Britz, Inc. v. Alfa-Laval Food & Dairy Co.

• Decision Date: 08 May 1995
• Docket Number: ALFA-LAVAL,No. F020306,F020306
• Court: California Court of Appeals Court of Appeals
• Parties: BRITZ, INC. et al., Plaintiffs and Appellants, v.FOOD & DAIRY CO. et al., Defendants and Respondents.

Page 700

40 Cal.Rptr.2d 700

34 Cal.App.4th 1085

BRITZ, INC. et al., Plaintiffs and Appellants, v. ALFA-LAVAL FOOD & DAIRY CO. et al., Defendants and Respondents.

No. F020306.

Court of Appeal, Fifth District, California.

May 8, 1995.

As Modified on Denial of Rehearing June 6, 1995.

Review Denied Aug. 10, 1995.

[34 Cal.App.4th 1090] Thomas E. Campagne, Fresno, Cotkin & Collins, Joan M. Dolinsky, Los Angeles and Jeffrey L. Garland, Santa Ana, for plaintiffs and appellants.

McCormick, Barstow, Sheppard, Wayte & Carruth, Stephen R. Cornwell, Fresno, Wildman, Harrold, Allen & Dixon, Craig M. White and Thomas J. Verticchio, Chicago, IL, for defendants and respondents.

OPINION

VARTABEDIAN, Associate Justice.

This is an appeal from a judgment confirming an arbitration award. Appellants primarily contend that arbitration should not have been compelled in the first instance and that the arbitrator failed to disclose certain conflicts of interest. We reverse the judgment and remand the matter to superior court for further proceedings consistent with this opinion.

FACTS AND PROCEDURAL HISTORY

The Underlying Controversy.

The merits of the underlying controversy are not before us in this appeal. (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 11, 10 Cal.Rptr.2d 183, 832 P.2d 899.) Accordingly, we only briefly summarize the rather complex facts.

Appellants are interrelated corporations that, in various combinations, contracted with respondents to buy and lease certain machines and equipment essential to the operation of a tomato paste processing plant. The total sale/lease price exceeded $1.5 million.

The plant never reached its production goals and appellants closed the plant during its first season of operation. They sold the plant at a substantial loss. They then sued respondents in Fresno County Superior Court for more than $10 million in compensatory and exemplary damages.

The Arbitration.

The sales and lease contracts contained arbitration clauses. Respondents moved in the superior court for an order staying appellants' lawsuit and compelling arbitration of the dispute. Appellants contested this motion. The motion was granted.

The arbitration was to be conducted through the American Arbitration Association (AAA). Pursuant to a list of potential arbitrators submitted by AAA, the parties agreed to the appointment of a single arbitrator, John Peterson, a Fresno attorney.

The arbitration was bifurcated. The liability portion began on January 6, 1992. The arbitrator issued an interim award in favor of respondents on May 22, 1992. He issued a final award in favor of respondents in the amount of $587,425, plus costs and attorney fees in an unspecified amount, on March 31, 1993. The award was served by mail on the parties on April 6, 1993. After additional submissions by the parties, the arbitrator on May 6, 1993, issued a supplemental award of $1,412,953.75 for respondents' attorney fees and $696,747.45 as costs.

The Controversy About the Arbitrator's Neutrality.

Respondents were represented in the initial superior court proceedings by McCormick, Barstow, Sheppard, Wayte & Carruth, a Fresno law firm (McCormick). Attached to their petition to compel arbitration was a copy of a demand for arbitration filed with AAA. That document named as respondents' attorneys Craig M. White and Michael Dockterman of Chicago, Illinois. White and Dockterman are with the Chicago law firm of Wildman, Harrold, Allen & Dixon (Wildman). With one important exception, the Wildman firm, not McCormick, appeared for respondents in the arbitration. When the matter returned to superior court after the arbitration, both McCormick and Wildman appeared for respondents.

After Peterson issued his interim award in favor of respondents, appellants requested that Peterson disclose all past and present relationships with the McCormick firm. Eventually, Peterson did so. The relationships included a number of referrals of legal business to Peterson and his firm from McCormick in the ordinary course of business. These did not involve any financial relationship between the two firms.

Peterson also disclosed that in 1984 he had been retained by McCormick as an expert witness in a legal malpractice case McCormick was defending on behalf of another Fresno law firm. In addition, Peterson disclosed that in November of 1991 and December of 1991 he had been retained by McCormick as an expert witness in two other legal malpractice cases in which McCormick represented law firm defendants. He was still involved in the 1991 cases at the time of the disclosure.

In November 1991, attorneys from McCormick tried to have a subpoena issued by the superior court for the production of documents by a third party involved in construction of appellants' tomato processing plant. The superior court declined to issue the subpoena; it instructed respondents to seek the subpoena from the arbitrator. This gave rise, on December 2, 1991, to the only appearance in the arbitration by a McCormick attorney.

On that date, attorney John T. Savrnoch of McCormick mailed to Peterson a three-page letter on McCormick letterhead. The letter referenced the pending arbitration and requested issuance of a subpoena on behalf of respondents, explaining in detail the importance of the requested materials to respondents' arbitration presentation. The letter included the following statement: "By this letter, the attorneys for Alfa-Laval respectfully request that a records only deposition subpoena be served upon L & A Engineering, Inc. for the following documents...." Peterson granted the request for subpoena by means of a letter from Peterson to McCormick, together with joint addressees Wildman, appellants' attorney, and the attorney for L & A Engineering. ¹

Peterson disclosed his role as an expert witness for McCormick on July 9, 1992, and, in greater detail, on July 15, 1992. Based on this relationship and the referrals of cases to Peterson and his firm by McCormick, appellants requested appointment of a new arbitrator by letter to AAA dated July 21, 1992. AAA, after soliciting input from respondents and Peterson, declined on August 4, 1992, to disqualify Peterson. The AAA decision did not contain a statement of reasons.

Appellants sought relief in the superior court and by petition for extraordinary writ in this court. All of appellants' efforts were unsuccessful.

Peterson presided over the damages portion of the arbitration beginning February 22, 1993.

Postarbitration Proceedings in Superior Court.

Appellants renewed their petition to vacate the arbitrator's award on April 21, 1993, noticing a hearing for May 28, 1993, in superior court. They alleged Peterson's various connections with McCormick created a reasonable impression of possible bias on Peterson's part. Respondents petitioned to affirm the award. Both parties submitted declarations of various attorneys. The parties also relied on Peterson's letter of July 9, 1992, in which he states:

"In the past, when I have arbitrated a matter involving a party represented by the McCormick, Barstow firm, I have advised the American Arbitration Association that I have been on McCormick, Barstow's referral list. I would have done so in this case had I believed that McCormick, Barstow represented Alfa-Laval in the arbitration, or in any other capacity.

"... I knew in April 1991 that McCormick, Barstow had represented Alfa-Laval in the Superior Court action. To the best of my knowledge then, and since then, McCormick, Barstow was not to be, and was not, involved in the arbitration."

The trial court conducted a law and motion hearing on the petitions to vacate and to confirm the award. The court determined that AAA's disposition of appellants' request for Peterson's disqualification was subject to only the limited judicial review available for factual and legal determinations of the arbitrator. In accordance with that standard, the court determined AAA's resolution of the conflict issue was a "plausible interpretation of the law and facts and was rendered with a minimum standard of fair dealing." Secondarily, the court concluded that appellants and their attorney had sufficient information before Peterson was selected as arbitrator about Peterson's relationship with McCormick to place upon appellants a duty of inquiry concerning these relationships; by failing to inquire in a timely manner, appellants waived objection to both types of relationships, the business referrals and the expert witness employment.

The court dismissed appellants' petition to vacate the arbitrator's award and granted respondents' petition to confirm the award, including attorneys fees and costs, with interest from the date of the award through entry of judgment. Judgment was entered on July 16, 1993. The total judgment was for $2,732,477.51, plus costs of the superior court proceedings.

Appellants filed a timely notice of appeal on September 14, 1993.

DISCUSSION

The parties impliedly agree that this case is governed by the Federal Arbitration Act (9 U.S.C. § 1 et seq.) (the Act). (See 9 U.S.C. § 2 [the Act covers arbitration arising from a "written provision in ... a contract evidencing a transaction involving (interstate) commerce...."].) "Generally, under the Act, arbitration is strongly favored, and 'any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration....' [Citations.]" (Rice v. Dean Witter Reynolds, Inc. (1991) 235 Cal.App.3d 1016, 1023, 1 Cal.Rptr.2d 265.)

The Act, however, provides that an arbitration clause is not enforceable if "grounds as exist at law or in equity for the revocation of any contract" permit relief from the arbitration clause. (9 U.S.C. § 2; see Code Civ.Proc., § 1281.) We will turn first, therefore, to appellants' contention that such grounds exist and that the trial court impermissibly compelled arbitration of the present dispute. After concluding that arbitration was properly ordered, ...