FEDERICI, v. GURSEY SCHNEIDER & CO.,

Filed 9/28/06

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FIVE

APPEAL from a judgment of the Superior Court of Los Angeles County. Michael J. Farrell, Judge. Affirmed.

Law Offices of Nicholas A. Carlin and Nicholas A. Carlin for Plaintiff and Appellant.

Chapman, Glucksman & Dean, Randall J. Dean and Michael Louis Newman for Defendants and Respondents.

Plaintiff Kathlynn Federici appeals from the judgment and order granting the demurrer of the accountancy firm of Gursey, Schneider & Co. and its employee David Blumenthal (collectively, Gursey).^[1] Plaintiff alleged that Gursey committed professional negligence in providing her with forensic accounting services in connection with marital dissolution proceedings with her husband Danny Federici, a longtime keyboardist for Bruce Springsteen and the E Street Band. The trial court found plaintiff’s professional negligence action was barred by her failure to assert that claim in a prior arbitration that Gursey had successfully brought against her to recover unpaid fees. We affirm. As explained below, an unambiguous provision in Gursey’s retainer agreement required, as a prerequisite to any future malpractice action, that plaintiff raise existing professional negligence claims as an affirmative defense in any fee-related arbitration with Gursey. Under the retainer agreement, the issue of professional negligence was to be litigated initially through arbitration, so that any such damages would be offset against Gursey’s fees--and only if that remedy failed to compensate plaintiff for all of her negligence damages could she pursue further relief through a separate litigation. Because that arbitration provision was valid and enforceable, plaintiff’s failure to comply with it resulted in the forfeiture of her right to sue Gursey for malpractice.

FACTS AND PROCEDURAL BACKGROUND^[2]

The Federicis married in 1987. At the time of marriage, Danny Federici already had a financially rewarding career as a rock musician. During their marriage and after, his annual earnings from live performances, as well as from record and merchandizing royalties, were “well into the mid six figures.” The couple separated in July 2000. In December 2002, plaintiff retained Silberberg to represent her in the dissolution action. Silberberg recommended that plaintiff retain Gursey to assist with forensic accounting in the dissolution proceedings--more specifically, Gursey was to assess the respective financial positions of plaintiff and her husband with regard to the identification and valuation of their separate and community property.

A four-page, single-spaced letter from Blumenthal to plaintiff, dated December 28, 2000, sets forth the terms of the retainer agreement between plaintiff and Gursey, including the arbitration provision at the heart of this appeal. The retainer agreement’s first two paragraphs describe the scope of Gursey’s retention. The next five paragraphs describe Gursey’s billing practices--the manner in which it will apply plaintiff’s $5,000 retainer fee, how plaintiff will be billed for services, the interest penalty to be applied to overdue account balances, and a 30-day deadline for contesting the fees or charges on periodic billing statements.

The following three paragraphs addressed arbitration. Paragraph eight provided: “Any controversy, claim, or dispute relating to our unpaid fees for professional services and costs rendered under this Agreement shall be submitted for binding arbitration to the American Arbitration Association [AAA] . . . . Should you contend that any services were performed improperly or below the standard of care you must raise that defense in the arbitration proceeding as an offset to, or reduction, discharge or complete elimination of the fees we contend you owe. In the event the arbitrator eliminates all of our fees and you still believe you have a cause of action not yet satisfied you may bring such action in a Court of Law for affirmative relief. However, if the arbitrator determines that your claim does not exceed our contended fees you then will be prevented from bringing the same contention in any separate civil action.”

Paragraph nine further addressed the interplay between fee-related arbitration and a separate action by plaintiff for affirmative relief: “[I]n order to protect your rights and our rights to a trial on any such action in Court for affirmative relief, we agree that neither the findings of the arbitrator(s) [n]or any Judgment entered confirming such arbitration award shall be determinative of any issue in your action in Court for affirmative relief, nor shall they be admissible for the purpose of said trial. You may not assert such a claim as a defense in the arbitration proceeding and then again as a separate civil action for affirmative relief, if the arbitrator determined that your recovery was limited to your fee balance. Should you raise such a claim in the arbitration proceeding, and also file a separate civil action in Court, raising the same claim of improper services performed below the standard of care, we shall, in that instance only, be permitted to show the Court that this claim was made in the arbitration proceeding and therefore is a bar to prevent you from proceeding with the civil action.” Paragraph ten discussed entry and collection of an arbitrator’s award.

The agreement’s final page began: “If, after discussing this agreement with your attorney, you agree that the above accurately sets forth the terms of our engagement, please so indicate by signing below and returning this agreement to Gursey . . . .” Plaintiff signed the agreement on January 12, 2001. Ten days later, Silberberg signed and dated the agreement, representing that he had “reviewed the above agreement with” plaintiff, and that he was “in agreement with its terms.”

In the following spring, Silberberg negotiated a marital settlement agreement that plaintiff now considers highly unfavorable to her. In the underlying pleading, plaintiff alleged that Silberberg misrepresented the settlement’s unfavorable terms, insisted that she agree to it, and instructed her to sign without reading it--which she did.^[3] On June 18, 2002, the final judgment of dissolution was entered pursuant to the terms of the settlement agreement. That settlement, plaintiff contends, allowed her husband to keep as his own, outside the marital community, approximately “$1.6 million in cash and the rights to virtually all of his Bruce Springsteen band royalties,” while she received only $2,500 per month in child support for their two children and a house “with equity valued at under $200,000.”

In approximately June of 2003, Gursey sought to arbitrate its claim for unpaid fees against plaintiff. On July 15, 2003, the AAA sent notices to plaintiff and Gursey, confirming the arbitrator’s award of $29,884.40, plus interest and fees. On October 16, 2003, the superior court entered judgment for Gursey in its unopposed petition to confirm the arbitrator’s award.

On May 10, 2004, plaintiff, representing herself, filed a professional negligence complaint against Silberberg and Gursey. At a November 10, 2004 hearing, the trial court sustained Gursey’s demurrer, ruling that plaintiff’s claim against Gursey was barred by the doctrines of waiver and res judicata because plaintiff had failed to raise her malpractice allegations during the fee arbitration. The court granted plaintiff leave to amend, providing her with more time to retain counsel and “an opportunity to plead around those defenses.”

On February 10, 2005, still in propria persona, plaintiff filed the pleading here at issue, her first amended complaint. According to plaintiff, due to Silberberg’s malpractice and breach of fiduciary duty (the first two causes of action) and Gursey’s professional negligence (the third cause of action), she failed to receive any portion of various significant assets that should have been included in the marital community--her husband’s royalties from Bruce Springsteen’s most popular albums and her husband’s cash, including a “tour bonus” payment of approximately $620,000 that her husband was to receive shortly after the dissolution. Plaintiff also alleged that her retainer agreement with Gursey did not require that all of plaintiff’s professional negligence claims be submitted to arbitration. Plaintiff conceded that she did not counterclaim for professional negligence at the arbitration with Gursey, but alleged that she “was not aware of the facts constituting Gursey’s negligence until October 2003, after the fee arbitration had concluded.” Plaintiff discovered those facts when she retained an independent accountant to review the financial records used in connection with the dissolution action. Plaintiff further alleged that if the retainer agreement’s arbitration provision were interpreted to foreclose her malpractice claim without a “full and fair hearing,” it would be unenforceable as being unconscionable and contrary to public policy. Plaintiff alleged that she suffered at least $1 million in general and compensatory damages from Gursey’s negligence, but did not specify her fees to Gursey as a component of those damages.^[4]

On March 2, 2005, current appellate counsel became plaintiff’s counsel in the trial court. Six days later, Gursey demurred to the new pleading, arguing that the arbitration award barred her malpractice claim. The demurrer was supported by the July 14, 2003 arbitrator’s award, the judgment on petition to confirm that award (entered by the same court before which the demurrer was pending), and the December 28, 2000 retainer agreement with Gursey. The trial court granted Gursey’s unopposed motion to take judicial notice of those documents.

At the April 15, 2005 hearing, the trial court ruled that plaintiff’s claim against Gursey was “barred by res judicata and waiver” and sustained Gursey’s demurrer without leave to amend.^[5] Plaintiff timely appealed.

DISCUSSION

“’In reviewing the sufficiency of a complaint against a general demurrer, we are guided by long-settled rules. “We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.” [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff.’ (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) ‘To meet [the] burden of showing abuse of discretion, the plaintiff must show how the complaint can be amended to state a cause of action. [Citation.] However, such a showing need not be made in the trial court so long as it is made to the reviewing court.’ [Citation.] ‘[W]e may affirm a trial court judgment on any basis presented by the record whether or not relied upon by the trial court.’ [Citation.]” (Blumhorst v. Jewish Family Services of Los Angeles (2005) 126 Cal.App.4th 993, 999.)

The substantive law governing this appeal is also well established. In Powers v. Dickson, Carlson & Campillo (1997) 54 Cal.App.4th 1102, 1108-1109 (Powers ), we explained: “As a general rule, a written agreement to arbitrate a future controversy is valid and enforceable and requires no special waivers or provisions. Exceptions to the general rule may apply if the arbitration provision is included within an adhesion contract or the scope of the arbitration provision is ambiguous.” In Powers, we addressed an arbitration dispute between an attorney and client, and found no ethical proscription against including “in an initial retainer agreement with a client a provision requiring the arbitration of both fee disputes and legal malpractice claims.” (Id. at p. 1109.) The parties advance no reason why the same would not be true in the accountancy context.

“’A written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.’ (Code Civ. Proc., § 1281.) ‘[A]rbitration has become an accepted and favored method of resolving disputes [citations], praised by the courts as an expeditious and economical method of relieving overburdened civil calendars [citation].’ [Citation.] ‘Consequently, courts will “’indulge every intendment to give effect to such proceedings.’ “ ‘ [Citation.]” (Powers, supra, 54 Cal.App.4th at p. 1109.)

Plaintiff first argues as a matter of contractual interpretation that the retainer agreement’s arbitration clause applies only to fee disputes, not malpractice claims, and therefore does not cover plaintiff’s cause of action. “Our Supreme Court long ago established ‘[t]he interpretation of a written instrument, even though it involves what might properly be called questions of fact [citation], is essentially a judicial function to be exercised according to the generally accepted canons of interpretation so that the purposes of the instrument may be given effect. [Citations.] . . . It is therefore solely a judicial function to interpret a written instrument unless the interpretation turns upon the credibility of extrinsic evidence.” [Citation.] The question must be decided de novo by this court, unless the interpretation depends upon extrinsic evidence. [Citations.]” (Powers, supra, 54 Cal.App.4th at p. 1111.) As plaintiff has never identified any extrinsic evidence of intent in support of her proffered interpretation, we proceed with our independent review.

“’We interpret the intent and scope of the agreement by focusing on the usual and ordinary meaning of the language used and the circumstances under which the agreement was made.’ [Citations.] ‘A contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties.’ [Citations.] ‘The court must avoid an interpretation which will make a contract extraordinary, harsh, unjust, or inequitable.’ [Citation.]”

‘In cases of uncertainty not removed by the preceding rules, the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist.’ [Citation.] Where the language in a contract is ambiguous, the contract should be interpreted most strongly against the party who prepared it. [Citations.]” (Powers, supra, 54 Cal.App.4th at pp. 1111-1112.)

Plaintiff’s reading of the retainer agreement’s arbitration provision--that it was narrowly drafted to apply only to fee disputes, leaving the client’s prospective malpractice claims outside its purview--is not tenable. First, although fee-related matters predominate in the retainer agreement, the agreement as a whole was not limited to fee issues. Rather, it concerned the entire scope of services Gursey was to render. Second, the arbitration provision was broadly drafted to subject “[a]ny controversy, claim, or dispute relating to our unpaid fees for professional services and costs rendered under this Agreement” to binding arbitration. Under that provision’s ordinary and usual meaning, it would certainly implicate a malpractice claim arising out of the rendition of services for the dissolution proceedings. While it is possible to imagine a malpractice claim that would fall outside that provision’s plain terms--for instance, a claim arising after all the fees had been paid or one concerning services provided under a different agreement--plaintiff’s claim arose in the context of unpaid fees for the contracted-for services.

Moreover, the provision’s next sentence made it clear that in the event Gursey sought to arbitrate a dispute over unpaid fees, plaintiff was required to assert her malpractice claims as a means of counterclaim or defense: “Should you contend that any services were performed improperly or below the standard of care you must raise that defense in the arbitration proceeding as an offset to, or reduction, discharge or complete elimination of the fees we contend you owe.” Given the contract’s broad definition of claims subject to arbitration and the specific requirement that malpractice-type claims must be asserted in the arbitration proceeding, plaintiff could not have reasonably understood the arbitration provision “to concern exclusively financial matters.”^[6] (Powers, supra, 54 Cal.App.4th at p. 1113.)

As such, plaintiff’s reliance on Lawrence v. Walzer & Gabrielson (1989) 207 Cal.App.3d 1501 (Lawrence) is misplaced. In Lawrence, the retainer agreement’s arbitration provision was part of “an agreement devoted almost exclusively to financial matters.” (Id. at p. 1506.) The defendant law firm had drafted the agreement and sought to compel arbitration of its client’s malpractice claim, based solely on general language in a phrase that was embedded in a discussion of fee-related matters: “’In the event of a dispute between us regarding fees, costs or any other aspect of our attorney-client relationship, the dispute shall be resolved by binding arbitration.’” (Ibid., italics added.) The appellate court, applying “’the doctrine of ejusdem generis . . . which states that where general words follow the enumeration of particular classes of persons or things, the general words will be construed as applicable only to persons or things of the same general nature or class as those enumerated . . . ,’” found “the arbitration clause appears to be limited to disputes concerning financial matters such as fees and costs and is most likely to be so viewed by a prospective client to whom the proposed agreement is tendered by the law firm.” (Ibid.) Through application of that interpretive canon, the Lawrence court “avoid[ed] construing the retainer provisions as a document which misleadingly appears to the client to deal almost exclusively with financial matters, while extracting from her a significant yet inconspicuous relinquishment of the client’s rights regarding future claims of malpractice.” (Id. at pp. 1506-1507, fn. omitted.)

In contrast, Gursey’s arbitration clause specifically identified such malpractice claims to the client and required that they be raised as part of the fee-related arbitration. (See Powers, supra, 54 Cal.App.4th at pp. 1112-1113 [“Unlike the arbitration provision in Lawrence, [supra, 207 Cal.App.3d 1501] . . . [the subject] arbitration provisions unambiguously apply to legal malpractice claims as well as fee disputes.”].) There simply was nothing ambiguous or misleading about the arbitration provision in the Gursey retainer agreement.

Nor do we find our decision in Pratt v. Gursey, Schneider & Co. (2000) 80 Cal.App.4th 1105 supportive of plaintiff’s argument. The arbitration agreement in dispute in that case was not the same agreement signed by plaintiff and Gursey in this case. In our earlier opinion, we dismissed Gursey’s appeal, holding that the arbitration agreement contained an unambiguous waiver of appellate rights following arbitration, and that any ambiguity created by inconsistent references to contractual and judicial arbitration did not affect the parties’ broad waiver of the right to appeal “any judgment” or “any order.” (Id. at p. 1110.) The issue presented in Gursey’s earlier appeal is not the issue presented in this case, and the decision provides no support for plaintiff’s position here. It is well-settled that cases are not authority for issues not considered. (McDowell & Craig v. City of Santa Fe Springs (1960) 54 Cal.2d 33, 38.) In any event and contrary to plaintiff’s assertion, the fact that the retainer agreement in Pratt, supra, 80 Cal.App.4th 1105 specified that claims “’arising out of this agreement or the performance of services pursuant thereto‘“ shall be subject to binding arbitration does not reasonably tend to show that the new arbitration provision now before us was intended to apply solely to fees, not performance. (Id. at p. 1106, emphasis added.) The retainer agreement that plaintiff accepted contained a provision that specifically required arbitration of malpractice claims.

Plaintiff cannot reasonably contend that her malpractice claim falls outside the intended reach of the arbitration provision because she was not aware of her claim’s existence at the time of arbitration. By agreeing to a contract that imposed on her the obligation to raise malpractice claims as part of the arbitration, plaintiff implicitly accepted the duty to make a reasonable investigation into the existence of any such claims that arose out of the services Gursey rendered and billed for. It is undisputed that plaintiff’s malpractice claim is premised on precisely those services and that the operative facts were available to her at the time of Gursey’s arbitration demand. Plaintiff alleged that Gursey’s malpractice arose prior to, and culminated in, the marital settlement reached in the spring of 2002, with the final dissolution judgment entered on June 18, 2002. The arbitration did not take place until June of 2003.

Plaintiff alleges no facts that would excuse or justify her failure to discover the salient facts at the time of the arbitration. She does not assert that Gursey did anything to prevent her from discovering those facts, or that she could not have discovered them by reasonable efforts. Instead, she merely contends that she did not become “aware of the facts constituting Gursey’s negligence until October 2003, after the fee arbitration had concluded.” According to plaintiff, she discovered the operative facts when she retained an independent accountant to review the financial records used in connection with the dissolution action. The only legitimate inference based on the record below was that plaintiff could have discovered those facts in a timely fashion if she had made a reasonable effort.

Certainly, plaintiff had a strong incentive to diligently discover facts supporting her claim of professional negligence: Gursey sought to recover close to $30,000 in unpaid fees, and the retainer agreement specified that she could reduce, discharge, or eliminate her liability for those fees by contending “that any services were performed improperly or below the standard of care.” Further, as discussed above, the only way she could seek affirmative malpractice damages beyond Gursey’s fees in a civil action was to prevail on that claim at arbitration. Plaintiff’s apparent failure to perceive that the retainer agreement imposed such a duty--whether due to her failure to read or understand the significance of that unambiguous arbitration provision--”may not be used to invalidate a written arbitration provision.” (Powers, supra, 54 Cal.App.4th at p. 1109.)

Next, plaintiff argues that the retainer agreement, by its strict terms, permits a subsequent malpractice claim such as plaintiff’s because she failed to assert it in connection with the arbitration. Plaintiff points to the arbitration provision in paragraph nine that prevents her from asserting a malpractice claim “as a defense in the arbitration proceeding and then again as a separate civil action for affirmative relief” where the arbitrator determines that her recovery was limited to her fee balance. Since plaintiff did not raise such a defense during arbitration and the arbitrator had no occasion to make such a determination, plaintiff asserts that the contractual bar does not apply to her. Plaintiff’s argument rests on an extraordinary and self-contradictory interpretation of the agreement. As explained above, by its plain terms, the agreement required plaintiff to raise her malpractice claims in connection with the arbitration. The quoted provision obviously would come into play only if she had done so; it cannot be reasonably interpreted to excuse her noncompliance.

In a closely related but unmeritorious argument, plaintiff contends that the strict terms of the retainer agreement serve to bar Gursey from relying on the arbitration agreement and award as a bar to her malpractice action. Plaintiff points to the following provision from paragraph nine of the agreement (emphasis added): “Should you raise such a [malpractice] claim in the arbitration proceeding, and also file a separate civil action in Court, raising the same claim of improper services performed below the standard of care, we shall, in that instance only be permitted to show the Court that this claim was made in the arbitration proceeding and therefore is a bar to prevent you from proceeding with the civil action.” Plaintiff argues that this language means that a prior arbitration judgment can serve as a bar to a future malpractice claim only if plaintiff raised the claim as a defense during the arbitration, but not if plaintiff violated the agreement’s plain terms by failing to present such a claim to the arbitrator in the first place.

Once again, “[a] contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties.” (Civ. Code, § 1643; Powers, supra, 54 Cal.App.4th at pp. 1111-1112.) We reject plaintiff’s interpretation because it would frustrate the parties’ clear, objective intent in favor of imposing a highly partisan, hypertechnical reading that would allow one party to use hindsight to redraft the contract and reallocate the parties’ agreed-upon obligations.

Plaintiff alternatively contends that if the arbitration provision required her to assert her malpractice allegations in connection with the arbitration, it is unenforceable on grounds of unconscionability. However, plaintiff forfeited that contention by failing to raise it in opposition to the arbitration. In Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 31 (Moncharsh), our Supreme Court “held that if a party believes the entire contractual agreement or a provision for arbitration is illegal, it must oppose arbitration on this basis before participating in the process or forfeit the claim.” (Cummings v. Future Nissan (2005) 128 Cal.App.4th 321, 328.) It does not appear that plaintiff opposed Gursey’s initial arbitration demand on any ground, and it is clear that plaintiff did not oppose Gursey’s petition to confirm the arbitrator’s award.^[7] Consequently, she forfeited her unconscionability claim.

To be continue as Part II ...

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^[1] Also named in the operative pleading, plaintiff’s first amended complaint of February 10, 2005, were Fred Silberberg and the law firm of Silberberg & Ross (collectively, Silberberg). Silberberg’s demurrer was overruled. Silberberg is not a party to this appeal, which solely concerns plaintiff’s cause of action against Gursey.

^[2] These facts in this section are taken from the allegations in the first amended complaint and documents properly before the trial court in accordance with the standard of review on appeal. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)

^[3] Silberberg contends that as part of the entry of judgment, plaintiff stipulated that counsel had not investigated the valuation of the parties’ separate and community property assets, and that plaintiff was entering into the judgment freely and against counsel’s advice, and releasing counsel from liability. Plaintiff acknowledges the existence of the stipulation and release, but alleges the recitals were false.

^[4] Later, at the demurrer hearing, plaintiff’s counsel conceded that, if her malpractice claim were permitted to go forward, she would be barred from recovering the fees awarded through the arbitration.

^[5] The trial court overruled the Silberberg defendants’ demurrer and granted them 30 days to answer the first amended complaint.

^[6] Plaintiff’s malpractice allegations concern Gursey’s performance in connection with her marriage dissolution proceeding, which were services for which Gursey was retained. The dissent’s hypothesis that the alleged malpractice might have occurred early in Gursey’s retention and that plaintiff might have paid “in full” for those particular services has never been argued or alleged by plaintiff. In any event, the parties’ unambiguous agreement required that plaintiff raise her malpractice claim as a defense or offset if she contended that any services were performed improperly or below the standard of care.

^[7] The pleadings established that plaintiff was served with the arbitrator’s award for fees and that judgment was entered in Gursey’s favor on its unopposed petition to confirm that award. The trial court gave plaintiff every opportunity to plead that she opposed arbitration on the basis that the arbitration provision was unconscionable, but she failed to do so.