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Caveat: Know Your Arbitrator

Law: Two tales illustrate the risks in an increasingly common feature of contracts.

January 19, 1997|MYRON LEVIN | TIMES STAFF WRITER

Two Holgate development consultants in Indio told The Times that they had applied and become SCAA arbitrators after hearing about the association from Holgate. One of them, planner Rob Strong, expressed dismay at learning that Holgate had brought his own dispute to the private tribunal. The other, engineer Bill Warner, said he did not know Holgate's relationship to the group.

Soderstrom says she knew nothing of these ties when the arbitration notice arrived. Believing she had no other choice, she attended the arbitration hearing last May 13.

In an interview and court papers, Soderstrom said Holgate testified that she had ruined his chance to build an office building, telling "a great big story that he had pleaded with me to reconsider finishing with the escrow, and that he was going to lose this big bundle of money if I didn't."

In fact, Soderstrom said, she had dealt with Holgate's agents, and the conversation that he described never took place.

The arbitrator, Suzanne Cherry, later testified in a deposition that her previous experience was limited to one case. She also declined to be interviewed.

Cherry had brought Philip Puritsky to the arbitration to assist her as clerk. Puritsky is Cherry's brother-in-law and a business partner of Cyril Chern, court records show. Puritsky could not be reached for comment.

Two weeks after the hearing, without a line of explanation, Cherry awarded Holgate $558,270.

That's how matters stood until last month when Judge Wright vacated the award and ended months of anguish for Soderstrom. Though George thought he had proved his client had been cheated, he said he was prepared for the worst because the burden of proving abuse in arbitration is so high.

*

Dunlap's experience was a case in point.

Dunlap had leased office space in Long Beach to a firm called Omni Medical Corp., whose vice president was Cyril Chern. The lease called for Dunlap to fund up to $89,000 in tenant improvements. It also contained a clause, inserted by Omni, for arbitrating disputes before the SCAA.

Court documents show that Omni returned the signed lease in December 1995 and immediately demanded $36,000 toward the improvements.

Dunlap agreed to reimburse Omni, but asked for proof of payment to the contractors. Such proof--in the form of a document called a release of mechanic's lien--is a routine protection for landlords having work done on their property.

But Omni refused, saying it was not required to submit the proof--a stance Dunlap considered bizarre if Omni truly wanted reimbursement. When Dunlap insisted, Omni demanded arbitration.

Records show that at the arbitration hearing last January, it was revealed that Omni had signed a highly unusual contract with the firm it had hired to oversee the improvements.

The agreement required Omni to pay the second firm a penalty of $10,000 per day for any delay in paying its bills. As a result, Omni claimed that by the time of the arbitration, it had become liable for penalties in the hundreds of thousands of dollars. Moreover, Chern was vice president both of Omni and of the second firm to which Omni was hugely indebted, court records show.

Omni was awarded $582,000.

The arbitrator, Wayne M. Schultz, had been jointly picked by Dunlap and Omni from an SCAA list that said he was "an arbitrator/mediator with 10 years' experience." But in an interview with The Times, Schultz said his prior experience was limited to a couple of "minor arbitrations" several years ago.

Court records show that Schultz had been involved with Holgate in business ventures, and at least indirectly with Chern.

During the 1980s, for example, a development firm run by Schultz was involved in Holgate's ill-fated development project in northern San Diego County. Another business of which Chern was vice president had also worked with Holgate in trying to complete the project.

State law requires arbitrators to disclose business or personal relationships with parties appearing before them. Schultz and Chern later stated in court declarations that while both knew Holgate, they had never spoken to each other before the arbitration. Thus, Schultz said, he had no relationship to disclose.

In an interview, Schultz said the $582,000 award was based on the evidence presented at the hearing. "Omni was indeed harmed," Schultz said. "They did in fact have a contract [to pay penalties of $10,000 per day] with maybe unreasonable but real damages attached."

Dunlap lawyer Mark Yocca called it "the most manifestly unjust result I've ever seen in an arbitration."

Outraged by the decision, Dunlap hired investigators to probe links between Holgate, Chern and Schultz.

In February, Dunlap's lawyers filed court papers seeking to vacate the award, calling it the product of a "bogus arbitration association and an arbitrator corrupted by fraud."

Omni countered in court papers that the relationships alleged by Dunlap ranged from "trivial" to "just not there."

Under state law, fraud is grounds for voiding an arbitration award. But proving fraud is very difficult--particularly without the ability to subpoena witnesses and put them under oath.

Los Angeles County Superior Court Judge Lorna Parnell denied Dunlap's request to take depositions to prove its case--as Soderstrom's lawyers were allowed to do. Then last June, Parnell ruled that Dunlap had not presented enough evidence to justify vacating the award.

Dunlap filed a notice of appeal, but believing it had little chance, it quietly settled by paying Omni a six-figure sum.

For Yocca, the Dunlap lawyer, the case was a bitter lesson. "Any time a client is thinking about signing an arbitration clause, I will tell them to think twice," he said.

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