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Bak v. MCL Financial Group

January 30, 2009; as modified February 25, 2009


Appeal from a judgment of the Superior Court of Orange County, James P. Gray, Judge. Request for sanctions. Judgment affirmed. Request denied. (Super. Ct. No. 04CC11478).

The opinion of the court was delivered by: Rylaarsdam, Acting P. J.



Objector Theodore C. Peters, an attorney for defendants and cross-complainants MCL Financial Group, Inc. and Michael Upton (collectively defendants), appeals from a judgment confirming an award issued by an arbitration panel. He contends the arbitrators exceeded their powers by ordering him to pay $7,500 in sanctions as a result of his conduct during a prehearing dispute over the production of documents and the trial court erred by failing to strike the sanctions order when confirming the arbitration award. Since objector's claims lacks merit, we shall affirm the judgment.


Plaintiffs are seven registered representatives of the Financial Industry Regulatory Authority (FINRA; previously known as the National Association of Securities Dealers or NASD). Before this litigation arose, each plaintiff had been employed by defendants on a commission basis to assist clients with property transfers eligible for tax-free exchanges under the Internal Revenue Code. Each plaintiff had executed a registered representative agreement with defendants that included a clause declaring, "Any controversies or claims arising out of or relating to this Agreement, or breach thereof, shall be resolved in arbitration in accordance with the Code of Arbitration Procedures of the NASD . . . ."

This litigation arose from a dispute over plaintiffs' commissions. Plaintiffs left defendants' employ and sued to recover the amount they believed was due under their respective contracts with defendants. Defendants filed a cross-complaint against plaintiffs and also obtained a preliminary injunction that prohibited plaintiffs from soliciting defendants' current and prospective clients, the issuance of which this court upheld in a prior appeal. (MCL Financial Group, Inc. v. Bak (May 12, 2006, G035192) [unpub. opn.].)

While the prior appeal was pending, the trial court issued a stay of the lawsuit and directed the parties' dispute be arbitrated before a panel appointed by the FINRA. During a prehearing document production and information exchange, plaintiffs delivered documents to defendants. After doing so, plaintiffs discovered the material included 112 pages of documents they claimed were subject to the attorney-client privilege. Plaintiffs sent defendants a letter informing them of the privileged documents, claiming they had been inadvertently produced, and demanding defendants "return them immediately . . . ."

Defendants returned the privileged material. But objector claims that before doing so, he “made a cursory review of the documents,” copied them, and then placed the copies in a sealed envelope, which he sent to a staff attorney with FINRA who was handling the case. Objector also admits he "create[d] a spreadsheet . . . outlining key information culled from the limited information reviewed . . . ."

Plaintiffs filed an emergency motion with the arbitrators for an order prohibiting defendants “from using the privileged documents” and seeking “destruction of the documents . . . unilaterally sent to [FINRA].” Objector filed a response for defendants, acknowledging they had "agreed not to use the . . . privileged documents . . . ." He further claimed copying the documents was "appropriate."

After a hearing, the panel issued an order that directed objector to pay plaintiffs' counsel "the sum of $7,500[] as a sanction for the copying of privileged documents" and to execute an affidavit that neither he nor anyone in his office retained copies of the privileged material, that they did not give copies to anyone else, and that no other copies of the documents exist. Objector submitted the requested affidavit. He also twice unsuccessfully sought reconsideration of the sanctions award.

Ultimately, the arbitration panel conducted a hearing on the underlying issues and issued an award. In part, the award vacated "[a]ll preliminary injunctions" and confirmed the $7,500 sanctions order issued against objector.

Plaintiffs petitioned to confirm the award. Defendants opposed the request and filed a petition to vacate the award, in part citing the sanctions order as a reason to do so. The trial court struck the portion of the arbitration award that vacated the preliminary injunction, but otherwise granted plaintiffs' petition and entered a judgment confirming it with ...

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