Monday, September 22, 2008

It's The Real Deal: For McCaw 3 Heads Prove Better Than One

So, was the recent decision in the litigation between News-Press owner Wendy McCaw and her former lover and attorney Greg Parker, the massive victory for McCaw that the article in Friday's News-Press seemed to indicate that it was?

The fact that it carried the "Staff Report" by-line made me skeptical as I take that label as a cue that no one wants to be accountable for reporting this story.

But after I read the actual decision of the panel of arbitrators who heard the case, I have to conclude, this is indeed a genuine victory for Wendy.

Let me reset the scene for you in terms of the events that led up to this most recent decision.

Santa Barbara attorney Greg Parker met Wendy back in 1995 when he represented the owner of the Hope Ranch property that she ultimately purchased and later built upon it the home which she to this day occupies. Parker eventually became McCaw's attorney, lover and in charge of her business operations, although it's not clear to me, chronologically speaking, the order in which he assumed each of those roles.

Parker and McCaw eventually entered into a written contract where he was to become president of McCaw's holding company and was to be paid an annual salary of $700,000. The contract provided that if McCaw fired him, he was to get two-years salary as severance pay.

He and McCaw also entered into a separate agreement for incentive pay. McCaw had been awarded a significant amount of stock in a company called NextLink as part of her divorce settlement from billionaire Craig McCaw. Wendy nominated Parker to serve on the board of directors on NextLink. She placed her NextLink stock into a limited liability corporation (LLC). If and when she sold or transferred to the stock out of the LLC, Parker was to receive a percentage of any increase in the stock's value.

Parker broke off his romantic relationship with McCaw in April of 1999, less than a month after the ink had dried on the incentive pay agreement. Despite the fact that he had broken off their engagement, Parker continued to hold his position as chief operating officer of McCaw's holding company until January of 2000 when McCaw fired him.

In August 2000, McCaw caused the NextLink stock held by the LLC to be transferred into her own name. Parker claimed that this event was a change of ownership triggering his right to receive the payment called for by the incentive agreement, which meant McCaw owed him a cool $9 million and change.

McCaw refused to pay the $9 million nor would she pay the $1.4 million called for in severance pay. The parties tried to reach a settlement through mediation. When that turned out to be fruitless, Parker sued McCaw.

Both Parker's employment contract and the incentive agreement had clauses requiring that any disputes be arbitrated rather than decided by a court of law. McCaw took steps to enforce the arbitration clauses. However, the arbitration clauses contained in each of the respective agreements had language that conflicted with the other: the employment contract provided that any disputes would be decided by a single arbitrator while the incentive agreement provided for a panel of three arbitrators to decide disputes.

Santa Barbara judge William McLafferty ruled that Parker's lawsuit would have to be arbitrated, but by a single arbitrator.

In April 2002 the case was heard by the arbitrator, David Eagleson, a retired justice of the California Supreme Court. McCaw lost big time. Eagleson ruled, among other things, that McCaw owed Parker the $1.4 million in severance pay, $9.75 million on the incentive agreement plus $100,000 in punitive damages.

He also ruled that Wendy had to indemnify Parker for the legal fees he incurred when she famously sued the Coastal Commission to stop people from walking on the beach beneath the bluff on which her Hope Ranch home sits. (Parker had been the trustee of the trust in which title to McCaw's home was held. He was included as a party to the Coastal Commission litigation both in his capacity as a trustee and individually.)

Eagleson also awarded Parker the attorney's fees and costs he incurred in the arbitration to boot. And he gave McCaw nothing for the several counterclaims she had brought against Parker. By the time interest on all of those obligations was thrown in the amount Wendy owed Parker was in the neighborhood of $15 million.

That defeat was duly reported by the News-Press in August of 2002. Of course in those days, Wendy was keeping her nose out of the newsroom.

The arbitration was binding meaning that there could be no appeal based on the arbitrator's conclusions of what the facts were or his application of the law to those facts. McCaw appealed on the only ground left to her, that the single arbitrator didn't have authority to decide the case based upon the clause in the incentive agreement requiring that any disputes be heard by a panel of three arbitrators.

On this point, the appellate court agreed with her. While Parker's award of $1.4 million in severance pay and $100,000 for punitive damages stood, the $9.75 million that represented what he was owed as a result of the incentive agreement was set aside.

Although it occurred back in September of 2005, as far as I can determine, it was only recently revealed that Wendy paid Parker $3.4 million to settle the part of Eagleson's award which was upheld. The dispute as to whether Parker was owed the $9.75 million under the incentive agreement went back to arbitration in late October of last year and concluded in February of this year. The arbitrators rendered their written decision on July 28. It was only made public last Thursday when Wendy's lawyer, David Millstein, filed a petition with the Santa Barbara Superior Court to confirm the arbitration award.

I, like probably a lot of other people, thought that the reversal of Judge Eagleson's original award was on a mere technicality. After all, if Eagleson - a former associate justice of the Supreme Court who passed away about a year after he heard the case - had concluded that Parker was owed $9.75 million, why wouldn't a panel of three arbitrators, listening to the same evidence, come to the same conclusion?

Evidently, the three new arbitrators saw the evidence very differently than Eagleson did.

Before they got to the issue of whether McCaw's transfer of the NextLink stock back into her name was an event that triggered Parker's right to be paid, they had to examine whether Parker, who was an attorney about to embark upon a a business venture with a client, had complied with State Bar rules by advising McCaw that she had a right to seek independent legal advice on the matter.

This was an issue that Eagleson quickly disposed of when he concluded that a written recital signed by McCaw at the time she entered into the incentive agreement declaring that Parker was not taking advantage of her, "clearly placed her on notice that she had a right to independent counsel."

The panel of three arbitrators found this issue to be far more problematic.

It appeared that the LLC agreement had as its major purpose to provide capital gains treatment to incentive payments made to Parker. Yet this same arrangement also appeared to deprive McCaw of the ordinary business expense deduction she would get by simply paying compensation to Parker. The gain to Parker appeared to be less than the loss to McCaw. In other words, it appeared it would be more beneficial to McCaw simply to pay Parker a bonus and to deduct it as a business expense, rather than have Parker obtain a capital gain. And this could be done without encumbering virtually all of her assets. How was this fair and reasonable to McCaw?

The panel found that no attorney represented Wendy or counseled her as to whether the incentive compensation transaction made for the benefit of Parker was advisable.

The arbitrators concluded that one of two things had happened; either Ampersand Holdings general counsel Joe Cole (who would later become publisher of the News-Press) or the L.A. attorney who was actually drafting the agreement, thought the other was performing the function of advising McCaw as to the advisability of the transaction or instead each simply concluded that advising McCaw personally was not within the scope of their own responsibility.

At the time, Cole worked for Parker, and the three arbitrators found that Cole taking instructions from Parker meant that "Cole was not in a position to serve as independent counsel to McCaw."

The net result was that "none of the counsel involved gave (McCaw) independent advice that might have pointed out the merits and demerits of the transaction, other options, etc."

The panel ruled that McCaw neither had the benefit of the advice of independent counsel or was advised to get it. Based on that, they concluded that McCaw didn't owe Parker anything without ever reaching the issue of whether his right to the incentive payment had ever in fact matured.

If the ruling on the incentive agreement had gone the other way, McCaw would have owed Parker the $9.75 million plus interest - which would have accumulated for the eight years since he was fired - meaning his award would be approaching the $18 million range.

And $18 million would have been a big hit to absorb. Even for a multi-millionaire like McCaw.

As of today, State Bar Records show that Parker is still practicing law in Santa Barbara and working as in-house counsel at Investec, a local real estate development and management firm.

And according the arbitrators' decision, that NextLink stock, now considered to be worthless, has never been sold by McCaw.

One can only wonder whether McCaw's News-Press, an asset she has vowed never to sell, will someday be worth as much as that NextLink stock is right now.