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By Samson Habte
June 17 — A former client who ran out of funds to pay her share of the costs of arbitrating her malpractice claims against a law firm can go ahead and litigate those claims in court, the U.S. Court of Appeals for the Ninth Circuit ruled June 15 ( Tillman v. Rheingold, Valet, Rheingold, Shkolnik & McCartney, 2016 BL 190432, 9th Cir., No. 13-56624, 6/15/16 ).
Neither the Federal Arbitration Act nor Ninth Circuit decisions interpreting the Act offered a direct answer to the question on appeal: whether a court that received a civil claim and then referred it to arbitration must dismiss the action if the arbitration was terminated because one party lacked the resources to pay her share of the arbitration costs.
A district court concluded that under these circumstances “the party responsible for the termination loses certain rights,” and that if that party was the plaintiff in a civil action, her claims “must be dismissed.”
The appellate panel disagreed. “In the absence of a statutory directive, the district court erred in dismissing [the] case,” Judge Marsha S. Berzon wrote.
The panel further held that plaintiff Renee Tillman—who was contractually obligated to arbitrate her malpractice claims against a law firm but lacked funds to pay a required $18,562 deposit to the arbitrator—was entitled to pursue her claims in federal court.
“We are mindful, of course, of the ‘liberal federal policy favoring arbitration' reflected in the FAA,” the panel said. “Our ruling today, which allows Tillman's case against the [defendant law 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,” Berzon wrote.
“If Tillman had refused to pay for arbitration despite having the capacity to do so, the district court probably could still have sought to compel arbitration under the FAA's provision allowing such an order in the event of a party's ‘failure, neglect, or refusal' to arbitrate,” Berzon added. “Or, in that context, the court could, and most probably should, dismiss Tillman's complaint under Fed. R. Civ. P. 41(b), for failure to comply with the order to arbitrate despite its ability to do so.”
The decision reversed an order dismissing Tillman's lawsuit against Rheingold, Valet, Rheingold, Shkolnik & McCartney LLP, which represented Tillman in a wrongful death action after her husband died in a truck accident.
A jury awarded Tillman just north of $8 million, an amount reduced on appeal to $4.95 million. Tillman and the Rheingold firm were then sued by Tillman's son-in-law, who said they wrongly excluded him from the lawsuit in violation of a rule requiring heirs suing in wrongful death actions to join all other known heirs.
Tillman then sued the Rheingold firm for malpractice, and her lawsuit was referred to arbitration as required by language in the firm's retainer agreement with Tillman.
The retainer provided that the arbitration would proceed under the rules of the American Arbitration Association, which requires parties to bear costs equally absent some other arrangement.
The AAA rules also allowed the arbitrator to terminate proceedings in the event of nonpayment—and to do so without entering a judgment.
That was significant, Berzon said, because the FAA requires courts that refer a civil action to arbitration to stay proceedings “until such arbitration has been had in accordance with the terms of the agreement.”
“Here, Tillman and the firm chose rules that allowed the arbitrator to terminate their arbitration in the event of non-payment without any resulting award or judgment,” Berzon wrote.
“Tillman cooperated with those rules as long as she was able to,” she added. “No section of the FAA compelled the district court to dismiss her case once the arbitration had concluded in accordance with the agreed upon rules governing but without resolution.”
The court said the Tenth Circuit reached a similar conclusion in another case involving “a scenario in which an arbitration under the AAA's rules was terminated for non-payment of the AAA's fees.”
“The Tenth Circuit held that because the AAA's rules allowed for such a termination of the proceedings, ‘the arbitration “ha[d] been had in accordance with the terms of the agreement,” … removing [the] requirement for the district court to stay the proceedings,'” Berzon wrote, quoting from Pre-Paid Legal Servs. Inc. v. Cahill, 786 F.3d 1287 (10th Cir. 2015).
Judge Ronald M. Gould and District Judge George Caram Steeh III, sitting by designation, concurred.
Stephen C. Johnson of Dempsey & Johnson P.C., Los Angeles, argued for Tillman.
Stephen M. Caine of Thompson Coe & O'Meara LLP, Los Angeles, argued for the Rheingold firm.
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