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