Appeals from the United States District Court for the District of Arizona. D.C. No. CV-92-00681-WDB. William D. Browning, District Judge, Presiding.
Before: Jerome Farris and Diarmuid F. O'Scannlain, Circuit Judges; Robert R. Merhige, Jr.,*fn* District Judge. Opinion by Judge O'Scannlain.
O'SCANNLAIN, Circuit Judge:
We must decide whether to enforce an arbitration award which grants over $7 million in attorneys' fees to an attorney notwithstanding his ethical improprieties.
Arizona Electric Power Cooperative, Inc. ("AEPCO") is a rural electric cooperative, headquartered in Benson, Arizona. Berkeley is a lawyer licensed in Washington, DC, who specializes in regulatory matters pertaining to the production, sale, and transportation of natural gas in interstate commerce.
During the 1970s, AEPCO produced electric power with natural gas-fired equipment. AEPCO purchased its natural gas through the City of Willcox, Arizona ("Willcox"), which acquired it from the region's sole supplier, El Paso Natural Gas Company ("El Paso"). The energy crisis of the 1970s prevented El Paso from providing adequate supplies of natural gas to its customers, including AEPCO and Willcox. Consequently, AEPCO hired Berkeley to represent it in proceedings before the Federal Energy Regulatory Commission ("FERC"). Because Willcox was a necessary party to these proceedings, AEPCO retained Berkeley to represent Willcox as well. Prior to 1979, AEPCO paid Berkeley on an hourly basis.
In May 1978, while AEPCO's administrative proceedings before FERC were still in progress, Berkeley filed an action against El Paso in federal court alleging that El Paso had damaged AEPCO and Willcox in the amount of $200 million (the "damages case"). In January 1979, AEPCO and Berkeley entered into a contingency fee agreement ("CFA") which provided that Berkeley would continue to represent AEPCO in the ongoing administrative proceeding for an annual fee of $400,000. The CFA also provided that Berkeley's fees for the recently-filed damages case would consist of specified percentages of any actual recovery that AEPCO received from El Paso. Actual recovery was defined to include money or other benefits of value received by AEPCO. The CFA provided that any differences as to the construction of that document were to be settled by arbitration pursuant to the Arizona Arbitration Statute, Arizona Revised Statutes Annotated §§ 12-1501 et seq.
On December 15, 1980, Berkeley settled both the administrative proceeding before FERC and the damages case. In settlement, AEPCO received a package of new gas rights from El Paso, but no money changed hands.
In August 1982, Berkeley and AEPCO amended the CFA to provide that certain benefits that were received by AEPCO from El Paso were obtained in settlement of the damages case. Pursuant to the amended CFA, AEPCO then made payments to Berkeley totaling $2.7 million.
At some point Berkeley apparently decided that AEPCO was not paying him what he was due under the CFA. Accordingly, in August 1987, while he still represented AEPCO in other matters, Berkeley hired AEPCO's former general manager, Jerome Flanders, whom AEPCO had fired for cause. For approximately three and one-half years, Flanders assisted Berkeley in preparing a claim against AEPCO for additional legal fees. Berkeley remained AEPCO's attorney throughout this period and apparently never informed AEPCO that he believed that AEPCO had failed to comply with the CFA.*fn1 As AEPCO's counsel, Berkeley was asked annually by AEPCO's auditors if he was aware of any significant claims against AEPCO. Berkeley never mentioned that he believed that AEPCO owed him substantial legal fees or that he and Flanders were preparing a demand for arbitration regarding those fees.
In May 1991, Berkeley filed a demand for arbitration, seeking more than $67 million in additional legal fees. AEPCO denied that it owed Berkeley any additional fees and promptly fired Berkeley. However, Berkeley continued to represent Willcox in the same natural gas matter in which he previously represented AEPCO. This matter included a dispute about whether AEPCO rather than Willcox could be a direct customer of El Paso. Berkeley had previously advised AEPCO that a settlement agreement permitted AEPCO to become a direct customer of El Paso at will; after he was discharged, Berkeley took the diametrically opposite position on behalf of Willcox. AEPCO filed an action against Willcox in the United States District Court for the District of Columbia to prevent it from interfering with AEPCO's attempt to establish a direct relationship with El Paso. Although the district court concluded that a temporary restraining order was not warranted because money damages would be an adequate remedy, the district court noted that AEPCO had made a strong showing that Berkeley's actions constituted a breach of the fiduciary duties that he owed to AEPCO. The parties subsequently settled that suit.
Based on information it learned through discovery, AEPCO filed a counter-claim in the arbitration. AEPCO accused Berkeley of committing fraud in securing the 1982 amendment to the CFA, alleging that he "wrongfully transposed benefits received from El Paso in the Administrative Proceedings to the Damage Case." AEPCO also alleged that Berkeley had breached numerous fiduciary and ethical duties that he owed to AEPCO.
In accordance with the arbitration clause in the CFA, AEPCO and Berkeley each selected an arbitrator. They repeatedly attempted to agree on a neutral, third arbitrator from the American Arbitration Association ("AAA") lists, but could not. AEPCO insisted that the neutral arbitrator have judicial experience. Finally, each party agreed to list six candidates from the AAA lists. If the parties listed a common candidate, then that person would be selected. If not, each side would choose ...