Wednesday, October 24, 2007
Court of Appeal Allows Ex-USC Star Chad Morton to Sue Agent
By STEVEN M. ELLIS, Staff Writer
A former USC running back’s claim against a prominent attorney/agent for breach of fiduciary duty is not subject to an arbitration clause in a representation agreement unless the claim directly arises from that agreement, the Court of Appeal for the Fourth District Court of Appeal has ruled.
In an unpublished opinion, Div. Three Monday affirmed Orange Superior Court Judge James P. Gray’s ruling that Chad Morton, who played for four NFL teams between 2000 and 2006 and made the Pro Bowl in 2005, is not required to arbitrate a dispute with, Leigh Steinberg, because the subject of the dispute was not within the scope of the representation agreement containing the arbitration provision.
The court also affirmed Gray’s ruling that Steinberg could not compel arbitration, despite Morton’s allegation that other defendants were Steinberg’s alter-egos, because the other defendants had not sought to invoke the benefits of the agreement or its arbitration provision, were not third-party beneficiaries of the agreement, and claims against them similarly did not arise under the agreement.
Morton sued Steinberg and six other individual and entity defendants in June of 2006 for causes of action including breach of contract, fraud, breach of fiduciary duty, unfair competition, and violation of the Miller-Ayala Athlete Agents Act, which regulates specified activities of an agent in representing professional athletes.
Morton claimed that the defendants, who he alleged were Steinberg’s agents, alter egos, or under his control, acted negligently in failing to use due care in handling his business affairs, thereby breaching a duty they owed as his athlete agents and financial advisors.
He said that the defendants borrowed $300,000 from him in June of 2003, and convinced him to accept a five percent interest in a restaurant venture in China as a substitute when they defaulted. He claimed that the defendants defaulted a second time after he loaned them an additional $200,000 in June of 2004 to finance a music concert series in China.
Seeking as damages the money due under the terms of the loans and the guarantee, plus any profits the defendants made as well as punitive and statutory damages, Morton argued that the defendants misrepresented the risk of his investment in the restaurant venture in China, obtained the second loan from him while intentionally concealing the fact they lacked funds to repay the first loan pursuant to its terms, and provided false assurances to Morton regarding their ability to repay the loan and honor the guarantee.
In response, Steinberg filed a petition to compel arbitration, arguing that Morton’s claims fell within the scope of an arbitration provision in a standard representation agreement the two had executed on Dec. 10, 1999 pursuant to the requirements of the NFL Players Association. The agreement provided that any and all disputes with respect to the agreement would be resolved exclusively through arbitration.
Morton opposed the petition, arguing that Steinberg had failed to produce a valid agreement to arbitrate. He asserted that the dispute was not within the scope of the arbitration provision in the representation agreement and that certain defendants were not subject to any arbitration agreement, leading to the possibility of inconsistent judgments if the claims against Steinberg were ordered to arbitration.
Reasoning that Morton’s claims were not within the scope of the agreement containing the arbitration provision, and that the other parties to the proceeding were not subject to mandatory arbitration under Code of Civil Procedure Sec. 1281.2(c) because of the possibility of inconsistent judgments, Gray agreed with Morton and denied the petition.
On appeal, Fybel agreed.
Noting that the purpose of the agreement was “to represent, advise, counsel, and assist [Morton] in the negotiation, execution, and enforcement of his playing contract(s) in the National Football League,” he said that Morton did not assert any claim for breach of the representation agreement; did not ask the court to interpret, apply or enforce the agreement; and alleged that Steinberg also breached other contracts that did not contain arbitration provisions.
In doing so, Fybel said that the court was not deciding if Steinberg had breached a fiduciary duty to Morton, or even whether such a duty existed.
“All we hold here,” he wrote, “is that by alleging Steinberg violated a fiduciary duty owed to him, Morton did not make the arbitration provision in the representation agreement applicable to claims not arising out of that agreement.”
Fybel wrote that, if the court had ruled to the contrary, virtually any conduct of any type occurring between Steinberg and Morton would fall within the arbitration provision.
“If Steinberg punched Morton,” he asked, “would a claim for personal injuries be subject to mandatory arbitration?”
Fybel also rejected Steinberg’s arguments that the trial court abused its discretion by not compelling arbitration under Code of Civil Procedure Sec. 1281.2(c). The provision provides that where a party refuses to abide by a written agreement requiring arbitration, the court must compel arbitration unless the possibility of conflicting rulings on a common issue of law or fact exists.
Noting that several of the nonsignatory defendants had actually litigated their case in court, Fybel concluded that they had not sought the benefits of the representation agreement and its arbitration provision, were not third party beneficiaries of the representation agreement, and were also not the subject of claims arising under the agreement.
As such, they had no more right to demand arbitration than Steinberg, he said.
Fybel was joined in his opinion by Justice William F. Rylaarsdam and Justice William W. Bedsworth.
The case is Morton v. Steinberg, G037793.
Copyright 2007, Metropolitan News Company