Wednesday, June 17, 2009
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C.A. Clarifies Rule on Waiver of Mandatory Fee Arbitration
By KENNETH OFGANG, Staff Writer
An attorney who demanded binding arbitration of a rent dispute with a law firm that was his subtenant waived his right to non-binding arbitration of a related dispute over legal fees he owed that firm, the Court of Appeal for this district has ruled.
Div. Eight yesterday certified for publication its June 2 ruling on the complicated series of interrelated disputes between Robert O. Smylie, who heads Robert Smylie and Associates, and the law firm of Fagelbaum & Heller LLP. The opinion was by Orange Superior Court Judge Ronald Bauer, sitting on assignment.
The parties’ controversies, Bauer explained, date back to 2001, when Smylie retained the Fagelbaum firm—a subtenant in his Century City office suite—to defend him in a suit brought by Neo-Tech Cosmetics Manufacturing Inc. The firm also represented him in connection with a bad faith claim against his insurer for not providing a defense to the Neo-Tech suit.
In 2006, Fagelbaum & Heller sued Smylie in Los Angeles Superior Court. It alleged that it was owed more than $400,000 in fees for the two cases, and asked for provisional remedies pending binding arbitration.
Fee Payments
In moving for arbitration, the firm asserted that Smylie fell behind on his fee payments, and agreed to allow the firm credits against rent, but that he had, a few months before the suit was filed, said he would no longer give such credits and demanded that the firm pay rent or quit.
The firm, in turn, demanded binding arbitration of its fee dispute before Action Dispute Resolution Services Inc., pursuant to a written fee agreement. It also demanded arbitration of the rent demand before the American Arbitration Association, pursuant to its sublease.
Smylie then demanded non-binding arbitration, before the Beverly Hills Bar Association, of the fee dispute pursuant to the mandatory fee arbitration statute. He declared that more than $1 million was in dispute, including more than $470,000 in fees that he had already paid; that the firm had committed malpractice; and that he was entitled to a refund of everything that he had paid.
The trial judge ordered—over Smylie’s objection—that all of the parties’ disputes be consolidated for binding arbitration before Action Dispute Resolution Services, with the court reserving jurisdiction over any matter that the arbitrators declined to hear.
A three-member arbitration panel heard the case, and largely ruled for Fagelbaum & Heller, awarding more than $1 million, including attorney fees for the arbitration. It concluded, among other things, that there was no malpractice and that Smylie was bound by his agreement to deduct legal fees from the rent that the firm owed.
Award Confirmed
Superior Court Judge Aurelio Munoz, now retired, confirmed the award, rejecting Smylie’s contention that his statutory right to non-binding arbitration of the fee dispute was violated by the court’s previous order consolidating all of the issues into the ADR arbitration.
Bauer, writing for the Court of Appeal, said Smylie waived his right to non-binding arbitration by filing a cross-demand in the AAA arbitration over the landlord-tenant dispute. He cited a provision in the mandatory fee arbitration statute providing that the right to demand arbitration under that law is waived if the client seeks “[a]ffirmative relief against the attorney for damages or otherwise based upon alleged malpractice or professional misconduct.”
The jurist rejected Smylie’s argument that he was only seeking unpaid rent, and not asserting malpractice, in the AAA arbitration.
“To award cash rents in lieu of credits in the AAA arbitration, the arbitrator would necessarily have to reach the issues of whether there had been an agreement to pay rent by crediting Smylie’s debt for fees and costs, and if so, whether such debt should be eliminated by deducting Smylie’s damages for alleged malpractice and misconduct,” Bauer explained. “The AAA cross-demand thus did not simply seek past due rent, as Smylie claims, but a rescission of the agreement to offset rent against the debt for legal fees and costs, and a refund of monies, which would be due on account of rent, if the arbitrator found that Smylie’s damages for malpractice and attorney misconduct sufficient to offset the entire debt.”
Besides, Bauer noted, the mandatory fee arbitration statute gives the trial court discretion to permit a suit for legal fees to go forward if the dispute is considered too complex for arbitration under the statute.
Attorneys on appeal were James A. Moss of Robert Smylie & Associates and Stuart B. Esner and Gregory R. Ellis of Esner, Chang & Ellis for Smylie and Frank W. Nemecek, Mark Schaeffer, and Joel Gluzman of Nemecek & Cole for the Fagelbaum firm.
The case is Fagelbaum & Heller LLP v. Smylie, B205181.
Copyright 2009, Metropolitan News Company