Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-13-56624/USCOURTS-ca9-13-56624-0/pdf.json

Parties Involved:
Rheingold, Valet, Rheingold, Shkolnik & McCartney
Appellee
Renee Tillman
Appellant
Sean Tillman

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

SEAN TILLMAN,

Plaintiff,

v.

RENEE TILLMAN, AKA

Renee Chicino,

Defendant-Appellant,

RHEINGOLD, VALET,

RHEINGOLD, SHKOLNIK &

MCCARTNEY,

Defendant-Appellee.

No. 13-56624

D.C. No.

2:09-cv-02017-VAP-RC

OPINION

Appeal from the United States District Court

for the Central District of California

Virginia A. Phillips, District Judge, Presiding

Argued and Submitted December 9, 2015

Pasadena, California

Filed June 15, 2016

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2 TILLMAN V. RHEINGOLD FIRM

Before: Ronald M. Gould and Marsha S. Berzon, Circuit

Judges and George Caram Steeh III,

*

 Senior District Judge.

Opinion by Judge Berzon

SUMMARY**

Arbitration

The panel reversed the district court’s dismissal of a legal

malpractice case, where the parties had entered into a valid

arbitration agreement but the arbitrator terminated arbitration

proceedings without entering judgment because one party ran

out of funds to pay for its share of the arbitration, and

remanded.

Renee Tillman sued her law firm; the retainer with the

firm contained an arbitration clause; arbitration proceeded

until Tillman ran out of funds; and the arbitration was then

terminated without entry of an award or judgment.

The panel held that the Federal Arbitration Act did not

require dismissal where Tillman’s case “has been had in

accordance with the terms of the [arbitration] agreement,”

9 U.S.C. § 3, and the district court appropriately excused

* The Honorable George Caram Steeh III, Senior District Judge for the

U.S. District Court for the Eastern District of Michigan, sitting by

designation.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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TILLMAN V. RHEINGOLD FIRM 3

Tillman’s failure to pay for arbitration on the grounds of

financial incapacity. The panel reversed the district court’s

dismissal of Tillman’s case and remanded to the district court

with instructions to allow Tillman’s case to continue in court.

COUNSEL

Stephen C. Johnson (argued) and Arlene M. Turinchak,

Dempsey & Johnson P.C., Los Angeles, California, for

Defendant-Appellant.

Stephen M. Caine (argued), Frances M. O’Meara, and Holly

M. Teel, Thompson Coe & O’Meara, LLP, Los Angeles,

California, for Defendant-Appellee.

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4 TILLMAN V. RHEINGOLD FIRM

OPINION

BERZON, Circuit Judge:

When two parties have entered into a valid arbitration

agreement, the Federal Arbitration Act requires federal courts

to stay lawsuits between them until the arbitration is resolved

and then to enforce any arbitration award. Our question is

how a federal court is to proceed where one party runs out of

funds to pay for its share of the arbitration and the arbitrator

thereupon terminates the arbitration proceedings without

entering an award or judgment or otherwise resolving the

case.

Here, Renee Tillman sued her law firm, Rheingold, Valet,

Rheingold, Shkolnik & McCartney (“the firm” or “the

Rheingold firm”). Tillman’s retainer with the firm contained

an arbitration clause, which the firm invoked. Arbitration

proceeded for a time, until Tillman ran out of funds. The

arbitration was then terminated. The parties disagree about

what should now happen to Tillman’s federal court case

against the Rheingold firm.

Our conclusion is that Tillman’s case “has been had in

accordance with the terms of the agreement,” so it is no

longer appropriate to stay the proceedings below. See

9 U.S.C. § 3; Lifescan, Inc. v. Premier Diabetic Servs., Inc.,

363 F.3d 1010, 1012–13 (9th Cir. 2004). Further, the district

court appropriately excused Tillman’s failure to pay for

arbitration on the grounds of financial incapacity. Finally,

under these circumstances, we hold, the FAA does not require

dismissal of Tillman’s case; instead, Tillman’s case should go

forward in federal court. We therefore remand the case with

instructions to allow it to proceed.

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TILLMAN V. RHEINGOLD FIRM 5

I

Renee Tillman’s husband, Tim Tillman (“Tim”), died in

a truck accident in 2002. Tillman hired the Rheingold firm to

represent her. The firm filed a wrongful death suit on

Tillman’s behalf against the manufacturer of the truck Tim

was driving. Tillman won the suit and was awarded about

eight million dollars, an amount later reduced on appeal.

Tillman and the Rheingold firm were then sued by Sean

Tillman (“Sean”), Tim’s son from a prior marriage. Sean

asserted that Tillman and the firm wrongfully excluded him

from the suit against the truck manufacturer, alleging they

were negligent and had violated a California requirement that

an heir suing in a wrongful death action join all other known

heirs. Sean’s claims against the Rheingold firm were

dismissed but his action against Tillman proceeded. Tillman,

in turn, filed a complaint against the firm, alleging it had

committed malpractice by not including Sean in the wrongful

death action and by failing to advise her of the rights of Tim’s

other heirs.

In response to Tillman’s complaint, the firm moved to

compel arbitration, citing the arbitration clause in its retainer

agreement with Tillman. Tillman filed her response to the

motion late. As a result, the district court declined to

consider her response. The court granted the firm’s motion

to compel arbitration and stayed the federal court proceedings

between Tillman and the firm.

Tillman and the firm began arbitration in New York under

the rules of the American Arbitration Association (“AAA”),

as provided in the retainer agreement. During the arbitration,

Tillman objected to several aspects of the arbitration as

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6 TILLMAN V. RHEINGOLD FIRM

unnecessarily increasing costs. In particular, she challenged

the need for the arbitration to include a “case-within-a-case”

adjudication, in which the arbitrator would rehear witnesses

and evidence presented in the underlying wrongful death

action.

The arbitrator nonetheless scheduled additional dates for

a case-within-a-case adjudication. Tillman borrowed money,

and her counsel in the arbitration agreed to front certain costs. 

Nevertheless, Tillman was ultimately unable to provide the

required deposit of $18,562.50 the AAA asked for as a

condition of continuing the proceedings.

The AAA then “inquir[ed] as to whether [the firm was]

willing to cover th[e] deposit,” but the firm declined. Tillman

then requested that the AAA require the firm to pay the

deposits going forward, under AAA rules authorizing interim

relief. The arbitrator responded that it did “not intend to

decide the motion for interim relief” until the deposits had

been paid; set a deadline for Tillman to submit the funds; and

ultimately terminated the arbitration due to the missing

deposits.

The Rheingold firm returned to the district court. It

moved for the court to lift its stay and to dismiss Tillman’s

complaint pursuant to Federal Rule of Civil Procedure 41(b),

which provides that, “[i]f the plaintiff fails to prosecute or to

comply with these rules or a court order, a defendant may

move to dismiss the action or any claim against it.” 

According to the firm, Tillman’s failure to pay her deposits

was a violation of the court’s order compelling arbitration. 

Tillman objected, arguing that she had fully participated in

the arbitration and done “everything in her power” to proceed

before the arbitrator. Tillman also argued that the firm was

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TILLMAN V. RHEINGOLD FIRM 7

at fault as well for the arbitration’s termination, because,

under the AAA rules, it could have paid to continue the

arbitration but chose not to.

Before ruling on the Rule 41(b) motion, the district court

allowed Tillman to submit evidence confirming that her

financial situation precluded her from paying her share of the

arbitration fees. Tillman did so, submitting a declaration with

various exhibits describing how the money from the initial

settlement had been exhausted — through a combination of

legal fees, payment of outstanding debts, educational

payments and set-asides for several family members, vehicle

purchases, home improvements, investment losses, and

gambling losses. After reviewing the evidence, the district

court found Tillman was indeed “unable to pay for her share

of arbitration.” It therefore declined to dismiss her case under

Rule 41(b) and instructed the parties to further brief the issue

of how to proceed given Tillman’s inability to pay the

arbitrator’s fees.

The district court ultimately dismissed the case. 

According to the district court, because the AAA’s rules

required Tillman and the firm to bear the costs of arbitration

equallyand allowed the arbitrator to suspend the proceedings,

the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq.,

deprived the district court of authority to hear “the claims that

would have been subject to the arbitration agreement,” and

dismissal was required.

Tillman timely appealed.

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8 TILLMAN V. RHEINGOLD FIRM

II

“[C]ourts must rigorously enforce arbitration agreements

according to their terms.” Am. Express Co. v. Italian Colors

Rest., 133 S. Ct. 2304, 2309 (2013) (citing Dean Witter

Reynolds Inc. v. Byrd, 470 U.S. 213, 221 (1985)) (internal

quotation marks removed). When a party petitions a court to

compel arbitration under the FAA, “the district court’s role is

limited to determining whether a valid arbitration agreement

exists and, if so, whether the agreement encompasses the

dispute at issue. If the answer is yes to both questions, the

court must enforce the agreement.” Lifescan, 363 F.3d at

1012. Here, there is no dispute that both these conditions

were initially met, and no challenge to the original referral of

the dispute to arbitration.

Although the validity of the arbitration agreement

between Tillman and the Rheingold firm is not at issue, it is

not immediately clear what it means to “enforce the

agreement,” id., in the context before us. The firm seeks to

lift the district court’s stay of proceedings and to dismiss

Tillman’s complaint. We agree that it is appropriate to lift

the stay but conclude that Tillman’s case should be allowed

to proceed.

A.

The Rheingold firm, invoking the FAA, originally sought

to stay the district court proceedings and compel arbitration. 

The FAA requires courts to stay court proceedings on issues

subject to arbitration “until such arbitration has been had in

accordance with the terms of the agreement.” 9 U.S.C. § 3.

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TILLMAN V. RHEINGOLD FIRM 9

But what does it mean for an arbitration to “ha[ve] been

had in accordance with the terms of the agreement”? Id.

Here, arbitration was “had” in the sense that the parties

engaged in arbitration until the arbitrator terminated those

proceedings. The arbitration was terminated because Tillman

could no longer pay the arbitrator’s fee; the arbitrator did not

enter any sort of award or judgment. The parties disagree

about whether, in these circumstances, her arbitration “has

been had in accordance with the terms of the agreement.”

Our decision in Lifescan goes a long way toward

resolving this dispute. See 363 F.3d at 1010. In Lifescan,

two parties, Premier and Lifescan, submitted a dispute to

arbitration under the AAA’s rules. Id. at 1011. Shortly

before the final arbitration hearings, Premier advised that it

was not able to pay its share of the arbitrators’ costs. Id. The

arbitrators gave Lifescan the option of paying Premier’s

share. Id. When Lifescan declined, the AAA suspended the

proceedings. Id.

Lifescan petitioned the district court to compel arbitration

under the FAA. Id. On appeal, we directed that the petition

be dismissed. Id. at 1013. As the AAA’s rules allowed the

arbitrators to suspend the proceedings when Lifescan

declined to pay Premier’s costs, we concluded, “the

arbitration ha[d] proceeded pursuant to the parties’

agreement.” Id. Lifescan left matters there. It did not treat

the suspension of arbitration proceedings as an award in favor

of one party or the other, as no award had issued. Id.

The Tenth Circuit recently reached a similar conclusion

in Pre-Paid Legal Services, Inc. v. Cahill, 786 F.3d 1287,

1293–94 (10th Cir. 2015), cert denied 136 S. Ct. 373 (Oct.

19, 2015). Cahill also concerned a scenario in which an

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10 TILLMAN V. RHEINGOLD FIRM

arbitration under the AAA’s rules was terminated for nonpayment of the AAA’s fees. Id. at 1294. The Tenth Circuit

held that because the AAA’s rules allowed for such a

termination of the proceedings, “the arbitration ‘ha[d] been

had in accordance with the terms of the agreement,’ 9 U.S.C.

§ 3, removing the § 3 requirement for the district court to stay

the proceedings.” Id.

We conclude that Tillman’s arbitration likewise “has been

had in accordance with the terms of the [arbitration]

agreement.” The retainer agreement between Tillman and the

Rheingold firm explicitly incorporated the AAA’s rules. 

While the numbering of some of the AAA’s rules has

changed since Lifescan, all the relevant provisions remain the

same. See Am. Arbitration Ass’n, Commercial Arbitration

Rules and Mediation Procedures (2013). Current Rule R-53

allows the AAA to prescribe fees and gives it the sole

discretion to reduce fees in the event of hardship. Id. at 29. 

Rule R-56 allows the AAA to require the parties to pay

deposits in advance in “such sums of money as it deems

necessary.” Id. at 30. Rule R-57 states that in the event of

nonpayment, the arbitrator may “limit[] a party’s ability to

assert or pursue their claim,” and “may order the suspension

of the arbitration.” Id. at 30–31. If such suspension has

occurred and the parties still fail to make full deposits within

a designated time period, the arbitrator “may terminate the

proceedings.” Id. at 31.

All these steps were followed here, including terminating

the proceedings without issuance of an award. Because the

arbitration had “been had” pursuant to the agreement between

the firm and Tillman, the district properly lifted the stay. See

9 U.S.C. § 3; Lifescan, 363 F.3d at 1013; Cahill, 786 F.3d at

1294.

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TILLMAN V. RHEINGOLD FIRM 11

B.

We review a district court’s decision under Rule 41(b) for

abuse of discretion. The district court did not abuse its

discretion in refusing to dismiss under Rule 41(b).

Generally, the “harsh penalty” of dismissal “should only

be imposed in extreme circumstances.” Ferdik v. Bonzelet,

963 F.2d 1258, 1260 (9th Cir. 1992). Here, the district court

reviewed Tillman’s submissions and concluded that she did

lack the resources to make the requested arbitration deposit. 

This case, a malpractice suit involving an arbitration

agreement, is relatively run-of-the-mill apart from Tillman’s

inability to pay. Whether Tillman “fail[ed] . . . to comply

with . . . [the] court order” to arbitrate is debatable, as she was

willing to arbitrate but unable to pay for it, and the Rheingold

firm could have fronted the costs but did not. In any event,

any failure to comply was, for the same reasons, not culpable

and so does not merit a harsh penalty, particularly given “the

public policy favoring disposition of cases on their merits,” 

Pagtalunan v. Galaza, 291 F.3d 639, 642 (9th Cir. 2002).

We therefore affirm the district court’s Rule 41(b) ruling.

C.

The district court did err, however, in dismissing

Tillman’s complaint on other grounds. To justify its

dismissal, the court cited Lifescan as holding that it “lack[ed]

the power to allow further litigation.” Far from requiring

dismissal of Tillman’s case, Lifescan points in the opposite

direction.

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12 TILLMAN V. RHEINGOLD FIRM

Lifescan held that, despite Premier’s non-payment of its

share of arbitration fees, there was “no basis for an order

requiring Premier to pay the fees, or compelling arbitration.” 

363 F.3d at 1013. Lifescan does not discuss how the

underlying dispute should be disposed of, but it never

indicates that the action should be dismissed. See id. 

Lifescan’s only conclusion was that compelling arbitration

would be inappropriate.

This silence is telling. Nothing in the FAA requires

dismissal of the litigation under Lifescan’s circumstances or

the present ones.

The FAA provides that district courts must stay pending

proceedings on issues subject to arbitration until such

arbitration has been had, 9 U.S.C. § 3; compel arbitration in

the event of a party’s “failure, neglect, or refusal” to arbitrate,

9 U.S.C. § 4; and enforce a valid award resulting from an

arbitration, 9 U.S.C. §§ 9–11. As discussed above, there is no

longer a basis for a stay. There is also no arbitration award to

enforce. And the Rheingold firm has not moved anew to

compel arbitration. Even if it had, Lifescan held that there

was no “failure, neglect, or refusal” to arbitrate where one

party had been unable to pay and the AAA suspended the

proceedings when the other party was unwilling to front the

bill. 363 F.3d at 1011–13.

Here, the district court expressly found that Tillman

lacked the resources to deposit the arbitration fee. The

Rheingold firm has not pointed to any section of the FAA

compelling dismissal of Tillman’s claim under these

circumstances. None is apparent from the statute’s plain text

or our case law interpreting it. In the absence of a statutory

directive, the district court erred in dismissing Tillman’s case. 

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TILLMAN V. RHEINGOLD FIRM 13

“District courts have an obligation and a duty to decide cases

properly before them,” absent a firm basis for declining to do

so. See S. Cal. Edison Co. v. Lynch, 307 F.3d 794, 805 (9th

Cir. 2002) (quoting City of Tucson v. U.S. West Commc’ns,

Inc., 284 F.3d 1128, 1132 (9th Cir. 2002) (internal quotation

marks omitted).

We are mindful, of course, of the “liberal federal policy

favoring arbitration” reflected in the FAA. AT&T Mobility

LLC v. Concepcion, 563 U.S. 333, 339 (2011) (quoting Moses

H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1,

24 (1983)) (internal quotation marks omitted). Our ruling

today, which allows Tillman’s case against the Rheingold

firm to proceed despite the existence of an arbitration

agreement between the two, does not run afoul of that policy. 

Our decision that Tillman’s case may proceed does not mean

that parties may refuse to arbitrate by choosing not to pay for

arbitration. If Tillman had refused to pay for arbitration

despite having the capacity to do so, the district court

probably could still have sought to compel arbitration under

the FAA’s provision allowing such an order in the event of a

party’s “failure, neglect, or refusal” to arbitrate. 9 U.S.C.

§ 4.1 Or, in that context, the court could, and most probably

1 A question may arise in such circumstances as to whether an

arbitration “has been had in accordance with the terms of the agreement,”

9 U.S.C. § 3, when it has been terminated due to the nonpayment of a

party who has the ability to pay but simply chooses not to. Even if such

an arbitration has been terminated in accordance with the rules governing

the arbitration, as Tillman’s arbitration was here, it may be contrary to

“the structure and purpose of the FAA” to allow a party to an arbitration

agreement to benefit from their intentional noncompliance with an

arbitrator’s rules. Sink v. Aden Enters., 352 F.3d 1197, 1200 (9th Cir.

2003). But because Tillman was unable to pay, gave notice of her

inability to pay during arbitration, and “made genuine efforts to make

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14 TILLMAN V. RHEINGOLD FIRM

should, dismiss Tillman’s complaint under Fed. R. Civ. P.

41(b), for failure to comply with the order to arbitrate despite

its ability to do so. Here, however, the district court found

that Tillman had exhausted her funds and was “unable to pay

for her share of arbitration.” As a result, the district court

excused Tillman’s lack of compliance with its order

compelling arbitration under 9 U.S.C. § 4.

As Tillman’s arbitration terminated before the merits

were reached or any award issued, allowing her case to

proceed in district court is the only way her claims will be

adjudicated.

The outcome would likely be different if Tillman were the

one seeking a stay of the district court proceedings, as that

would frustrate the Rheingold firm’s attempts to have the

case heard in either the court or the arbitral forum. See Sink,

352 F.3d at 1201. But Tillman had not sought a stay, so

9 U.S.C. § 3’s reference to a party “in default” does not

apply. See 9 U.S.C. § 3 (providing for a stay of federal court

proceedings pending arbitration so long as “the applicant for

the stay is not in default in proceeding with such

arbitration.”).

As Lifescan noted, there is “no totally satisfactory

solution” to a party’s nonpayment of its share of arbitration

fees. 363 F.3d at 1013. But parties have the right under the

FAA to choose the rules under which their arbitration will be

conducted. See Italian Colors Rest., 133 S. Ct. at 2309. 

Here, Tillman and the firm chose rules that allowed the

alternate payment arrangements,” id. at 1199, we need not decide how to

construe 9 U.S.C. §§ 3 and 4 in the event of a party’s willful nonpayment

of an arbitrator’s fees.

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TILLMAN V. RHEINGOLD FIRM 15

arbitrator to terminate their arbitration in the event of nonpayment without any resulting award or judgment. Tillman

cooperated with those rules as long as she was able to. No

section of the FAA compelled the district court to dismiss her

case once the arbitration had concluded in accordance with

the agreed upon rules governing but without resolution. We

therefore remand to the district court with instructions to

allow Tillman’s case to continue in court.

REVERSED and REMANDED.

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