C.A: No Arbitration of Debt Action Against Attorneys
By SHERRI M. OKAMOTO
August 27, 2009
This district’s Court of Appeal yesterday rejected efforts by two Pasadena-area attorneys to compel arbitration of an ex-client’s claim for indemnification of a $25,000 judgment entered against her—based on a breach of a confidentiality provision in a settlement agreement the lawyers had negotiated with her former employer—arising from their firm’s activities to solicit new business.
Div. One’s unpublished opinion by Presiding Justice Robert M. Mallano explained that none of Patricia Dahlstrom’s causes of action against Neil J. Barker and Dale L. Gronemeier were related to their provision of legal services in her wrongful termination case against Litton Data Systems, and therefore the arbitration agreement she had signed was inapplicable to the dispute.
When Dahlstrom retained Gronemeier & Barker in 1991, she had signed a “Professional Services Agreement” which stated that the firm would “provide legal services…concerning [her] employment discrimination, breach of contract, and allied claims against Litton.”
The document also contained an arbitration provision which provided that any controversy or claim “ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE BREACH THEREOF, THE SERVICES RENDERED BY G&B TO CLIENT, OR ANY ALLEGED BREACH OF FIDUCIARY DUTY, FRAUD, NEGLIGENCE OR MALPRACTICE BY G&B” would be submitted to binding arbitration.
Gronemeier & Barker subsequently negotiated a settlement with Litton, obtaining an award for Dahlstrom which Mallano characterized as “substantial.”
This settlement was memorialized in a written agreement containing a confidentiality clause providing that Litton would be entitled to liquidated damages of $25,000 in the event of a breach by Dahlstrom.
In the fall of 1993, Barker allegedly contacted Dahlstrom and asked her to loan the firm $100,000, which she agreed to do.
Under the terms of a promissory note executed Sept. 29, 1993, the money was to be repaid within 12 months at an interest rate of 10 percent per annum.
Dahlstrom claimed that Gronemeier later told her that Litton was claiming she had breached the confidentiality provision of the settlement agreement. She maintained that Litton’s assertion was based on a post-settlement letter sent to Litton employees by Gronemeier in an effort to generate new business for the firm.
Litton’s claim was submitted to arbitration, and Gronemeier & Barker represented Dahlstrom in those proceedings. After the arbitrator issued a $25,000 award against her, Dahlstrom said her attorneys promised to indemnify her for that amount.
Dahlstrom eventually filed suit against Barker and Gronemeier individually, alleging causes of action for breach of contract and breach of fiduciary duty. Both claims were based on the allegations that Barker and Gronemeier had not repaid the loan nor fulfilled their promise to indemnify her for the arbitration award.
She sought damages of $76,128.61 on each cause of action.
The attorneys answered the complaint and filed a cross-complaint for “unjust enrichment and overpayment of promissory note due to mistake,” claiming they had overpaid Dahlstrom on the note by $2,250. Dahlstrom answered the cross-complaint.
Barker and Gronemeier then filed a motion to compel arbitration, insisting that the note had been paid in full, leaving only Dahlstrom’s claims for indemnification and breach of fiduciary duty to be decided.
Those claims, they argued, arose out of their provision of legal services in Dahlstrom’s case against Litton and were therefore subject to arbitration, pursuant to the terms of the Professional Services Agreement.
Dahlstrom filed opposition, including a declaration in which she stated her accounting records indicated the attorneys had not paid off the loan and that she had periodically submitted her accounting records to Barker and Gronemeier reflecting outstanding payments for both the loan and the judgment debt.
In reply, Barker and Gronemeier argued that Dahlstrom had improperly credited a prior payment to the indemnification obligation instead of the loan. If the payment had been properly credited, they contended, the loan would have been overpaid, and the indemnification claim, part of which was still outstanding, had to be arbitrated.
Los Angeles Superior Court Judge Edward A. Ferns conducted a hearing on the motion to compel in September 2008 and found that none of Dahlstrom’s causes of action were subject to arbitration.
Joined by Justices Victoria Gerrard Chaney and Jeffrey W. Johnson, Mallano agreed with Ferns’ ruling.
As the offending solicitation letter which resulted in the judgment against Dahlstrom was sent “long after” Barker and Gronemeier had settled Dahlstrom’s wrongful termination case and the firm was no longer representing her in regard to that matter, Mallano reasoned that Dahlstrom’s indemnification claim was not based on the provision of any legal service.
“In short, the indemnification claim arose out of and was related to G&B’s own economic interests in obtaining new clients, not any interest the firm was pursuing on Dahlstrom’s behalf,” he wrote.
Mallano also concluded the breach of fiduciary duty cause of action was based on the promissory note and the promise of indemnification, not the legal services rendered to Dahlstrom, and so the arbitration provision did not apply to either of Dahlstrom’s claims.
Elbie J. Hickambottom Jr. of Gronemeier & Associates PC represented Barker and Gronemeier, while Jeffrey A. Lipow of Smith & Lipow represented Dahlstrom.
Lipow said he had viewed the case as “kind of a frivolous appeal of a frivolous effort to try and force a case out of the courthouse when clearly the facts didn’t justify that,” remarking that the lesson to be learned from yesterday’s decision was “if you borrow money from your client, pay it off.”
He said that the case is set for trial Sept. 14 but that the parties will be appearing today to stipulate for a continuance to engage in mediation.
Hickambottom declined to comment, saying he had not yet reviewed the decision, and neither Barker nor Gronemeier could be reached for comment.
The case is Dahlstrom v. Barker, B211718.