Caveat: Know Your Arbitrator

Dolores Soderstrom’s legal nightmare began innocuously enough with a routine agreement to sell two vacant lots she owned in Indio.

But the deal landed the 73-year-old widow, against her will, in binding arbitration before the Southern California Arbitration Assn. Last May, an inexperienced arbitrator ordered Soderstrom to pay the putative buyer a staggering $558,000--nearly eight times the value of her properties.

Shocked and depressed by the decision, Soderstrom later discovered that her adversary, Palm Desert businessman Steve Holgate, was closely linked to the arbitration service. The SCAA was run by a former Holgate employee, court records show, and Holgate had recruited some of its arbitrators.

D.D. Dunlap Cos., a Long Beach real estate firm, also went before an SCAA arbitrator last year--with similar results. Following a minor landlord-tenant dispute involving $36,000, Dunlap was ordered to pay an eye-popping $582,000. Holgate served as hearing clerk in the Dunlap arbitration, and the award went to a business firm whose vice president was a Holgate associate, court records show.

Holgate declined to be interviewed for this story.

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The Soderstrom and Dunlap cases are cautionary tales about the risks of binding arbitration--a fast-growing system of alternative private justice that promises speed and cost savings, but often lacks safeguards against legal error.

Soderstrom was the luckier of the two. In December, Los Angeles County Superior Court Judge James L. Wright threw out the award, citing the “close relationship” between Holgate and the SCAA’s president. The arbitration was “presumptively biased,” Wright said.

Soderstrom still faces legal bills in the tens of thousands of dollars, and may have to wait out an appeal. Even so, she is fortunate, says her lawyer, Paul George. California courts usually are so reluctant to disturb even dubious arbitration awards, he said, that Wright’s ruling was “almost a one-in-a-million type of victory.”

Dunlap, too, had presented its evidence of potential bias, but drew a different judge, who declined to vacate the arbitration award. Fearing an appeal would go nowhere, Dunlap last September cut its losses by paying a six-figure settlement.

Arbitration clauses have become a standard feature of contracts of all kinds, as people and businesses seek escape from the high costs and crowded dockets of the civil courts. An arbitration clause may appear in the fine print any time you lease an apartment, open a brokerage account or enroll in an HMO.

Major providers like the American Arbitration Assn. typically offer experienced lawyers or retired judges to hear cases. But arbitrators aren’t required to earn a license, have legal training or knowledge of how to run a fair hearing.

“Arbitration is not regulated,” said Carrie Menkel-Meadow, a UCLA and Georgetown University law professor and arbitration expert. “Anyone can call themselves an arbitrator.”

Proponents of arbitration say the system works as intended a high percentage of the time--resolving disputes fairly, quickly and at reduced cost. But critics say there is no way to know how often abuses occur, since no agency monitors complaints and victims often consider court appeals to be a waste of time.

Some critics contend that an overburdened judiciary has put the bureaucratic imperative of reducing caseloads ahead of concern for justice in arbitration cases. Docket clearing has become such a priority that it “has now trumped all other public policies,” complained Cliff Palefsky, a San Francisco attorney.

The California Supreme Court underscored the sanctity of arbitration with its 1992 decision in a case called Moncharsh. The court--stressing that binding means binding--decreed that arbitrators can’t be reversed for errors of fact or law, even those resulting in “substantial injustice.”

In a scathing dissent, Justice Joyce L. Kennard said the ruling “requires our trial courts not only to tolerate substantial injustice, but to become its active agent.”

The fact that arbitration clauses often are buried in preprinted contracts raises additional concern, legal observers say. As in the Soderstrom case, they note, many people are at most dimly aware that they have agreed to arbitration.

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Although a Californian for more than 50 years, Dolores Soderstrom still speaks with a vestigial South Dakota twang. Bright and independent, she pitched in with her children to run the family business when her husband died 20 years ago.

But her business experience did not prepare her for her encounter with the Southern California Arbitration Assn., an unfamiliar name in state arbitration circles.

Court records show that its headquarters was a Palm Desert typing service that took its calls and mail. Among those listed on its four-person executive board last year were a deceased businessman and a fitness center operator who later claimed she did not know what the SCAA did.

SCAA President Loren Huweiler, a Palm Desert real estate salesman, declined to be interviewed, saying only that the “SCAA and the arbitrators and myself have done nothing improper in any cases.”

Court records show that Huweiler has had extensive business dealings with Holgate--a onetime CHP officer whose resume, filed as an exhibit in a court case, boasts of his role in real estate ventures worth “in excess of $100 million.”

At least one, however, was a messy flop.

During the 1980s, Holgate, now 49, was sued scores of times over a failed development project in northern San Diego County. Investors who lost millions of dollars accused him and others of fraud, claiming they had pushed a highly speculative venture as a sure thing. Eventually, the cases were settled without admission of wrongdoing when insurance companies paid off part of the losses.

In 1989, at the height of the litigation, Holgate and his wife, Karen, filed for bankruptcy, listing nearly $21 million in claims by hundreds of creditors--most of them irate investors. The Holgates emerged from bankruptcy the following year.

By 1995, Holgate was promoting another development--this time for a blighted part of Indio where Soderstrom owned the two small vacant lots.

Soderstrom, who lives in San Pedro, wanted to keep the property, she said, but agreed to sell it for $75,000 after Holgate’s agents pestered her several times.

The deal fell through last March, however, when Soderstrom said she received escrow instructions with terms that she had repeatedly rejected. Saying she was tired of being toyed with, she refused to deal with Holgate any more.

According to Soderstrom, the matter should have ended there--but didn’t.

At first, she was mystified by the SCAA notice of Holgate’s arbitration demand. Then she realized that, in passing papers back and forth, she had inadvertently signed one containing the arbitration clause.

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As Judge Wright would later rule, Soderstrom never meant to agree to arbitration. Twice during negotiations, she had returned sales contracts with an “X” marked through unacceptable items--including the clause referring disputes to the SCAA. Once a verbal deal was struck, however, Soderstrom said she naively followed Holgate’s agent’s instructions and signed another paper with the SCAA clause.

Holgate obviously had given some thought to how to handle such quarrels. At one point, he planned to arbitrate them before an associate of his, Los Angeles lawyer and architect Cyril Chern, interviews and documents show.

Indio city officials and residents told The Times that Chern had accompanied Holgate to meetings and was introduced as a financial backer of the Indio project. Brad Barnett, a real estate agent hired to acquire land for the project, recalled Holgate going “on and on about this wonderful guy that was a partner of his, Cyril Chern.”

So Barnett said he was shocked to read, deep in the fine print of Holgate’s real estate contracts, a clause stating that disputes would be referred to Chern.

“Both parties expressly waive any conflict of interest which may or may not exist between themselves, the project and arbitrator Chern,” stated the document, a copy of which was obtained by The Times.

Chern declined to be interviewed.

Several arbitration experts told The Times that such a waiver was extremely unusual and of doubtful legal validity. “It is absolutely appalling to me that anyone should be asked to waive a conflict of interest in advance,” said Menkel-Meadow, the law professor.

Barnett said he protested to Holgate because sellers would not know that he and Chern were partners. “I said, ‘Steve, you’re going to get yourself in a lot of trouble,’ ” Barnett recalled.

Either because of these objections or for another reason, the SCAA was designated in Chern’s place--though the conflict waiver language remained.

Holgate’s links to the SCAA also were extensive.

Its president, Huweiler, had worked for Holgate in at least two businesses, court records show. Huweiler at one point owed Holgate $189,000, according to a financial statement prepared by Holgate and filed as an exhibit in court.

SCAA letterhead listed Huweiler and three others on its executive board. One of them, Shelly Muro, ran a fitness center where Karen Holgate was a member. Muro told The Times that she had filed the SCAA’s incorporation papers as a favor but “shouldn’t have been” listed on its board.

“I don’t even know what they do,” Muro said.

Also listed was Andrew Sfingi, a Coachella Valley businessman whose name appeared on the letterhead last January, although he had died four months earlier.

Huweiler said in a court declaration that he and Holgate had talked to Sfingi and got permission to use his name. But Sfingi’s widow denied any connection between her husband and the SCAA. (An SCAA lawyer said he believes that the association has since dropped Sfingi’s name from the letterhead.)

Two Holgate development consultants in Indio told The Times that they had applied and become SCAA arbitrators after hearing about the association from Holgate. One of them, planner Rob Strong, expressed dismay at learning that Holgate had brought his own dispute to the private tribunal. The other, engineer Bill Warner, said he did not know Holgate’s relationship to the group.

Soderstrom says she knew nothing of these ties when the arbitration notice arrived. Believing she had no other choice, she attended the arbitration hearing last May 13.

In an interview and court papers, Soderstrom said Holgate testified that she had ruined his chance to build an office building, telling “a great big story that he had pleaded with me to reconsider finishing with the escrow, and that he was going to lose this big bundle of money if I didn’t.”

In fact, Soderstrom said, she had dealt with Holgate’s agents, and the conversation that he described never took place.

The arbitrator, Suzanne Cherry, later testified in a deposition that her previous experience was limited to one case. She also declined to be interviewed.

Cherry had brought Philip Puritsky to the arbitration to assist her as clerk. Puritsky is Cherry’s brother-in-law and a business partner of Cyril Chern, court records show. Puritsky could not be reached for comment.

Two weeks after the hearing, without a line of explanation, Cherry awarded Holgate $558,270.

That’s how matters stood until last month when Judge Wright vacated the award and ended months of anguish for Soderstrom. Though George thought he had proved his client had been cheated, he said he was prepared for the worst because the burden of proving abuse in arbitration is so high.

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Dunlap’s experience was a case in point.

Dunlap had leased office space in Long Beach to a firm called Omni Medical Corp., whose vice president was Cyril Chern. The lease called for Dunlap to fund up to $89,000 in tenant improvements. It also contained a clause, inserted by Omni, for arbitrating disputes before the SCAA.

Court documents show that Omni returned the signed lease in December 1995 and immediately demanded $36,000 toward the improvements.

Dunlap agreed to reimburse Omni, but asked for proof of payment to the contractors. Such proof--in the form of a document called a release of mechanic’s lien--is a routine protection for landlords having work done on their property.

But Omni refused, saying it was not required to submit the proof--a stance Dunlap considered bizarre if Omni truly wanted reimbursement. When Dunlap insisted, Omni demanded arbitration.

Records show that at the arbitration hearing last January, it was revealed that Omni had signed a highly unusual contract with the firm it had hired to oversee the improvements.

The agreement required Omni to pay the second firm a penalty of $10,000 per day for any delay in paying its bills. As a result, Omni claimed that by the time of the arbitration, it had become liable for penalties in the hundreds of thousands of dollars. Moreover, Chern was vice president both of Omni and of the second firm to which Omni was hugely indebted, court records show.

Omni was awarded $582,000.

The arbitrator, Wayne M. Schultz, had been jointly picked by Dunlap and Omni from an SCAA list that said he was “an arbitrator/mediator with 10 years’ experience.” But in an interview with The Times, Schultz said his prior experience was limited to a couple of “minor arbitrations” several years ago.

Court records show that Schultz had been involved with Holgate in business ventures, and at least indirectly with Chern.

During the 1980s, for example, a development firm run by Schultz was involved in Holgate’s ill-fated development project in northern San Diego County. Another business of which Chern was vice president had also worked with Holgate in trying to complete the project.

State law requires arbitrators to disclose business or personal relationships with parties appearing before them. Schultz and Chern later stated in court declarations that while both knew Holgate, they had never spoken to each other before the arbitration. Thus, Schultz said, he had no relationship to disclose.

In an interview, Schultz said the $582,000 award was based on the evidence presented at the hearing. “Omni was indeed harmed,” Schultz said. “They did in fact have a contract [to pay penalties of $10,000 per day] with maybe unreasonable but real damages attached.”

Dunlap lawyer Mark Yocca called it “the most manifestly unjust result I’ve ever seen in an arbitration.”

Outraged by the decision, Dunlap hired investigators to probe links between Holgate, Chern and Schultz.

In February, Dunlap’s lawyers filed court papers seeking to vacate the award, calling it the product of a “bogus arbitration association and an arbitrator corrupted by fraud.”

Omni countered in court papers that the relationships alleged by Dunlap ranged from “trivial” to “just not there.”

Under state law, fraud is grounds for voiding an arbitration award. But proving fraud is very difficult--particularly without the ability to subpoena witnesses and put them under oath.

Los Angeles County Superior Court Judge Lorna Parnell denied Dunlap’s request to take depositions to prove its case--as Soderstrom’s lawyers were allowed to do. Then last June, Parnell ruled that Dunlap had not presented enough evidence to justify vacating the award.

Dunlap filed a notice of appeal, but believing it had little chance, it quietly settled by paying Omni a six-figure sum.

For Yocca, the Dunlap lawyer, the case was a bitter lesson. “Any time a client is thinking about signing an arbitration clause, I will tell them to think twice,” he said.