Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-07034/USCOURTS-cand-3_06-cv-07034-1/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 09:0010 Petition to Vacate Arbitration Award

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UNITED 

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DISTRICT 

COURT

For the Northern District of California

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UNITED 

STATES 

DISTRICT 

COURT

U

For the Northern District of California

NITED 

STATES 

DISTRICT 

COURT

U

For the Northern District of California

NITED 

STATES 

DISTRICT 

COURT

For the Northern District of California

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

THE THOMAS KINKADE COMPANY, f/k/a

MEDIA ARTS GROUP, INC., a California

corporation and RICHARD F. BARNETT,

Plaintiffs,

v.

KAREN HAZLEWOOD, JEFF SPINELLO, and

THOMAS KINKADE AT THE DOWNTOWN

MALL, LLC, a Virginia corporation,

Defendants. /

No. C 06 7034 MHP

MEMORANDUM & ORDER

Re: Plaintiffs’ Motion for Leave to

Take Limited Discovery

Plaintiffs The Thomas Kinkade Company (“TKC”) and Richard F. Barnett (collectively

“plaintiffs”), filed this action against Karen Hazlewood, Jeff Spinello and Thomas Kinkade at the

Downtown Mall (collectively “defendants”), seeking to vacate an arbitration award in favor of

defendants. Now before the court is plaintiffs’ motion for leave to take limited discovery regarding

allegedly fraudulent conduct by defense counsel in connection with their application for attorneys’

fees in the underlying arbitration. Having considered the parties’ arguments and submissions, and

for the reasons set forth below, the court enters the following memorandum and order.

BACKGROUND

This motion is narrowly addressed to the arbitration panel’s award of attorneys’ fees in the

underlying arbitration, which was one part of the panel’s overall award in favor of defendants. The

panel awarded defendants $900,000 in attorneys’ fees. Plaintiffs assert that defense counsel engaged

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For the Northern District of California

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in fraudulent conduct in petitioning for these fees, and that limited discovery is necessary to fully

uncover this fraud and challenge the fee award.

In the proceeding below, plaintiffs took discovery related to defense counsel’s billing

practices in support of its argument that defendants’ fee petition was fraudulent. Levitt Dec., ¶ 2. 

Plaintiffs presented evidence that defense counsel’s practices were unreliable, and the panel agreed. 

Defendants had requested $2,669,016.25 in fees, “based on about 7,000 hours of attorney and law

clerk time billed at $425–$475 for attorneys and $125–$150 for law clerks and paralegals.” Final

Award at 13. The majority noted that there were no contemporaneously created time sheets or prebills to substantiate these fees, but rather time was communicated by e-mail or audio tape to the

office manager who erased or deleted the recordings after time was entered. Id. The majority held

that if this system “were established as reliable and genuine, under California law, it could provide

an evidentiary basis for the application.” Id. The majority held, however, that this system was not

reliable, and that “many of the fee entries are obviously unsupportable.” Id. at 13–14. The majority

nonetheless decided to award attorneys’ fees to defendants, believing that “to deny Claimants’

Counsel any fees whatsoever would be arbitrary and demonstrate a sense of strong bias in favor of

Respondents.” Id. at 14. The majority awarded defendants $900,000, arriving at this number “based

upon reasonable time and effort which amount is then reduced further by certain amounts for

sanctions imposed during the course of the matter against Claimants’ counsel.”1

 Id. The dissent

rejected this approach, claiming that “[t]he proper remedy when knowingly false support is offered

for a claimed reimbursement is to deny the reimbursement entirely rather than to try, as the Majority

did, to figure out what was reasonable in the circumstances . . . .” Dissent at 11. The dissent

therefore would have denied attorneys’ fees outright. Id.

Plaintiffs assert that, after the arbitration award was entered, plaintiffs’ counsel learned the

identities of certain former employees of defense counsel’s firm that may have information about the

firm’s billing practices and possibly fraudulent conduct. These former employees include two

former office managers, a former executive assistant to the firm’s lead attorney, Norman Yatooma,

and a former attorney from the firm who was involved in the arbitration. Plaintiffs assert that three

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of these four witnesses have refused to provide declarations, but have stated that they will testify if

subpoenaed. Defense counsel, meanwhile, has threatened two of these former employees with

litigation if they disclose any confidential information. Supp. Levitt Dec., Exhs. 1 & 2. Plaintiffs

therefore claim that limited discovery is necessary to compel these witnesses to provide testimonial

and documentary evidence related to defense counsel’s allegedly fraudulent billing practices and

false representations to the panel.

LEGAL STANDARD

In the context of a post-arbitration judicial proceeding, discovery is “available only in limited

circumstances, where relevant and necessary to the determination of an issue raised by such an

application.” Frere v. Orthofix, Inc., No. 99CIV.4049(RMB)(MHD), 00CIV.1968(RMB)(MHD),

2000 WL 1789641, at *4 (S.D.N.Y. Dec. 6, 2000). “In judging discovery requests in this context,

the court must weigh the asserted need for hitherto undisclosed information and assess the impact of

granting such discovery on the arbitral process.” Id. at 5. This is a practical inquiry, assessing the

specific issues raised by the challenging party and the extent to which “those issues implicate factual

questions that cannot be reliably resolved without some further disclosure.” Id. When fraud by a

party is discoverable during an arbitration proceeding, a district court does not abuse its discretion in

denying discovery related to that fraud. O.R. Securities, Inc. v. Prof’l Planning Assocs., Inc., 857

F.2d 742, 749 (11th Cir. 1988); see also A.G. Edwards & Sons, Inc. v. McCollough, 967 F.2d 1401,

1404 (9th Cir. 1992) (holding that, where “fraud or undue means is not only discoverable, but

discovered and brought to the attention of the arbitrators,” such misconduct cannot support the

vacation of an arbitration award). Parties therefore must exercise due diligence in discovery during

the arbitration proceedings before seeking discovery post-arbitration. Empresa Constructora Contex

Limitada v. Iseki, Inc., 106 F. Supp. 2d 1020, 1025 (S.D. Cal. 2000).

When a party seeks discovery in support of an allegation of impropriety on the part of an

arbitrator, the moving party must first show “clear evidence of impropriety.” Id.. A lesser showing

is required for issues unrelated to arbitrator misconduct. Frere, 2000 WL 1789641 at *5.

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DISCUSSION

Plaintiffs assert that the requested discovery is necessary because it will support a reversal of

the panel’s attorneys’ fee award, and that the recently discovered information was not available

during the proceedings below. Defendants dispute both of these assertions, claiming that the panel

fully addressed the issue of billing fraud and, in any case, did not base its fee award on any evidence

proffered by defendants, but rather determined the award based on a reasonable fee for work

performed.2

I. Prior Discovery Related to Fraud

Defendants claim that, because the issue of billing fraud was considered by the arbitration

panel below, plaintiffs cannot raise the issue of fraud in post-arbitration proceedings, and discovery

related to fraud is therefore inappropriate. As a general matter, issues that are considered and

decided on the merits by an arbitration panel are not subject to re-litigation at the district court level. 

O.R. Securities, 857 F.2d at 748 (the fact that an issue was “clearly presented to the arbitrators and

the arbitrators declined to state reasons for their conclusions” ended the inquiry regarding whether

the district court abused its discretion in denying discovery); see also Kotakis v. Gruntal & Co., No.

C 97-0202 CRB, 2000 WL 1006541, at *4 (N.D. Cal. July 11, 2000) (Breyer, J.) (holding that the

examples of fraud and undue means that had been presented to the arbitrators could not support an

order vacating the arbitration award).

Here, the specific instances of fraud and misconduct that plaintiffs assert were never

presented to the arbitration panel. Significantly, however, plaintiffs did present substantial evidence

to the panel related to billing fraud, and the panel explicitly found that defense counsel’s billing

records were unreliable and unsupportable. The panel therefore considered billing fraud, though not

the specific allegations to which the instant discovery request is directed. The question, therefore, is

whether plaintiffs could have discovered the information from defense counsel’s former employees

through the exercise of due diligence in the proceedings below.

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Plaintiffs claim that the specific instances of fraud it seeks to uncover were not discoverable

during the proceedings below because defense counsel actively concealed it during those

proceedings, and that the testimony of newly discovered witnesses will support that contention. 

Plaintiffs further assert that their decision to depose only Mr. Yatooma and his firm’s current office

manager was reasonable, as plaintiffs had no reason to believe that former employees had different

information or that the witnesses they deposed would lie under oath. Plaintiffs further argue that

they “could not pick up the phone and call the Yatooma Firm’s law offices and ask to speak to each

employee.” The court finds that plaintiffs acted diligently in the arbitration proceedings, and should

be permitted to explore relevant information that they obtained after the final award was issued.

II. Relevance of Discovery Sought

Defendants further challenge plaintiffs’ request for discovery on the grounds that defense

counsel’s billing records ultimately proved to be irrelevant to the panel’s attorneys’ fee award. 

Defendants assert that the panel’s award was based entirely upon “reasonable time and effort.” 

Award at 14. Because the panel explicitly rejected defendants’ proposed fee evidence, defendants

assert that allowing discovery directed toward this evidence would shed no light on the propriety of

the attorneys’ fee award. Plaintiffs respond that the issue is whether the challenged award “was

procured by corruption, fraud, or undue means,” not whether the award itself was fraudulent. See 9

U.S.C. § 10(a)(1). An award may be “procured by” fraud where “fraud prevents the panel from

considering a significant issue to which it does not otherwise enjoy access.” Forsythe Int’l, S.A. v.

Gibbs Oil Co. of Tex., 915 F.2d 1017, 1022 (5th Cir. 1990)

In support of their contention that the attorneys’ fee award was procured by fraud, plaintiffs

assert that defense counsel lied regarding the availability of contemporaneous time records and prebills, and that the panel relied on the absence of such records in reaching its ultimate award based on

“reasonableness.” The arbitration panel acknowledged that defendants’ billing evidence was

unreliable and unsupportable, and stated that it “share[d] certain of the views of the dissent

regarding the excesses of Claimant’s Counsel in its request for fees.” Final Award at 14. The panel

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nonetheless awarded $900,000 in attorneys’ fees, demonstrating not only that it did not require

reliable evidence to support such an award but that it was willing to countenance a certain degree of

misrepresentation by defense counsel without denying attorneys’ fees. However, given the

seriousness of the allegations raised by plaintiffs in their discovery request, the court finds that it is

likely the panel would have acted differently if such allegations had been raised and proven during

the proceedings below. At the very least, the panel might have increased its monetary sanctions and

reduced its ultimate attorneys’ fee award. Furthermore, the court as guardian of the integrity of the

arbitration process and the integrity of the court’s confirmation or vacation of the arbitration award

must satisfy itself that the award was not infected by fraud by either the parties or counsel. 

Therefore, the court finds that plaintiffs should be permitted to pursue discovery and attempt to

prove their case of newly discovered billing fraud.

CONCLUSION

For the reasons stated above, the court GRANTS plaintiffs’ motion for leave to take limited

discovery. At the hearing on this motion the parties agreed to the scope of discovery and a schedule

for its completion. The parties are bound by those limitations.

IT IS SO ORDERED.

Dated: 

MARILYN HALL PATEL

District Judge

United States District Court

Northern District of California

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1. The majority also stated its belief that the dissenting Arbitrator has agreed to reduce the

Claimants’ fee request by two thirds, which would be approximately $900,000. The panel’s award

therefore appears to be tied to the dollar amount of defendants’ fee request, though not to

defendants’ evidence in support of that request.

2. Defendants also attack the credibility of plaintiffs’ newly identified witnesses and their

statements. Credibility, however, is best addressed in the context of conducting discovery rather

than in deciding whether discovery should be permitted.

ENDNOTES

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