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 Div. 8, July 23, 2012) (Bigelow, J., author) (not for publication).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.”
In the News: San Bernardino Skips Mediation, Venture Capital Firm Kleiner Perkins Is Denied Request to Arbitrate, and California State Attorney General Gets To Mediate With Madoff Bankruptcy Trustee
San Bernardino: Do Not Pass Mediation, Go Straight to Bankruptcy
The Associated Press reported on July 18, 2012, that the San Bernardino City Council voted 5-2 to declare a fiscal emergency, thereby allowing it to skip the mediation step now required by California law, and head straight to bankruptcy.
How quaint and optimistic are the lyrics of The Vandals’ song, “San Berdu”:
I wanna go with you and leave all this behind us
We’ll live in San Berdu and sell the place in Cypress
Venture Capital Firm’s Request to Send Employment Discrimination Suit to Arbitration Is Declined
David Streitfeld reports in the July 20, 2012 New York Times that San Francisco Superior Court Judge Harold E. Kahn denied the request of venture capital firm Kleiner Perkins Caufield & Byers to arbitrate a sex discrimination claim brought by partner Ellen Pao. The article quotes Silicon Valley attorney Melinda Riechert, who represents employers, as saying: “People who want to keep cases out of the press and the blogosphere should seriously consider arbitration agreements.” That’s definitely the trend.
Collision of Madoff Bankruptcy Trustee and California Attorney General Produces Mediation
Collisions in the CERN supercollider yield exotic particles such as the Higgs boson. On July 18, 2012, Bloomberg reporter Linda Sandler reported in the San Francisco Chronicle that a legal super collision between the Madoff bankruptcy trustee Irving Picard and California State Attorney General Kamala Harris has yielded another byproduct: mediation.
The collision has occurred over the estate of Stanley Chais, the “financial wizard”who funneled gazillions in investor funds to Madoff, earning $270M in fees between 1995 to 2008. Mr. Chais, like the Blue Norwegian parrot in the Monty Python skit, is defunct, having joined the choir invisible.
At issue is whether the bankruptcy trustee’s powers trump the powers of California’s State Attorney General to protect consumers from fraud. Unsurprisingly, as discretion is the better part of valor, Mr. Picard chose not to pick that fight in his (or Mr. Madoff’s) home state of New York against the NY State Attorney General.
The parties will pursue mediation, says Bankruptcy Judge Burton Lifland.
Arbitration/Employment/Class Actions/Enforceability: First District, Division 1 Affirms Order Compelling Employee To Individual Arbitration
Viability of Gentry v. Superior Court is Sidestepped By Court of Appeal
Plaintiff/employee Lorena Nelsen filed a putative class action lawsuit against her former employer LPI for multiple Labor Code violations. Because Nelsen signed an arbitration agreement when she was hired, the employer, LPI moved, successfully, to compel arbitration with Nelsen all alone. Nelsen appealed the order compelling arbitration, arguing it was unconscionable, and the order violated state or public policy, because it precluded class arbitration by its terms. Nelsen v. Legacy Partners Residential, Inc., A132927 (1st Dist. Div. 1 July 18, 2012) (Margulies, J., author) (certified for publication).
First, the Court of Appeal had to deal with the issue of appealability, because ordinarily an order compelling arbitration is not appealable. An exception is the “death knell doctrine” when it is unlikely that the case will proceed as an individual action. Szetela v. Discover Bank, 97 Cal.App.4th 1094, 1098 (2002). Here, however, there was no explanation by Nelsen as to whether her complaint could proceed as an individual action. Nevertheless, the Court exercised its discretion to treat her appeal as a petition for a writ of mandate, thereby preserving her claims long enough to dispatch them.
Second, unconscionability had to be considered. While several factors supported a finding that the agreement was procedurally unconscionability, that was not enough to nix the agreement to arbitrate, unless there was also substantive unconscionability. Because nearly the same arbitration clause language had already passed muster in Little v. Auto Stiegler, Inc., 29 Cal.4th 1064 (2003), LPI’s agreement was not substantively unconscionable. The only difference between the agreement in issue in Little and that in Nelsen actually weighed in favor of finding Nelsen’s agreement was not unconscionable. In Little, only awards exceeding $50,000 required the arbitrator’s “written reasoned opinion” — precisely the awards an employer would be more likely to appeal — whereas in Nelsen’s case, there was no such distinction to favor the employer. The agreement in Nelsen did not appear to work in a lopsided, unilateral fashion.
Third, all the relevant contractual language contemplated a two-party arbitration, not class arbitration. See Kinecta Alternative Financial Solutions, Inc. v. Superior Court, 205 Cal.App.4th 506 (2012), also concluding there was no contractual basis for finding an arbitration agreement authorized class arbitration.
And this takes us to the issue of enforceability under Gentry v. Superior Court, 42 Cal.4th 443 (2007) – the important issue the Court sidestepped. In Gentry, the California Supreme Court concluded that, in wage and hour cases, a class action waiver would frequently have an exculpatory effect and would undermine enforcement of the statutory right to overtime pay. Gentry treated the statutory Labor Code rights as unwaivable, regardless of unconscionability.
However, “the continuing vitality of Gentry has been called into serious question by a recent decision of the United States Supreme Court holding [AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011)] that a state law rule requiring classwide arbitrations based on public policy grounds rather than the parties’ arbitration agreement itself does violate the FAA.”
The Court of Appeal avoided having to address whether Gentry has been vitiated by Concepcion with an explanation that there was no evidence in the record of the “Gentry factors” – “a predicate showing that (1) potential individual recoveries are small; (2) there is a risk of employer retaliation; (3) absent class members are unaware of their rights; and (4) as a practical matter, only a class action can effectively compel employer overtime law compliance.” So Gentry, like Wile E. Coyote1, is still “up in the air.”
Finally, the Court of Appeal was not persuaded by the argument in D.R. Horton, Inc., 27 NLRB No. 184 (2012) that it was a violation of the National Labor Relations Act to require employees as a condition of employment to waive the filing of a class action claim regarding wages. The Court of Appeal treated Horton as an outlier case, and instead followed the analysis in Iskanian v. CLS Transportation, 206 Cal.App.4th 949 (2012), , 206 Cal.App.4th that the NLRB went beyond its administrative expertise in interpreting a statute. Besides, Horton is not a California state court decision.
For some of our related blawg posts see: June 14, 2012, June 4, 2012, May 3, 2012, March 18, 2012 (Concepcion); April 25, 2012 (Kinecta); June 5, 2012 (Horton); April 25, 2012 (Gentry). June 14, 2012, June 5, 2012 (Iskanian).
1BLAWG BONUS: The animator Chuck Jones based his Wile E. Coyote on Mark Twain’s description of the coyote as "a long, slim, sick and sorry-looking skeleton" that is "a living, breathing allegory of Want. He is always hungry."
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In the News: More About Mediation and Municipal Bankruptcies
More Mediation for Stockton, and Possibly Mediation for San Bernardino
No sooner did Stockton end mediation and file for bankruptcy, than Judge Christopher Klein, the bankruptcy judge overseeing Stockton’s bankruptcy ordered the city and its creditors to mediate with bankruptcy Judge Elizabeth L. Perris next month. So reported Steven Church at bloomberg.net on July 13, 2012.
Looks like San Bernardino may be next up at the plate. On July 12, 2012, Reuters reported that San Bernardino’s city council “will receive an opinion from the city’s legal staff on July 16 on whether the city needs to enter into pre-bankruptcy mediation with its creditors . . . .”
How to build and destroy a house of cards . . . .
Appealability: Court Of Appeal Dismisses Appeal From Order Staying Action And Compelling Arbitration
Affirm? Reverse? No, Dismiss, Because the Order is Unappealable
Plaintiff Brian Zulli “purports to appeal from an order staying an action and compelling arbitration . . . “ Purports? Yes, “purports”, because the order is not appealable. Zulli v. Toll Brothers, Inc., Case No. B231622 (2nd Dist. Div. 6 July 10, 2012) (Perren, J., author) (not to be published).
“’The rationale behind the rule making an order compelling arbitration nonappealable is that inasmuch as the order does not resolve all of the issues in the controversy, to permit an appeal would delay and defeat the purposes of the arbitration statute. . . However, a party compelled to arbitrate is entitled to have the validity of the order reviewed on his appeal from a judgment confirming an award.’. . . “ State Farm Fire & Casualty v. Hardin, 211 Cal.App.3d 501, 506 (1989). “Accordingly, the appeal must be dismissed.”
Arbitration/Federal Arbitration Act: Ninth Circuit Affirms District Court’s Decision Affirming Denial of Motion to Compel Arbitration Where Conflict Existed Between Dischargeability Purpose of Bankruptcy Code and Arbitration
How to Reconcile the Federal Arbitration Act With the Bankruptcy Code?
The threshold issue that the Ninth Circuit had to resolve In the Matter of: Jose Eber, Case Nos. 10-56772 and 11-55341 (9th Cir. July 9, 2012) (for publication) was “how to reconcile the FAA with the Bankruptcy Code, and, more specifically, a bankruptcy court’s jurisdiction to determine dischargeability pursuant to sections 523(a)(2), (4) and (6).” Those subsections are the bases for nondischargeability of a debt in bankruptcy: fraud or deception ((a)(2)), fiduciary fraud, embezzlement, or larceny ((a)(4)); and willful and malicious injury to person or property ((a)(6)). The debtor in the bankruptcy, Jose Eber, is the well-known celebrity hairstylist (i.e., a celebrity himself, as well as a stylist for celebrities), and author of the books “Shake Your Head, Darling,” and “Beyond Hair: The Ultimate Makeover Book.” Mr. Eber earns a Wikipedia entry.
The appellants, Ackerman and Kuriloff, had sought to compel arbitration with with Jose Eber, based on an arbitration agreement. The problem, according to the Bankruptcy Court, was that the arbitration, which had not yet commenced, could result in findings to which collateral estoppel applied — “for all practical purposes” the arbitrator would end up determining the issue of nondischargeability. The district court agreed, and the appeal followed.
The Ninth Circuit noted that disputes involving the Bankruptcy Code and the FAA often “present a conflict of near polar extremes: bankruptcy policy exerts an inexorable pull towards centralization while arbitration policy advocates a decentralized approach towards dispute resolution.” (quoting In re United States Lines, 197 F.3d 631, 640 (2d Cir. 1999).
Polar extremes. 1924. Library of Congress.
Here, there is “no evidence in the text of the Bankruptcy Code or in the legislative history suggesting that Congress intended to create an exception to the FAA in the Bankruptcy Code.” But that is not the sole test of preemption here. “The relevant inquiry then becomes ‘whether there is an inherent conflict between arbitration and the underlying purposes of the Bankruptcy Code.’” Ins. Co. v. Thorpe Insulation Co., 671 F.3d 1011, 1020 (9th cir. 2012). And because dischargeability is especially within the purview of the Bankruptcy Court, here, the Ninth Circuit found that there was no abuse in denying the motion to compel arbitration because it would have conflicted with the underlying purpose of the Bankruptcy Code.
The opinion, authored by District Judge Marbley, invites future examination. Why? Because: “Our holding in no way extends beyond the particular facts of this case or to all cases in which a bankruptcy judge makes this determination prior to the commencement of an arbitration.”