Thursday, June 16, 2016
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Ninth Circuit Rules, in Legal Malpractice Case:
Client Who Couldn’t Afford Arbitration Can Sue in U.S. Court
By KENNETH OFGANG, Staff Writer
A plaintiff who ran out of money during the arbitration of her legal malpractice case may continue to litigate in federal court, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
The panel partially affirmed a ruling by U.S. District Judge Virginia Phillips of the Central District of California. It held that Phillips was correct in terminating an arbitration between Renee Tillman and the law firm of Rheingold, Valet, Rheingold, Shkolnik & McCartney, but erred in dismissing Tillman’s claim against the firm.
“We are mindful, of course, of the ‘liberal federal policy favoring arbitration,’ “Judge Marsha S. Berzon wrote. “…Our ruling today, which allows Tillman’s case against the Rheingold firm to proceed despite the existence of an arbitration agreement between the two, does not run afoul of that policy. Our decision that Tillman’s case may proceed does not mean that parties may refuse to arbitrate by choosing not to pay for arbitration.”
Wrongful Death Action
Tillman hired the Rheingold firm to represent her in a wrongful death action after her husband was killed in a truck accident. An $8 million verdict was reduced on appeal, following which Tiilman’s stepson sued her and the firm, claiming he had been negligently excluded from the wrongful death action.
Those claims against the law firm were dismissed, but the action against Tillman proceeded. She in turn sued the firm in the Central District court, claiming that failing to include her stepson in the action, and to advise her of the rights of other heirs, constituted malpractice.
The firm moved to compel arbitration, as provided for in its retainer agreement, and the motion was granted and the action stayed. An arbitration was commenced in New York, where the Rheingold firm is based, under the auspices of the American Arbitration Association.
Tillman objected to various aspects of the arbitration, including the need for a “case-within-a-case” adjudication, and claimed the process was needlessly driving up costs. Tillman ultimately failed to put up a deposit of more than $18,000 that the AAA said would be needed in order to continue the proceedings.
The firm said it would not put up the deposit, and the arbitration was dismissed for nonpayment.
Motion to Dismiss
Rheingold Valet then moved for dismissal in the district court, citing Federal Rule of Civil Procedure 41(b), which permits dismissal for failure “to prosecute or to comply with these rules or a court order.” While the firm argued then nonpayment of the deposit was a violation of the order compelling arbitration, Tillman responded that she had done “everything in her power” to comply, including borrowing money and persuading her attorneys to front some of her costs.
Tillman presented evidence that her settlement proceeds had been exhausted paying legal fees, outstanding debts, educational payments, and home improvement costs, in addition to losses from investments and gambling. Phillips concluded that the plaintiff’s financial situation precluded dismissal under Rule 41(b), but ultimately dismissed the case on the ground that the Federal Arbitration Act barred the court from proceeding.
Berzon, however, said the FAA, which provides in part that a stay of arbitration remains in effect “until such arbitration has been had in accordance with the terms of the agreement,” does not bar the court from lifting the stay and allowing the case to proceed in court when a party’s inability to pay precludes the completion of arbitration.
The judge cited Lifescan, Inc. v. Premier Diabetic Servs., Inc., 363 F.3d 1010 (9th Cir. 2004). The Ninth Circuit in that case ordered dismissal of a petition to compel arbitration where the AAA had suspended proceedings after the responding party said it could not pay its share of the arbitration costs.
The arbitration had proceeded pursuant to the parties’ agreement, within the meaning of the FAA, the panel held.
Phillips, Berzon said, cited Lifescan but had misinterpreted it as precluding the litigation from proceeding in court.
The appellate jurist explained:
“Lifescan does not discuss how the underlying dispute should be disposed of, but it never indicates that the action should be dismissed….Lifescan’s only conclusion was that compelling arbitration would be inappropriate.
“This silence is telling. Nothing in the FAA requires dismissal of the litigation under Lifescan’s circumstances or the present ones.”
If Tillman were able to pay her share of arbitration costs but refused to do so, Berzon elaborated, the district court could have ordered her to do so under the FAA or ordered dismissal under Rule 41(b). But since the arbitration was terminated without fault on her part, and there was thus no hearing on the merits and no award, “allowing her case to proceed in district court is the only way her claims will be adjudicated.”
Berzon emphasized that allowing termination of an arbitration without an award is a feature of the AAA rules, which the parties agreed to abide by, and that “Tillman cooperated with those rules as long as she was able to.”
The opinion was joined by Judge Ronald M. Gould and George Caram Steeh III, senior district judge for the U.S. District Court for the Eastern District of Michigan, sitting by designation.
The case is Tillman v. Rheingold, Valet, Rheingold, Shkolnik & McCartney, 13-56624.
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