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CAMFERDAM v. ERNST & YOUNG INTERNATIONAL

February 12, 2004.

HENRY CAMFERDAM, JR., JEFFREY M. ADAMS, JAY MICHENER, CAROL TRIGILIO, BAMC INC., CARMEL PARTNERS, HNC DITCH INVESTMENTS LLC, JMA SEDGEMOOR INVESTMENTS LLC, JM WALNUT INVESTMENTS, and CT OAK TREE INVESTMENTS LLC, Plaintiffs
v.
ERNST & YOUNG INTERNATIONAL, INC., ERNST & YOUNG LLP, BRIAN UPCHURCH, CARL RHODES, WAYNE T. HOEING, JENKINS & GILCHRIST, P.C., PAUL M. DAUGERDAS, SIDLEY AUSTIN BROWN & WOOD LLP, R.J. RUBLE, Defendants



The opinion of the court was delivered by: BARBARA JONES, District Judge

Opinion

Plaintiffs filed this action on December 20, 2002, alleging claims under RICO, breach of fiduciary duty, fraud, negligence, breach of contract constituting professional malpractice, conspiracy to breach fiduciary duty, and tortious interference with contract. The Plaintiffs seek in excess of $40 million in compensatory damages and $1 billion in punitive damages against their accountants and advisors, Ernst & Young and three of its partners, as well as two law firms, Jenkins & Gilchrist and Brown & Wood and two of their partners (collectively "Law Firm Defendants"), who acted in concert with Ernst & Young to Page 2 allegedly promote an unlawful and unregistered tax shelter, which they dubbed "COBRA."

On April 14, 2003, Defendants Ernst & Young LLP ("E&Y"), Ernst & Young International ("E&Y International"), Brian Upchurch, Carl A. Rhoades, and Wayne T. Hoeing (collectively the "E&Y Defendants") moved this Court (1) to stay litigation of Counts 1-7 of Plaintiffs' First Amended Complaint pending arbitration of such claims pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 3, and (2) for dismissal of Counts 8 and 9 as relief in aid of arbitration. For the reasons set forth below, Defendants' motion is granted.

  Also before this Court are motions by the Law Firm Defendants to stay these proceedings pending arbitration. As explained below, these motions are also granted.

  FACTS

  The four individual plaintiffs — Henry A. Camferdam, Jr., Jeffrey M. Adams, Jay Michener, and Carol Trigilio (collectively, "the Individual Plaintiffs") — received tax advice from E&Y relating to certain capital gains incurred when they sold their business in 1999. (Am. Compl. ¶¶ 46, 48). Each Individual Plaintiff had his or her own engagement letter with E&Y (collectively "the Letter Agreements"). (Defs' Exs. 2, 3, 4, 5). Page 3

  The six entity plaintiffs are a corporation, a partnership and four limited liability companies ("the Entity Plaintiffs") created by the Individual Plaintiffs as part of the transactions contemplated by the Letter Agreements.*fn1 To effectuate the strategy outlined in the Letter Agreements, the Individual Plaintiffs established the Entity Plaintiffs and conducted certain additional transactions (the "1999 tax transactions"). (Am. Compl. at ¶¶ 21-26). All Plaintiffs now allege that as a result of advice they received from E&Y with respect to the 1999 tax transactions — advice indisputably rendered pursuant to the Letter Agreements — Plaintiff have been "exposed . . . to audits by the IRS [Internal Revenue Service] and [have been exposed to] substantial tax liability." (Am. Compl. at ¶ 4). Additionally, Plaintiffs allege that E&Y and Plaintiffs' tax counsel charged Plaintiffs excessive fees for their work on the 1999 tax transactions. (Am. Compl. at ¶ 2).

  The E&Y Defendants have moved to compel arbitration based on the Letter Agreements signed by the Individual Plaintiffs. According to each Letter Agreement:

  Any controversy or claim arising out of or relating to tax and tax-related services now or hereafter provided by us to you (including any such matter involving any parent, subsidiary, affiliate, successor in interest, or agent of Page 4 Ernst & Young LLP) shall be submitted first to voluntary mediation, and if mediation is not successful, then to binding arbitration, in accordance with the dispute resolution procedures set forth in the Attachment to this letter.

 (the "Arbitration clause")(Defs' Ex. 2-5). The E&Y Defendants have submitted to this Court each of Plaintiffs' signed two page Letter Agreements. In addition, they have submitted what they claim were the *Attachments" to the Letter Agreements referred in the above paragraph. Each "Attachment" is a two-page document, titled "Dispute Resolution Procedures." (Defs' Exs. 2-5). Wayne T. Hoeing, a partner at E&Y who was with Plaintiffs when they signed these Letter Agreements, has submitted a declaration in which he avers that the "Attachment" was attached to the Letter Agreements at the time that the Plaintiffs signed those contracts.

  DISCUSSION

  Plaintiffs contend that their claims are not subject to arbitration because the "Attachments," which the E&Y Defendants allege were attached to the Letter Agreements, were not actually attached. The Plaintiffs have each submitted affidavits in which they aver that the two-page Dispute Resolution Procedures, which E&Y has filed with the Court, were not attached the to Letter Agreements. (See, e.g., Trigilio Aff. at ¶ 25; Camferdam Aff. at 24). Moreover, the Plaintiffs contend that they were not aware that the Letter Agreement itself even contained an Page 5 agreement to arbitrate because Hoeing, the E&Y partner with them at the time that they signed the Letter Agreements, did not explain to them that the contract included an arbitration clause. Based on these factual assertions, Plaintiffs now claim that, as a matter of law, they cannot be found to have agreed to arbitration.

  Plaintiffs argue, in the alternative, even if an agreement to arbitrate existed, the E&Y Defendants have waived their right to demand arbitration due to their participation in related litigation in the Northern District of Illinois ("the Illinois Litigation"). The Illinois Litigation arose out of a subpoena that E&Y received from the IRS seeking disclosure of the identities of-E&Y clients who had participated in certain tax-related transactions. Several E&Y clients — not including any of the Plaintiffs in this matter — sought to enjoin this disclosure, and the matter was litigated before the district court and the Seventh Circuit. The Plaintiffs in the Illinois Litigation did not prevail and the identities of E&Y clients were disclosed pursuant to the IRS subpoena.

  The Plaintiffs also argue that the Entity Plaintiffs and the Law Firm Defendants are not subject ...


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