Monday, February 2, 2004
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Justices Throw Out Multi-Million Dollar Award in Breakup of Medical Malpractice Firm
By KENNETH OFGANG, Staff Writer/Appellate Courts
An arbitration award requiring former partners in the now-defunct law firm of O’Flaherty & Belgum 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 has been tossed out by this district’s Court of Appeal.
A divided panel in Div. Five ruled Thursday that arbitrator Edward Costello Jr. had no jurisdiction over O’Flaherty & Belgum while it was in receivership.
It 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.”
Justice Richard Mosk, in a 22-page majority opinion, and Justice Margaret Grignon, in a 55-page dissent, described the contentious breakup of the onetime medical malpractice firm in late 1997 and early 1998.
At the time, the justices explained, the firm had 28 associates and between $2 million and $5 million worth of receivables and work in progress.
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, 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 before the O’Flaherty Cross group, at Costa Mesa’s Stephan, Oringher, Richman & Theodora.
O’Flaherty 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, he awarded Belgum more than $1.2 million in punitive damages, most of it against O’Flaherty.
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.
But Grignon said the forfeiture remedy was appropriate in light of the arbitrator’s finding that the withdrawing partners had acted in bad faith. Such an award, she said, is consistent with California law—both before and after the adoption of the Uniform Partnership Act—and with the parties’ agreement.
The dissenting justice agreed that the arbitrator should not have proceeded over the objections of the receiver. But the issue is moot, and the error harmless, because the receivership has been terminated and the firm’s property turned over to the liquidating trustees, she argued.
“Sadly, six years after the wrongful acts of appellants, the parties must begin resolution of their disputes anew,” Grignon lamented. “They may take no comfort from the finality for which they bargained. The Arbitrator’s decision in this case is, unfortunately, the beginning, and not the end, of this dispute.”
The case is O’Flaherty v. Belgum, 04 S.O.S. 494.
Copyright 2004, Metropolitan News Company