Ernst & Young Llp v. Baker O'Neal Holdings, Inc.

• Decision Date: 23 September 2002
• Docket Number: No. 01-3862.,01-3862.
• Citation: 304 F.3d 753
• Parties: ERNST & YOUNG LLP and Charles J. Roach, Defendants-Appellants, v. BAKER O'NEAL HOLDINGS, INC., and American Public Automotive Group, Inc., Plaintiffs-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 753

304 F.3d 753

ERNST & YOUNG LLP and Charles J. Roach, Defendants-Appellants, v. BAKER O'NEAL HOLDINGS, INC., and American Public Automotive Group, Inc., Plaintiffs-Appellees.

No. 01-3862.

United States Court of Appeals, Seventh Circuit.

Argued February 26, 2002.

Decided September 23, 2002.

Brian W. Welch, McHale, Cook & Welch, Indianapolis, IN, John J. Tharp, Jr. (argued), Mayer, Brown, Rowe & Maw, Chicago, IL, for appellants.

Andrew W. Hull (argued), Hoover Hull Baker & Heath, Indianapolis, IN, for appellees.

Before FAIRCHILD, COFFEY, and KANNE, Circuit Judges.

KANNE, Circuit Judge.

Plaintiffs Baker O'Neal Holdings, Inc. and American Public Automotive Group, Inc. filed for relief under Chapter 11 of the Bankruptcy Code. Shortly thereafter, the plaintiffs initiated an adversary proceeding against Ernst & Young LLP and Charles J. Roach ("Ernst & Young"), asserting various claims. Ernst & Young then objected to provisions of the plaintiffs' Chapter 11 plan of reorganization, arguing that provisions within the proposed plan would infringe upon Ernst & Young's ability to bring an action or assert a defense against third parties in the adversary proceeding. The plaintiffs then modified their proposed plan to Ernst & Young's apparent satisfaction, and the bankruptcy court confirmed the plan as modified. As described in both the plan and the plan's confirmation order, the bankruptcy court expressly retained jurisdiction for the purpose of "[a]djudication of any pending adversary proceeding, or other controversy or dispute." After the plan's confirmation, Ernst & Young filed a motion to dismiss the adversary proceeding or to stay the proceeding pending arbitration based on prior contractual language between the parties. The plaintiffs objected, asserting that in light of their confirmed plan, the bankruptcy court retained jurisdiction to adjudicate the merits of the adversary proceeding. The bankruptcy court agreed, denying Ernst & Young's motion, and the district court affirmed. For the reasons stated herein, we affirm.

I. History

American Public Automotive Group is a wholly owned subsidiary of Baker O'Neal Holdings. Together, they employed the services of Ernst & Young from 1994 to 1998, working closely with Charles J. Roach, a partner at Ernst & Young. In October 1996 and again in August 1997, Ernst & Young entered into "Engagement Letters" with the plaintiffs. The terms of the Engagement Letters included a provision that required the parties to resolve any "controversy or claim arising out of or relating to the services covered by this letter or hereafter provided by [Ernst & Young]" through arbitration.

The plaintiffs filed for civil bankruptcy relief on October 30, 1998. On December 7, 1999, they initiated adversary proceedings against Ernst & Young and Charles J. Roach, seeking to avoid and recover fraudulent transfers of property, and to recover damages. In addition to professional misconduct, the plaintiffs alleged that Charles J. Roach assisted James O'Neal, Baker O'Neal Holdings's former president and chief executive officer, in obtaining a $3.7 million loan from Baker O'Neal Holdings.

On December 13, 1999, the plaintiffs filed a proposed plan of reorganization and Ernst & Young filed an objection to that plan on January 19, 2000. The objection stated that a settlement agreement and release in the plan would limit Ernst & Young's ability to bring an action or assert a defense against Patrick J. Baker, the sole shareholder of Baker O'Neal Holdings and the Chairman of the Board of Directors, or his wife Penny. On February 11, 2000, the plaintiffs modified the settlement agreement and release in the plan, excluding Ernst & Young from any limitation in pursuing an action or asserting a defense against the Bakers. The modification apparently satisfied Ernst & Young, as they withdrew their objection to the plan. The plan was then confirmed on February 23, 2000 by the bankruptcy court.

Under the terms of both the plan and the confirmation order, the bankruptcy court retained jurisdiction for the purpose of "[a]djudication of any pending adversary proceeding, or other controversy or dispute." On March 10, 2000, Ernst & Young filed a motion to dismiss or stay the adversary proceeding pending arbitration, citing the terms of the Engagement Letters. The plaintiffs objected. The bankruptcy court denied Ernst & Young's motion, and the district court affirmed, finding that arbitration was precluded by the terms of the confirmed plan and that Ernst & Young, in any event, had waived its right to arbitrate.

On appeal, Ernst & Young argues, inter alia, that the district court erred in ruling that confirmation of the plan altered the parties' prior arbitration agreement. Citing language in the plan and the confirmation order, Ernst & Young claims that the documents merely confirm the bankruptcy court's ability to "retain control over the case" and do not supersede the arbitration provisions of the Engagement Letters. Ernst & Young also disputes the lower court's conclusion that its actions in the bankruptcy proceeding were sufficient to waive its right to arbitrate. Ernst & Young contends that its actions were "defensive" in nature and therefore should not constitute waiver of the right to proceed in another forum.

II. Analysis

A. Terms of the Plan

Denial of a motion to stay proceedings pending arbitration is reviewed de novo, see Adamovic v. METME Corp., 961 F.2d 652, 653 (7th Cir.1992). In their Engagement Letters, the parties provided for "arbitration of any `controversy or claim arising out of or relating to the services covered by this letter or hereafter provided by [Ernst & Young].'" However, the plaintiffs' subsequent confirmed plan of reorganization provides that the bankruptcy court retains jurisdiction "to adjudicate" any "pending adversary proceeding, other controversy or dispute."

A confirmed plan of reorganization is in effect a contract between the parties and the terms of the plan describe their rights and obligations. See In re Chicago, Milwaukee, St. Paul and Pacific R.R., Co., 891 F.2d 159, 161 (7th Cir.1989). Ernst & Young argues that the focus of our analysis should be on the words "retains jurisdiction" and that the bankruptcy court can satisfy its obligation to retain jurisdiction over the pending adversary proceeding by simply hearing arguments on the motion to compel arbitration or to stay the proceedings. We disagree. The plaintiffs' plan expressly provides for the bankruptcy court to retain jurisdiction to adjudicate pending adversary proceedings, controversies, and disputes. While, as the district court explained, the terms of the plan could have called for the bankruptcy court to retain jurisdiction over a dispute while its merits are arbitrated, the terms of this plan specifically called for the bankruptcy court to retain jurisdiction to adjudicate such disputes. See BARRON'S LAW DICTIONARY 11 (Ed.1996) (defining "adjudication" as "the determination of a controversy and a pronouncement of a judgment based on evidence presented, implies a final judgment... as opposed to a proceeding in which the merits of the cause of action were not reached"). Consequently, we believe that the bankruptcy court's retention of jurisdiction to adjudicate pending adversary proceedings, controversies and disputes should not be read to limit the bankruptcy court's jurisdiction to a ruling on Ernst & Young's motion to compel arbitration. See Merit Ins. Co. v. Leatherby Ins. Co., 581 F.2d 137, 143 (7th Cir.1978) ("A motion to stay proceedings and to compel arbitration focuses judicial scrutiny upon the arbitrability of the controversy, not upon the controversy itself.... It has no effect on the merits themselves.").

Had Ernst & Young wished to protect its right to arbitrate, it certainly could have done so in the same manner in which it sought to protect its rights against the Bakers. See, e.g., In re GWI, Inc., 269 B.R. 114, 118 (Bankr.D.Del.2001) (finding that because the parties expressly adopted arbitration provisions of pre-petition agreements into a plan of reorganization, the prior arbitration provisions were enforceable and not superceded by generalized language in the confirmed plan conferring jurisdiction on the bankruptcy court). We believe that in this instance, Ernst & Young's right to arbitrate is superseded by the terms of the confirmed plan.

B. Waiver of Rights of Arbitration

Regardless of how we interpret the term "adjudication" in the plan, Ernst & Young waived any right to arbitrate. The factual determinations that a district court predicates a finding of waiver upon are reviewed for clear error, while the legal question of whether the conduct amounts to waiver is reviewed de novo. See Iowa Grain Co. v. Brown, 171 F.3d 504, 509 (7th Cir.1999). Reviewing for "clear error" means that the Court of Appeals will reverse only if it reaches a firm and definite conviction that the district court made a mistake. See St. Mary's Medical Center of Evansville, Inc. v. Disco Aluminum Prods. Co., 969 F.2d 585, 589 (7th Cir.1992).

A contractual right to arbitrate may be waived expressly or implicitly, and a party that chooses a judicial forum for the resolution of a dispute is presumed to have waived its right to arbitrate. See Cabinetree of Wisconsin, Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 388, 390 (7th Cir.1995). Courts must examine the totality of the circumstances and "determine whether based on all the circumstances, the [party against whom the waiver is to be enforced] has acted inconsistently with the right to arbitrate." Grumhaus v. Comerica Securities, Inc., 223 F.3d 648, 650-51 (7th Cir.2000) (quotation omitted); see also Iowa Grain Co., 171 F.3d at 510. Although several factors may be considered in determining waiver, diligence or the lack thereof should weigh heavily in the decision — "did that party do all it could reasonably have been expected to do to make the...