In Multifaceted Action Against Several Defendants, Illinois Court Grants Ernst & Young’s Defense Motion to Dismiss, Grants Timmis Law Firm/Lawyers Defense Motion to Compel Arbitration, and Grants Deutsche Bank Defense Motion for Stay
Plaintiffs filed a putative class action in Illinois state court against various lawyers, accountants, and bankers with whom they had consulted in connection with minimizing tax liability arising from the sale of their respective companies because the IRS subsequently determined that the tax saving strategy recommended to plaintiffs was “illegal” and they “ended up losing hundreds of thousands of dollars in the transactions.” Olson v. Jenkens & Gilchrist, 461 F.Supp.2d 710, 714 (N.D. Ill. 2006). Defense attorneys removed the action to federal court. Certain defendants then moved to dismiss the class action complaint, and other defendants moved to compel arbitration under a clause governed by the Federal Arbitration Act (FAA), and still other defendants moved for a stay of proceedings, id. The district court granted the defense motions.
The tax strategy recommended to plaintiffs involved digital option contracts, sometimes called Currency Options Bring Reward Alternatives (COBRA). Olson, at 714-15. We do not summarize here the convoluted and complicated fact pattern underlying the class action complaint. Suffice it to say that plaintiffs were persuaded by some of the law firm defendants to use digital options as a tax shelter in connection with the sale of their companies, the IRS subsequently determined such tax shelters to be illegal, and that plaintiffs suffered substantial damages as a result. The law firm defendants also allegedly advised plaintiffs not to participate in an IRS amnesty program and, even after the IRS determination, defendants failed to “retract, modify, or qualify their advice that the tax strategy was legal.” Id., at 716.
Ernst & Young moved to dismiss the 10 claims against it, which included claims for fraud, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (Illinois Consumer Fraud Act), conspiracy, declaratory relief, and breach of the duty of good faith and fair dealing. The district court granted the motion finding that the class action complaint alleged only that Ernst & Young was involved “in the initial creation of the COBRA tax strategy in 1999”: plaintiffs “[did] not allege that [Ernst & Young] provided any professional services to Plaintiffs; received any fees from Plaintiffs directly or as a result of any transaction Plaintiffs engaged in; communicated with Plaintiffs in any way; or had any relationship with Plaintiffs whatsoever. While the Complaint does allege that [Ernst & Young] had a relationship with Jenkens and Deutsche Bank, Plaintiffs do not allege that relationship led to any damages to Plaintiffs.” Olson, at 718. Accordingly, the district court dismissed the class action claims against Ernst & Young, but did so without prejudice. Id.
The law firm/lawyers collectively referred to as the Timmis Defendants also moved to dismiss the claims against them for lack of jurisdiction, or alternatively to compel arbitration. Olson, at 720. Timmis had been retained to assist in the marketing of the COBRA tax shelters, and allegedly “made an aggressive sales pitch to Plaintiffs to use the digital options tax strategy to shelter the gains from the sale of Plaintiffs’ companies.” Id., at 715. The 16 claims against Timmis included fraud and conspiracy to defraud, violation of the Illinois Consumer Fraud Act, breach of contract, breach of fiduciary duty, breach of the duty of care and of good faith and fair dealing, negligence, malpractice, and declaratory judgment. Id., at 720-21. The district court determined that it did not have general jurisdiction over the Timmis defendants, id., at 723, but concluded that it did have specific jurisdiction over them because “[they] should have foreseen that all of their contacts with Illinois could have subjected them to suit in this forum,” id., at 724.
However, the district court agreed with defense attorneys that the claims against Timmis must be referred to arbitration. The retainer agreements signed by plaintiffs contained arbitration clauses that provided, “While we look forward to a mutually enjoyable relationship with you, should any dispute arise between us, we mutually agree that such dispute will be subjected to binding arbitration in . . . Michigan pursuant to the rules of the American Arbitration Association and that the arbitrators may award reasonable attorneys’ fees to the prevailing party in such proceedings.” Olson, at 725. The court found that the agreement was governed by the Federal Arbitration Act (FAA) and that it was fully enforceable explaining that “the disputes at issue here fall into the broadly worded agreement to arbitrate,” id., at 727.
Finally, the Deutsche Bank defendants moved under section 3 of the FAA for a stay of the proceedings against them. Olson, at 728. Deutsche Bank has its own arbitration clauses with plaintiffs which precluded participation in class actions. Specifically, Deutsche Bank’s account agreements with plaintiffs provide, “No person shall … seek to enforce any pre-dispute arbitration agreement against any person … who is a member of a putative class … until (1) the class certification is denied; or (2) the class is decertified; or (3) the customer is excluded from the class by the court.” Id., at 729. A separate lawsuit arising from the facts underlying this action had been certified as a class action, and the parties agreed that at least some of plaintiffs claims against Deutsche Bank were encompassed by that action. Plaintiffs therefore argued that the instant matter was not referable to arbitration, and accordingly FAA § 3 did not apply. Id. The district court disagreed, holding that plaintiffs’ argument would eviscerate Deutsche Bank’s rights under the account agreements. The court explained at page 730:
This Court agrees with Deutsche Bank. In the absence of a stay of litigation, Deutsche Bank’s right to arbitrate will be effectively nullified. The arbitration agreement between Deutsche Bank and Plaintiffs unambiguously states that the arbitration agreement shall not be enforced until Plaintiffs are excluded from the class action by the court. The agreement does not state “if” Plaintiffs are excluded from the class action; rather, the agreement presumes that any disputes remain ultimately referable to arbitration until the designated event: which has not occurred yet in this case. In determining whether claims are “referable to arbitration” under the FAA, the court must “focus solely on the arbitration clause and determine whether there is an agreement to arbitrate the underlying dispute,” . . . . Any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. . . . Thus, the dispute between Plaintiffs and Deutsche Bank remains referable to arbitration, and this Court must grant a stay pursuant to section 3 of the FAA. (Citations omitted.)
NOTE: “A digital foreign currency option is an all-or-nothing option, which pays a fixed amount when the optioned currency falls below (or exceeds) a preset strike price.” Denney v. BDO Seidman, L.L.P., 412 F.3d 58, 61 n.3 (2d Cir. 2005).