. Reed, 177 Ill. 2d 389, 393 (1997). There is no basis for construing the term differently here.

The permissive language used by Rule 307 is shared by this Court's Rule 306 (166 Ill. 2d R. 306), which authorizes parties to petition for immediate appeal from certain other interlocutory orders. Among the orders subject to interlocutory appeal under Rule 306 are orders granting or denying motions for a transfer of venue. Where the circuit court orders transfer to another venue, a party may petition for immediate review under Rule 306. The failure to seek such review, however, does not preclude a party from challenging the circuit court's order later, after final judgment has been entered. See, e.g., American International Hospital v. Chicago Tribune Co., 120 Ill. App. 3d 435, 438-39 (1983).

The same is true under our court's Rule 308 (155 Ill. 2d R. 308), which authorizes parties to seek immediate review of an interlocutory order where the circuit court has made a written finding that the order involves a question of law as to which there is substantial ground for difference of opinion and that an immediate appeal may materially advance the ultimate termination of the litigation. As in the case of Rule 306, the failure of a party to exercise its option of seeking immediate review under Rule 308 is not fatal to the party's right to challenge the court's interlocutory order following entry of final judgment. To the contrary, "[a] request for an interlocutory appeal, under Rule 308, is entirely optional; nothing in Rule 308 or in case law suggests that failure to assert one's rights under the rule amounts to waiver of the issue." Prosen v. Chowaniec, 271 Ill. App. 3d 65, 68 (1995).

An analogous situation is also presented by our Rule 604(f), which provides that a defendant "may" appeal to the appellate court from the denial of a motion to dismiss a criminal proceeding on grounds of former jeopardy. 145 Ill. 2d R. 604(f). That rule "does not mandate that a defendant file an interlocutory appeal; rather, by using the word `may' it merely provides a defendant with the option of doing so." People v. Franklin, 159 Ill. App. 3d 56, 60 (1987). If a defendant elects not to exercise that option, he may still assert a double jeopardy claim on appeal from his conviction and sentence. Franklin, 159 Ill. App. 3d at 60.

Were we dealing here with statutes, there would be no question that the foregoing provisions, all of which pertain to interlocutory appeals, should be read consistently. As a general rule, statutes which relate to the same thing, subject, or object are deemed to be in pari materia and should be construed together. People ex rel. Daley v. Datacom Systems Corp., 146 Ill. 2d 1, 17-18 (1991). Courts presume that statutes which relate to one subject were intended by the legislature to be consistent and harmonious with each other. Collins v. Board of Trustees of the Firemen's Annuity & Benefit Fund, 155 Ill. 2d 103, 111-12 (1993). Further, the same words used in different sections of a statute should be given a consistent meaning unless legislative intent to the contrary is clearly evident. See Mirabella v. Retirement Board of the County Employees' Annuity & Benefit Fund, 198 Ill. App. 3d 971, 974 (1990).

Although the present dispute involves rules of court rather than statutes, these principles apply with equal force. Our rules of court are construed in the same manner as statutes. In re Estate of Rennick, 181 Ill. 2d 395, 404 (1998); 134 Ill. 2d R. 2. That being so, I fail to see how Rule 307 can be given a mandatory construction when Rules 306, 308, and 604(f) are not.

If a party seeks to take an appeal under Rule 307, he must file a notice of appeal within 30 days (166 Ill. 2d R. 307), just as a party wishing to appeal under Rule 306 must file his petition within 30 days (166 Ill. 2d R. 306(b)), a party wishing to appeal under Rule 308 must make application within 14 days (155 Ill. 2d R. 308(b)), and a defendant wishing to appeal under Rule 604(f) must file a notice of appeal within 30 days (134 Ill. 2d R. 606(b)). If that deadline is not met, the party who is unhappy with the circuit court's order can still request that the circuit court reconsider its decision. That is so because a trial judge may review, modify, or vacate an interlocutory order at any time before final judgment, even if the original order was immediately appealable. See Kemner v. Monsanto Co., 112 Ill. 2d 223, 240-42 (1986). The order at issue cannot be appealed to a higher court, however, until final judgment is entered in the case. The period for filing an interlocutory appeal is jurisdictional, and its expiration precludes appellate review during the pendency of the case. Odom v. Bowman, 159 Ill. App. 3d 568, 571 (1987).

Once final judgment has been entered, as it has been in the case before us today, all prior orders which were not final when entered become appealable. Burtell v. First Charter Service Corp., 76 Ill. 2d 427, 433 (1979). That is so even if such orders could have been the subject of an interlocutory appeal but were not. The appellate court in this case was therefore wrong to hold that plaintiffs' failure to bring an interlocutory appeal under Rule 307 deprived the court of jurisdiction to consider plaintiffs' contention that they should not have been compelled to arbitrate their dispute with defendants.

Decisions by the Second District (Anderson v. Financial Matters, Inc., 285 Ill. App. 3d 123, 135 (1996); Alpine Bank v. Yancy, 274 Ill. App. 3d 766, 768 (1995)) and the Fifth District (Davis v. Bughdadi, 120 Ill. App. 3d 236, 241 (1983)) of the appellate court directly support this view. Both districts have correctly held that the failure to seek review of an interlocutory order under Rule 307 does not preclude a subsequent challenge to that order on appeal from the circuit court's final judgment. Although the First District has held otherwise (Hwang v. Tyler, 253 Ill. App. 3d 43, 45-46 (1993); Safeway Insurance Co. v. American Arbitration Ass'n, 247 Ill. App. 3d 355, 358 (1993)), its opinions are fatally flawed by the same analytical error made by the majority in this case. They focus exclusively on the technical requirements for perfecting an interlocutory appeal and completely overlook the earlier provisions in the rule governing whether a party is required to bring such an appeal in the first instance. Their analysis ignores the rule's permissive language and fails to interpret the rule's clear and unambiguous provisions in accordance with accepted rules of statutory construction. Accordingly, it is those decisions, rather than Anderson v. Financial Matters, Inc., 285 Ill. App. 3d 123 (1996), and Alpine Bank v. Yancy, 274 Ill. App. 3d 766 (1995), that should be overruled.

For the foregoing reasons, I respectfully dissent.

JUSTICES FREEMAN and McMORROW join in this dissent.

JUSTICE FREEMAN, also dissenting:

I agree with Chief Justice Harrison that the language of Supreme Court Rule 307(a)(1) is permissive rather than mandatory. I also agree with Chief Justice Harrison that Rule 307(a)(1) must be construed in pari materia with Supreme Court Rules 306, 308 and 604(f). Therefore, I join his dissent.

I write separately to note that the majority opinion works an injustice upon plaintiffs. According to the majority, plaintiffs had to file an interlocutory appeal within 30 days of the order denying the stay of arbitration. Having failed to do so, plaintiffs cannot argue that the contract was not subject to arbitration. However, the chancery division of the circuit court (chancery court) did not resolve the issue of arbitrability in the order denying the stay. Rather the issue was left for the arbitrator to decide. Given these circumstances, plaintiffs should not be foreclosed from a review of their claim that the contract was not subject to arbitration.

The facts set forth in the majority opinion require elaboration. On March 9, 1994, plaintiffs, Neil Salsitz and Biago D'Ugo, each executed a letter of understanding, dated as of November 17, 1993, whereby Salsitz and D'Ugo agreed to invest $6,500 in defendant Alternative Utility Services of IL, Inc. (AUS). Defendant Fritz Kreiss executed the letters of understanding as president of AUS. The letters of understanding do not contain an arbitration clause. Also on March 9, 1994, Salsitz and D'Ugo each executed a document denominated:

"Addendum 1, Letter of Understanding dated November 17, 1993

INCENTIVE STOCK OPTION PROGRAM."

These documents contained an arbitration clause providing in part:

"In the event there are any claims or disputes between PARTIES hereto, such claims or disputes shall be submitted by the PARTIES for resolution and binding arbitration within Lake County, IL, in accordance with the rules of the American Arbitration Association as in effect under IL law."

On June 17, 1994, Salsitz and D'Ugo requested the return of their investment. On July 21, 1994, Kreiss returned Salsitz's and D'Ugo's original investment. Salsitz and D'Ugo then filed suit in the municipal division of the circuit court (municipal court) for breach of contract and fraud, seeking $29,888.58 in unpaid expenses.

Kreiss and AUS moved to dismiss the municipal court action based upon the presence of the arbitration clauses in the addenda. Salsitz and D'Ugo filed a response denying that they agreed to arbitrate the claims at issue, arguing that there was no agreement to arbitrate since the arbitration clauses were in the addenda, not the letters of understanding. Salsitz and D'Ugo also argued that the contracts had been rescinded.

On February 15, 1995, the municipal court ordered the civil action stayed and directed that the arbitrator determine whether particular matters were arbitrable. Salsitz and D'Ugo did not pursue arbitration. However, Kreiss and AUS filed their own demand for arbitration on November 16, 1995. In their demand for arbitration, Kreiss and AUS sought an injunction preventing Salsitz, D'Ugo and New Horizon Productions, Ltd., from unfairly competing with AUS, and they sought monetary damages for violation of the Illinois Trade Secrets Act, for tortious interference with defendants' existing contracts and with prospective business relations, for breach of contract, and for breach of fiduciary duty. On November 17, 1995, Salsitz and D'Ugo nonsuited the action in municipal court. At that point, all that remained before the court was Kreiss' and AUS's demand for arbitration.

Several arbitration hearings were held in 1996 and 1997. On August 8, 1997, Salsitz, D'Ugo and New Horizon Productions, Ltd. (collectively plaintiffs), filed a verified complaint in chancery court for declaratory and injunctive relief, seeking to stay and permanently enjoin the arbitration proceedings on the grounds that no agreement to arbitrate existed. Plaintiffs also sought a declaration that the arbitration clause was invalid or non-binding. Plaintiffs also filed an emergency motion for a temporary restraining order, which was denied as not constituting an emergency. On August 19, 1997, the chancery court denied plaintiffs' request to stay the arbitration proceedings. As explained by the court at a later hearing:

"This case first came to this Court during the pendency of an arbitration hearing. At that time, on or about August 19, 1997, then Counsel for Plaintiffs Salsitz, D'Ugo and the New Horizon Productions asked this Court to stay an arbitration proceeding commencing between the parties. The issue addressed during the emergency motion was a determination as to the arbitrability of the issues. Although this Court did not enter a stay of the arbitration Proceedings at that time, the Court did leave it open for parties to address the issue at a later date."

The arbitration continued. The parties were notified by the arbitrator that the final arbitration hearings would be held on December 10, 1997. Plaintiffs did not appear for those hearings. The arbitrator heard evidence from defendants regarding damages that they sustained. On December 11, 1997, the arbitrator declared the hearings closed, and issued a notice to plaintiffs on December 24, 1997. The notice informed plaintiffs that the arbitrator would issue an award within 30 days. Plaintiffs did not file a motion to reopen the hearings. On January 10, 1998, the arbitrator awarded defendants $3,761,174.40 in actual damages, and $2.5 million in punitive damages.

On June 12, 1998, plaintiffs amended their complaint to add a count seeking to vacate the arbitration award. Plaintiffs alleged that the arbitration award was obtained through undue means, citing misleading communications between the arbitrator and plaintiffs. Plaintiffs also complained that the arbitrator should not have conducted the hearing on December 10, 1997, in plaintiffs' absence, and should not have closed the hearings without giving plaintiffs an opportunity to present evidence. Plaintiffs alleged that they did not know the law firm, which had represented plaintiffs at the earlier hearings, had decided to cease representing plaintiffs and, consequently, did not appear on plaintiffs' behalf at the hearing on December 10.

Defendants filed an application for confirmation of the arbitrator's award and a motion to dismiss plaintiffs' amended verified complaint. At a hearing on January 29, 1999, the chancery court noted that the issue of arbitrability and defendants' motion to dismiss plaintiffs' amended complaint were intertwined. The court stated that it would first "address whether or not there could be arbitration of the agreement or agreements involved in the business relationship that was entered into by the parties." The court believed, however, that it could not upset or invalidate the arbitrator's ruling as to the arbitrability of the issues because the arbitrator's ruling was entitled to deference. The court reasoned:

"[T]he Court finds that it cannot upset or invalidate the arbitrator's rulings as to the arbitrability of the issues ***. The Court and the parties are both aware that-this is in parenthesis. Now I am quoting a case `Judicial review of arbitration award is restricted. Courts encourage settlement of disputes by arbitration; and accordingly, judicial review of an arbitration award is more limited than Appellate review of a Circuit Court's decision. Courts must construe an arbitration award whenever possible to uphold their validity. Limited judicial review fosters the long accepted and encouraged principles that arbitration awards should be the end and not the beginning of litigation.' "

The court dismissed plaintiffs' amended verified complaint, affirmed the arbitrator's award of actual damages, and vacated the award of punitive damages.

Within 30 days after this final ruling, plaintiffs filed an appeal from the order dismissing the amended verified complaint. Defendants moved to dismiss the appeal as untimely under Rule 307(a)(1). Defendants argued, inter alia, that plaintiffs should have filed an interlocutory appeal from the denial of plaintiffs' motion to stay the arbitration proceedings. Since plaintiffs failed to file an interlocutory appeal, they forfeited their right to contest the arbitrability of the contract. The appellate court granted the motion to dismiss as to the issue of arbitrability, but denied the motion as to the remaining issues. Having considered those issues on the merits, the appellate court affirmed the chancery court's order. 311 Ill. App. 3d 590. Plaintiffs then filed a petition for leave to appeal in this court.

According to the majority, plaintiffs had to file an interlocutory appeal from the order of August 19, 1997, in order to preserve the issue of arbitrability. It is clear, however, that the issue of arbitrability was not yet decided. When the chancery court denied plaintiffs' motion for a stay of arbitration, the court left the issue of arbitrability for the arbitrator to decide. It was on January 10, 1998, that the arbitrator issued its award, finding that the contract, and defendants' claims, were subject to arbitration. Since the issue of arbitrability had not been decided as of August 19 or even September 19, 1997, the cutoff date for an interlocutory appeal from the August 19 order, it is troublesome to require that plaintiffs have filed an interlocutory appeal by September 19 in order to preserve this issue. I believe that a timely objection to arbitrability of an issue preserves for review the question of whether the parties agreed to arbitrate the issue, even where the parties complete the arbitration. See Bisluk v. Town Realty, Inc., 90 Ill. App. 3d 1039 (1980); Ozdeger v. Altay, 66 Ill. App. 3d 629 (1978); 710 ILCS 5/12(a)(5) (West 1996).

My reading of the facts of this case is in keeping with the chancery court's explanations of its actions. As noted above, as late as January 1999, the chancery court believed that the issue of arbitrability was subject to review. Indeed, the court ruled on the issue. However, because the chancery court believed that the arbitrator's ruling on arbitrability was subject to deference, the court determined not to upset the ruling.

The question in this case is whether plaintiffs waived the issue of arbitrability by failing to file an interlocutory appeal on September 19, 1997, even though the issue of arbitrability had not yet been decided. The majority answers yes. I respectfully dissent.

20001201

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