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ECC Capital Corp. v. Manatt, Phelps & Phillips, LLP

California Court of Appeals, Second District, Seventh Division

March 15, 2017

ECC CAPITAL CORPORATION et al., Plaintiffs and Appellants,
v.
MANATT, PHELPS & PHILLIPS, LLP, Defendant and Respondent.

         APPEAL from judgment of the Superior Court of Los Angeles County, No. BC429484 Mark Mooney, Judge. Affirmed.

          Law Office of Julie M. McCoy, Julie M. McCoy; Sall Spencer Callas & Krueger, Robert K. Sall, Lara A.S. Callas; Lane Powell and Paul George for Plaintiffs and Appellants.

          Kendall Brill & Kelly, Alan Jay Weil, Corey E. Klein and Richard M. Simon for Defendant and Respondent.

          SEGAL, J.

         INTRODUCTION

         ECC Capital Corporation and its subsidiary, Performance Credit, LLC, formerly known as Encore Credit Corp., (collectively, ECC) appeal from a judgment confirming a final arbitration award of almost $7 million against them and in favor of Manatt, Phelps & Phillips, LLP (Manatt). The award was for attorneys' fees, expert fees, and costs incurred by Manatt as the prevailing party in an arbitration of legal malpractice claims ECC brought against Manatt.

         ECC contends the trial court erred in confirming the arbitrator's interim award denying ECC's claims because the arbitrator violated mandatory disclosure rules governing arbitrations. ECC also contends the trial court erred in confirming the final award because Manatt's engagement agreement was illegal, Manatt obtained the award by fraud, and the arbitrator limited ECC's rights to take discovery and present evidence at the arbitration on the issue of Manatt's conflict of interest. Because we conclude ECC's arguments are either meritless or forfeited, we affirm.

         FACTUAL AND PROCEDURAL BACKGROUND

         A. ECC Contracts with and Then Sues Bear Stearns

         In October 2006 ECC Capital and Bear Stearns Residential Mortgage Corporation (Bear Stearns)[1] entered into an Asset Purchase Agreement (APA) providing that Bear Stearns would buy ECC Capital's subprime mortgage loan origination business, Encore Credit Corp (Encore). The APA required Encore to originate a minimum average of $400 million in mortgage loans per month for as many months as it took the parties to close the transaction, a period they expected to last approximately three months. The APA required Bear Stearns to purchase and securitize the loans Encore originated during this “pre-closing period.”

         ECC Capital hired Latham & Watkins (Latham) as “deal counsel” for this transaction. ECC Capital also hired Manatt partner Ellen Marshall to help negotiate and draft Section 7 of the APA, the portion of the agreement governing Bear Stearns' obligation to purchase and securitize the loans Encore originated during the pre-closing period. According to ECC Capital, Bear Stearns had agreed, and ECC Capital understood and intended, that Bear Stearns would purchase those loans before the borrowers' first payments were due, so that Bear Stearns would assume all risk of early defaults. ECC Capital claimed it communicated its intention on this point to Marshall and, based on conversations with her, understood the final draft of Section 7 reflected that intention.[2]

         By December 2006, however, a dispute had arisen between ECC Capital and Bear Stearns about the timing of Bear Stearns' obligation to purchase the loans Encore originated. Roque Santi, President of ECC Capital and Encore, felt Bear Stearns was “not living up to the spirit of the deal” because Bear Stearns was not purchasing all of the loans “promptly upon origination.” Bear Stearns' position was that the APA did not obligate it to purchase the loans before the first payments were due, but did prohibit it, after purchasing a loan, from requiring Encore to repurchase the loan in the event of an early payment default (or breach of a representation or warranty), as Bear Stearns had required when previously purchasing loans from Encore.

         ECC Capital and Bear Stearns ultimately closed the transaction contemplated by the APA on February 9, 2007. Approximately two months later, ECC filed suit in federal court against Bear Stearns, seeking damages for Bear Stearns' alleged breach of the APA by, among other things, not buying all of the loans Encore originated during the pre-closing period before the due dates of the loans' first payments. The case settled in July 2009, with ECC receiving $15 million.

         B. ECC Sues Latham and Manatt, Who Compel Arbitration

         In January 2010 ECC filed this action in state court against Latham and Manatt, asserting causes of action for legal malpractice, breach of contract, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing. ECC alleged that poor drafting by Latham and Manatt of Section 7 of the APA had enabled Bear Stearns to refuse to buy loans promptly during the pre-closing period, forced ECC to sue Bear Stearns to recover ECC's resulting losses, and weakened ECC's position in that litigation, leaving ECC to settle for much less than the $48 million it sought. ECC also asserted Latham and Manatt “failed to make full written disclosure of conflicting interests to [ECC] and to obtain [ECC's] informed written consent, ” but made no specific factual allegations to support this assertion.

         Manatt moved to compel arbitration, citing arbitration provisions in an April 2003 engagement agreement between Manatt and Encore and a January 2007 engagement agreement between Manatt and ECC Capital. Latham also moved to compel arbitration, citing an arbitration provision in a March 2005 engagement agreement between Latham and ECC Capital, although Latham conceded it lacked a fully executed copy of that agreement. Latham also argued it could compel arbitration under ECC's engagement agreements with Manatt because ECC alleged Latham acted as Manatt's agent (and vice versa) in providing legal services to ECC.

         In opposing the motions, ECC did not dispute the validity of the engagement agreements or arbitration provisions cited by Manatt. Rather, ECC argued it had no enforceable arbitration agreement with Latham and, because ECC's claims against Latham and Manatt arose out of the same transaction, the court should try the claims against both defendants pursuant to Code of Civil Procedure section 1281.2, subdivision (c), [3] to avoid conflicting rulings on common issues of law and fact. The court granted the motions to compel arbitration “under the Manatt contract.”

         In October 2010 ECC initiated arbitration against Latham and Manatt before the American Arbitration Association (AAA), asserting the same claims it had asserted in court.[4] Shortly before the arbitration hearing began in January 2013, ECC settled with Latham.

         C. ECC Takes Discovery on Manatt's Alleged Conflict of Interest

         The arbitrator limited discovery to requests for production of documents and depositions. One category of documents ECC requested from Manatt was “[a]ll DOCUMENTS concerning [Manatt's] COMMUNICATIONS or analysis of conflicts of interest concerning the representation of ECC in connection with the BEAR STEARNS TRANSACTION.” ECC also requested billing records for any legal services Manatt provided to The Bear Stearns Companies, Inc. and its affiliates, including Bear Stearns Residential Mortgage Corporation and EMC Mortgage Corporation, from 2004 through 2008.

         When Manatt objected to these requests, ECC sought to compel the production of responsive documents on the grounds that the documents were necessary to discover whether Manatt had a conflict of interest, arising from legal services provided to Bear Stearns when Manatt represented ECC in the sale of Encore, and whether Manatt had obtained conflict waivers. ECC cited a September 2006 email exchange among Marshall, Manatt partner Robert Sherman, and ECC Capital's general counsel, Alanna Darling, in which Darling asked Marshall and Sherman to provide comments on Bear Stearns' proposed amendments to an agreement relating to the transaction for the sale of Encore. In doing so, Darling commented, “I think you have a waiver for these agreements but if not, let me know.” Sherman responded that he was “not aware of any waiver from Bear.” Marshall replied, “I think we talked about getting a waiver the last time this came up, but because of the timing we did not do the work. At least that's what I recall. I think we could get the waiver readily. (Rob, the best person to connect with Bear on this is [Manatt partner] Barbara Polsky.)” Darling responded, “Please do try to get a waiver.”[5]

         After holding at least two hearings on these and other discovery issues, the arbitrator sustained Manatt's objection to ECC's request for Manatt's billing records. And although the arbitrator directed Manatt to supplement its response to ECC's request for communications or analyses concerning conflicts of interest in connection with representing ECC in its sale of Encore, the arbitrator ruled Manatt did not have to search Barbara Polsky's emails or use her name as a search term when searching the email accounts of other custodians of record.[6]

         When ECC later deposed Sherman, counsel questioned him about his September 2006 email exchange with Darling and Marshall, the conflict waiver referred to in the exchange, and any communications he may have had with Polsky concerning the issue. Sherman could not recall communicating with Polsky about such a waiver or actually seeing one, but he believed Manatt obtained one because Manatt was “not in the habit of doing work when we had a conflict without getting a waiver.”

         Counsel for ECC asked similar questions when deposing Marshall. When asked whether “Bear had historically been a client of Manatt, ” Marshall answered, “From time to time, ” including at the time of the September 2006 email exchange with Darling. Marshall stated she recalled Manatt sought and obtained a conflict waiver from ECC in connection with the sale of Encore to Bear Stearns. She also stated that in February 2007, when ECC began considering litigation against Bear Stearns to enforce ECC's understanding of Section 7 of the APA, Marshall told ECC she could not bring one of Manatt's litigation partners to a meeting to discuss the issue because Manatt's conflict waiver from “Bear” excluded litigation work.

         ECC did not seek to depose Polsky or any other Manatt attorneys, though the arbitrator did not prohibit ECC from doing so. Nor did ECC call Polsky as a witness at the arbitration hearing.

         ECC designated Robert Kehr as its expert on issues of standard of care, professional ethics, and professional responsibility. When counsel for Manatt asked Kehr during his deposition whether he was giving any opinion in the case regarding a conflict of interest on the part of Manatt, Kehr said he was not. Consistent with this answer, Kehr gave no opinion during the arbitration hearing that Manatt had any conflict of interest.

         D. The Arbitration Hearing and the Interim Award

         The arbitration hearing was held from January 15 to March 1, 2013. In advance of the hearing, ECC submitted a brief setting forth all its contentions, including its principal contention that Manatt was negligent in drafting the APA because, among other reasons, Manatt failed to include a provision obligating Bear Stearns to purchase the loans Encore originated before the first payments on those loans were due. ECC's brief did not contend Manatt had any conflict of interest or fraudulently induced or coerced ECC to sign the 2007 engagement agreement.

         The arbitrator heard testimony from numerous witnesses and considered approximately 2, 000 pages of deposition testimony. At no time did ECC argue or seek to present evidence that Manatt had a conflict of interest or induced ECC through any inappropriate means to sign the 2007 engagement agreement. In fact, during the hearing, counsel for ECC “expressly disavowed that [ECC] was seeking testimony to claim that Manatt had a conflict or breached some fiduciary duty with respect to conflicts.” At the conclusion of the hearing, the parties submitted closing briefs, and on May 14, 2013 the arbitrator heard closing arguments. Again, ECC made no mention of any conflict of interest, fraud, or coercion on the part of Manatt.

         On August 1, 2013 the arbitrator issued a 49-page interim arbitration award, denying all of ECC's claims against Manatt. The arbitrator found ECC had not proved by a preponderance of the evidence that Manatt was negligent in drafting Section 7 or that any losses ECC may have incurred in the transaction with Bear Stearns were the fault of Manatt. The arbitrator deemed Manatt the prevailing party in the arbitration and directed it to submit an application to recover its reasonable attorneys' fees, expert fees, and costs, as provided in the 2007 engagement agreement.

         E. ECC Requests Disqualification of the Arbitrator

         On October 30, 2013, before Manatt filed its application for fees and costs, ECC wrote the arbitrator and AAA requesting the arbitrator's disqualification from the proceeding and suggesting there were grounds to vacate the interim award. ECC contended the arbitrator failed to comply with his disclosure obligations by not disclosing his “role as a Panelist in a prior matter involving [Manatt] that took place in 2006.” ECC identified that matter as Tom Leykis v. Damian Macafee dba QTK Internet Name Proxy, a Uniform Domain Name Dispute Resolution Policy (UDRP) proceeding before the National Arbitration Forum in which the arbitrator served as a panelist and the claimant was represented by Jill M. Pietrini, an attorney who at that time (and until approximately January 2012) worked for Manatt.[7] ECC stated it “only recently” discovered these facts and believed the ...


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