O'Flaherty v. Belgum

• Decision Date: 29 January 2004
• Docket Number: No. B162758.,B162758.
• Citation: 115 Cal.App.4th 1044,9 Cal.Rptr.3d 286
• Court: California Court of Appeals Court of Appeals
• Parties: Michael A. O'FLAHERTY et al., Cross-complainants and Appellants, v. Stephen L. BELGUM et al., Cross-defendants and Respondents.

9 Cal.Rptr.3d 286

115 Cal.App.4th 1044

Michael A. O'FLAHERTY et al., Cross-complainants and Appellants, v. Stephen L. BELGUM et al., Cross-defendants and Respondents.

No. B162758.

Court of Appeal, Second District, Division 5.

January 29, 2004.

As Modified on Denial of Rehearing February 26, 2004.

Review Denied April 14, 2004.

Brown & Kellner, Michael R. Brown and Richard L. Kellner, Pasadena, for Cross-complainants and Appellants.

Ernest C. Chen, Anaheim, for Cross-defendants and Respondents O'Flaherty & Belgum, Stephen L. Belgum and Marie Belgum.

Dawn S. Theodora for Cross-defendant and Respondent Todd C. Theodora.

MOSK, J.

Appellants 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 (collectively the withdrawing partners), the law firm of O'Flaherty, Cross, Martinez, Ovando & Hatton LLP (OCMOH), and the law firm of O'Flaherty, Cross, Martinez & Ovando LLP (OCMO) appeal from a judgment confirming an arbitration award in favor of their former partners (sometimes collectively the remaining partners) and former law firm O'Flaherty & Belgum (OB) in this matter concerning the withdrawal of the partners, dissolution of the partnership, and the appointment of a receiver for OB. Stephen L. Belgum (Belgum), his former wife Marie Belgum, and OB are the respondents.

Appellants contend as follows: (1) the arbitrator exceeded his powers by adjudicating claims that were instituted by Belgum's attorney on behalf of OB over the objection of the receiver when such claims could be prosecuted only in the receiver's name; (2) the arbitrator exceeded his powers by finding that the withdrawing partners had forfeited their interests in OB and that no accounting of their capital accounts was required; (3) the award should have been vacated based on the arbitrator's failure to disclose he had been represented in two matters by the law firm that represented appellants during part of the arbitration proceedings; (4) the arbitrator failed to disclose circumstances concerning his separation from a former law firm that could cause a reasonable person to doubt his ability to be impartial; (5) the trial court abused its discretion by denying discovery requests concerning the arbitrator's separation from the law firm; and (6) due process requires judicial review of the punitive damages award.

We hold that because the arbitration clause in the partnership agreement expressly precluded the arbitrator from granting any remedy prohibited by the agreement or "not available in a court of law," the arbitrator exceeded his authority by declaring a forfeiture of the withdrawing partners' capital accounts. We further hold that the arbitrator had no jurisdiction over OB in view of the objection of the receiver. We reverse the judgment and order that the award be vacated.

FACTS AND PROCEDURAL BACKGROUND

OB was a law partnership, the equity partners being Belgum, O'Flaherty, Weber, Hatton, Thies, Dato, Cross, Ovando, Martinez, Todd Theodora, Ernest Chen, and Nancy Wanski. The partners had a dispute leading to O'Flaherty, Cross, Martinez, Ovando, Hatton, Weber, Thies and Dato withdrawing from OB and forming a new law partnership (OCMOH).

On January 12, 1998, Wanski filed an action (Los Angeles Superior Court Case No. BC184060 — the Wanski action) against the withdrawing partners and OCMOH for breach of contract, intentional violation of fiduciary duty, conversion, appointment of an impartial receiver, an accounting, and judicial dissolution of OB. The withdrawing partners filed a cross-complaint against the remaining partners of OB for declaratory relief and appointment of a receiver, while reserving their right to arbitration.

The withdrawing partners stated that the disputes between the parties included the following: who was the managing partner; whether Belgum had been expelled; whether OB was properly dissolved effective December 31, 1997; and issues concerning the use of OB's offices and property. They also stated that, "A receiver should be appointed by the court to hold the Partnership's property and wind up the Partnership's affairs while the disputes between the parties are being resolved in order to preserve the Partnership's value and insure the effect of any arbitration award and resulting judgment specifying how the Partnership should be wound up and liquidated."

On January 21, 1998, the superior court in the Wanski action found that a receiver was necessary and appointed David Ray to act as the receiver for OB (hereafter, we will refer to the court in that action — the Wanski action — as the receivership court with respect to matters pertaining to the OB receivership and as the trial court with respect to matters dealing with the litigation or the arbitration).¹ The receiver's powers included enforcing and collecting debts, instituting lawsuits on behalf of OB to preserve and protect the partnership's assets, discharging obligations of OB from the funds in his possession, and engaging the services of counsel.

The receivership court confirmed the receiver's appointment on February 10, 1998. On February 25, 1998, Belgum filed a motion for an order discharging the receiver and terminating the receivership on the grounds that OB had not been dissolved and that no receiver was required to manage the assets. Belgum argued that because no dissolution had been effected, there was no entitlement to a receivership for dissolution purposes. In addition, Belgum argued that the withdrawing partners had violated the partnership agreement, and that therefore, their interests in OB's assets were limited to the return of their capital accounts. Wanski joined in Belgum's motion, and Chen filed a nonopposition. The receivership court denied the motion to discharge the receiver and ordered as follows: (1) the receiver should request an accounting of net profits from OCMOH for OB clients from the time of dissolution; (2) the receiver should execute substitution of attorneys for OB clients; (3) OCMOH's claim to payments for work on OB cases should be treated as any other claim that will await final disposition through the arbitration process; (4) the receiver should pay for services provided to OB by OCMOH; and (5) the receiver should pursue collection of rent from former OB partners using and occupying receivership property.

On May 26, 1998, the withdrawing partners filed a petition in the Wanski action for an order staying the Wanski action and compelling arbitration pursuant to an arbitration clause in the partnership agreement. Section 20.1 of the partnership agreement provided for arbitration of disputes as follows: "Except as otherwise provided in this Agreement, any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by mediation, or by arbitration before a single arbitrator in Los Angeles, California." In addition, section 20.5 provided: "Each of the parties reserves the right to file with a court of competent jurisdiction an application for temporary or preliminary injunctive relief, writ of attachment, writ of possession, temporary protective order and/or appointment of a receiver on the grounds that the arbitration award to which the applicant may be entitled may be rendered ineffectual in the absence of such relief." Section 20.9 provided: "The arbitrator shall not have any power to alter, amend, modify or change any of the terms of this Agreement nor to grant any remedy which is either prohibited by the terms of this Agreement ... or not available in a court of law." Section 20.11 provided: "The costs of the arbitration ... shall be borne equally by the parties to the arbitration. Attorneys' fees may be awarded to the prevailing or most prevailing [party] at the discretion of the arbitrator."

The withdrawing partners stated in their petition for arbitration that the disputed issues included whether Belgum was properly involuntarily terminated for cause; whether OB was properly dissolved by a vote of the majority in interest effective December 31, 1997; whether Belgum's consent was required to dissolve OB; and whether the withdrawing partners were obligated to account to the remaining partners for profits earned in connection with completing OB client matters after December 31, 1997. The withdrawing partners requested that the trial court order the remaining partners to arbitration and that the receivership court retain jurisdiction over the receiver and the receivership estate. On July 30, 1998, the trial court granted the petition and dismissed the action, but retained jurisdiction to enforce the arbitration award and jurisdiction over the actions of the receiver and the receivership estate. The court later amended the order to provide that the matter was stayed pending arbitration.

On December 17, 1998, Attorney Steven Morgan (Attorney Morgan) filed a complaint on behalf of Belgum and OB against the withdrawing partners and OCMOH for breach of written contract, intentional breach of fiduciary duty, conversion, defamation, intentional interference with contracts, and intentional interference with economic advantage (Los Angeles Superior Court Case No. EC026142 — the Belgum action). Belgum filed a motion to vacate the dismissal of the Wanski action and restore it to the active calendar for failure to institute arbitration proceedings. The withdrawing partners stated that they had not instituted arbitration proceedings because their claims to shares of the net assets after liquidation could be litigated in the receivership proceeding. The withdrawing partners argued it was the responsibility of the remaining partners to institute arbitration proceedings to pursue other claims. The trial court set an order to show cause why the stay should not be dissolved for failure to arbitrate.

On March 30, 1999, the withdrawing partners sent a demand for arbitration to the remaining partners in...