ADR Case Updates
"Approved As To Form and Content" Not Actionable, 04/06/10
California Appellate Courts have recently rendered several decisions regarding Alternative Dispute Resolution, holding:
A more detailed summary and analysis is below.
In Freedman v. Brutzkus, (Mar. 11, 2010, Second District, Div. Four), __ Cal. Rptr. 3d __, 2010 WL 820478, Plaintiff, Gary Freedman, served as counsel for Teddi of California, Inc.(Teddi), beginning in 1987. Prior to 2000, he also represented Carol Anderson, Inc (CAI). In 2002, he contacted CAI on behalf of Teddi regarding a trademark license agreement, stating that he would withdraw if CAI was uncomfortable with his representation of Teddi. CAI did not object and retained Defendant, Mark Brutzkus, to represent it. The parties negotiated the license agreement over the next three months. The final agreement recited that Freedman represented only the interests of Teddi with the consent of CAI, stated that all conflicts of interest were waived, and contained an integration clause. The last page included a signature block signed by Freedman and Brutzkus, "Approved as to Form and Content."
Later, a dispute arose between Teddi and CAI, leading to litigation. Teddi's creditors forced it into bankruptcy. CAI then sued Freedman claiming he represented CAI in the negotiations leading up to the license agreement. In deposition, Brutzkus testified that CAI told him that CAI was relying on Freedman in connection with the transaction in light of their "long standing professional relationship." Brutzkus never told Freedman or anyone else at Teddi about the reliance on Freedman, or that the conflict waiver provisions in the agreement were inaccurate. Freedman's malpractice carrier ultimately settled with CAI prior to trial.
Freedman then sued Brutzkus in the instant action alleging that in approving the agreement "as to form and content," Brutzkus made an actionable representation to Freedman as to the accuracy of the agreement. The trial court sustained Brutzkus' demurrer without leave to amend and dismissed the action. Freedman appealed.
Affirmed. Although a lawyer communicating on behalf of a client may not knowingly make a false statement of material fact to a nonclient, "approving as to form and content" does not constitute an actionable representation. Rather, the only reasonable meaning given to such a recital is that counsel is the attorney for one of the parties, the document is in proper form, and embodies the deal made between the parties.
Implicit in the court's holding is the conclusion that the recital does not verify the accuracy of the client's statements. An opposite conclusion would be inconsistent with the rule that an agent for a disclosed principal to a contract is not liable on the contract itself. Moreover, Freedman's position would wreak havoc in the widely-followed practice of approving as to form and content by exposing lawyers to liability anytime a client's representations in an agreement were arguably inaccurate. Finally, such a rule would interfere with counsel's absolute duty of loyalty to the client. Therefore, Brutzkus did not make an actionable statement to Freedman, and his complaint failed to state a cause of action.
In Gravillis v. Coldwell Residential Brokerage Company, (Feb. 26, 2010, Second District, Div. One), __ Cal. Rptr. 3d __, 2010 WL 670133, Plaintiff purchased a home and then sued Defendant, his broker and agents, for nondisclosure of material facts. The purchase agreement, a pre-printed form prepared by the California Association of Realtors, included an arbitration clause whereby "the arbitrator … shall render an award in accordance with substantive California Law." Defendant successfully compelled arbitration. However, the arbitrator entered an award in favor of Plaintiff in the amount of $394,076.35, and the trial court entered judgment against Defendant on Plaintiff's motion to confirm the award. Defendant sought appeal on the merits asserting that the arbitrator did not apply substantive California law thereby making the award appealable for legal error.
Affirmed. An arbitrator's decision is not generally reviewable for errors of fact or law, whether or not they appear on the face of the award, and cause substantial injustice to the parties. However, under California law, an arbitration agreement may allow for judicial review, but only if the language is clear as to the parties' intent. Here the language evidenced no such intent, and was silent as to the scope of review. Therefore, the general rule of nonreviewability applies. The language "in accordance with California substantive law" does not, by itself, mandate review of the award on the merits.
Reaching a similar conclusion is Oaktree Capital Management, L. P. v. Bernard, (Feb. 22, 2010, Second District, Div. Eight), __ Cal. Rptr. 3d __, 2010 WL 598756. Plaintiff, a real estate investment hedge fund, employed Defendant to manage its funds. Defendant resigned, formed a competing equity real estate fund, and acquired a building that he had found while employed by Plaintiff. Plaintiff then formally discharged Defendant, and refused to pay incentive fees. At arbitration, the arbitrator found that the fees vested only if Defendant was employed by Plaintiff when the fees were distributed, and awarded Plaintiff $12.3 million plus attorney fees. The trial court affirmed the award, and Defendant appealed.
Affirmed. A party to an arbitration proceeding may not challenge an award for insufficiency of evidence or flaws in the arbitrator's reasoning. The arbitrator did not exceed her powers by divesting Defendant of eared compensation, thereby triggering statutory grounds for vacating an award. As a factual matter, the arbitrator found that Defendant had not earned his incentive fees before leaving Plaintiff's employment and, therefore, no forfeiture occurred. The arbitrator's finding was a legal conclusion based upon disputed evidence and, therefore, was not reviewable on appeal, even if the arbitrator was mistaken.
In Seltzer v. Barnes, (Mar. 9, 2010, First District, Div. Five), __ Cal. Rptr. 3d __, 2010 WL 468051, Plaintiff sued her condominium HOA, which filed a cross-complaint against her. Defendant was her lawyer paid by her homeowner's insurer. The Defendant negotiated with the HOA to settle the action. Later, Plaintiff sued Defendant claiming he secretly colluded with the HOA to dismiss the suit to avoid defense costs and eliminate insurance coverage. Defendant brought an anti-SLAPP motion on the basis that his settlement discussions were protected as free speech or petitioning activity. The trial court denied the motion, and Defendant appealed.
Reversed and remanded. Under the anti-SLAPP statute (CCP § 425.16), a special motion to strike is authorized for a cause of action against a person arising from any act in furtherance of the person's right of petition or free speech. Such actions include statements made in connection with civil litigation. Plaintiff's claims were based on allegations that Defendant negotiated a settlement agreement, an exercise of the right to petition. Moreover, the litigation privilege of Civil Code § 47 (b) established that Plaintiff cannot prevail as a matter of law. Therefore, the trial court erred in denying the motion.
In San Francisco Housing Authority v. SEIU Local 790, (Mar. 9, 2010, First District, Div. Two), __ Cal. Rptr. 3d __, 2010 WL 779241, the Service Employees International Union, Local 790, and San Francisco Housing Authority operated under a memorandum of understanding ("MOU") that required the Housing Authority to allow employees with greater seniority to "bump" employees with less in the same classification in the face of layoffs. Donise Manchester was laid off from her position at the Housing Authority. The Union met with the Housing Authority and suggested that she could be "bumped into" a different position for which she was qualified but had not previously held. The Housing Authority rejected the proposal without a modification to the MOU, which the Union was willing to pursue. In arbitration, the arbitrator found that the meet-and-confer provision was rendered meaningless by the Housing Authority's unwillingness to consider the proposed alternative, and ordered reinstatement of Manchester. Granting the Housing Authority's motion to vacate, the trial court concluded the arbitrator exceeded her authority.
Reversed. Arbitrators are not required to read contracts literally, and an award will not be vacated because the court cannot find a specific provision in the contract upon which relief was granted. Here, the arbitrator's decision did not modify the MOU, but simply acknowledged the parties own ability to modify their contract with a good faith consideration of alternatives. The Housing Authority's refusal to consider such a modification rendered such discussions meaningless. Thus, the arbitrator did not exceed her authority when basing the award on the parties' ability to modify their contract in order to comply with good faith standards.
In Suh v. Superior Court (CHA Hollywood Medical Center, (Feb. 18, 2010, Second District, Div. Five), 105 Cal. Rptr. 3d 585, Young Suh and Yongkew Chung (Plaintiffs) were anesthesiologists at CHA Hollywood Medical Center (CHA). Plaintiffs formed an anesthesiology group that entered into a contract with CHA. The agreement contained an arbitration clause requiring arbitration of disputes in accordance with the American Health Lawyers Association Alternative Dispute Resolution Service Rules of Procedure for Arbitration (AHLA Rules). The AHLA rules prohibited awards of "consequential, exemplary, incidental, punitive, or special damages" except in tort cases "unrelated to employment or termination of employment." CHA fired Plaintiffs, who then sued for discrimination based upon national origin and age discrimination. The trial court granted CHA's petitioned to compel arbitration over Plaintiffs' objection that the arbitration provision was unconscionable. Plaintiffs sought review.
Petition granted. An arbitration provision is unconscionable and thus unenforceable if it is both procedurally and substantively unconscionable. Here, the severe limitations on remedies set for the in the AHLA Rules were substantively unconscionable, and could not be severed from the agreement. In addition, procedural unconscionability existed because Plaintiffs were not afforded the opportunity to review the AHLA Rules before they signed the underlying agreement. Thus, the arbitration clause was invalid and unenforceable.
In Intergulf Development v. Superior Court (Interstate Fire & Casualty Co., Mar 24, 2010, Fourth District, Div. One), __ Cal. Rptr. 3d __, 2010 WL 1052745, a homeowners association sued Intergulf Development, the developer of a condominium project, for construction defects. Intergulf tendered to its insurance carrier, Interstate Fire & Casualty, which provided a defense with counsel it selected under a reservation of rights. Intergulf sought Cumis counsel and reimbursement of defense costs. After Interstate did not respond to Intergulf's request, Intergulf filed suit for bad faith and breach of contract. Interstate petitioned to compel arbitration. After the trial court granted the motion, Intergulf sought petition for writ of mandate, which was denied by the appellate court. The California Supreme Court granted the petition, and transferred the case back to the appellate court.
Petition granted. Civil Code § 2860 (c) requires binding arbitration of all contested issues regarding the amount of attorney fees owed independent counsel. However, arbitration is not appropriate before the court makes a determination of the duty to defend. Therefore, the trial court erred in treating this case as a fee dispute and ordering arbitration before resolving the issues of bad faith and breach of contract.
In Fullerton Redevelopment Agency v. Southern California Gas Company, Mar 30, 2010, Fourth District, Div. Three), __ Cal. Rptr. 3d __, 2010 WL 1213264, Plaintiff sued Defendant for hazardous waste contamination to property it owned. Defendant cross-complained against Plaintiff and Union Pacific Railroad Co., which owned the property before Plaintiff. Later, the California Dept. of Toxic Substances Control ordered Plaintiff, Defendant, and Union Pacific to clean up the property. Plaintiff and Defendant reached a settlement resolving all issues between them. The trial court found the settlement to be in good faith under CCP § 877.6, barring all claims for contribution and indemnity against Plaintiff by any joint tortfeasors. Union Pacific appealed, arguing that the good faith settlement order could not bar its claim against Plaintiff under Health and Safety Code § 25363, a provision of the Carpenter-Presley-Tanner Hazardous Substance Account Act (HSAA).
Affirmed. CCP §§ 877 and 877.6 "bar claims against the settling defendant for contribution or indemnity by other joint tortfeasors." However, HSAA § 25363 "permits contribution and indemnity claims by parties to comply with remedial cleanup orders." Public policy supports settlements that resolve environmental issues, such as the one at issue. Therefore, a good faith settlement determination bars indemnity claims based upon a remedial cleanup order of hazardous waste contamination. A contrary ruling would hinder such settlements.
The opinions are posted at: http://www.courts.ca.gov/opinions.htm.
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