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Golden v. O'Melveny & Meyers, LLP

United States District Court, C.D. California

August 3, 2016

JEFFREY I. GOLDEN
v.
O'MELVENY & MEYERS LLP

          Present: The Honorable CHRISTINA A. SNYDER JUDGE

          PLAINTIFF’S MOTION FOR RECONSIDERATION AND MOTION FOR DISQUALIFICATION

          Honorable CHRISTINA A. SNYDER JUDGE

         I. INTRODUCTION

         On November 10, 2014, plaintiff Jeffrey I. Golden (“Golden”), in his capacity as the trustee in bankruptcy for defendants’ former client, Aletheia Research and Management, Inc. (“Alethia”), filed a plenary action in this Court against defendants O’Melveny & Myers LLP, Steven J. Olson, and J. Jorge deNeve (“O’Melveny”), and Freedman & Taitelman, LLP for alleged legal malpractice. Dkt. 1 (“Compl.”). Plaintiff asserts claims for: (1) professional negligence (conflict of interest); (2) breach of fiduciary duty; (3) avoidance and recovery of preferential transfers under 11 U.S.C. §§ 548 and 550; (4) avoidance and recovery of fraudulent conveyances (two-year transfers) under 11 U.S.C. §§ 548 and 550; and (5) avoidance and recovery of fraudulent conveyances (four-year transfers) under 11 U.S.C. §§ 544 and 550 and Cal. Civ. Code §§ 3439.04, 3439.05, and 3439.07. Id.

         On June 15, 2015, the Court compelled arbitration as to claims one and two, pursuant to the arbitration provisions contained in the engagement agreement between O’Melveny and Alethia, dated January 26, 2010 (“the Agreement”).[1] Dkt. 30 (“Arbitration Order”). The Court stayed claims three through five pending the completion of arbitration. Id. The parties began arbitration before the Hon. Gary A. Feess, United States District Judge (Retired), in November 2015. Dkt. 39 at 3.

         On June 14, 2016, Golden filed a motion for reconsideration of the Arbitration Order. Dkt. 54 (“Mot.”). Golden contends that the Agreement is void as against public policy. Golden further argues that California arbitration rules, rather than the rules of the Federal Arbitration Act, 9 U.S.C. § 1 (the “FAA”), applies to the Agreement, and that accordingly, the Court was required to address any challenges to the validity of the Agreement before the case could be sent to an arbitrator. Id. O’Melveny opposes the motion. Dkt. 60 (“Opp.”).

         On June 22, 2015, Golden moved to disqualify O’Melveny’s counsel, Gibson, Dunn & Crutcher LLP, based primarily on an alleged conflict of interest. Dkt. 56. O’Melveny opposes the motion. Dkt. 59.

         II. BACKGROUND

         Alethia was a Los Angeles-based investment advising firm serving high net worth individuals and institutions. Compl. ¶ 13. When the U.S. Securities and Exchange Commission (“SEC”) began to investigate its activities, Alethia retained O’Melveny on January 26, 2010, pursuant to the Agreement, to represent the firm and several of its officers and directors in connection with the investigation. Id., ¶¶ 26-29. The Agreement notified the parties that the terms of engagement would call for arbitration should disputes arise between them:

As a material part of our agreement, you and we agree that any and all disputes, claims or controversies arising out of or relating to this agreement, our relationship, or the services performed, will be determined exclusively by confidential, final and binding arbitration, in accordance with the then existing Comprehensive Arbitration Rules and Procedures of JAMS [‘JAMS Rules’], in the City of Los Angeles.

Dkt. 17-2 (the Agreement) at 10-11. See also Initial Engagement Agreement, at 11-12 (“The Terms include an agreement to arbitrate certain matters before and pursuant to the Comprehensive Arbitration Rules and Procedures (as then in effect) of JAMS in the City of Los Angeles”).

         The Agreement also contained a general choice-of-law provision, which stated:

         Our agreement will be governed by the internal law, and not the law pertaining to choice or conflict of laws, of the State of California, except to any extent required by applicable law or rules of professional conduct.

         Agreement at 7 (“Choice-of-Law Provision”). The instant claims against O’Melveny arise from its representation in these matters.

         On November 10, 2014, Golden filed the present lawsuit in this Court. Dkt. 1. On June 15, 2015, the Court compelled arbitration as to claims one and two and stayed claims three through five pending the completion of arbitration. Id. The parties began arbitration before Judge Feess in November 2015. Dkt. 39 at 3.

         On February 4, in response to Golden’s request, Judge Feess stayed the arbitration in contemplation of Golden’s stated intention to bring a motion to reconsider this Court’s Arbitration Order in light of the California Court of Appeals’ opinion in Sheppard, Mullin, Richter & Hampton, LLP v. J-M Mfg. Co., 244 Cal.App.4th 590, as modified on denial of reh’g (Feb. 26, 2016) (“Sheppard Mullin”), review granted and opinion superseded sub nom. Sheppard, Mullin, Richter & Hampton v. J-M Mfg., 368 P.3d 922 (Cal. 2016). Dkt. 46 at 3. On June 14, 2016, Golden filed a motion for reconsideration of the Court’s June 15, 2015 Arbitration Order. Dkt. 54 (“Mot.”).[2]

         III. ANALYSIS

         Golden contends that the Agreement is voidable on the grounds of illegality. In its “Limited Opposition” to O’Melveny’s motion to compel arbitration, Golden did not raise an illegality argument, conceded that the FAA applies to the Agreement, Dkt. 26, at 5, 10, 11, and did not dispute that its professional negligence and breach of fiduciary duty claims were subject to arbitration. Dkt. 26 at 1. The Court’s Arbitration Order applied the FAA, which vests in the arbitrator the power to determine the legality of the contract in which an arbitration clause is contained. See Nitro-Lift Techs., LLC v. Howard, __ U.S. __, 133 S.Ct. 500, 503 (2012) (where “parties commit to arbitrate contractual disputes, it is a mainstay of the [FAA’s] substantive law that attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved ‘by the arbitrator in the first instance, not by a federal or state court, ’” quoting Preston v. Ferrer, 552 U.S. 346, 349 (2008)); Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445-46 (2006) (“as a matter of substantive federal arbitration law, ” “unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance, ” because an arbitration provision is “enforceable apart from the remainder of the contract”).

         Golden now seeks reconsideration of the Arbitration Order, contending that the Agreement is invalid and that the Agreement required application of California law, under which “the determination of the legality of the agreement should first be judicially determined” before the case is sent to an arbitrator. Green v. Mt. Diablo Hospital Dist., 207 Cal.App.3d 63, 74 (1989) (interpreting the holding in Loving & Evans v. Blick, 33 Cal.2d 603, 610 (1949) and holding that because illegality voids the entire contract, the court must first determine legality of the contract before determining effectiveness of arbitration provisions); see also Hotels Nevada, LLC v. Bridge Banc, LLC, 130 Cal.App.4th 1431, 1437 (2005) (“California law obligates the trial court to decide illegality issues when the entire contract is illegal”); Moncharsh v. Heily & Blasé, 3 Cal.4th 1, 29 (1992) (“[I]f an otherwise enforceable arbitration agreement is contained in an illegal contract, a party may avoid arbitration altogether”); California State Council of Carpenters v. Superior Court, 11 Cal.App.3d 144, 157 (1970) (“We are of the opinion that illegality in a contract containing a provision for arbitration, in order to vitiate such provision, must be such as renders the entire contract illegal and unenforceable”).

         A. Procedural Basis for Golden’s Motion for Reconsideration

         Golden argues that reconsideration is justified by any of the following alternative bases: (1) clear error of law pursuant to Local Rule 7-18, or the Court’s inherent power; (2) excusable neglect by plaintiff’s counsel pursuant to Rule 60(b)(1); (3) a misrepresentation by O’Melveny by failing to address the known impact of the California choice-of-law provision pursuant to Rule 60(b)(3); and (4) achievement of the correct legal result and facilitation of a speedy resolution of the litigation, within the meaning of “any other reason that justifies relief, ” pursuant to Rule 60(b)(6). Mot. at 24-25. O’Melveny contends that Golden’s motion is procedurally improper and that the arbitrator, not the Court, must resolve Golden’s belated illegality argument, regardless of whether the FAA or California Arbitration Act (“CAA”) applies.

         1. Local Rule 7-18

         A motion for reconsideration under Local Rule 7-18 may be made on only the following grounds:

(a) a material difference in fact or law from that presented to the Court before such decision that in the exercise of reasonable diligence could not have been known to the party moving for reconsideration at the time of such decision, or
(b) the emergence of new material facts or a change of law occurring after the time of such decision, or
(c) a manifest showing of a failure to consider material facts presented to the Court before such decision.

L.R. 7-18. See In re Countrywide Fin. Corp. Mortgage-Backed Sec. Litig., 966 F.Supp.2d 1031, 1036 (C.D. Cal. 2013).

         “Motions for reconsideration are disfavored and rarely granted.” Brown v. United States, Nos. CV 09-8168 ABC, CR 03-847 ABC, 2011 WL 333380, *2 (C.D. Cal. Jan. 31, 2011). “Whether to grant a motion for reconsideration under Local Rule 7-18 is a matter within the court’s discretion.” Daghlian v. DeVry Univ., Inc., 582 F.Supp.2d 1231, 1251 (C.D. Cal. 2007). See also Dixon v. Wallowa County, 336 F.3d 1013, 1022 (9th Cir. 2003) (“We review a district court’s decision on a Rule 59(e) motion to amend a judgment for abuse of discretion”).

         a. Error that Could Not Reasonably Have Been Known

         Golden states that he brings his motion for reconsideration under prong (a) of Local Rule 7-15 but quotes only the first portion of that prong: “a material difference in fact or law from that presented to the Court.” Mot. at 23. Golden contends that O’Melveny’s legal argument in support of its motion to compel arbitration was incomplete and misleading insofar as it failed to address the significance of the California choice-of-law provision in the Agreement, and that therefore the law presented to and applied by the Court was incorrect.

         This is insufficient to support reconsideration of a prior order pursuant to Local Rule 7-15, as that rule also requires that the law asserted upon reconsideration could not “in the exercise of reasonable diligence . . . have been known to the party moving for reconsideration at the time of such decision.” L.R. 7-18. A motion for reconsideration “may not be used to raise arguments . . . for the first time when they could reasonably have been raised earlier in the litigation.” Kona Enterprises, Inc. v. Estate of Bishop, 229 F.3d 877, 890 (9th Cir. 2000).

         Golden does not contend that he now possesses facts that he could not have known at the time of the Arbitration Order. Indeed, Golden claims that the alleged conflict rendering the Agreement illegal was apparent since at least July 2011. Mot. at 13-14. Further, he asserts that his own Complaint, filed in 2014, “[r]aises the Rule 3-310(C)(2) Conflict of Interest” and “alleges the facts and circumstances which evidence the substance of” the alleged conflict. Id. at 14. Golden also presumably knew of the content of the Agreement, including the choice-of-law provision that forms the basis for Golden’s California law argument, at the time of the motion to compel arbitration.

         Rather, in his motion for reconsideration, Golden concedes that he previously simply “failed to recognize” the arguments he now raises. Id. at 24. Golden contends that his failure was excusable because O’Melveny did not raise the potential applicability of the CAA in the motion to compel arbitration. Id. at 6. Golden contends that unlike its own inadvertance, O’Melveny’s failure to address the potential applicability of the CAA was a knowing, affirmative misrepresentation because O’Melveny’s counsel also represented Sheppard, Mullin, Richter & Hampton LLP in Sheppard, Mullin, Richter & Hampton, LLP v. J-M Mfg. Co., 244 Cal.App.4th 590, as modified on denial of reh’g (Feb. 26, 2016), review granted and opinion superseded sub nom. Sheppard, Mullin, Richter & Hampton v. J-M Mfg., 368 P.3d 922 (Cal. 2016), which involved similar choice-of-law and illegality issues as those Golden now raises.

         Golden’s accusations of wrongdoing are misplaced. The Court declines to find that O’Melveny’s counsel made an affirmative misrepresentation of law in this case based on the fact that it made a different argument in a different case, on behalf of a different client, involving different engagement agreements and different facts. As discussed further below, the issue of whether an agreement requires application of the CAA, the FAA, or private arbitration rules requires case-by-case analysis of the terms of the agreement in question.

         More importantly, under Local Rule 7-18, what matters is whether or not the moving party seeking reconsideration could have known of the newly-presented factual or legal argument at the time the Court made its original order. Golden never explains why he was unable to make his same choice-of-law and illegality arguments, regardless of what O’Melveny argued. Golden’s explanation that a “ ‘light bulb went on’ as a result of the recent ruling in Sheppard Mullin, leading to the raising of the issue, ” Mot. at 6, does not warrant reconsideration of the Court’s prior order. See Carroll v. Nakatani, 342 F.3d 934, 945 (9th Cir. 2003) (affirming denial of reconsideration where movant “could reasonably have raised” his arguments earlier).

         b. Change of Law

         Golden takes a different approach in his reply brief, arguing that although the California Supreme Court, by granting review thereby superceding the Court of Appeal’s decision in Sheppard Mullin, and rendering it unpublished, that decision “connected the dots, ” drawing together existing case law in a factual setting that closely resembled this case. Golden argues that he acted promptly once the original Sheppard Mullin decision was issued. Reply, Dkt. 66 at 1-3. Golden later makes clear that he considers such “connecting the dots” to constitute an intervening change in California law, demonstrating (1) not only that a concurrent conflict of interest renders the entirety of an engagement agreement illegal and void as against public policy, but also (2) that such determination must be made by a court, not an arbitrator. Id. at 3-4.

         As a threshold matter, the Court of Appeal’s decision in Sheppard Mullin is no longer binding precedent, because the Supreme Court granted review of the Court of Appeal’s decision in Sheppard Mullin.

         Even were that not the case, Golden’s argument fails substantively because, as the Court of Appeal in Sheppard Mullin itself states, see Sheppard Mullin, 244 Cal.App.4th at 605, 614, at the time O’Melveny brought its motion to compel arbitration, California courts had already established both rules of law that Golden now claims to be novel: (1) that conflicts of interest can render an engagement agreement void as against public policy, see, e.g., Kashani v. Tsann Kuen China Enterprise Co., Ltd., 118 Cal.App.4th 531, 541 (2004) (“California courts have stated that an illegal contract ‘may not serve as the foundation of any action, either in law or in equity, ’ and that when the illegality of the contract renders the bargain unenforceable, ‘[t]he court will leave them [the parties] where they were when the action was begun, ’” quoting Tiedje v. Aluminum Taper Milling Co., 46 Cal.2d 450, 453-54 (1956) (“A contract made contrary to public policy or against the express mandate of a statute may not serve as the foundation of any action, either in law or in equity, and the parties will be left, therefore, where they are found when they come to a court for relief”); Wells v. Comstock, 46 Cal.2d 528, 532 (1956)); and (2) that, where the parties have agreed that California law governs the contract, the alleged illegality of an agreement is for the court, not the arbitrator to decide, see, e.g., Loving, 33 Cal. 2d at 610 (“If it . . . appears to the court from the uncontradicted evidence that the contract is illegal, the court should deny the petition for ‘an order directing the parties to proceed to arbitration’”); 1 Witkin, Summary of the Law, Contracts § 450 (10th ed. 2005) (“The power of the arbitrator to determine rights under a contract is dependent upon the existence of a valid contract under which this right might arise, and the question of the validity of the basic contract is essentially a judicial question, which cannot be finally determined by an arbitrator”). Golden therefore does not identify any intervening change in the law to justify his belated arguments.

         2. Federal Rule of Civil Procedure 60(b)

         Three of the remaining purported bases for Golden’s motion are premised on Federal Rule of Civil Procedure 60(b). See Mot. at 7, 24-25. However, Rule 60(b) applies only to final orders, and not to ...


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