Wednesday, October 6, 2004
Superior Court Judge Overrules Demurrers in Suit Charging AAA and Arbitrator With Fraud
By a MetNews Staff Writer
A Los Angeles Superior Court judge yesterday overruled demurrers in a suit charging that the American Arbitration Association and one of its arbitrators defrauded parties to an arbitration by failing to disclose facts that would have led the plaintiffs to reject the arbitrator.
The ruling by Judge Judith Chirlin allows the suit by former partners in the now-defunct law firm of O’Flaherty & Belgum to proceed against Edward Costello Jr. and the AAA.
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 LLP. Hatton and Dato later left the new firm.
The new firm and its partners have been in arbitration and litigation with former managing partner Stephen Belgum for more than six years.
The suit before Chirlin grows out of an arbitration proceeding in which Costello ordered the attorneys who are now suing him 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 their former firm and its former managing partner.
The arbitration ruling was thrown out by Div. Five of this district’s Court of Appeal earlier this year. The divided panel said the arbitrator had no jurisdiction over the firm while it was in receivership, and that the award included relief prohibited by the partnership agreement.
The O’Flaherty Cross partners say they were defrauded because they were not told that Costello had personally engaged in contentious litigation regarding the breakup of a law firm in which he had formerly practiced.
“There is not a lawyer in this town that would choose as sole arbitrator an individual who had litigated his own claim in such a contentious type of environment and it is unfortunate that the disclosure is simply left to the discretion of the arbitrator,” plaintiffs’ attorney Michael Brown of the downtown Los Angeles firm of Kabateck Brown Kellner LLP told the MetNews following the judge’s ruling.
Chirlin gave the defendants 30 days to answer the complaint.
Costello’s attorney, Kirk Dillman of Hennigan, Bennett & Dohrman, said that while the judge had given his side “a fair and attentive hearing,” they are considering their options, including seeking appellate review of her conclusion that the arbitrator lacks absolute immunity for acts which Dillman said were “part of the arbitral process.”
He added that it is Costello’s position that he did nothing wrong. Dillman emphasized that the plaintiffs’ claims are the “bare allegations” of a complaint and said that “all of the facts will be tested” via discovery.
Brown said his clients were “extremely pleased” that the judge is allowing their case to go to trial. The judge, he suggested, “while recognizing the existence of quasi-judicial immunity, also expressed concern about preserving the integrity of the arbitration process and was troubled by the fact that an arbitration administration program and individual arbitrators could essentially commit fraud as alleged in the complaint and have no liability for it.”
If immunity is recognized, he added, it means that not only can the AAA and the arbitrators injure parties with impunity, they get to keep the arbitration fees—of which his clients paid $110,000 in this case, Brown said—even if the arbitration award is thrown out by the courts.
The case is scheduled for a case management conference in January, at which a trial date is expected to be set.
Copyright 2004, Metropolitan News Company