BDO Seidman, LLP v. SSW Holding Co.

• Citation: 2012 Ark. 1,386 S.W.3d 361
• Decision Date: 05 January 2012
• Docket Number: No. 11–165.,11–165.
• Court: Supreme Court of Arkansas
• Parties: BDO SEIDMAN, LLP; Mark Puckett; and James Cross, Appellants v. SSW HOLDING CO., INC.; Straits Steel & Wire, Co.; and Straits Diversification, LLC, Appellees.

2012 Ark. 1

386 S.W.3d 361

BDO SEIDMAN, LLP; Mark Puckett; and James Cross, Appellants

v.SSW HOLDING CO., INC.; Straits Steel & Wire, Co.; and Straits Diversification, LLC, Appellees.

No. 11–165.

Supreme Court of Arkansas.

Jan. 5, 2012.

DLA Piper LLP, by: Cary B. Samowitz, New York, NY; and Ledbetter, Cogbill, Arnold & Harrison, LLP, by: Ronald D. Harrison and Victor L. Crowell, Forth Smith, for appellants.

Loewinsohn Flegle Deary, LLP, by: David R. Deary, Carol E. Farquhar, and J. Dylan Snapp, Dallas, TX; and Cross, Gunter, Witherspoon & Galchus, P.C., by: Benjamin H. Shipley, III, Fort Smith, for appellees.

KAREN R. BAKER, Justice.

Appellants BDO Seidman, LLP, Mark Puckett, and James Cross (“BDO”) appeal from the Sebastian County Circuit Court's denial of their amended motion to compel arbitration against appellees SSW Holding Co., Inc., Straits Steel & Wire, Co., and Straits Diversification, LLC (“SSW Holding”). On appeal, BDO argues (1) that the circuit court erred in denying arbitration because the claim of fraud in the inducement must be resolved by the arbitrator and not the courts, (2) that arbitration cannot be avoided because of unconscionability, and (3) that all of the claims raised fall within the scope of the broad arbitration provisions. An order denying a motion to compel arbitration is an immediately appealable order. Ark. R.App. P.–Civ. 2(a)(12) (2011); Ark.Code Ann. § 16–108–228 (Repl.2006); see IGF Ins. Co. v. Hat Creek P'ship, 349 Ark. 133, 76 S.W.3d 859 (2002). We reverse and remand.

I. Procedural Background

SSW Holding filed a complaint against BDO and other defendants ¹ in the Sebastian County Circuit Court, asserting claims for breach of fiduciary duty, negligence/professional malpractice, negligent misrepresentation, disgorgement of excessive and illegal fees, fraudulent inducement, fraudulent concealment, declaratory judgment, fraud, civil conspiracy, and breach of contract. SSW Holding sought damages arising from a tax-advantaged investment strategy involving investments in distressed debt that SSW Holding entered into and utilized on its federal tax returns for the 2001–2005 tax years. SSW Holding alleged that BDO devised a scheme and advised SSW Holding to execute the distressed debt strategy (“DDS”), claiming it would yield a substantial profit and minimize SSW Holding's tax liability. According to SSW Holding, at the time BDO sold the DDS, it knew or should have known that the DDS would not yield the results promised and that federal authorities were investigating the legality of similar “abusive tax shelters.”

Some of the defendants removed the case to the United States District Court, Western District of Arkansas, asserting that federal-question jurisdiction existed. The district court disagreed that it had subject-matter jurisdiction and remanded the case to the Circuit Court of Sebastian County. In Sebastian County Circuit Court, BDO filed an amended motion to compel arbitration and stay the action.² BDO asserted that it and SSW Holding entered into two consulting agreements (“Consulting Agreement” or “Consulting Agreements”), dated April 24, 2001, and September 19, 2003, wherein BDO agreed to provide certain tax services. BDO alleged that the Consulting Agreements provided for arbitration before the American Arbitration Association. The relevant paragraphs are as follows:

2001 Consulting Agreement:

Dispute Resolution.

8. (d) If any dispute, controversy or claim arises in connection with the performanceor 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.

11. Governing Law. This agreement shall be governed and construed in accordance with the laws of the State of New York, except for its conflict of law principles.

2003 Consulting Agreement:

9. (d) If any dispute, controversy or claim arises in connection with the performance or breach of this Agreement (including the validity or enforceability 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. The arbitration proceeding shall take place in the city in which the BDO Seldman office providing the relevant services exists, unless the parties agree to a different locale. The proceeding shall be governed by the provisions of the Federal Arbitration Act (“FAA”) or, if a court of competent jurisdiction determines the FAA inapplicable, by the laws of the state in which the proceeding is to take place. In any arbitration instituted hereunder, the proceedings shall proceed in accordance with 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.

12. Governing Law and Severability. This Agreement, shall be governed by, and construed in accordance with, the laws of the State of Michigan (without giving effect to the choice of law principles thereof).

SSW Holding filed a response to the amended motion to compel arbitration and stay this action. SSW Holding stated that the 2001 Consulting Agreement contained an arbitration provision and that New York law governed. SSW Holding argued that under New York law, the arbitration provision was invalid and unenforceable because fraud permeated the entire Consulting Agreement. As a basis for denying the motion, SSW Holding also asserted that the claims against BDO were outside the scope of both arbitration provisions as those provisions only covered disputes arising “in connection with the performance or breach” of the Consulting Agreements, which specifically stated that they do not apply to investment advice and services. Finally, SSW Holding stated that the arbitration provision in the 2001 Consulting Agreement was procedurally and substantively unconscionable under New York law and that the arbitration provision in the 2003 Consulting Agreement was substantively unconscionable under Michigan law because (1) the arbitration provisions violate public policy as they were part of a conspiracy to commit criminal fraud, (2) BDO was the sole creator of the provisions, (3) the provisions contain unreasonable and impermissible limits on discovery, and (4) the provisions impermissibly preclude SSW Holding's right to recover punitive damages. The response included voluminous exhibits of actual pleadings in criminal cases wherein some of the original defendants, their officers, and employees had been charged or convicted of offenses arising from the performance of DDS with other clients.

BDO replied that all of the claims raised in the complaint related to services that it agreed to provide pursuant to the Consulting Agreements, which contain a broad provision mandating arbitration of “any dispute, controversy or claim aris[ing] in connection with the performance or breach of this agreement.” BDO contended that under New York law the arbitration clause must provide that New York law governed its “enforcement” and as that language was absent from the 2001 Consulting Agreement, the FAA applied. BDO asserted that the FAA required arbitration of the fraudulent-inducement claim. BDO also argued that because the claim of unconscionability concerned the contract as a whole, as opposed to only the arbitration provision, arbitration and not the court must decide the issue.

After a hearing, the circuit court entered an order denying BDO's amended motion to compel arbitration. The court found that New York law governed the 2001 Consulting Agreement and that the FAA does not apply and does not preempt New York law. The order stated that BDO could not enforce the 2001 arbitration provision because BDO committed fraud as part of a grand scheme that permeated the entire 2001 Consulting Agreement and its arbitration provision. The court further held that BDO could not enforce the arbitration clause in the 2001 Consulting Agreement because it was procedurally and substantively unconscionable. The court also found that BDO could not enforce the arbitration provision in the 2003 Consulting Agreement because pursuant to the FAA the arbitration clause was procedurally and substantively unconscionable under Michigan law.

II. Standard of Review

We review a circuit court's order denying a motion to compel arbitration de novo on the record. S. Pioneer Life Ins. Co. v. Thomas, 2011 Ark. 490, 385 S.W.3d 770. De novo review means that the entire case is open for review. Unknown Heirs of Warbington v. First Cmty. Bank, 2011 Ark. 280, 383 S.W.3d 384. Arbitration is simply a matter of contract between parties. Ruth R. Remmel Revocable Trust v. Regions Fin. Corp., 369 Ark. 392, 255 S.W.3d 453 (2007). The issue of whether a dispute should be submitted to arbitration is a matter of contract construction, and we look to the language of the contract that contains the agreement to arbitrate and apply state-law principles. Tyson Foods, Inc. v. Archer, 356 Ark. 136, 147 S.W.3d 681 (2004).

BDO argues that it was error to deny its amended motion to compel arbitration because (1) SSW Holding's claim of fraud in the inducement must be resolved by the arbitrator and not the courts; (2) SSW Holding may not avoid arbitration due to alleged unconscionability; and (3) all of SSW Holding's claims falls within the scope of the...