Bacall v. Shumway CA2/8

Filed 2/18/21 Bacall v. Shumway CA2/8
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT
MICHAEL BACALL et al., B302787
Plaintiffs and Respondents, (Los Angeles County
Super. Ct. No. BC674035)
v.
JEFFREY SHUMWAY et al.,
Defendants and Appellants.
APPEAL from a judgment of the Superior Court of
Los Angeles County. Ruth Ann Kwan, Judge. Affirmed.
Faegre Drinker Biddle & Reath; Fitzgerald Legal Consult
and James E. Fitzgerald for Defendants and Appellants.
Freedman + Taitelman, Bryan J. Freedman and Sean M.
Hardy for Plaintiffs and Respondents.
_____________________________
An arbitrator issued an award against appellants Jeffrey
Shumway and Timaeus Group, LLC (together, Appellants) and in
favor of respondents Michael Bacall and RBC Entertainment,
Inc. (together, Respondents) in a contract dispute. The arbitrator
partially rescinded the contract after finding Shumway provided
legal services without an active license. Appellants petitioned to
vacate the award on the grounds that the arbitrator exceeded his
powers and engaged in misconduct. The trial court rejected
Appellants’ arguments and confirmed the award. We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
Bacall is a successful actor and screenwriter, and RBC
Entertainment, Inc. (RBC) is his loan-out company. Shumway
represented Bacall as his attorney and talent manager for many
years.
In 2011, Shumway left his law firm and formed Timaeus
Group, LLC (Timaeus). Three years later, he changed his status
with the California State Bar to “inactive.” Shumway continued
to represent Bacall, but he allegedly never informed Bacall that
he could no longer practice law in light of his inactive status.
In early 2016, RBC entered into a representation
agreement with Timaeus. Under the agreement, Timaeus agreed
to provide RBC with “Chief Content Officer” services, as well as
management, producing, and business affairs services. In
exchange, RBC agreed to pay Timaeus a $243,750 Chief Content
Officer fee and a 10 percent management commission.
The initial agreement lasted one year, and the parties
entered into essentially the same agreement in early 2017.
Bacall terminated the new agreement on May 26, 2017 when he
discovered Shumway was “inactive” with the California State
Bar.
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Timaeus filed a demand for arbitration with the American
Arbitration Association, alleging breach of contract. Respondents
then filed a complaint against Appellants in superior court,
asserting causes of action for fraud, rescission, legal malpractice,
breach of fiduciary duties, and violation of the unfair competition
law (Bus. & Prof. Code, § 17200 et seq.) (UCL). The gravamen of
the complaint was that Shumway, who was the alter ego of
Timaeus, had represented himself as a lawyer and provided legal
services to Respondents, despite not being authorized to practice
law. Among other things, Respondents sought rescission of the
2016 and 2017 agreements on the basis that they were unlawful
and violated public policy.
Appellants moved to compel arbitration of Respondents’
claims pursuant to arbitration clauses contained in the 2016 and
2017 agreements. The trial court granted the motion.
Arbitration
After issuing a series of orders and conducting a two-day
evidentiary hearing, the arbitrator issued an award requiring
Appellants pay Respondents $201,025.82 plus attorney fees and
costs. The arbitrator found Shumway had rendered legal services
to Respondents under the 2016 and 2017 agreements, during
which time he was not licensed to practice law. Those services
included corresponding with attorneys about a contract, redlining
agreements, and making comments on proposed contracts. The
arbitrator concluded that because Shumway was providing
unlicensed legal services under the agreements, the “contract
between the parties was properly ended, for good and valid
reason, on May 26, 2017. Bacall owes no further money to
Shumway.”
3
The arbitrator then discussed the law related to the
severability of partially-illegal contracts, after which he
concluded “it has been clearly established that there were two
types of services being rendered by [Appellants]:
legal/management services and [Chief Content Officer] services.
It is only proper that Respondent[s] be able to recoup the monies
paid for the legal services that were improperly rendered.
However, Respondent[s] received [Chief Content Officer] services
over the 16 month period that were proper and beneficial, which
Respondent[s] will not be able to recoup.”
The arbitrator next turned to the proper allocation of the
fees and commissions that Respondents had paid under the
agreements. He concluded Appellants were entitled to retain
their fees for Chief Content Officer services, which totaled
$406,393.70. However, they had to return the $201,025.82 paid
in commissions. The arbitrator noted that although the
commissions covered legal work and non-legal managerial work,
Shumway’s conduct during the arbitration made it impossible to
allocate the amount between them.
Finally, the arbitrator concluded Respondents were the
prevailing parties and awarded them $237,607.25 in attorney
fees and costs.
Post-Arbitration Proceedings
Respondents filed a petition in the trial court to confirm the
award. Appellants, in turn, petitioned the court to vacate the
award on the basis that the arbitrator exceeded his powers and
engaged in misconduct. Among other things, they argued the
trial court was required to independently determine whether the
2016 and 2017 contracts were illegal. The trial court rejected
Appellants’ arguments and confirmed the award. Shumway
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subsequently filed a motion for renewal and/or reconsideration,
which the court also denied.
The trial court entered judgment in favor of Respondents,
and Appellants timely appealed.
DISCUSSION
Appellants contend the arbitration award must be vacated
because the arbitrator exceeded his authority by declaring the
2016 and 2017 agreements illegal, violating public policy and
their statutory rights, concluding Shumway engaged in the
unlicensed practice of law, and ruling Shumway is liable for
repayment of the commissions. They also contend the arbitrator
engaged in misconduct by refusing to allow them to address
issues related to attorney fees and costs. We disagree with each
of these contentions.
I. Relevant Law
In general, judicial review of an arbitration award is
extremely limited. As the California Supreme Court explained in
Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1 (Moncharsh), “an
arbitrator’s decision is not generally reviewable for errors of fact
or law, whether or not such error appears on the face of the
award and causes substantial injustice to the parties.” (Id. at
p. 6.) This is because parties who enter into arbitration
agreements are presumed to know the arbitrator’s decision will
be final and binding; “arbitral finality is a core component of the
parties’ agreement to submit to arbitration.” (Id. at p. 10.)
Courts do not review the validity of an arbitrator’s reasoning,
and, while Code of Civil Procedure sections 1286.2 and 1286.6 set
forth grounds for vacating or correcting an arbitration award, “
‘[a]n error of law is not one of those grounds.’ [Citation.]”
(Moncharsh, at pp. 11, 14.)
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Under Code of Civil Procedure section 1286.2, a court may
vacate an arbitration award if the “rights of the party were
substantially prejudiced . . . by the refusal of the arbitrators to
hear evidence material to the controversy or by other conduct of
the arbitrators contrary to the provisions of [the California
Arbitration Act].” (Code Civ. Proc., § 1286.2, subd. (a)(5).) A
court may also vacate an arbitration award when the arbitrator
has exceeded his or her powers “and the award cannot be
corrected without affecting the merits of the decision upon the
controversy submitted.” (Id., subd. (a)(4).)
To determine whether an arbitration award should be
vacated under Code of Civil Procedure section 1286.2, we review
the trial court’s decision de novo. (Jordan v. Department of Motor
Vehicles (2002) 100 Cal.App.4th 431, 443–444.)
II. The Trial Court Was Not Required to Independently
Review the Legality of the Agreements
Relying on Loving & Evans v. Blick (1949) 33 Cal.2d 603(Loving & Evans), Appellants contend the trial court erred in
refusing to independently determine the legality of the 2016 and
2017 agreements. We disagree.
In Loving & Evans, the California Supreme Court
recognized an exception to the general rule that a court may not
set aside an arbitration award even if the arbitrator made an
error in law or fact. In that case, the arbitrator rendered an
award in favor of contractors in a contractual dispute with a
property owner. (Loving & Evans, supra, 33 Cal.2d at p. 605.) In
opposing confirmation of the award, the property owner argued
that because one of the contractors was unlicensed, the contract
was illegal and unenforceable. (Id. at pp. 605–606.) The trial
court nevertheless confirmed the award. (Id. at p. 606.)
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The Supreme Court reversed, in the process holding “the
rules which give finality to the arbitrator’s determination of
ordinary questions of fact or of law are inapplicable where the
issue of illegality of the entire transaction is raised in a
proceeding for the enforcement of the arbitrator’s award. When
so raised, the issue is one for judicial determination upon the
evidence presented to the trial court, and any preliminary
determination of legality by the arbitrator, whether in the nature
of a determination of a pure question of law or a mixed question
of fact and law, should not be held to be binding upon the trial
court.” (Loving & Evans, supra, 33 Cal.2d at p. 609.)
The Supreme Court suggested two reasons for this
exception. First, an arbitrator who enforces an illegal contract
exceeds his powers because “[i]n the absence of a valid contract
no such rights [under contract] can arise and no power can be
conferred upon the arbitrator to determine such nonexistent
rights.” (Loving & Evans, supra, 33 Cal.2d at p. 610.) Second,
“[i]f this were not the rule, courts would be compelled to stultify
themselves by lending their aid to the enforcement of contracts
which have been declared by statute to be illegal and void. A
party seeking confirmation cannot be permitted to rely upon the
arbitrator’s conclusion of legality for the reason that paramount
considerations of public policy require that this vital issue be
committed to the court’s determination whenever judicial aid is
sought.” (Id. at p. 614.)
Appellants contend that under Loving & Evans, the trial
court was required to independently determine whether the 2016
and 2017 agreements were illegal, without giving any weight to
the arbitrator’s decision.
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Based on the procedural history of this case, we find this
argument somewhat curious. First, it was the Respondents
which attempted to have the legality of the agreements initially
determined by a court (not through arbitration), but Appellants
successfully moved the trial court to send the case to arbitration.
Second, throughout the arbitration, Appellants never suggested
the legality of the agreements was an issue beyond the
arbitrator’s powers to decide. This is understandable. At the
arbitration, Appellants were not contending the contract was
illegal. Quite the opposite. Appellants sought to enforce the
contract. It was only after the arbitrator decided against them
that they first raised this as a concern.
In any event, we are not persuaded the Loving & Evans
exception applies to this case. In Loving & Evans, and every
other case upon which Appellants rely, one of the parties sought
to vacate the arbitration award on the basis that the arbitrator
enforced an illegal contract. (See Loving & Evans, supra, 33
Cal.2d at pp. 605–606; Sheppard, Mullin, Richter & Hampton,
LLP v. J-M Manufacturing Co., Inc. (2018) 6 Cal.5th 59, 71;
Lindenstadt v. Staff Builders, Inc. (1997) 55 Cal.App.4th 882,
888.) The instant appeal is the opposite scenario—the arbitrator
did not enforce an illegal contract, instead, the arbitrator severed
the unlawful legal services rendered on a contract that
Respondents had terminated on May 26, 2017 and allocated
damages accordingly.
Here, unlike Loving & Evans, Appellants contend
something different: that the award must be vacated because the
arbitrator erroneously failed to enforce a legal contract. Given
this distinction, neither rationale underpinning the Loving &
Evans exception exists: the arbitrator was not tasked with
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determining “nonexistent rights,” nor was the trial court called
upon to aid the enforcement of an illegal contract.
Because we conclude the Loving & Evans exception does
not apply to this case, we need not consider Appellants’
arguments that the arbitrator made legal errors in concluding
the 2016 and 2017 agreements were illegal. (See Moncharsh,
supra, 3 Cal.4th at p. 14 [arbitration awards generally may not
be vacated for legal errors].) We also reject Appellants’ derivative
argument that the arbitrator exceeded his powers by ruling the
agreements were illegal.
III. The Award Does Not Violate Public Policy or
Appellants’ Statutory Rights
An arbitrator may exceed his or her powers “by issuing an
award that violates a party’s unwaivable statutory rights or that
contravenes an explicit legislative expression of public policy.”
(Richey v. AutoNation, Inc. (2015) 60 Cal.4th 909, 916.) Here,
Appellants argue the award must be vacated because it violates
public policy and statutory rights found in the Talent Agencies
Act (Lab. Code, § 1700 et seq.). We disagree.
Appellants first contend the award violates the well-defined
and dominant public policy expressed in the Talent Agencies Act.
Appellants concede, however, that the Talent Agencies Act’s
central legislative concern is the exploitation of artists by
representatives. (See Marathon Entertainment, Inc. v. Blasi
(2008) 42 Cal.4th 974, 984 [“Exploitation of artists by
representatives has remained the Act’s central concern through
subsequent incarnations to the present day.”]; Waisbren v.
Peppercorn Productions, Inc. (1995) 41 Cal.App.4th 246, 254 [the
Talent Agencies Act was enacted for the protection of artists].) It
is not clear, and Appellants do not explain, how the award
9
violates this public policy. If anything, it would seem to further
the policy by protecting Bacall from his representative,
Shumway. Accordingly, we decline to vacate the award on this
ground.
Appellants alternatively contend the award violates their
statutory rights. We disagree. Appellants insist the award
violates their statutory rights found in Labor Code section
1700.44, which provides it is not unlawful for a non-talent agent
“to act in conjunction with, and at the request of, a licensed talent
agency in the negotiation of an employment contract.” (Lab.
Code, § 1700.44, subd. (d).) According to Appellants, this
provision gave them the right to perform all the services that the
arbitrator concluded constituted the unlicensed practice of law,
such as corresponding with attorneys, redlining agreements, and
making comments on proposed contracts. The plain meaning of
the “safe harbor” provision based on the language of Labor Code
section 1700.44, subdivision (d),1 however, is to exempt
individuals and corporations from obtaining a talent agency
license when a licensed talent agent requests assistance in the
negotiation of an employment contract, not to permit the practice
of law without a license.
Additionally, assuming that Labor Code section 1700.44
grants Appellants unwaivable statutory rights, their argument
nonetheless fails because they have not shown the award violated
those rights. Although Appellants point to evidence in the record
1 Labor Code section 1700.44, subdivision (d) states, “It is not
unlawful for a person or a corporation which is not licensed
pursuant to this chapter to act in conjunction with, and at the
request of, a licensed talent agency in the negotiation of an
employment contract.”
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showing Shumway was working “in conjunction with” licensed
talent agents, they have not pointed to any evidence showing he
was working “at the request of” a licensed agent, which is
required to fall within the safe harbor provision of Labor Code
section 1700.44. (See Denham v. Superior Court (1970) 2 Cal.3d
557, 564 [a lower court’s judgment is presumed correct and the
appellant must affirmatively show error]; Inyo Citizens for Better
Planning v. Inyo County Bd. of Supervisors (2009) 180
Cal.App.4th 1, 14 [Courts of Appeal “do not serve as ‘backup
appellate counsel’ ”].)
IV. The Arbitrator Did Not Exceed His Powers by
Finding Shumway Engaged in the Unlicensed
Practice of Law
Appellants contend the arbitrator exceeded his powers by
finding Shumway engaged in the unlicensed practice of law.
They argue that in making such a finding, the arbitrator
essentially imposed discipline on them and improperly
“highjack[ed]” the regulatory power of the State Bar and the
courts. We disagree.
Contrary to Appellants’ claims, the arbitrator did not
regulate the practice of law or impose discipline on them. Rather,
it is clear he concluded Respondents were entitled to restitution
because Shumway’s unlicensed practice of law rendered portions
of the 2016 and 2017 agreements illegal. The arbitrator acted
well within his authority in so finding. (See Gueyffier v. Ann
Summers, Ltd. (2008) 43 Cal.4th 1179, 1182 [“Absent an express
and unambiguous limitation in the contract or the submission to
arbitration, an arbitrator has the authority to find the facts,
interpret the contract, and award any relief rationally related to
his or her factual findings and contractual interpretation.”];
11
Moncharsh, supra, 3 Cal.4th at p. 30 [holding the legality of a
contract provision was a question for the arbitrator].)
V. The Arbitrator Did Not Exceed His Powers by Ruling
Shumway is Personally Liable for the Award
Appellants contend the arbitrator exceeded his powers by
ruling Shumway is personally liable for repayment of the
commissions to Respondents. They acknowledge that
Respondents claimed Shumway was liable as Timaeus’s alter ego
and submitted that issue to arbitration. Nonetheless, they insist
the arbitrator lacked power to issue an award against him
because Respondents failed to submit any evidence to support
their alter ego theory. We disagree.
Despite framing their argument in terms of the arbitrator’s
powers, Appellants have essentially argued insufficiency of the
evidence to support the decision to hold Shumway liable for
repayment of the commissions. Even if that were true, it would
not provide grounds for vacating the award. As the court
explained in Hotels Nevada, LLC v. L.A. Pacific Center, Inc.
(2012) 203 Cal.App.4th 336, “[t]ypically, we would review a trial
court’s finding as to whether a person or entity is the alter ego of
a corporation under the substantial evidence standard.
[Citations.] But our review of an arbitration award is different.
‘We do not review the merits of the dispute, the sufficiency of the
evidence, or the arbitrator’s reasoning, nor may we correct or
review an award because of an arbitrator’s legal or factual error,
even if it appears on the award’s face.” (Id. at p. 359, fn.
omitted.)
Appellants’ reliance on Tenzera, Inc. v. Osterman (2012)
205 Cal.App.4th 16, is misplaced. In that case, the court vacated
an arbitration award against individuals who were not parties to
12
the relevant arbitration agreement and had not voluntarily
consented to arbitration. (Id. at pp. 19–20.) Here, in contrast,
Shumway voluntarily consented to have Respondents’ claims
against him decided through arbitration, and Appellants do not
contend the arbitrator lacked jurisdiction to issue an award
against him. Instead, they argue the award lacks evidentiary
support, which is not a proper basis to vacate an arbitration
award.
VI. The Arbitrator Did Not Engage in Misconduct
Appellants contend the arbitrator engaged in misconduct
by denying them the opportunity to address issues related to
attorney fees and costs. We disagree.
A. Background
In their post-hearing arbitration briefs, Respondents
requested an award of attorney fees and costs. In support, they
submitted detailed billing records and a declaration from their
counsel describing the fees and costs incurred in the matter.
Appellants’ counsel responded by sending the arbitrator an
e-mail stating that, in his experience, arbitrators typically will
entertain an application for attorney fees and costs after the
award has been rendered. Counsel, therefore, suggested waiting
until after the arbitrator rendered a decision on the merits of the
claims to file a response to Respondents’ request. Counsel offered
to file an immediate response if the arbitrator wanted to proceed
differently.
The arbitrator wrote back: “Consideration of attorney fees
will not take place until the case is decided and a prevailing party
is determined. Anything submitted in that regard will not be
read until then.”
13
Appellants did not file a response to Respondents’ request,
nor did they file their own request for attorney fees and costs.
The arbitrator’s final award included a finding that Respondents
were the prevailing parties, and it awarded them $237,607.25 in
attorney fees and costs.
After the arbitrator issued his award, Appellants requested
the opportunity to submit an opposition to Respondents’ request
for attorney fees and costs. Appellants represented that they
declined to file one earlier because they “were led to believe [by
the arbitrator’s e-mail] that we would have time after a decision
on the merits to address prevailing party and attorney fees
issues.”
The arbitrator construed Appellants’ request as an
application for modification. In denying the request, the
arbitrator noted that he had already issued his final award.
B. Analysis
Code of Civil Procedure section 1286.2, subdivision (a)(5)
requires a court vacate an arbitration award where the “rights of
the party were substantially prejudiced . . . by the refusal of the
arbitrators to hear evidence material to the controversy or by
other conduct of the arbitrators contrary to the provisions of this
title.” The provision “was designed as a ‘safety valve in private
arbitration that permits a court to intercede when an arbitrator
has prevented a party from fairly presenting its case.’ [Citation.]
It comes into play, for example, when an arbitrator, without
justification, permits only one side to present evidence on a
disputed material issue. [Citation.] The Arbitration Act codifies
‘the fundamental principle that “[a]rbitration should give both
parties an opportunity to be heard.” [Citation.] . . . [T]he
opportunity to be heard must be extended to all parties
14
equitably.’ [Citation.] To conduct an arbitration without abiding
by that principle evinces bias, constituting misconduct.”
(Heimlich v. Shivji (2019) 7 Cal.5th 350, 368–369.)
Here, Appellants contend the arbitrator engaged in
misconduct by denying, without reason, their request to file an
opposition to Respondents’ request for attorney fees and costs.
They argue the arbitrator failed to give them an opportunity to
present evidence and argument on a significant financial issue in
the case. They further suggest the arbitrator violated the
Arbitration Act’s requirement that an arbitrator conduct “a
balanced process in which each party is given an opportunity to
participate.” We are not persuaded.
Initially, we disagree the arbitrator denied Appellants’
request to file an opposition without reason. The arbitrator’s
decision indicates he construed Appellants’ request as an
“application for modification” of the final award. Such
applications are governed by rule R-50 of the AAA Commercial
Arbitration Rules, which states an “arbitrator is not empowered
to redetermine the merits of any claim already decided.” By the
time Appellants filed their request, the arbitrator had already
determined the merits of the attorney fees and costs issues.
Under rule R-50, he was not permitted to reconsider those issues.
We think it is reasonable to infer this was the basis for the
arbitrator’s decision.
Appellants’ claim that the arbitrator denied them the
opportunity to address the attorney fees and costs issues is also
mistaken. Appellants were free to submit arguments and
evidence on those issues before the arbitrator made his final
award, just as Respondents did. In fact, Appellants offered to do
precisely that in their e-mail to the arbitrator. For whatever
15
reason, they instead decided to wait until after the arbitrator
issued his final award to attempt to address the issues.
Appellants suggest they declined to file an opposition in
reliance on the arbitrator’s order allowing them to address
attorney fees and costs after he decided the merits of the parties’
claims. The arbitrator, however, never made such an explicit
order; Appellants interpreted that into the arbitrator’s e-mail
response. While we acknowledge the arbitrator’s response was
vague, the onus was on Appellants to seek clarification, which
they failed to do.
Appellants further point out that until the arbitrator issued
his decision on the merits, neither side could know how best to
argue who the prevailing party should be or to what extent that
party would be entitled to attorney fees and costs. While we do
not disagree this may be so, Respondents, facing the same
challenges, managed to address the attorney fees and costs issues
in their post-hearing briefs.
As the Supreme Court recently reaffirmed, “ ‘ “[t]he
statutory provisions for [review of an arbitration award] are
manifestly for the sole purpose of preventing the misuse of the
proceeding, where corruption, fraud, misconduct, gross error, or
mistake has been carried into the award to the substantial
prejudice of a party to the proceeding.” ’ [Citation.]” (Heimlich v.
Shivji, supra, 7 Cal.5th at p. 368.) This is not one of those cases.
VII. Respondents’ Requests for Sanctions and Attorney
Fees
Respondents request we issue sanctions against Appellants
for filing a frivolous appeal. An appeal is frivolous “when it is
prosecuted for an improper motive—to harass the respondent or
delay the effect of an adverse judgment—or when it indisputably
16
has no merit—when any reasonable attorney would agree that
the appeal is totally and completely without merit.” (In re
Marriage of Flaherty (1982) 31 Cal.3d 637, 650.) “An appeal that
is simply without merit is not by definition frivolous and should
not incur sanctions. . . . the punishment should be used most
sparingly to deter only the most egregious conduct.” (Id. at pp.
650–651.)
Our disagreement with the Appellants’ contentions does
not mean any reasonable attorney would find them totally and
completely without merit. Moreover, we have not been presented
with clear evidence of subjective bad faith in connection with this
appeal, nor does the appeal appear to fall into the category of the
“most egregious conduct.” We therefore decline to impose
sanctions against Appellants for filing a frivolous appeal.
We also deny without prejudice Respondents’ request for
attorney fees on appeal. Any request for such fees should be
made in the trial court. (See Cal. Rules of Court, rule 3.1702.)
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DISPOSITION
The judgment is affirmed. Respondents are awarded their
costs on appeal.
OHTA, J.*
We concur:
GRIMES, Acting P. J.
WILEY, J.
* Judge of the Los Angeles Superior Court, assigned by the
Chief Justice pursuant to article VI, section 6 of the California
Constitution.
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