Metropolitan News-Enterprise


Thursday, April 15, 2004


Page 1


Ruling Throwing Out Award in Law Firm Breakup Left Standing


By KENNETH OFGANG, Staff Writer/Appellate Courts


The California Supreme Court yesterday let stand a ruling by this district’s Court of Appeal that threw out a multimillion dollar arbitration award against former partners in the now-defunct local law firm of O’Flaherty &  Belgum.

An arbitration award requiring eight former partners to forfeit money owed to them at the time of the breakup and pay more than $7.5 million in damages, costs, and legal fees to the firm and its former managing partner exceeded the arbitrator’s powers, Div. Five of this district’s Court of Appeal said in a January ruling.

None of the high court’s justices voted for review at yesterday’s conference.

The divided Court of Appeal panel in O’Flaherty v. Belgum, B162758, said that arbitrator Edward Costello Jr. had no jurisdiction over O’Flaherty & Belgum while it was in receivership.

The panel also held that the portion of the award declaring a forfeiture of the withdrawing partners’ capital accounts exceeded the arbitrator’s authority because the partnership agreement expressly prohibited the arbitrator from granting any remedy prohibited by the agreement or “not available in a court of law.”

A new wrinkle was added to the dispute recently when the withdrawing partners sued Costello, claiming he acted unethically in failing to disclose that he had himself been involved in a bitter law firm breakup.

Boutique’s Downfall

The breakup of what had been a successful medical malpractice boutique took place in late 1997 and early 1998. Justice Richard Mosk, in the majority opinion for Div. Five, and Justice Margaret Grignon, who dissented, explained how infighting brought the firm, which at its height had 12 partners, 28 associates, and between $2 million and $5 million worth of receivables and work in progress, into receivership and arbitration.

Partners Michael A. O’Flaherty, John J. Weber, Lee T. Thies, Robert M. Dato, Lisa A. Cross, Mike Martinez, Lynn E. Ovando, and Gregory M. Hatton withdrew and formed O’Flaherty, Cross, Martinez Ovando & Hatton, Grignon said, because they thought managing partner Stephen Belgum was spending too much time on his Colorado cattle ranch and not enough on firm business.

Hatton later left the new firm and now practices in Newport Beach. Dato later joined Todd C. Theodora, who had left O’Flaherty & Belgum a few months earlier, at Costa Mesa’s Stephan, Oringher, Richman & Theodora.

Distractions Cited

The firm was, in the eyes of the withdrawing partners, unable to make necessary personnel decisions and get a handle on its finances due to Belgum’s distractions, Grignon said. In addition, she said, they were upset over Belgum’s volatile divorce and several affairs which they felt were bad for business.

Belgum responded that he had offered to meet with the dissatisfied partners and hear their grievances, but that none had responded. He accused them of breaching the partnership agreement, and their fiduciary duties to him and the firm, by taking possession of firm property, hiring away most of the associates and support staff, and notifying the clients that they were now being represented by O’Flaherty Cross.

The arbitrator found for Belgum, O’Flaherty & Belgum, and Belgum’s†ex-wife, who held an interest as a result of the divorce, on most of their claims. In addition to compensatory damages and forfeiture of the funds in the capital accounts, Costello awarded  Belgum† more than $1.2 million in punitive damages, most of it against O’Flaherty.

Arbitrator’s Authority

But Mosk, joined by Justice Orville Armstrong, said the arbitrator had no authority to rule with respect to the firm over the repeated objections of its receiver, or to grant a forfeiture remedy not authorized by the partnership agreement or by law.

In other action at yesterday’s conference, the justices:

•Unanimously agreed to decide whether a recent federal law that immunizes users of interactive computer services from liability for content authored by others abrogates  traditional liability for republication of material that one knows or reasonably should know to be false and defamatory. The First District’s Div. Two said it does not.

That panel ruled Jan. 21 in Barrett v. Rosenthal, A096451, that Sec. 230 of the Communications Decency Act, which provides in part that “[n]o provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider,” is not an absolute bar to Dr. Terry Polevoy’s claims against Ilena Rosenthal.

Polevoy, a Canadian-based physician and operator of the “Quackbuster” website, claims he was libeled in newsgroup postings by Rosenthal, an advocate of “alternative medicine.”

An Alameda Superior Court judge threw out his suit on an anti-SLAPP motion, but Presiding Justice J. Anthony Kline, writing for the Court of Appeal, said Polevoy can still prevail if he proves that Rosenthal†knew of the falsity of republished material from other sources accusing Polevoy of “stalking women” and various specific criminal acts.

The Supreme Court asked attorneys to brief, among other issues, the definition of “user” in Sec. 230 and whether it matters “whether a user engaged in active or passive conduct.”

•Let stand a Fourth District Court of Appeal ruling allowing the owners of the San Diego Padres to maintain a malicious prosecution suit against J. Bruce Henderson, a San Diego attorney and former city councilman who represented opponents of the team’s new ballpark—the Padres played there for the first time last weekend—in at least seven of the 17 lawsuits challenging the construction and financing of Petco Field. 

Padres L.P. claimed in its complaint that five of the suits were maliciously prosecuted. A San Diego Superior Court judge granted an anti-SLAPP motion as to two of the claims, and the Court of Appeal said that the motion should have been granted as to two more. But the divided panel in Div. One said that Padres L.P. is likely to prevail on its claim that Henderson brought suit in Currie v. City of San Diego knowing that the action was without merit.

Currie was a mandate proceeding challenging an ordinance authorizing the issuance of $299 million in lease revenue bonds to finance and fund the city’s contribution to the ballpark project. Justice James McIntyre, writing for the Court of Appeal, said it was clear at the time Currie was filed, based in part on trial and appellate rulings in some of the other cases,  that the ordinance did not violate the city charter or the annual budget ordinance, as Henderson contended.

The case is Padres L.P. v. Henderson, D040627.

•Let stand a First District Court of Appeal ruling that allows the operator of the Red and White Fleet, one of the two lines offering cruises of San Francisco Bay from Fisherman’s Wharf, to sue competitor Blue & Gold Line under the Unfair Practices Act.

The appeals court concluded that Red and White may predicate its causes of action alleging predatory pricing and the offering of “secret rebates and privileges” on Blue & Gold’s below-cost sales to wholesale purchasers of bay cruises, even though Blue & Gold’s bay cruise ticket revenues, taken as a whole, are above its costs.

The case is Fisherman’s Wharf Bay Cruise Corp. v. Superior Court (2003) 114 Cal. App. 4th 309.


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