Court Opinion

ID: 3213488
Source: CourtListenerOpinion
Date Created: 2016-06-15 17:01:40.232719+00
Date Added: 2024-06-11T12:38:35.895266
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

SEAN TILLMAN,                         No. 13-56624
                   Plaintiff,
                                       D.C. No.
            v.                  2:09-cv-02017-VAP-RC

RENEE TILLMAN, AKA
Renee Chicino,                          OPINION
      Defendant-Appellant,

RHEINGOLD, VALET,
RHEINGOLD, SHKOLNIK &
MCCARTNEY,
      Defendant-Appellee.

     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
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.
               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.
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.
                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
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
                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
equally and 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.
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.
                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
10              TILLMAN V. RHEINGOLD FIRM

arbitration under the AAA’s rules was terminated for non-
payment 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.
                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.
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.
                  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
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.
               TILLMAN V. RHEINGOLD FIRM                   15

arbitrator to terminate their arbitration in the event of non-
payment 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.