California Mediation and Arbitration

Arbitration/Fees/Construction of Agreement/Mediation/Settlement Agreement: Limiting Language in Settlement Agreement Required Arbitrator, Not Court, To Determine Fees

"Customary Provision Allowing for the Award of Legal Fees in Any Action on a Contract" Was Missing Here 

     This case presents a common issue: whether a prevailing party must seek fees from the arbitrator or from the trial court. Here, the issue was resolved by express, non-standard language in a settlement agreement. DeSena v. Richert, C070461 (3d Dist. May 13, 2013) (Butz, J., author 3:0).

     Plaintiff settled a neighbor dispute during mediation. The settlement agreement provided that the mediator could resolve future disputes acting as an arbitrator. Sure enough, disputes arose, the mediator cum arbitrator resolved the disputes in favor of Plaintiff, and Plaintiff was thus the prevailing party. As the prevailing party, Plaintiff expected to recover fees based on a contractual fee provision in the settlement agreement. Consequently, Plaintiff appealed after the superior court judge denied her motion for legal fees incurred to confirm the ruling of the mediator acting as an arbitrator.

     Plaintiff ended up cornered by the language of the settlement agreement. "The intent reflected in the terms of the . . . settlement . . . was for the parties to bear their own costs and legal fees except in matters relating to the enforceability and interpretation of the settlement agreement (undoubtedly as a way to avert any subsequent truculence about settling the dispute). This exception, however, is limited to issues of enforceability and interpretation submitted to the mediator for binding arbitration, as to which the mediator possesses sole discretion to award costs or legal fees." Here, because the Plaintiff did not submit the fee issue to the arbitrator, Plaintiff was unable to recover fees. Focusing on the language of the settlement agreement, the Court of Appeal pointed out," this is not the equivalent of the customary provision allowing for the award of legal fees in any action on a contract . . . . "

     Judgment affirmed.

Arbitration/Consumers/Fees: Sorry, Wrong Number – Court of Appeal Rejects Cingular Wireless Customer’s Claim That Fees Incurred Successfully Opposing Arbitration Before Concepcion Was Decided Amounted To Damages

Concepcion Looms Large, As Court Summons “Large Animal” and “Tanker of Ink”Images For The Case -- And Its Wake

     The issue in Selby v. Cingular Wireless LLC, Case No. G045769 (4th Dist. Div. 3 January 29, 2013) (Bedsworth, J., author 3-0) (unpublished), was whether the customer of a cell phone carrier could state damage under the California Legal Remedies Act (CLRA) because she had incurred legal fees successfully opposing Cingular’s motion to compel arbitration back in 2005.  Unless the plaintiff suffers some “damage” from enforcement of a contract provision alleged to violate the CRLA, the plaintiff lacks standing to sue under the CRLA.  Meyer v. Sprint Spectrum L.P., 45 Cal.4th 634 (2009).

      Unfortunately for the plaintiff, none of the contractual provisions she claimed violated the CLRA had ever been enforced against her (with one exception), and therefore under Meyer, she could not state a claim for damages as to those claims.  The one exception was that back in 2005, she had successfully opposed Cingular’s motion to compel arbitration, thereby incurring fees -- arguably “transaction costs” constituting damages.

     As to the motion to compel arbitration, however, AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011) has changed the legal landscape.   In the colorful language of Justice Bedsworth, Concepcion is “so significant a tanker of ink has been spilled about it in less than two years after it was handed down . . . . Concepcion is the large animal in this room.”

Tanker of oil.  Public domain work of sailor or employee of U.S. Navy.  Wikimedia Commons.

      Concepcion – a case involving the very same defendant, Cingular (called AT&T in the opinion) – held that the Federal Arbitration Act made arbitration agreements valid and enforceable, save “upon such grounds as exist in law or in equity for the revocation of a contract.”  The most common exception under the “savings clause” is unconscionability of the contract.   In Selby, however, the Court believed that it would be “a perversion of state law unconscionability doctrine” to apply the doctrine to a situation in which the consumer “picked the fight in the first place,” making no claims of “any damage” arising from the non-arbitration she attacked.  Her costs, Justice Bedsworth wrote, “are the legal equivalent of a self-inflicted wound, and cannot be regarded as recoverable transaction costs.”  Selby’s claims based on Cingular’s enforcement of its arbitration right, covered by Concepcion and the FAA, lacked merit. 

     Judgment affirmed. 

Margate Elephant, Margate City, Atlantic County, N.J.  U.S. Government photo.  Library of Congress.

Arbitration/1286.2 Vacatur: Second District, Div. 2 Affirms Judgment Confirming Arbitration Award in Attorney-Client Fee Dispute

“Manifest Disregard of the Law” Doctrine Inapplicable to Arbitrator’s Decision Concerning Attorney’s Fees Dispute Between Law Firm and Client

     Appellant Fuchs & Associates, Inc. (Law Firm) sued former client, Elke Lesso, for unpaid attorney’s fees of $647.688.13.  An arbitrator found Law Firm was not entitled to recover additional fees, and its attorney fee lien was invalid.  On appeal, the Law Firm attacked the arbitration award – unsuccessfully.  Fuchs & Associates, Inc. v. Lesso, Case No. B239246 (2nd Dist. Div. 2 January 8, 2013) (Doi Todd, Acting P.J., author) (unpublished). 

     The Court of Appeal rejected arguments that the Arbitrator exceeded his powers by rewriting the fee agreement, failing to decide issues submitted, or deciding issues not submitted.  The Court also rejected an argument that the arbitration hearing should have been continued, because the Law Firm did not identify what additional evidence it wished to present that it was precluded from presenting, or how it was prejudiced.

     The Law Firm also argued that the arbitration award should be vacated because of the Arbitrator’s “manifest disregard of the law.”  This is a basis for rejecting an award in federal cases, but in state cases, a strict review standard for legal error “does not include a ‘manifest disregard’ exception, while at the same time leaving open the possibility of greater judicial review . . . in the case of rulings inconsistent with the protection of statutory rights.”  (citing Pearson Dental Supplies, Inc. v. Superior Court, 48 Cal.4th 665, 679, n. 3 (2010)). 

      Evidently, however, the Court of Appeal viewed this attorney-client fee dispute as a private affair that did not trigger protection of statutory rights and heightened scrutiny, for it observed:  “[Law Firm] has not cited any authority showing than an arbitrator’s decision on a law firm’s action for attorney fees has ever been reviewed on the merits by a trial court under the exceptional circumstances involving a statutory or public policy decision.”

     Is it possible that the Court’s view of the case was somewhat colored by Law Firm’s failure to “advise Lesso to seek independent legal counsel before she signed the loan” (to make possible the payment of in pendente lite attorney fees); by Law Firm’s concession “that it did not inform Lesso that it would be taking the position that the [attorney’s fees] lien would attach to all of her assets”; or by the fact that at the time of the arbitration, the attorney had been disciplined by the State Bar three times?  See Fuchs & Associates, Inc., n. 3.

Arbitration/Scope/Fees: Court of Appeal Affirms Arbitration Award Leaving Out Attorney Who Refused Arbitration

Standing On One’s Right May Not Always Be The Best Way To Protect One’s Rights

     The stake in the next case was a share of a $380,000 attorney’s fees award in a class action lawsuit.  The parties included the class, whose representative was McCall, and two law firms that had represented the class:  Morris Polich & Purdy (Morris) and The Quisenberry Law Firm (Mr. Quisenberry).   McCall, Plaintiff and Respondent, v. Morris Polich & Purdy et al., Defendants and Respondents; The Quisenberry Law Firm, Objector and Appellant, Case No. B239142 (2nd Dist. Div. 5 October 30, 2012) (Turner, J.) (not for publication). 

     Morris represented the clients first, substituting out in favor of Mr. Quisenberry, the attorney who actually negotiated the settlement on behalf of the class.  Morris, which had an arbitration provision in its fee agreement, arbitrated with the class, and based on quantum meruit, was awarded 65% of the award – $270,000.  The arbitrator also held that Mr. Quisenberry was entitled to 35% of the award, though Mr. Quisenberry was not a party to the arbitration provision, and had in fact successfully resisted efforts of Morris to compel Mr. Quisenberry to arbitrate.  The superior court confirmed the award in favor of Morris, but corrected the arbitrator’s award by deleting the 35% allocation in favor of Mr. Quisenberry, because the issue of Mr. Quisenberry’s rights to fees was not part of the “controversy submitted” to the arbitrator.  Mr. Quisenberry appealed from the judgment correcting and confirming the arbitration award.

     Affirmed. 

     Standing on his rights, Mr. Quisenberry asserted the arbitrator did not have the power to allocate the fee, as Mr. Quisenberry was not a party to the arbitration, and the Court of Appeal agreed:  the allocation to Mr. Quisenberrry was in excess of the arbitrator’s powers.  However, the Court of Appeal found no basis for overturning the quantum meruit award in favor of Morris.

     Mr. Quisenberry also argued that “the award as corrected interferes with and constitutes an involuntary forfeiture of his property rights.”  But the Court of Appeal was entirely unsympathetic to that claim.  The superior court judge had earlier ruled:  “If [Mr. Quisenberry] refuses to participate in the arbitration, [he] will have little practical opportunity to provide input to the arbitrator.”  The judge called that one correctly.  The Court of Appeal pointed out that Mr. Quisenberry could have protected his rights by participating in the arbitration, or filing suit to adjudicate his rights to the attorney’s fees fund, instituting litigation to bring in all interested parties (Cal. Code Civ. Proc. section 1281(c), and seeking to stay the arbitration to resolve the dispute in a judicial forum.

      But by standing on his right not to arbitrate, “Mr. Quisenberry’s [sic] declined to opt for any of these courses of action to protect his rights.” 

Arbitration/Fees/: HOA’s Dismissal of Arbitration Against Management Company Results In Award of Attorney’s Fees Against HOA

HOA Was Not Spared Fees Because It Initiated Arbitration, And Fees Clause Was Broad Enough To Cover Situation

     Plaintiff homeowners association, Lakeside Club Villas, Inc., settled with developer defendants, and therefore voluntarily dismissed an arbitration against defendant property management company.  The management company brought a successful motion to obtain attorney fees.  The HOA appealed, arguing that, because it voluntarily dismissed the arbitration, the management company was not the prevailing party.  Lakeside Club Villas, Inc. v. LB Property Management, Inc., Case No. B236001 (2nd Dist. Div. 5 October 16, 2012) (Armstrong, J.) (unpublished).

     Under Civil Code section 1717, a voluntary dismissal may save a losing party from having to pay attorney’s fees on a contract claim.  But that didn’t work here, because the fees clause was “sufficiently broad to allow such fees on the noncontract claim, but are limited to those associated with the arbitration of the dispute.”

     The HOA’s contention depended “upon the premise that there was no arbitration.”  No go.  “A JAMS arbitration is commenced by filing the Demand for Arbitration, a copy of the agreement containing the arbitration provision, and the filing fee.”  And the HOA did that.

Arbitration/Disclosures/Fees: Second District, Division 8 Affirms Significant Fee Award and Rejects Argument Arbitrator Failed to Make Required Disclosures

Profession Relationships Were Too Attenuated To Justify Disqualification

     Our next case is a lawsuit between a law firm and a lawyer/client over a significant amount of attorney’s fees – confirmation of the mission statement in our other blog, California Attorney’s Fees (brought to you by Mike Hensley and Marc Alexander), that attorney’s fees are often the “tail that wags the dog in litigation”.  The interesting legal issue at the heart of this case is disclosure of professional relationships by an arbitrator.  Nemecek & Cole v. Horn, case No. B233274 (2nd Dist. Div. 8, July 23, 2012) (Bigelow, J., author) (not for publication).

     Attorney Horn was retained by the Hoffmans to represent them in a lot line dispute.  That case did not go so well, and the next dispute – over fees – was between Mr. Horn and his erstwhile clients.  In the dispute with the Hoffmans, Mr. Horn was represented by Nemecek & Cole (Nemecek).  After a jury trial and an appeal, Mr. Horn was order to pay approximately $380,000 in attorney’s fees to the Hoffmans (settled for $250,000).  Believing that the negligence of Nemecek was the cause of the “disastrous results” in his suit with the Hoffmans, Mr. Horn submitted his dispute with Nemecek to arbitration with JAMS.

     Nemecek prevailed in the arbitration.  The arbitrator, retired U.S. District Judge George Schiavelli, awarded $289,028.85 in attorney’s fees to Nemecek.  Mind you, this all started with a lot line dispute!

    Attorney Horn hired an investigator who discovered professional relationships between the arbitrator and Nemecek.  Specifically, the arbitrator was a member of the appellate courts executive committee with the head of Nemecek’s appellate department; Nemecek’s expert and the arbitrator appeared together as panelists; Nemecek had appeared before the arbitrator earlier when he had been a district judge; and, the arbitrator was of counsel to a law firm that had, since its founding, provided representation in three legal malpractice actions.

     Those professional relationships did not warrant disqualification of the arbitrator.  The cases recognize the practicalities of the profession:  lawyers and judges who have been around for a long time will know a lot of attorneys and will have served on panels and in professional organizations.  Specific matters that must be disclosed, such as an arbitrator’s financial interest, the arbitrator’s knowledge of disputed facts relevant to the arbitration, and the arbitrator’s membership in any organization that practices invidious discrimination, were not at issue here. 

     Nor did the Court of Appeal see an abuse of discretion in the calculation of the fee award in a case that the arbitrator characterized as complex “requiring a great deal of work.”

     Judgment affirmed.

      We note that arbitrator disclosure issues tend to be fact specific.  A good place to begin is Code Civ. Proc. section 1281.9, subd. (a)(1)-(6), laying out disclosure requirements.  The ethics standards adopted by the Judicial Council require disclosure of “specific interests, relationships or affiliations” and other “common matters that could cause a person aware of the facts to reasonably entertain a doubt that the arbitrator would be able to be impartial.”

Arbitration/Fees/Construction: Fifth District Agrees Attorney’s Fees Clause Provided For Recovery Of Fees Only In Arbitration, Not In Superior Court

 

Parties’ Agreement To Litigate In Superior Court Proved Fatal To Prevailing Party’s Fee Recovery

     Plaintiff Mari sued Defendant Hawkins for professional negligence in connection with a survey, and prevailed in the trial court. However, the trial court denied Plaintiff’s request for attorney’s fees, because the fee provision was part of an arbitration provision stating, “[t]he arbitrator will award attorney’s fees to the prevailing party” -- and the parties agreed to proceed in superior court rather than to arbitrate. Mari v. Hawkins, Case No. F062563 (5^th Dist. June 25, 2012) (Kane, J., author) (unpublished). Plaintiff appealed the adverse fee ruling.

     The contract between the parties contained three separate fee provisions. However, the broadly worded fee provision, quoted above, applied only to arbitration. Plaintiff argued that the provision applied, and the parties simply substituted a judge for an arbitrator. Nope, that didn’t work.

     The second fee provision provided, “[i]f any proceeding is brought to enforce or interpret the provisions of this Agreement, the prevailing party therein shall be entitled to receive from the losing party therein, its reasonable attorney’s fees . . . “ Plaintiff ingeniously argued that prevailing on the claim for professional negligence required interpreting the contract. Nope, that didn’t work either. Suing for professional negligence is different than suing to enforce or interpret the provisions of a contract.

     The third fee provision provided, “[i]n the event [plaintiff] institutes a proceeding against [defendants], either directly or by way of cross-complaint, including a claim for . . . alleged negligence . . . wherein [defendants prevail], [plaintiff] agrees to pay [defendants] immediately following the proceedings all costs of defense, including . . . reasonable attorneys’ fees . . . .” Nope, that too didn’t work. The problem here is that the clause is not reciprocal – it provides recovery to a prevailing defendant, but not to a prevailing plaintiff. But I thought attorney’s fees provisions were reciprocal? Well might you ask. Attorney’s fees provisions are reciprocal when the action is on a contract (Civ. Code section 1717). Here, you will recall that Plaintiff prevailed on a cause for professional negligence, not for breach of contract. Therefore, the third provision is valid, despite the fact that it is not reciprocal.  However, because that fee provision is not reciprocal, the prevailing Plaintiff derived no benefit from it here.  Too late for tears . . . .

     The order of the trial court was affirmed.

     Comment: Consider the economics of this case. The parties went to trial, filed post-trial briefs, and went through an appeal. At trial, Plaintiff was found to be damaged in the amount of $155,134, but the damage amount was reduced by the trial judge to $50,000, due to a contractual fee limitation. Then, because the parties had agreed to litigate in superior court, Plaintiff was denied fees. The opinion does not tell us how much the fees were, but you can guess.

     Practice Tip: When confronted with a choice of an arbitral or judicial forum, consider the fee implications.  Also, consider whether agreeing to litigate in one forum rather than another forum means the attorney’s fees provisions ought to be revisited and revised.

Arbitration/Fees/Rules/Scope: Trial Court Affirmed in Case Involving Arbitrator’s Authority, Rules, Sanctions, and Fees

Plus We Learn Some Legal Arcana

    The next case, though unpublished, covers several interesting issues concerning the arbitrator’s authority, rules, sanctions, and fees. Prime Associates Group, LLC v. NAMA Holdings, LLC, Case No. B226167 (2nd Dist. Div. 4 June 19, 2012) (Suzukawa, J., author) (not for publication). 

     The case involved a messy dispute arbitrated among participants in a real estate project.  After 26 days of arbitration, the panel ordered, among other things, that Claimant Alliance Network pay NAMA $12,750,405.  NAMA was also granted monetary relief against Claimants Alliance Network, Alliance Holdings, and Network as sanctions for discovery misconduct. Another party, Crescent, prevailed against NAMA, entitling it to recover fees, costs, and expenses in the amount of $350,000 from NAMA. Appeals followed  How did it all shake out?

    First, the Court of Appeal held that the arbitration panel did have authority to order Alliance Network to pay damages to NAMA, though Alliance was not named as a counterrespondent.  Alas, Alliance forfeited its argument by failing to raise it with the arbitration panel.

     Second, the Court held that the $12M award to NAMA did not exceed the scope of the panel’s authority pursuant to the rules under which it was operating.  The issue here was that the panel was proceeding under the rules of the International Centre for Dispute Resolution (ICDR), which rules provide:  “The tribunal shall not decide as amiable compositeur or ex aequo et bono unless the parties have expressly authorized it to do so.”  “Ex aequo et bono” means “according to what is just and good.” Arbitrators, acting as “amiables compositeurs”, are authorized to disregard legal technicalities and strict constructions, and not required to hew closely to the contract.  We note, as did the Court of Appeal, that generally “arbitrators are not bound to award on principles of dry law” – unless the rules require otherwise.However, if the panel strayed from the cold and harsh ground of law into the warm and fuzzy domain of equity, this issue too had been forfeited. 

     Third, the Court held that the award of sanctions for discovery misconduct was not subject to judicial review, citing Moncharsh v. Heily & Blase, 3 Cal.4th 1 (1992):  “Absent a clear expression of illegality or public policy undermining this strong presumption in favor of private arbitration, an arbitral award should ordinarily stand immune from judicial scrutiny.”  Id. at 32.

    Fourth, the fact that NAMA did not fully prevail in the arbitration was irrelevant to its claim of post-arbitration fees to correct or vacate the award.  The arbitration provision was broadly written to include the post-arbitration fees, and the determination of the prevailing party in a post arbitration proceeding is a judicial function distinct from the arbitrator’s decision to award fees in the arbitration.

      The judgment was affirmed.

Arbitration/Fees: Plaintiff’s Request for Fees for Defeating a Petition to Compel Arbitration in Pending Lawsuit Is Unsuccessful, Because Defendant Prevailed In the Whole Lawsuit

 

Under Civil Code Section 1717, There May Be Only One Prevailing Party Entitled to Recover Attorney’s Fees on Given Contract In Given Lawsuit

     The key to our next case, involving arbitration and attorney’s fees, turns on a nice point that may at first seem a technicality but is actually material and dispositive here. That point: a party may petition to enforce an arbitration agreement as an independent lawsuit if there is no pending lawsuit; otherwise, the party must file the petition in the pending lawsuit. Frog Creek Partners, LLC v. Vance Brown, Inc., Case No. A129651, p. 2, n. 4 (1^st Dist. Div. 5 May 24, 2012) (Simons, Acting P.J., author) (certified for publication); Cal. Code Civ. Proc., section 1281.2.

     In the first example, the petitioner who is defeated may be exposed to attorney’s fees under Civ. Code section 1717 (assuming of course the existence of an attorney’s fees provision), because the petitioner who loses a petition to compel arbitration has lost an action on a contract. One who wants to litigate must now file a lawsuit, and the prevailing party in that lawsuit will have a separate right to recover attorney’s fees. But in the second example, if someone files a petition to arbitrate in an existing lawsuit and loses, no determination of liability for attorney’s fees can be made until the lawsuit is over, because only one prevailing party is entitled to recover fees on a given contract in a given lawsuit. In the second example, the plaintiff successfully defeating the petition to arbitrate brought in the existing lawsuit, but ultimately losing the substantive contract dispute at trial is a loser, and will not be able to collect attorney’s fees. That is the rationale for the outcome in Frog Creek Partners.

     The frog who tried to be as big as a bull.  Library of Congress.

Arbitration/Fees/Waiver/Severability/Standard of Review : In Elder Abuse Case, Court of Appeal Affirms Severance From Arbitration Clause of Waiver of Plaintiff’s Statutory Right to Recover Attorney’s Fees

 

Fifth District Explains That By Submitting A Dispute to An Arbitral Forum, A Party Does Not Necessarily Forgo Substantive Statutory Rights

     Plaintiff Ruth Chappell (replaced by her trustee Bickel after she died) sued an assisted living facility, Sunrise Assisted Living, for Elder Abuse. Chappell’s written agreement with Sunrise included an arbitration clause specifying each party would bear its own fees and costs in arbitration. Sunrise petitioned to compel arbitration. The trial court granted the petition, but severed the provision that provided each side was to bear its own fees and costs. That provision amounted to a waiver of plaintiff’s statutory right to recover attorney’s fees if she prevailed on her Elder Abuse claim – a waiver the trial court found to be against public policy. After plaintiff prevailed in the arbitration and was awarded very substantial attorney’s fees ($666,725.30) and costs ($94,694.70), Sunrise appealed the trial court’s decision severing the attorney’s fees and cost provision. Bickel v. Sunrise Assisted Living, Case No. F062443 (5^th Dist. May 21, 2012) (Kane, J., author) (certified for publication).

     “Any one may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.” Cal. Civ. Code section 3513. Because the court determines whether the statute in question is for a public or a private benefit, the issue is reviewed here de novo.

     Here, the Court of Appeal concluded that the fee shifting provision of the Elder Abuse Act is for a “public benefit”: “the heightened remedies enacted in section 15657 were remedial measures designed to correct a significant problem affecting a highly vulnerable segment of our society.” Accordingly, the statutory rights were created for a public purpose and therefore not waivable by a private agreement. Because the arbitration agreement was not generally permeated by unconscionability, the trial court correctly ordered arbitration, while severing the objectionable waiver of statutory rights intended to be for a public benefit. Judgment affirmed.

     COMMENT:  On March 27, 2012, we blogged that, in a nursing home case, the United States Supreme Court slammed the Supreme Court of Appeals of West Virginia, for “misreading and disregarding the precedents of this Court” interpreting the Federal Arbitration Act, and for failing to follow controlling federal law. Marmet Health Care Center, Inc. v. Brown, 565 U.S. ____ (2012). The West Virginia court had "concluded that the FAA does not pre-empt the state public policy against predispute arbitration agreements that apply to claims of personal injury or wrongful death against nursing homes." While the United States Supreme Court’s application of the FAA may have shut the door to the courthouse, the approach taken in Bickel shows that it may still be possible to implement an agreement to arbitrate, while preserving unwaivable statutory rights with a little help from the doctrine of severability.