Key Issue: Who Is A Third Party Within The Meaning of 1281.2(c)?
Reger v. Glaser Weil Fink Howard Avchen & Shapiro, LLP, G052352 (4/3 11/22/16) (Aronson, Bedsworth, Ikola) (unpublished) shows how a party with an otherwise valid arbitration clause can be thwarted from arbitrating through the application of Cal. Code Civ. Proc., section 1281.2(c) “when pending litigation with a third party creates the possibility of conflicting rulings on common factual or legal issues.”
Glaser Weil had represented Mr. Coxeter in an earlier lawsuit in which Mr. Coxeter’s business partner Mr. Bisno, alleged to have embezzled funds, paid for his and Mr. Coxeter’s joint defense. Mr. Coxeter separately hired Jackson, DeMarco, Tidus & Peckenpaugh to monitor the litigation because of potential conflicts. (Disclosure: I was a shareholder at Jackson DeMarco till February 2008. The full extent of my knowledge about this case comes entirely from the Slip Opinion). In December 2008, Glaser Weil withdrew as counsel, and Jackson DeMarco became Mr. Coxeter’s counsel of record. In 2015, Mr. Reger, as trustee in Mr. Coxeter’s bankruptcy, sued Jackson DeMarco and Glaser Weil on behalf of Mr. Coxeter’s bankruptcy estate, alleging claims for legal malpractice and breach of fiduciary duty, based on conflicts of interest, and failure to properly advise and defend Mr. Coxeter.
Mr. Coxeter had an arbitration agreement with Glaser Weil, but not with Jackson DeMarco. So Glaser Weil petitioned to compel arbitration. Jackson DeMarco, which did not have an arbitration agreement, joined in the petition. The trial judged denied the petition and joinder, finding that the malpractice claims against Jackson DeMarco constituted third-party litigation under section 1281.2(c) that might result in inconsistent rulings, allowing the judge to exercise his discretion and deny the request for arbitration.
Section 1281(c) may be used to deny a petition to compel arbitration where the following applies: “A party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact.” Here, Glaser Weil did not dispute (1) that the claims against it and Jackson DeMarco arose out of the same related transactions; (2) that there was a possibility of conflicting rulings if one set of claims was litigated and the other was arbitrated. The nub of the dispute was Glaser Weil’s challenged to the trial court’s determination that Jackson DeMarco was “a third party within the meaning of section 1281.2(c)”.
In fact, there was some connection between Glaser Weil and Jackson DeMarco. A former Glaser Weil partner, Mr. Heyman, who later went to work for Jackson DeMarco, had done tax work for Glaser Weil’s first name founding partner, Patricia Glaser. Plaintiff alleged the “undisclosed and preexisting relationship with Patricia Glaser” made it impossible for Jackson DeMarco to exercise independent judgment when monitoring Glaser Weil’s representation of Mr. Coxter. But that was nowhere near enough to establish a commonality of interest between Glaser Weil and Jackson DeMarco such that Jackson DeMarco would not be a “third party”. Jackson DeMarco was not an agent nor an alter ego of Glaser Weil. Also, Jackson DeMarco and Glaser Weil represented Mr. Coxter for different purposes, and owed separate duties to him. Bottom line: “Heyman’s previous representation of Patricia Glaser, even when combined with Reger’s allegation regarding the purported conflict of interest that relationship created, is completely unrelated to the representations at issue in this case and has no connection to Glaser Weil’s retainer agreement and its arbitration provision.”
COMMENT: The case relies on section 1281.2(c) of the California Arbitration Act, and makes no reference to the Federal Arbitration Act. If interstate commerce had been involved, and Glaser Weil has been able to invoke the Federal Arbitration Act, the result would have been somewhat different. The Court would have been unable to deny Glaser Weil’s petition to arbitrate, because presumably it had a valid arbitration clause, and it would not matter that there was another lawsuit pending. However, the Court would likely still have denied Jackson DeMarco’s joinder in the petition, because Jackson DeMarco did not have an arbitration agreement. Good luck to my former colleagues at Jackson DeMarco on the ultimate outcome of the dispute.