Carlisle v. Curtis, Mallet-Prevost, Colt & Mosle

• Decision Date: 09 April 2008
• Docket Number: No. 06-5290.,06-5290.
• Citation: 521 F.3d 597
• Parties: Wayne CARLISLE, et al., Plaintiffs-Appellees, v. CURTIS, MALLET-PREVOST, COLT & MOSLE, LLP, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

521 F.3d 597

Wayne CARLISLE, et al., Plaintiffs-Appellees, v. CURTIS, MALLET-PREVOST, COLT & MOSLE, LLP, et al., Defendants-Appellants.

No. 06-5290.

United States Court of Appeals, Sixth Circuit.

Argued: November 1, 2007.

Decided and Filed: April 9, 2008.

ARGUED: Douglas E. Whitney, McDermott, Will & Emery, LLP, Chicago, Illinois, for Appellants. Paul M. De Marco, Waite, Schneider, Bayless & Chesley Co., L.P.A., Cincinnati, Ohio, for Appellees. ON BRIEF: Douglas E. Whitney, McDermott, Will & Emery, LLP, Chicago, Illinois, Russell S. Sayre, Taft, Stettinius & Hossister, LLP, Cincinnati, Ohio, Robert B. Craig, Taft, Stettinius & Hollister, LLP, Covington, Kentucky, Earle Jay Maiman, Thompson Hine, LLP, Cincinnati, Ohio, Richard J. Idell, Idell & Seitel, LLP, San Francisco, California, Donald L. Stepner, Adams, Stepner, Woltermann & Dusing, PLLC, Covington, Kentucky, for Appellants. Paul M. De Marco, James R. Cummins, Stanley M. Chesley, Jean M. Geoppinger, Waite, Schneider, Bayless & Chesley Co., L.P.A., Cincinnati, Ohio, for Appellees.

Before: DAUGHTREY and COOK, Circuit Judges; VINSON, District Judge.^*

OPINION

MARTHA CRAIG DAUGHTREY, Circuit Judge.

In this interlocutory appeal, the defendants seek to overturn an order of the district court that denied their motion for a stay pending arbitration of the dispute that brought the parties into court. To establish jurisdiction, they rely on Section 16(a)(1) of the Federal Arbitration Act, 9 U.S.C. § 16(a)(1), which permits interlocutory review of Orders denying motions to stay under Section 3 of the Act. See 9 U.S.C. § 3. However, none of the defendants involved in this appeal was a signatory to the written arbitration agreement in question. Instead, they based their effort to compel arbitration on a theory of equitable estoppel, a claim that the district court considered and rejected. In the absence of an applicable written agreement to arbitrate, the plaintiffs contend that Section 3 is inapplicable in this action and, consequently, that we are without jurisdiction to hear this appeal on an interlocutory basis. We agree.

FACTUAL AND PROCEDURAL BACKGROUND

The facts underlying the dispute in this case are not relevant at this stage of the litigation, except as they throw light on the jurisdictional question. Plaintiffs Carlisle Bushman, and Strassel sold their construction equipment business and sought advice on how to minimize the taxes on their sale from Arthur Andersen, LLP, an accounting firm; Bricolage Capital LLC, a "financial boutique"; and Curtis, Mallet-Prevost, Colt & Mosle, LLP, a law firm. Arthur Andersen, Bricolage Capital, and Curtis Mallet recommended investment in a tax shelter referred to as a "leveraged option strategy," which involved foreign currency exchange options. Following this advice, Carlisle, Bushman, and Strassel each created separate business entities, consisting of limited liability companies, to implement the leveraged option strategy. These LLCs then entered into investment management agreements with Bricolage Capital. Defendants Arthur Andersen and Curtis Mallet were not parties to the management agreements, which contained the following arbitration clause: "Any controversy arising out of or relating to this Agreement or the breach thereof, shall be settled by arbitration conducted in New York, New York, in accordance with the Commercial Arbitration Rules of the American Arbitration Association."

As a condition of participating in the tax shelters, the plaintiffs were required to invest $4,350,000 in warrants to purchase stock of unidentified small, high-tech companies. The plaintiffs formed another entity, WJC Strategic Investments, to buy the warrants, which were eventually found to be worthless. The plaintiffs also signed individual retainer agreements with defendant Curtis Mallet, for a fee of $100,000 each. The IRS later determined that the "leveraged option strategy" was an abusive tax shelter but offered amnesty to taxpayers who had invested in them, under certain conditions. The defendants did not inform the plaintiffs of these IRS rulings, and the plaintiffs were eventually forced to join an IRS settlement program that required them to pay taxes, penalties, and interest due to federal tax authorities, a sum that exceeded $25 million.

Plaintiffs Carlisle, Bushman, Strassel, and their various business entities filed suit against nine defendants, including Arthur Andersen, Bricolage Capital, and Curtis Mallet, alleging fraud, negligence, civil conspiracy between the defendants, and breach of fiduciary duty, among other counts. Relying on the arbitration agreements with the principal plaintiffs, Bricolage Capital filed a motion to stay the proceedings pending arbitration of disputes arising under the management agreements. While that motion was pending, Bricolage Capital notified the court that it had filed a petition in bankruptcy; an automatic stay as to Bricolage Capital was subsequently entered. The remaining defendants nevertheless sought to step into Bricolage Capital's shoes, seeking their own stay of the proceedings based on their theory that equitable estoppel should prevent the plaintiffs from "avoiding arbitration" under the contracts between Bricolage Capital and the plaintiffs and, as a result, that the arbitration clauses in those agreements should be binding on the plaintiffs as against all defendants. The district court rejected the defendants' equitable-estoppel argument and denied the motion to stay for substantive reasons that need not detain us here, given our determination that we do not have jurisdiction to address the merits of the claims. The defendants now seek appellate review of that denial, for the first time invoking Section 3 of the Federal Arbitration Act in an effort to establish interlocutory jurisdiction under Section 16 of the Act.

DISCUSSION

The jurisdiction question presented by this appeal is one of first impression in this circuit, although it has been addressed under similar circumstances in at least three of our sister circuits, resulting in a circuit split. The issue arises in the context of a very limited statutory exception to the general rule of appellate jurisdiction under 28 U.S.C. § 1291, which gives courts of appeal jurisdiction only over "final decisions" of the district courts. A final decision is, of course, one that "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Catlin v. United States, 324 U.S. 229, 233, 65 S.Ct. 631, 89 L.Ed. 911 (1945) (internal citation omitted). A district court's denial of the motion to stay proceedings pending arbitration is — obviously — not a final decision, making 28 U.S.C. § 1291 inapplicable. Furthermore, denials of motions to stay proceedings are not appealable as interlocutory orders denying injunctions under 28 U.S.C. § 1292(a)(1). See Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271, 287, 108 S.Ct. 1133, 99 L.Ed.2d 296 (1988). However, Section 16(a)(1) of the Federal Arbitration Act confers jurisdiction over interlocutory appeals from the denial of a motion to stay (Section 3) or to compel arbitration (Section 4) under the Act.

Section 3, purportedly at issue here, makes available a stay of proceedings based upon "any issue referable to arbitration under an agreement in uniting for such arbitration." 9 U.S.C. § 3 (emphasis added). The denial of a stay under Section 3 is then subject to interlocutory review under Section 16. The defendants in this case have invoked Section 16 as the basis for appeal, contending that the arbitration provisions in the investment management agreements between the plaintiffs and Bricolage Capital permit them to seek a stay under Section 3 because the action brought by the plaintiffs involves an issue that is referable to arbitration under "an agreement in writing" — even though the defendants are not signatories to the written agreement in question and are instead seeking to compel arbitration with the signatories to a contract with a third party that is no longer involved in these proceedings. In advancing their equitable-estoppel argument, the defendants rely on a Second Circuit case, Ross v. American Express Co., 478 F.3d 96, 99 (2d Cir.2007). However, we find the analysis in Ross to be less persuasive than that of two other circuit decisions, DSMC Inc. v. Convera Corp., 349 F.3d 679 (D.C.Cir.2003), and In re Universal Service Fund Telephone Billing Practice Litigation v. Sprint Communications Co., LP., 428 F.3d 940, 944-45 (10th Cir.2005). In the absence of a controlling decision in this circuit, we opt to follow the reasoning and result in the latter two opinions.

The litigation in DSMC Inc. stemmed from a contract between National Geographic Television Library, Inc., and DSMC Inc. for the performance of media archiving for National Geographic. When it became dissatisfied with DSMC's performance, National Geographic hired Convera to do the work instead. See DSMC Inc., 349 F.3d at 681. In a procedurally complicated case, DSMC sued Convera, and National Geographic sought to intervene and stay the proceedings under Section 3, based on pending arbitration between National Geographic and DSMC under their contract. National Geographic claimed that the DSMC/Convera litigation and the DSMC/National Geographic dispute had parallel issues and that, although DSMC and Convera did not have an agreement to arbitrate, DSMC should be equitably estopped under Section 4 from refusing to arbitrate with Convera. The district court denied the motion. See id.

On appeal, the D.C. Circuit held that because there was no actual written agreement between DSMC and Convera, there was no jurisdiction to review the district court's decision under Section 4, regardless of the fact that an equitable estoppel argument could be advanced. As the court noted, "Section 4 does not merely require that there be a written agreement somewhere in the picture ... [but]...