Summer 2004 • Issue 14, page 16

Who's the Boss?

By Rense, Kirk*

A recent California Appellate Court decision sheds a little more light on the murky legal interrelationships of receiverships and arbitrations. In O’Flaherty et al. v. Belgum et al., 115 Cal. App. 4th 1044, 9 Cal. Rptr. 3d 286 (2004) the court addressed whether and when an arbitrator resolving disputes between separating law firm partners pursuant to a contractual arbitration provision could adjudicate rights of a dissolving law firm that had earlier been placed in receivership. The appointing order vested in the receiver the right to institute actions on behalf of the law firm.

The procedural history is complex (ultimately three actions were filed, then consolidated). In essence, the trial court granted the motion of most of the parties in ordering an arbitration, but continued the receivership and retained jurisdiction to enforce the arbitrator’s award and direct actions of the receiver.

An attorney for one of the partners purported to represent the law firm in the ordered arbitration, over the receiver’s written objection. The arbitrator’s subsequent interim ruling included damage determinations and other provisions directly affecting the law firm.

In the midst of the arbitration the receiver petitioned his appointing court for instructions on how to proceed in light of the arbitration. The court instructed the receiver not to participate, but allowed the arbitration to proceed. The arbitrator ultimately made a number of rulings against the withdrawing partners, and, inter alia, ordered the receiver to disburse funds held by him to new “liquidating administrators.”

On challenge the appointing court upheld the arbitrator’s decisions, and terminated the receivership. But it refused to rule on whether the arbitrator’s decision was binding on the receiver. It punted on the issue of whether an arbitrator has jurisdiction over a partnership in receivership where the receiver does not participate and objects to such jurisdiction.

After thrashing the arbitrator for exceeding his jurisdiction in other ways, the appellate court addressed the relative primacy of a receiver vis-à-vis an arbitrator. It held that since the receiver was given power to direct the law firm’s affairs and bring suits if appropriate and had refused to participate in the arbitration (and the appointing court refused to order him to do so), the arbitrator exceeded his jurisdiction in purporting to adjudicate the law firm’s claims and in issuing other orders to the receiver.

In the absence of a specific order to the contrary, a receiver appointed for a dissolved partnership has the sole authority to commence an action on behalf of that entity, the appellate court said. “The exclusive jurisdiction of the receiver to manage the affairs of OB [the dissolving law firm] could not be waived by anyone other than the [appointing] court.” Power to modify the relationship is retained solely by the appointing court.

This inability of an arbitrator to intrude on a receivership effectively bookends a 1994 California Appellate Court decision, Marsch v. Williams, 23 Cal. App. 4th 238 (1994), which held that arbitrators may not appoint receivers, either, since there is no statutory authority for them to do so. The power to appoint receivers is unique, and parties to an arbitration may not extend that power to arbitrators by agreement absent legislative action, the court said.

Though certainly the interplay of receivers and arbitrators is evolving, it is now clear that an arbitrator may not create a receivership, and may not interfere with an existing one, except by order of the court with jurisdiction over the receivership.