Opinion
2:23-cv-1793-CDS-MDC
08-20-2024
SKY LAW GROUP, a California Professional Corporation, Plaintiff, v. PAUL PADDA LAW, PLLC, a Nevada Professional Limited Liability Company; and DARSHPAUL S. PADDA, ESQ.; an individual, Defendants.
REPORT AND RECOMMENDATION DENYING MOTION TO COMPEL ARBITRATION (ECF NO. 33) AND MOTION TO STAY DISCOVERY (ECF NO. 37)
Maximiliuno D. Couvillier III United States Magistrate Judge
Pursuant to the referral by District Judge Cristina S. Silva, the Court has considered the defendants' Motion to Compel Arbitration (ECF No.33) (“Arbitration Motion”) and Motion to Stay Discovery (ECF No. 37)(“Discovery Motion). For the reasons set forth below, the Court recommends DENIAL of both motions.
I. INTRODUCTION
In their Arbitration Motion, defendants ask the Court to compel plaintiff's counsel, the law firm of Bailey Kennedy, to arbitrate the issue of whether Bailey Kennedy is conflicted from continuing to represent plaintiff in this action due to an alleged prior attorney-client relationship between Bailey Kennedy and defendants. ECF No. 33 at 2. Specifically, defendants state that they entered into an attorney-client relationship with Bailey Kennedy when they engaged his legal services via a letter agreement dated October 28, 2019 (“10/28/19 Agreement”). Id. Thus, defendants also state that pursuant to the 10/28/19 Agreement, Dennis Kennedy, Esq. of Bailey Kennedy provided defendants with “legal advice, counsel and guidance during certain litigation” that was the subject of the 10/28/19 Agreement. Defendants claim that Bailey Kennedy is conflicted from representing plaintiff in this action because the litigation that was subject to the 10/28/19 Agreement concerned issues that are “germane to this litigation.” ECF No. 33 at 2. In sum, defendants seek to compel arbitration to determine whether Bailey Kennedy is conflicted because of a prior attorney-client relationship concerning similar issues.
Defendants' Arbitration Motion together with their Discovery Motion further ask the Court to stay discovery and the proceedings in general pending arbitration of Bailey Kennedy's attorney-client conflict per the 10/28/19 Agreement. Defendants' Discovery Motion also requests to stay discovery pending the resolution of defendants' motions to dismiss at ECF Nos. 12 and 40.
II. DISCUSSION
The 10/28/19 Agreement does not support defendants' version of the facts. First, the terms of 10/28/19 Agreement do not provide that Defendants engaged Bailey Kennedy or Dennis L. Kennedy. Instead, the 10/28/19 Agreement reveals that “Holland & Hart, LLP .... engaged Dennis L. Kennedy” of Bailey Kennedy. See ECF No. 33-1. At the time of the 10/28/19 Agreement, Holland & Hart, LLP represented defendants in a state court action against defendants by former law partner, Ruth Cohen, captioned: Ruth L. Cohen v. Paul S. Padda and Padda Law, PLLC, Eighth Judicial District Court Case No. A-19-792599-B, Clark County, Nevada (“Cohen Action”). Second, Holland & Hart, LLP engaged Mr. Kennedy as an expert witness and not as co-counsel or an independent lawyer. Id.
Third, Holland & Hart, LLP engaged Mr. Kennedy to provide expert reports and testimony regarding the singular issue of whether Donald J. Campbell, Esq. and his firm, Campbell & Williams, should be disqualified as counsel for Ruth Cohen in the Cohen Action. The 10/28/19 Agreement states:
Scope of Engagement
The Expert is engaged to provide services on the following matter (the "Matter"): The disqualification of Donald J. Campbell, Esq. and the Jaw film of Campbell & Williams as counsel for the plaintiff in Ruth L. Cohen v. Paul S. Padda and Padda Law, PLLC, Case No. A-19-792599-B, in the District Court, Clark County, Nevada.
Reports and Testimony
The Expert's services shall include the preparation and presentation of one or more written reports or affidavits if instructed by the Firm to do so. The Expert's services may also include testifying in deposition or an evidentiary hearing.ECF No. 33-1 at App.005 and App.007.
Fourth, while the defendants approved Holland & Hart, LLP's engagement of Mr. Kennedy and agreed to pay Mr. Kennedy's fees, Mr. Kennedy's responsibilities under the 10/28/19 Agreement were not to defendants but to Holland & Hart, LLP, who directed and controlled Mr. Kennedy's expert witness services. Finally, the 10/28/19 Agreement expressly and unequivocally disclaims any possible creation or existence of an attorney-client relationship between Mr. Kennedy and defendants that could be asserted or inferred from Mr. Kennedy's expert witness services. The 10/28/19 Agreement states:
General Responsibilities
The Expert shall cooperate fully and candidly with the Firm with respect to the Matter. The Expert shall be available to the Firm for consultation on reasonable notice and will provide such advice or opinions as the Firmmay request for the appropriate handling of the Matter. The Expert will keep the Firm informed as to the status of the Expert's services.
The Expert shall be an independent contractor and not an employee of the Firm or the Firm's clients. The Expert does not have an attorney-client relationship with the Firm or the Firm's clients. Although the Expert will be acting under the direction and control of the Firm, such direction and control shall not be exercised to compromise the independence, the professional standards or the professional ethics of the Expert.ECF No. 33-1 at App.006.
In sum, there is nothing in the 10/28/19 Agreement which provides that defendants engaged Mr. Kennedy or Bailey Kennedy to represent them in the Cohen Action or to provide defendants with legal advice and counsel regarding the Cohen Action.
III. DEFENDANTS' ARBITRATION MOTION SHOULD BE DENIED
Defendants' Arbitration Motion should be denied for any of the following independent and alternative grounds.
1. BAILEY KENNEDY CANNOT BE COMPELLED TO ARBITRATE
Defendants asks the Court to enforce the 10/28/19 Agreement containing an arbitration provision against Bailey Kennedy and compel Bailey Kennedy to arbitrate. However, there are no claims in this action against Bailey Kennedy arising out of that agreement, or otherwise. Bailey Kennedy is not before this court as a party to this action. “A party's counsel is not a party.” S.E.C. v. Art Intellect, Inc., No. 2:11-CV-00357-TC-DN, 2012 WL 776244, at *2 (D. Utah Mar. 7, 2012); see also e.g., Castillo v. W. Range Ass'n, No. 3:16-cv-00237-RCJ-CLB, 2024 WL 1376989, at *3 (D. Nev. Mar. 30, 2024)(“a deceased party's attorney ‘is not a party to the action'”....). As plaintiff points out, the defendants “have not cited any caselaw or statute allowing this Court to compel a nonparty to arbitrate.” (ECF No. 34 at 7). Equally, the Court did not locate any authority that would allow the Court to compel one who is not a party to the action to arbitrate or enforce an agreement containing an arbitration provision against one who is not a party to the action and present before the Court. To be sure, defendants' proposition runs afoul of the general principle that federal courts “may not attempt to determine the rights of persons not before the court.” Zepeda v. INS, 753 F.2d 719, 727 (9th Cir. 1985). Thus, the Court cannot compel Bailey Kennedy to arbitration under the 10/28/19 Agreement.
While the Court has “the prime responsibility for controlling the conduct of lawyers practicing before it,” In re Coordinated Pretrial Proc. in Petroleum Prod. Antitrust Litig., 658 F.2d 1355, 1358 (9th Cir. 1981), there are no issues here regarding Bailey Kennedy's conduct. Specifically, the issue of whether Bailey Kennedy is conflicted is not before the Court. See ECF No. 33 at 1 (“[T]he issue implicated by this motion is not whether a conflict of interest exists. Rather, the issue is whether arbitration must be compelled to adjudicate whether a conflict of interest exists.”)(emphasis in original).
A. PLAINTIFF CANNOT BE COMPELLED TO ARBITRATE
The Court applies Nevada contract law in construing the 10/28/19 Agreement. See Wolsey, Ltd. v. Foodmaker, Inc., 144 F.3d 1205, 1210 (9th Cir. 1998)(“In construing an arbitration agreement, courts must apply ordinary state-law principles that govern the formation of contracts.”)(citation and internal quotations omitted). Plaintiff is not a party to the 10/28/19 Agreement. “[A] party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” Truck Ins. Exch. v. Palmer J. Swanson, Inc., 124 Nev. 629, 634, 189 P.3d 656, 660 (2008)(citations and internal quotations omitted). Under certain circumstances, non-parties may be bound to arbitration agreements. Non-signatories may be bound to arbitration agreements only when 1) the agreement containing the arbitration provision, or the arbitration provision is incorporated into an agreement by the non-party; 2) where the non-party assumed the agreement containing the arbitration provision; 3) where there is agency relationship between the non-party and the party to the arbitration agreement; 4) under veil-piercing/alter ego theory; and 5) by estoppel. Truck Ins. Exch., 124 Nev. at 634-35, 189 P.3d at 660. See also Comer v. Micor, Inc., 436 F.3d 1098, 1101 (9th Cir. 2006)(identifying same circumstances). Defendants do not offer any evidence or anything on the record that establishes any of those five circumstances in this action.
There is no evidence of an agreement between plaintiff and Bailey Kennedy that incorporates the 10/28/19 Agreement or the arbitration clause thereunder. None of plaintiff's claims against defendants arise out of, or concern, the 10/28/19 Agreement. There is no evidence that plaintiff assumed the 10/28/19 Agreement. There is no evidence that plaintiff and Bailey Kennedy had an agency relationship at the time of the 10/28/19 Agreement or regarding the agreement. See e.g., Bridge v. Credit One Fin., 294 F.Supp.3d 1019, 1026 (D. Nev. 2018)(“... Credit One has not shown that Bridge was acting as an agent for his mother at the time she entered the Cardholder Agreement. Further, Bridge was not identified as an agent for his mother in the Cardholder Agreement. Accordingly, the arbitration provision cannot be enforced against Bridge..”). There is no evidence of an alter-ego relationship between plaintiff and Bailey Kennedy. Finally, there is no evidence that plaintiff knowingly accepted a direct benefit under the 10/28/19 Agreement such that it is now estopped from denying an obligation thereunder. See Comer, 436 F.3d at 1101-02 (“...Smith Barney is invoking equitable estoppel against a nonsignatory.. ..The insurmountable hurdle for Smith Barney, however, is that there is no evidence that Comer knowingly exploit[ed] the agreement[s] containing the arbitration clause[s] despite having never signed the agreement[s].”)(citation and internal quotations omitted).
2. DEFENDANTS' CLAIMED CONFLICT IS NOT ARBITRABLE
In deciding defendants' Arbitration Motion, the Court is “limited to determining (1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute at issue.” Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000)(citations omitted). In other words, the Court's “role is strictly limited to determining arbitrability and enforcing agreements to arbitrate..” Republic of Nicaragua v. Standard Fruit Co., 937 F.2d 469, 478 (9th Cir. 1991). Even if the Court could somehow consider compelling Bailey Kennedy to arbitration, the alleged conflict raised by defendants is not arbitrable. The 10/28/19 Agreement does not encompass defendants' alleged conflict of interest issue here.
The alleged arbitrable issue here is premised on the alleged existence of an attorney-client relationship. Defendants seek to compel Bailey Kennedy to arbitrate the issue of whether Bailey Kennedy is conflicted from representing plaintiff's here because, as defendants' claim, Bailey Kennedy was defendants' counsel in the Cohen Case per the 10/28/19 Agreement. Defendants' premise for compelling arbitration, however, is fundamentally flawed and contrary to the terms of the 10/28/19 Agreement.
Contrary to defendants' assertions, neither Mr. Kennedy nor Bailey Kennedy were defendants' counsel in the Cohen Case, nor engaged as counsel for defendants under the 10/28/19 Agreement. As discussed above, Mr. Kennedy's engagement under the 10/28/19 Agreement was narrowly defined solely as an expert witness to render reports and testimony about the disqualification of Donald J. Campbell, Esq., and the Law film of Campbell & Williams in the Cohen Action. Again, the 10/28/19 Agreement expressly and clearly disclaims the existence or creation of an attorney-client relationship from Mr. Kennedy's engagement by Holland & Hart, LLC as an expert witness. See ECF No. 33-1 at App.006. Defendants presented no evidence to the contrary. To be sure, it is highly unlikely that attorney-client relationship or privilege could somehow exists by Mr. Kennedy's engagement as an expert witness.
An attorney testifying as an expert does not represent the party offering her testimony.... Experts perform a very different function in litigation than do lawyers.... Attorneys are advocates, charged with selflessly serving their client's interests. Expert witnesses, on the other hand, are employed to assist the parties in their pretrial preparation, and if called to testify, to give their unbiased opinion in order to assist the trier of fact in understanding the relevant evidence.Marshall v. Northrop Grumman Corp., No. 2:16-cv-06794-AB(JCx), 2019 WL 4143300, at *3 (C.D. Cal. July 23, 2019)(internal citations and quotations omitted); see also Commonwealth Ins. Co. v. Stone Container Corp., 178 F.Supp.2d 938, 944 (N.D. Ill. 2001)(“when a law firm undertakes the role of testifying expert for a client, this undertaking, or ‘engagement,' does not form an attorney-client relationship..”).
See also ABA Standing Committee on Ethics and Professional Responsibility, Formal Opinion 97-407 (May 13, 1997)(An attorney, who is retained only as an expert witness, does not thereby enter into an attorney-client relationship).
Moreover, defendants make only a general, conclusory claim that there are related issues between Mr. Kennedy's engagement under the 10/28/19 Agreement and the issues in this action or regarding Mr. Kennedy's disqualification here. ECF No. 33 at 2. Defendants do not identify any specific issues. Defendants acknowledge this action concerns whether defendants failed to pay plaintiff a certain percentage of a recovery from an unrelated matter pursuant to an alleged referral fee agreement. ECF No. 33-1 at App.1. In pursuit of its claims, plaintiff's discovery objectives include discovery into defendants' financial information, including bank statements, federal tax returns, and financial statements (e.g., profit and loss, balance sheet, general ledger etc.). Defendants did not identify how any of such discovery or the merits of this action were somehow the subject of the 10/28/19 Agreement or, more importantly, Mr. Kennedy's expert witness services or testimony in the Cohen Action per that agreement.
In contrast, plaintiff presented evidence that the expert witness services and testimony provided by Mr. Kennedy in the Cohen Action per the 10/28/19 Agreement had nothing to do with the merits of this action or any of the discovery which plaintiff seeks here. As defendants' counsel in the Cohen Action (Holland & Hart) summarized, Mr. Kennedy's sole role in the Cohen Action was to provide an expert opinion as to “legal ethic issues.” See ECF No. 35-5 at 032. The 10/28/19 Agreement more expressly and unequivocally identifies those “legal ethic issues” as the disqualification of Donald J. Campbell and Campbell & Williams in the Cohen Action.
Therefore, the arbitration provision in the 10/28/19 Agreement does not encompass the attorneyclient conflict issue raised by defendants.
3. DEFENDANTS WAIVED ARBITRATION
Defendants' motion to compel arbitration may also be denied because it is untimely and prejudicial to plaintiff. A party who fails to diligently and promptly enforce an arbitration provision waives the right to arbitrate. “The right to arbitration, like other contractual rights, can be waived.” Martin v. Yasuda, 829 F.3d 1118, 1124 (9th Cir. 2016)(citing United States v. Park Place Assocs., Ltd., 563 F.3d 907, 921 (9th Cir. 2009)). Showing waiver is a heavy burden because of the “strong federal policy favoring enforcement of arbitration agreements.” Id. (citing Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691, 694 (9th Cir. 1986)). A party alleging waiver of the right to arbitration must demonstrate: (1) knowledge of an existing right to compel arbitration; and (2) acts inconsistent with that existing right. Hill v. Xerox Bus. Servs., LLC, 59 F.4th 457, 460 (9th Cir. 2023). Plaintiff has met its burden.
Defendants' knowledge of the arbitration provision under the 10/28/19 Agreement is not reasonably in dispute. Instead, defendants argue they did not discover the alleged arbitrable conflict until plaintiff served discovery into defendants' finances (ECF No. 38). Defendants' argument is not persuasive. One of the essential issues in this action is identifying and tracing the attorney's fees at issue. This issue is manifest from plaintiff's complaint, filed in November 2023. Among other things, plaintiff alleges in its complaint against defendants:
20. After several follow ups, on September 6, 2023, Mr. Padda informed Ms. Bisla that he was delayed in sending payment to Sky Law because he was trying to purchase a multi-million-dollar property and had to cover significant monthly marketing expenses for his law firm. Mr. Padda indicated that he would send an initial payment to Sky Law, with additional payment to be sent in the near future.
21. Sky Law is informed and believes, and thereon alleges, that Mr. Padda disbursed all the attorneys' fees arising out of the Matter to himself or his law firm despite knowing that Sky Law had a valid interest in a portion of those fees.
22. Following their discussion, Mr. Padda sent a check to Sky Law purporting to represent a portion of its share of the attorneys' fees. The check was drawn from the General Operating Account for Padda Law- indicia that Mr. Padda had not held in trust the portion of the attorneys' fees owed to, and claimed by, Sky Law despite his ethical obligation to do so.
23. A dispute subsequently arose between Sky Law and Padda Law as to the amount of attorneys' fees to be paid to Sky Law arising out of the settlement. As a result, Mr. Padda put a stop payment on the check.
24. Skeptical of what transpired, on September 8, 2023, Ms. Bisla's assistant contacted the adverse party's insurer to inquire about the settlement amount and, on September 11, 2023, she learned that the Matter had settled for more than what had been represented by Mr. Padda.
25. Mr. Padda has since refused to pay any attorneys' fees to Sky Law as required under the Fee Split Agreement.
26. Despite request, Mr. Padda has declined to send a copy of the Client's signed Disbursement Sheet associated with the settlement to Sky Law.ECF No. 1 at ¶¶21-26.
Plaintiff also met its burden of showing that defendants acted inconsistent with the now asserted arbitration rights under the 10/28/19 Agreement. “[T]his element satisfied when a party chooses to delay his right to compel arbitration by actively litigating his case to take advantage of being in federal court.” Martin, 829 F.3d at 1125. In meeting such burden, plaintiff relies on the Court's record to demonstrate that defendants have actively taken advantage of being in federal court and litigated this action. As plaintiff's argue, and the Court's record shows, this action has been actively litigated over the past 9 months. Defendants filed two motions to dismiss, negotiated and jointly drafted a Stipulated Discovery Plan and Proposed Scheduling Order, and have engaged in discovery. See ECF Nos. 12, 15, 18, 34, 40. The Ninth Circuit has found that similar conduct suffices to establish acts inconsistent with that existing right. See Martin, 829 F.3d at 1125 (filing a motion to dismiss; engaging in discovery; and negotiating and entering into stipulation structuring the litigation and protective order was sufficient conduct that is inconsistent with the right to arbitrate).
Finally, while prejudice is no longer an element of waiver (see Hill, 59 F.4th at 460), plaintiff is prejudiced by an arbitration given defendants' delay, the amount litigation transpired, and the fees undoubtedly expended. See Martin, 829 F.3d at 1127-28 (a party is prejudiced when it has expended considerable time, effort, and money in the action due to the opposing party's failure to timely move for arbitration). Plaintiff will also be prejudiced by the delay defendants seek in staying this action pending the yet-to-be filed arbitration on a collateral issue. See Fed.R.Civ.P. 1 (giving the parties the right to “secure the just, speedy, and inexpensive determination of every action and proceeding”).
III. DEFENDANTS' MOTION TO STAY DISCOVERY IS MOOT
Defendants Discovery Motion seeks a stay of discovery pending resolution of their motion to dismiss (ECF No. 12), and their Arbitration Motion. On August 12, 2024, the District Judge determined defendants' motions to dismiss (ECF Nos. 12 and 40) without dismissing the action. See ECF No. 42. Further, the undersigned recommends denying defendants' Arbitration Motion. Thus, defendants' Discovery Motion is denied as moot.
IV. CONCLUSION
For the foregoing reasons, IT IS RECOMMENDED that Defendants' Arbitration Motion (ECF No. 33) and Discovery Motion (ECF No. 37) be DENIED.