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Oaktree Capital Management, L.P. v. Bernard

February 22, 2010

OAKTREE CAPITAL MANAGEMENT, L.P. ET AL., PLAINTIFFS AND RESPONDENTS,
v.
RUSSEL S. BERNARD, DEFENDANT AND APPELLANT.



APPEAL from a judgment of the Superior Court of Los Angeles County. Kenneth R. Freeman, Judge. Affirmed. (Los Angeles County Super. Ct. No. BS110252).

The opinion of the court was delivered by: Rubin, J.

CERTIFIED FOR PUBLICATION

Russel S. Bernard appeals from the trial court's judgment confirming an arbitration award against him. We affirm.

FACTS AND PROCEEDINGS

Respondents Howard Marks and Bruce Karsh and others formed respondent Oaktree Capital Management L.P. (Oaktree) in 1995, a real estate investment hedge fund. Oaktree established limited partnerships called "funds," which it marketed to outside investors. A few months after Oaktree's creation, appellant Russel S. Bernard joined it to manage its funds.

Oaktree charged its investors two types of fees: management fees and incentive fees. Oaktree calculated its management fees as a percentage of total assets under the control of each of its funds. A second fee Oaktree charged its investors were incentive fees, also called "carried interest." Oaktree collected an incentive fee when a particular fund reached a specified performance benchmark calibrated to encourage managers such as appellant, who received a share of the fee, to achieve superior returns for Oaktree's investors.

In November 2005, appellant resigned from Oaktree. Shortly afterward, he announced his formation of a private equity real estate fund named Westport Capital Partners (Westport). After its establishment, Westport bought 60 Main Street, a commercial building in Connecticut. As later found by the arbitrator, appellant had identified 60 Main Street as an investment opportunity during his employment at Oaktree but had not disclosed its existence to Oaktree's principals. Instead, appellant breached his fiduciary duty to Oaktree by delaying Oaktree's launching of a new fund -- Fund IV -- so that he could buy himself time to present 60 Main Street as a substitute investment for potential Fund IV investors to invest their money at Westport. Among appellant's stalling tactics at Oaktree were misstating Fund IV's intended launch date, declining to meet with potential new investors, and failing to respond to those investors' inquiries. Based on his breach of fiduciary duty, Oaktree formally discharged appellant in December 2005, one month after he had resigned and refused to pay him incentive fees to which he claimed he was entitled.

Appellant demanded arbitration of his fee dispute with Oaktree. Arbitration began in January 2007. In July, the arbitrator issued her award in respondents' favor. She rejected appellant's claim that his incentive fees vested upon a fund's reaching its performance benchmarks. She found instead that the fees vested only if Oaktree employed appellant when Oaktree distributed the fees. The arbitrator further found appellant breached his fiduciary duty to Oaktree by attempting to steer investors to Westport and 60 Main Street by delaying Fund IV's launch. The arbitrator awarded Oaktree $12.3 million for the management fees it lost from Fund IV's delayed start up. The arbitrator also awarded respondents $6.7 million in attorneys fees, costs, and interest. Nineteen days after the arbitrator served the award, respondents filed with the trial court a petition to confirm it. The court later entered judgment for respondents confirming the award. This appeal followed.

DISCUSSION

Appellant contends the court committed two principal errors in confirming the arbitration award. First, the court adopted the arbitrator's findings that, in appellant's view, divested appellant of fees he claims he had already earned, a forfeiture that, among other sins, violates the public policy protecting an employee's compensation. Second, the court adopted the arbitrator's findings making appellant liable for the profits Oaktree lost from its delayed management fees in Fund IV, a liability that violates the public policy prohibiting an employee from being responsible for his employer's ordinary business losses. Respondents counter that we need not address the merits of appellant's contentions because appellant's response to their petition to confirm the arbitration award was untimely. Appellant's untimeliness, according to respondents, waived his right to contest the petition's allegations and the court's confirmation of the arbitrator's award. We hold appellant's response was timely, but we nevertheless affirm the award because it did not satisfy the narrow grounds for judicial review of an arbitration award.

"When [a] party petitions the court to confirm the award . . ., [the opposing party] may seek vacation . . . of the award by way of response only if he serves and files his response within 10 days after the service of the petition ([Code of Civ. Proc., ]§ 1290.6)[*fn1 ]. Unless the response is duly served and filed, under section 1290 the allegations of the petition are deemed to be admitted by [the other side]." (DeMello v. Souza (1973) 36 Cal.App.3d 79, 83.)*fn2 The relevant facts supporting our conclusion that appellant's response was timely are as follows. On Tuesday, July 31, 2007, respondents filed, and by overnight mail served, their petition to confirm the arbitration award. Under Code of Civil Procedure section 1290.6, appellant had 10 days to file his response to the petition. (§ 1290.6 ["A response shall be served and filed within 10 days after service of the petition"].) Appellant calculates he actually had 12 days to respond - ten days under section 1290.6 plus two court days because respondents served the petition by overnight mail. (Code Civ. Proc., § 1013, subd. (c).) Counting 10 days forward from July 31 leads to Friday, August 10, which when one allows for two extra court days ends at Tuesday, August 14. On Monday, August 13, alleging federal jurisdiction under diversity of citizenship, appellant removed respondents' confirmation proceeding to federal district court.*fn3 Once he was there, the district court ordered appellant to show cause why the court should not dismiss the federal action for incomplete diversity of citizenship. Appellant conceded the absence of complete diversity and consented to remand of the matter to state court. The federal court entered its dismissal and remand order on September 6, 2007, and appellant received notice on Friday, September 7 of the court's actions.

The day appellant received notice of the remand to state court, he filed a "Notice of Further Response to Petition to Confirm Arbitration Award." Appellant contends this notice came within the 12 days he had to respond, which had been suspended while the case was pending in federal court. (Dauenhauer v. Superior Court In and For Sonoma County (1957) 149 Cal.App.2d 22, 26 [upon remand, plaintiff has unexpired time left at removal within which to file].) He attached a copy of the response he had filed in federal district court almost three weeks earlier in August, entitled a "Response to Petition to Confirm Arbitration Award." (See Laguna Village, Inc. v. Laborers' Internat. Union of North America (1983) 35 Cal.3d 174, 179, 182 [motion to dismiss in federal court sufficiently similar "in substance" to state court demurrer to save defendant from default for not filing "responsive pleading" to state court complaint when matter remanded to state court].) Although the state court "Notice of Further Response" lacked citation to the arbitration record or substantive argument, it reiterated that appellant would pursue in state court the grounds for vacating the award that he had identified in federal court, including "the arbitrator exceeded her authority and further that the award is legally irreconcilable with the undisputed evidence and well established public policy." Appellant asked the trial court to issue a stay and briefing schedule to allow him time to file a petition to vacate the arbitration award. On October 4, 2007, nearly a month after the federal court remanded the matter to state court, appellant filed his petition to vacate.

Appellant contends he complied with the appropriate time limits imposed by the statutory framework for vacating an arbitration award. According to him, his "Notice of Further Response" to file a petition to vacate the award, followed by the petition itself within 100 days of the award's service, was the proper procedure for challenging the award's confirmation. He derives a window of 100 days from Code of Civil Procedure section 1288, which states: "A petition to vacate an award . . . shall be served and filed not later than 100 days after the date of the service of a signed copy of the award on the petitioner." (§ 1288; see also § 1288.2 ["A response requesting that an award be vacated . . . shall be served and filed not later than 100 days after the date of service of a signed copy of the award . . . ."].)

We agree appellant's response was timely, but not for the precise reasons he advances. Respondents' filing a petition to confirm an arbitration award changed the timing of events. When one side files a petition to confirm the award, the other side must respond within 10 days. "The parties to an arbitration may petition the court to confirm, correct or vacate the award. (Code Civ. Proc., § 1285.) However, such a petition must be served and filed `not later than 100 days after the date of the service of a signed copy of the award.' (Code Civ. Proc., § 1288.) If a party requests confirmation, within the 100 days specified in section 1288, a response may be filed seeking vacation of the award. Any such response must, however, be filed within 10 days of the date the petition to confirm is served. (Code Civ. Proc., § 1290.6.)" (Elden v. Superior Court (1997) 53 Cal.App.4th 1497, 1511.) (Italics added.) Because appellant filed his ...


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