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DENNEY v. JENKENS

December 14, 2005.

THOMAS DENNEY, R. THOMAS WEEKS, NORMAN R. KIRISITS, KATHRYN M. KIRISITS, TD CODY INVESTMENTS, L.L.C., RTW INVESTMENTS, L.L.C., NRK SYRACUSE INVESTMENTS, L.L.C., DKW PARTNERS, DKW LOCKPORT INVESTORS, INC., DONALD A. DESTEFANO, PATRICIA J. DESTEFANO, DD TIFFANY CIRCLE INVESTMENTS L.L.C., TIFFANY CIRCLE PARTNERS, DIAMOND ROOFING COMPANY, INC., JEFF BLUMIN, JB HILLTOP INVESTMENTS L.L.C., KYLE BLUMIN, KB HOAG LANE INVESTMENTS, L.L.C., L. MICHAEL BLUMIN, MB ST. ANDREWS INVESTMENTS, L.L.C., FAYETTEVILLE PARTNERS, and LAUREL HOLLOW INVESTORS, INC., on their own behalf and on behalf of all others similarly situated, Plaintiffs,
v.
JENKENS & GILCHRIST, a Texas Professional Corporation, JENKENS & GILCHRIST, an Illinois Professional Corporation, BDO SEIDMAN, L.L.P., PASQUALE & BOWERS, L.L.P., CANTLEY & SEDACCA, L.L.P., DERMODY, BURKE, AND BROWN, CERTIFIED PUBLIC ACCOUNTANTS, PLLC, PAUL M. DAUGERDAS, PAUL SHANBROM, EDWARD SEDACCA, DEUTSCHE BANK AG, and DEUTSCHE BANK SECURITIES, INC., d/b/a DEUTSCHE BANK ALEX BROWN, A DIVISION OF DEUTSCHE BANK SECURITIES, INC., Defendants.



The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge

OPINION AND ORDER

Plaintiffs, members of a putative class, allege that defendants violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") and are liable for damages and other relief arising from unjust enrichment, breach of contract, breach of the duty of good faith and fair dealing, breach of fiduciary duties, fraud, negligent misrepresentation, professional malpractice, unethical, excessive and illegal fees, and conspiracy.*fn1 In an Opinion and Order dated April 30, 2004 (the "April 30, 2004 Opinion"), this Court denied defendants' motion to compel arbitration, finding that the arbitration clauses were unenforceable because the underlying consulting agreements were mutually fraudulent, and alternatively, that the services the BDO Defendants provided to plaintiffs fell outside the scope of the consulting agreements.*fn2 The Court of Appeals reversed this Court's factual findings and vacated this Court's order as to those parties that were signatories to the consulting agreements.*fn3 The Court of Appeals remanded the action to this Court for consideration of first, "whether plaintiffs were estopped from avoiding arbitration with the Deutsche Bank defendants, non-signatories to the consulting agreements" and second, "whether the non-signatory plaintiffs should be compelled to arbitrate their claims against defendants alongside the signatory plaintiffs."*fn4

  Deutsche Bank now moves for a stay of this action pending arbitration pursuant to section 3 of the Federal Arbitration Act ("FAA").*fn5 For the reasons set forth in this opinion, Deutsche Bank's motion is denied. The BDO Defendants have withdrawn their motion to compel arbitration against non-signatory plaintiffs,*fn6 and therefore, this Court does not reach the second issue presented on remand.

  II. BACKGROUND

  A. Facts

  The factual allegations giving rise to this litigation are set forth in detail in the April 30, 2004 Opinion, and familiarity with that opinion is presumed.*fn7 In brief, plaintiffs represent a class of investors who, between 1999 and 2001, engaged in a tax strategy known as Currency Options Bring Reward Alternatives, or "COBRA." The gravamen of plaintiffs' allegations is that defendants knew that the tax strategies lacked economic substance and would be held invalid by the IRS, but falsely held them out to plaintiffs as legitimate. The strategy was developed by Jenkens*fn8 and marketed by the BDO Defendants to the wealthy clients of Pasquale and Dermody.*fn9 Jenkens, and later Cantley, wrote legal opinion letters attesting to COBRA's validity and legality. Plaintiffs opened accounts with Deutsche Bank at the recommendation of Jenkens. Deutsche Bank promoted the strategy, counseled plaintiffs, and carried out the underlying securities transactions on plaintiffs' behalf. Plaintiffs claim that defendants are jointly and severally liable for damages in the amount of fees paid to defendants in connection with the COBRA transactions and tax returns, and fees incurred as a result of federal and state audits.

  B. The Consulting Agreements

  On October 8, 1999, plaintiff L. Michael Blumin, on behalf of Jefyle Equipment Corp., Inc., entered into a consulting agreement with BDO (the "Blumin Agreement"). The Blumin Agreement required BDO to provide "certain tax, financing and business consulting services" in connection with the expansion of Jefyle Equipment Corporation's "business operations into new strategic markets."*fn10

  On October 12, 1999, Thomas Denney, R. Thomas Weeks, Norman R. Kirisits, and BDO executed a similar consulting agreement (the "Denney Agreement"). The Denney Agreement required BDO to provide "consulting services in conjunction with [Denney, Weeks, and Kirisits's transfer of business operations], including assistance in structuring the Transaction, assisting the client in determining a tax treatment for the Transaction, and [preparing] the 1999 and 2000 income tax returns that would reflect the Transaction."*fn11

  Finally, on November 2, 1999, plaintiff Diamond Roofing Co., Inc. entered into a consulting agreement with BDO (the "DeStefano Agreement"). The DeStefano Agreement required BDO to provide services to Diamond Roofing Company in connection with the expansion of its "business operations into new strategic markets."*fn12 Specifically, BDO was to provide the same services to Diamond Roofing Company that it was providing to Jefyle Equipment Corporation pursuant to the Blumin Agreement.*fn13

  Each agreement required signatory plaintiffs to pay certain fees in consideration for BDO's consulting services.*fn14 All three agreements (collectively, the "BDO Agreements") contained identical mandatory arbitration clauses:
If any dispute, controversy or claim arises in connection with the performance or breach of this Agreement and cannot be resolved by facilitated negotiations (or the parties agree to waive that process) then such dispute, controversy or claim shall be settled by arbitration in accordance with the laws of the State of New York, and the then current Arbitration Rules for Professional Accounting and Related Disputes of the American Arbitration Association ("AAA") except that no pre-hearing discovery shall be permitted unless specifically authorized by the arbitration panel, and shall take place in the city in which the BDO office providing the relevant Services exists, unless the parties agree to a different locale.*fn15
Deutsche Bank is not a party to any BDO Agreement.

  III. APPLICABLE LAW

  Section 3 of the FAA requires a court to enter a stay in a case where the asserted claims are "referable to arbitration" by written agreement.*fn16 "Because arbitration is a matter of contract, exceptional circumstances must apply" before a court will allow a non-contracting party to impose a contractual agreement to arbitrate.*fn17 A non-signatory may compel arbitration on an estoppel theory, where (i) there is a close relationship between the parties and controversies involved and (ii) the signatory's claims against the non-signatory are "`intimately founded in and intertwined with the underlying'" agreement containing the arbitration clause.*fn18 The Court of Appeals has already found that plaintiffs' conspiracy allegations establish a "close relationship" between the Deutsche Bank Defendants and BDO Defendants.*fn19

  "The Second Circuit has stressed, however, that it is not the case that `a claim against a co-conspirator of [the party entitled to compel arbitration] will always be intertwined to a degree sufficient to work an estoppel.'"*fn20 This Court must determine "whether plaintiffs' claims against the Deutsche Bank defendants are `intimately founded in' or `intertwined with' the underlying obligations of the consulting agreements."*fn21 Claims are intertwined "where the merits of an issue between the parties [i]s bound up with a contract binding one party and containing an arbitration clause."*fn22 The Second Circuit has been hesitant to set formalistic rules for the estoppel inquiry, holding that it "is fact-specific" and requires "careful review of `the relationship among the parties, the contracts they signed . . . and the issues that had arisen' among them."*fn23 Courts have found claims to be intertwined where the nonsignatory had no obligations under the agreement containing the arbitration clause,*fn24 where the intertwined claims did not require interpretation of the agreement,*fn25 where the signatory's claims did not exclusively rely on the agreement,*fn26 and where the intertwined claims may not have been meritorious.*fn27 At a minimum, the signatory's claims must "`make[] reference to or presume[] the existence of the written agreement.'"*fn28 The purpose of the doctrine of equitable estoppel "is to prevent a plaintiff from, in effect, trying to have his cake and eat it too; that is, from `rely[ing] on the contract when it works to [his] advantage [by establishing the claim], and repudiat[ing] it when it works to [his] disadvantage [by requiring arbitration].'"*fn29 "`The plaintiff's actual dependence on the underlying contract in making ...


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