ADR Case Updates
Client Waives Fee Arbitration By Asserting Malpractice, Summary and Analysis, 07/19/09
Four decisions regarding ADR have been rendered since my last update of June 17, 2009, holding:
A more detailed summary and analysis is below.
In Fagelbaum & Heller v. Smylie, (June 16, 2009, Second District, Div. Eight), 95 Cal. Rptr. 3d 252, the court held that a client waived his right to nonbinding mandatory fee arbitration with his former law firm by alleging legal malpractice against the firm. Plaintiff law firm represented Defendant Smylie (also an attorney), in several matters. In addition, Plaintiff law firm was Defendant�s subtenant in Defendant�s suite of law offices. After incurring substantial legal fees, Defendant agreed to allow Plaintiff to pay rent by way of a monthly credit towards Defendant�s outstanding balance of unpaid fees.
After several years, Defendant refused to accept further monthly credits and demanded that Plaintiff pay rent in cash. Plaintiff then initiated binding arbitration under its fee agreement with Defendant to recover the balance of unpaid fees pursuant to the California Arbitration Act (Code of Civil Procedure � 1280 et seq.). Defendant responded by initiating nonbinding arbitration with the Beverly Hills Bar Association under the Mandatory fee Arbitration Act (MFAA, Business and Professions Code � 6200 et seq.).
After Defendant served Plaintiff with a three-day notice to pay rent or quit, Plaintiff initiated a third arbitration proceeding under the arbitration clause in the sublease before the American Arbitration Association (AAA). The trial court consolidated all three proceedings into binding arbitration before Action Dispute Resolution Services, Inc. The arbitration went forward before a three-arbitrator panel that entered a $1,078,897 award in favor of Plaintiff.
Defendant opposed Plaintiff�s motion to confirm the award on the basis that the arbitrators were without power to proceed, since he demanded, but had not been afforded, his right to a nonbinding MFAA arbitration. Confirming the award, the trial court found that Defendant waived his right to an MFAA arbitration by alleging � in both the MFAA proceeding and in his AAA cross-demand � that Plaintiff committed legal malpractice, and entered judgment in favor of Plaintiff.
Affirmed. The purpose of the MFAA is to provide clients with a cost-efficient way to adjudicate attorney fee disputes with their former counsel. With few exceptions, attorneys must submit to non-binding fee arbitration with a client. Because the purpose is to address only fees, the client�s right to request or maintain MFAA arbitration is deemed waived if the client commences an action or files any pleading seeking �[a]ffirmative relief against the attorney for damages or otherwise based upon alleged malpractice or professional misconduct.�
Here, Defendant filed a cross-demand in the AAA sublease arbitration alleging that he no longer owed Plaintiff fees, and therefore rent was due, because Plaintiff committed legal malpractice thereby vitiating Defendant�s fee balance. Thus, Defendant waived his right to MFAA arbitration, and the trial court correctly confirmed the Action Dispute Resolution Services, Inc., arbitration award.
Reflecting a split of authority in California, the court in Ruiz v. Podolsky, (June 24, 2009, Fourth District, Div. Three), __ Cal. Rptr. 3d __, 2009 WL 1783638, held that a defendant physician may not compel arbitration of the wrongful death claims of a surviving spouse and her adult children based upon an arbitration agreement with the decedent. Plaintiffs, the surviving spouse and adult children of the decedent, brought a wrongful death action against Defendant, an orthopedic surgeon. Defendant sought to compel arbitration based upon an arbitration agreement he had entered into with decedent. The trial court granted the motion as to the wife, after she conceded she was bound by the agreement, but refused to compel arbitration as to the adult children.
Affirmed. In California, there is a split of authority as to the scope of a patent�s authority to bind a spouse and adult children to arbitration in a subsequent wrongful death action. One line of cases, beginning with Rhodes v. California Hospital Medical Center (1978) 76 Cal. App. 3rd 606, holds that wrongful death is not a derivative cause of action and, therefore, a patient cannot bind nonsignatory heirs absent a pre-existing agency-type relationship. The other line of cases, following Herbert v. Superior Court (1985) 169 Cal. App. 3rd 718, fosters public policy reasons that imbue patients with broad authority to bind nonsignatory heirs to a medical arbitration agreement, particularly in wrongful death actions.
This court embraced the Rhodes rationale concluding that California�s wrongful death statute (Code of Civil Procedure �� 377.60 � 377.62) does not create a derivative action. Therefore, decedent lacked authority, expressed or implied, to bind his spouse or adult children. However, since the spouse invited error before the trial court (conceding she was bound by decedent�s arbitration agreement), she is so bound, and Defendant may compel arbitration as to her, but not as to the adult children Plaintiffs.
In Clark v. American Residential Services, LLC, (July 6, 2009, Second District, Div. Eight), __ Cal. Rptr. 3d __, 2009 WL 1912713, the trial court failed to make an informed evaluation of the fairness of a proposed wage and hour class action settlement. The representative Plaintiffs filed a class action against the Defendant, a purveyor of plumbing and related services, claiming unpaid minimum and overtime wages, failure to provide rest and meal periods, and other Labor Code violations. The case was settled at mediation, and class counsel moved for approval of the settlement. Over objection from a small number of putative class members, the trial court approved the settlement.
Reversed and remanded. While an initial presumption of fairness exists when class counsel negotiates a proposed class action settlement, the court must independently assess the adequacy of settlement terms. To make this determination, the court must have sufficient information to make an informed determination of whether the parties� evaluation of the case is within the �ballpark� of reasonableness as to the entire class. Here, class counsel failed to include data to support his assertion that the overtime claims had no value. Moreover, when the objectors challenged class counsel�s calculations, the court did not asses the strength of each argument. Therefore, the court lacked sufficient information to make an informed evaluation, and abused its discretion in approving the settlement.
Finally, in Turner v. Schultz (July 13, 2009, First District, Div. Four), __ Cal. Rptr. 3d __, 2009 WL 2006846, an attorney fee award was proper where defendant was the �prevailing party� in an action to forestall arbitration even though there was no adjudication on the merits. Plaintiff, a shareholder of Defendant Asset Allocation Advisors, Inc., entered into a buy/sell agreement that provided for a formula to buy out shares of a shareholder who was terminated. The agreement also included arbitration and attorney fee clauses.
After his termination, a dispute arose as to the value of Plaintiff�s shares. Plaintiff refused to arbitrate. Claiming the arbitrators lacked jurisdiction because the agreement was void ab initio because it was procured by �fraud in the inducement,� Plaintiff filed an action for declaratory relief, and to enjoin the arbitration process.
The trial court ruled against Plaintiff, and awarded $82,280.78 in attorney fees to Defendants. Plaintiff contended that it was premature to award fees as the �prevailing party,� since that required adjudication on the merits by the arbitrator.
Affirmed. Civil Code � 1717 allows for an award of attorney fees to the party �determined to be the party prevailing on the contract� if the contract provides for such an award. The prevailing party is entitled to seek fees if it prevails offensively or defensively in any action to enforce contract provisions. Because the trial court determined that Defendants were entitled to compel arbitration � the sole contractual issue in the litigation � they were the prevailing party in this discrete legal proceeding that was independent of the underlying dispute.
The full opinions may be viewed at: http://www.courts.ca.gov/opinions.htm.
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