Seidman v. J.A. Green Dev. Corp..

• Decision Date: 09 November 2010
• Docket Number: No. 05–09–01520–CV.,05–09–01520–CV.
• Citation: 327 S.W.3d 852
• Parties: BDO SEIDMAN, LLP, James Fielding, Morris Gottlieb, and Lawrence Cohen, Appellants,v.J.A. GREEN DEVELOPMENT CORP., Jagi, Inc., and Jagi Verde, LLC, Appellees.
• Court: Texas Court of Appeals

327 S.W.3d 852

BDO SEIDMAN, LLP, James Fielding, Morris Gottlieb, and Lawrence Cohen, Appellants,

v.J.A. GREEN DEVELOPMENT CORP., Jagi, Inc., and Jagi Verde, LLC, Appellees.

No. 05–09–01520–CV.

Court of Appeals of Texas, Dallas.

Nov. 9, 2010.

Robert W. Kantner, DLA Piper US LLP, Dallas, Cary B. Samowitz, DLA Piper LLP (US), New York, NY, Melanie B. Rother, Fulbright & Jaworski LLP, Houston, for Appellants.David R. Deary, Carol E. Farquhar, J. Dylan Snapp, Loewinsohn, Flegle and Deary, L.L.P., Dallas, for Appellees.Before Justices MOSELEY, O'NEILL, and LANG–MIERS.

OPINION

Opinion By Justice O'NEILL.

Appellants BDO Seidman, LLP, James Fielding, Morris Gottlieb, and Lawrence Cohen (collectively referred to as “BDO”) appeal the trial court's order denying their motion to compel arbitration against appellees J.A. Green Development Corporation, Jagi, Inc., and Jagi Verde, LLC (collectively referred to as “Green”). BDO raises three issues on appeal: (1) whether the Federal Arbitration Act (“FAA”) or New York law determines whether Green's claims against BDO are arbitrable; (2) whether Green's claims are within the scope of the consulting agreement's arbitration clause; and (3) whether the arbitration clause is unconscionable.

We reverse the trial court's order denying arbitration and remand with instructions to order the parties to arbitration and stay the underlying case pending outcome of the arbitration.

Background

Green is a New York corporation involved in real estate development. In 1998, Green negotiated the sale of property near JKF International Airport and gained approximately $35 million from the sale. Green later met with BDO to discuss options for reducing tax liability, which included using a distressed debt strategy. In March 2001, Green entered into a tax consulting agreement with BDO, which included the following broad arbitration provision:

(d) 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”)....

The Internal Revenue Service later determined the distressed debt strategy implemented by BDO was nothing more than an illegal tax shelter. After an audit, the IRS assessed Green $5,147,555.00 in penalties and interest. Green filed suit against BDO asserting, among several causes of action, that BDO knew the distressed debt strategy was an illegal tax shelter and fraudulently induced them to enter into the consulting agreement.

BDO filed a motion to compel arbitration and to stay or dismiss Green's lawsuit pending outcome of the arbitration based on the arbitration clause in the consulting agreement. After a hearing, the trial court denied the motion. This accelerated appeal followed.

Standard of Review

Whether an arbitration clause imposes a duty to arbitrate is a matter of contract interpretation and a question of law for the court to review de novo.¹ See Tex. Petrochemicals, L.P. v. ISP Water Mgmt. Servs., L.L.C., 301 S.W.3d 879, 884 (Tex.App.-Beaumont 2009, no pet.); see also McReynolds v. Elston, 222 S.W.3d 731, 740 (Tex.App.-Houston [14th Dist.] 2007, no pet.). In a de novo review, the trial court's decision is given absolutely no deference. Quick v. City of Austin, 7 S.W.3d 109, 116 (Tex.1998). Although BDO requested findings of fact and conclusions of law, the trial court failed to file any. Therefore, we may affirm the trial court's decision on any legal theory supported by the evidence. In re Guardianship of Fortenberry, 261 S.W.3d 904, 910 (Tex.App.-Dallas 2008, no pet.).

Does New York Law or the FAA Apply?

As a threshold matter, we must determine whether New York substantive law governs the arbitration agreement or if the FAA applies. BDO argues the FAA applies because although the arbitration provision states New York law applies, it does not contain the specific “enforcement” language required to trigger enforcement under New York law. Thus, by default, the FAA applies. Green contends BDO misconstrues New York law because the arbitration clause is not required to have any sort of special “enforcement” language. Rather, there are two situations in which New York law governs an arbitration: (1) if the entire agreement (as opposed to the arbitration provision within the agreement) contains a choice-of-law provision providing that the entire agreement and its “enforcement” are governed by New York law or (2) if the arbitration provision itself (as opposed to the entire agreement) explicitly provides that arbitration is governed by New York law.² As explained below, we agree with BDO.

BDO argues Diamond Waterproofing Systems, Inc. v. 55 Liberty Owners Corporation, 4 N.Y.3d 247, 793 N.Y.S.2d 831, 826 N.E.2d 802 (2005) is controlling. In that case, parties entered into a contract agreeing to submit “[a]ny controversy or Claim arising out of or related to the Contract” for arbitration. The contract further provided “[it] shall be governed by the law of the place where the Project is located.” Id. at 804. After a dispute arose, 55 Liberty Owners demanded arbitration, and Diamond Waterproofing sought to permanently stay arbitration. Id. On appeal, the issue for New York's highest court was whether the FAA applied to the arbitration clause. It noted that where parties broadly agree to arbitrate “any controversy” arising from their contracts, they may—as with any contract—add qualifications to that clause by providing New York law will govern the agreement and its enforcement. Id. at 806 (emphasis added). It went on to hold

A choice of law provision, which states that New York law shall govern both “the agreement and its enforcement,” adopts as “binding New York's rule that threshold Statute of Limitations questions are for the courts.” In the absence of more critical language concerning enforcement, however, all controversies, including issues of timeliness, are subject to arbitration.

Id. (emphasis in original). Because the parties' arbitration clause did not express an intent to have New York law govern their agreement's enforcement, the FAA controlled. Id.

In All Metro Health Care Services, Inc. v. Edwards, the lower court relied on Diamond Waterproofing, Inc. when determining an arbitration clause did not contain the proper enforcement language and therefore, New York law did not apply. See All Metro Health Care Servs., Inc. v. Edwards, 25 Misc.3d 863, 884 N.Y.S.2d 648, 652 (2009). In that case, a stock purchase agreement contained a choice of law provision stating the “arbitration shall be held in accordance with the laws of the State of New York.” Id. at 653. The court noted that while the stock provision stated New York law applied, the provision did not state “New York law shall govern both the agreement and its enforcement, and is therefore not sufficient to express an intention to have the court, rather than an arbitrator, determine a procedural issue.” Id. (emphasis in original). To conclude otherwise would undermine the substantial authority under the FAA for the arbitrator to determine such issues. Id.

As previously stated, the arbitration clause at issue here states “[i]f any dispute, controversy or claim arises in connection with the performance or breach of this agreement ... then such dispute, controversy or claim shall be settled by arbitration in accordance with the laws of the State of New York....” It is clear the arbitration clause does not contain the “enforcement” language necessary under New York law. Therefore, based on the clear holdings of Diamond Waterproofing and All Metro Health Care Services, we conclude the FAA determines whether Green's objection to arbitration is decided by the court or an arbitrator. See 9 U.S.C. § 2 (2009) (stating FAA applies to any written agreement to arbitrate “a contract evidencing a transaction involving commerce”).

In reaching this conclusion, we are not persuaded by Green's arguments that the enforcement language is only necessary in a choice of law provision governing the entire agreement. We likewise discount his arguments that so long as the arbitration clause states New York law applies, without the enforcement language, then it controls over the FAA. Green cites several cases in support of their propositions; however, we find them distinguishable.

Green contends Hackett v. Milbank, Tweed, Hadley & McCloy stands for the proposition that when an arbitration provision states New York law governs arbitration, then the FAA does not apply and enforcement language is not needed. He relies on the court's holding, which states the following:

The overriding policy of the Act, however, is the enforcement of arbitration agreements according to their terms, including the parties' choice of governing law.... The parties' agreement here not only provided for binding arbitration of their dispute, it explicitly provided that New York law would govern that arbitration, and that the only grounds for vacating the arbitrator's award are those encompassed by CPLR 7509 and CPLR 7511. Such an explicit and unambiguous choice of law in an arbitration agreement must be given effect.

86 N.Y.2d 146, 630 N.Y.S.2d 274, 654 N.E.2d 95, 100 (1995).

We recognize the arbitration provision in Hackett did not contain the enforcement language, yet the court still determined New York law applied rather than the FAA. However, the arbitration provision, in addition to providing it was governed by New York law, also incorporated two specific sections of New York's procedural code regarding vacating an arbitration award. Id. The reference to these two sections of New York's procedural code further established the parties' “explicit and unambiguous...