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June 2, 2009

Fagelbaum & Heller LLP v. Smylie (2009) 174 Cal.App.4th 1351

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The Second District holds that a client waived his right to MFAA arbitration by requesting affirmative relief for malpractice in a related dispute. 

Fagelbaum & Heller represented Robert Smylie pursuant to agreements for legal services.  Smylie failed to honor his agreement to give Fagelbaum & Heller rent credit on a shared office suite in lieu of legal fees and costs.  Fagelbaum & Heller’s complaint alleged that there had been a written fee agreement for one matter, which had been lost, and a written agreement for a second matter.  Fagelbaum & Heller had instituted binding arbitration, as provided in the written agreement and the complaint sought provisional relief.  Fagelbaum & Heller filed a motion to compel binding arbitration and to consolidate arbitration proceedings and provided evidence that it had initiated binding arbitration, as provided in the existing fee agreement, by submitting a demand to Action Dispute Resolution Services, Inc.  (ADR).  In response Smylie initiated nonbinding Mandatory Fee Arbitration Act (MFAA) arbitration.

In addition, when Smylie served Fagelbaum & Heller with a three-day notice to pay rent or quit it invoked the arbitration clause in their sublease by submitting a demand to the American Arbitration Association (AAA) Smylie responded to the AAA demand by serving a cross-demand in which he alleged that he owed nothing in legal fees, that he was entitled to a refund of fees, and that those issues were then subject to a nonbinding MFAA arbitration.

After a failed mediation through the local bar association, Smylie’s attorney agreed that the mediation could be deemed to be compliance with the MFAA.  Smylie’s attorney also agreed to consolidate the disputes but later reneged on this agreement.  Fagelbaum & Heller attempted to proceed with the binding arbitration in the written attorney fee agreement but Smylie refused.

In seeking a motion to compel binding arbitration under the California Arbitration Act (CAA) Fagelbaum & Heller argued that Smylie had waived his right to an MFAA arbitration because he sought affirmative relief for legal malpractice.  Smylie denied the existence of a written fee agreement in one matter or that he agreed to arbitrate disputes.
The trial court consolidated the MFAA arbitration and the AAA arbitration into the ADR binding arbitration, and retained jurisdiction in the event the arbitrators determined that any of Fagelbaum & Heller’s claims were not subject to an arbitration agreement.

The arbitration panel found that the parties had executed the lost written retainer agreement, that it contained an arbitration clause, and awarded Fagelbaum & Heller its fees and costs for both cases.  The panel allowed Fagelbaum & Heller to deduct the rent owed each month for the outstanding legal fees.  The panel also awarded Fagelbaum & Heller its attorney fees and costs in the arbitration proceeding.

When Fagelbaum & Heller moved to confirm the award Smylie opposed the motion and requested that the trial court vacate the award because he was not afforded non-binding arbitration under the MFAA.  The trial court found that Smylie had waived his right to MFAA by alleging that Fagelbaum & Heller committed malpractice and because he participated fully in the ADR arbitration, without asserting that the arbitrators lacked jurisdiction because of his pending claim for MFAA arbitration.

The MFAA required the State Bar to establish and maintain a system for the arbitration of attorney-client fee disputes.  Once a client demands MFAA arbitration, participation by the attorney is mandatory, and the attorney’s action or other proceeding is stayed until the award of the arbitrators is issued or the arbitration is otherwise terminated.  A client who responds to or initiates a complaint waives the right to MFAA arbitration.  Waiver also occurs when a client seeks affirmative relief against the attorney based upon alleged malpractice or professional misconduct.

Smylie argued that he never sought to recover affirmative relief for his malpractice claims, they were raised defensively only.  The trial court found that on at least one occasion, Smylie’s AAA cross-demand for relief regarding the lease termination, he requested affirmative relief and thus waiver occurred.  Smylie’s demand in that proceeding was for unpaid rent.  He conceded that he had an agreement with Fagelbaum & Heller to apply rent due towards unpaid legal fees.  Thus, the AAA arbitrator would have had to reach the questions raised concerning malpractice to afford Smylie the requested relief.

In addition, the MFAA gives the court discretion to vacate the automatic stay upon finding that a matter is inappropriate for MFAA arbitration.  Given the complex issues the MFAA fee arbitration was unlikely to resolve the parties’ disputes and the court had discretion to allow Fagelbaum & Heller’s other proceedings.

As for the trial court’s order regarding the case with the lost written fee contract to arbitration, the Court of Appeal noted that a party seeking arbitration must prove the existence of a valid arbitration agreement, which must be in writing.  The trial court erroneously deferred the issue to the arbitration panel.  Yet, the Court of Appeal did not find that this error required reversal.  Smylie placed all outstanding and previously paid legal fees and costs in issue in the AAA lease arbitration.  The lease in question provided for binding arbitration in a provision broad enough to include related controversies not expressly described in the lease.

Comment: Courts are loathe to disrupt decisions made after a lengthy arbitration process, especially when the parties are all attorneys.


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