Wachovia Bank, Nat. Ass'n v. Schmidt

• Decision Date: 25 April 2006
• Docket Number: No. 03-2061.,03-2061.
• Citation: 445 F.3d 762
• Parties: WACHOVIA BANK, NATIONAL ASSOCIATION, Plaintiff-Appellant, v. Daniel G. SCHMIDT, III; Priag LLC; DGS Investments, Inc., Defendants-Appellees. Office of the Comptroller of the Currency, Amicus Supporting Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

445 F.3d 762

WACHOVIA BANK, NATIONAL ASSOCIATION, Plaintiff-Appellant, v. Daniel G. SCHMIDT, III; Priag LLC; DGS Investments, Inc., Defendants-Appellees Office of the Comptroller of the Currency, Amicus Supporting Appellant.

No. 03-2061.

United States Court of Appeals, Fourth Circuit.

Submitted: February 21, 2006.

Decided: April 25, 2006.

COPYRIGHT MATERIAL OMITTED

Robert W. Fuller, III, Stephen M. Cox, Robinson, Bradshaw & Hinson, P.A., Charlotte, North Carolina, for Appellant. James R. Gilreath, Greenville, South Carolina; John P. Freeman, Columbia, South Carolina; T. English McCutchen, III, L. Susan Foxworth, McCutchen Blanton Johnson & Barnette, LLP, Columbia, South Carolina, for Appellees. Daniel P. Stipano, Horace G. Sneed, Larry J. Stein, Office of the Comptroller of the Currency, Washington, D.C., for Amicus Supporting Appellant.

Before LUTTIG and KING, Circuit Judges, and ROBERT R. BEEZER, Senior Circuit Judge of the United States Court of Appeals for the Ninth Circuit, sitting by designation.

Affirmed by published opinion. Judge KING wrote the opinion, in which Judge LUTTIG and Senior Judge BEEZER joined.

OPINION

KING, Circuit Judge:

In June 2003, Daniel G. Schmidt, III, Priag LLC, and DGS Investments, Inc. (together, the "Schmidt Defendants"), filed a civil action in the Court of Common Pleas of Greenville County, South Carolina, asserting that Wachovia Bank, National Association, and others had wrongfully induced them to participate in an illegitimate tax shelter. Soon thereafter Wachovia filed a separate petition in the District of South Carolina, seeking to compel the Schmidt Defendants to arbitrate their state-court claims against Wachovia under the arbitration clauses found in two separate agreements to which Schmidt was a party. By its order of August 1, 2003, the district court denied Wachovia's petition to compel arbitration. See Wachovia Bank, N.A. v. Schmidt, CA-03-2005-6-20 (D.S.C. Aug. 1, 2003) (the "Order"). Wachovia has appealed from the Order and, as explained below, we affirm.

I.

In May 1998, Schmidt incurred a very substantial capital gain through the sale in South Carolina of his physical therapy businesses. Soon thereafter, representatives of Wachovia approached Schmidt and advised him of a potentially advantageous investment strategy involving KPMG LLP, and QA Investments, LLC ("Quadra").¹ His interest piqued, Schmidt soon thereafter attended a meeting conducted by representatives of Wachovia, KPMG, and Quadra. At that meeting, Schmidt was informed that the investment strategy, called a Foreign Leveraged Investment Program, i.e., a FLIP, involved highly leveraged investments in stock of the United Bank of Switzerland (the "UBS FLIP"). He was advised at the meeting that the UBS FLIP was a "slam dunk" — not only would the investors enjoy substantial profits, but the investment strategy would provide a so-called "basis shift," which would serve to shelter from federal taxation the capital gains Schmidt had made in the sale of his businesses. Wachovia, KPMG, and Quadra assured Schmidt that the UBS FLIP strictly complied with the rules and regulations of the Internal Revenue Service (the "IRS"). According to the Schmidt Defendants' state-court complaint, however, Wachovia, KPMG, and Quadra knew or should have known that the IRS was likely to oppose the use of the UBS FLIP as a tax shelter.

At some point, Schmidt decided to participate in the UBS FLIP and created defendant Priag LLC to carry out the necessary transactions.² Wachovia's role in the UBS FLIP was to provide financial advice concerning the investments. KPMG (a major accounting firm), on the other hand, was to provide tax planning services and prepare Schmidt's tax returns, while Quadra was to control and direct the investments. The UBS FLIP was comprised of both direct and indirect purchases of UBS stock. The indirect purchases were accomplished through the purchase of a warrant in the stock of Sandpiper Capital, Inc., a Cayman Islands company which had previously made leveraged purchases of UBS stock.

Wachovia's role as Schmidt's financial advisor concerning the UBS FLIP was formalized on September 10, 1998, in a Financial Advisory Services Contract between Wachovia and Schmidt under which Schmidt paid Wachovia $100,000 for its services. Later, on September 21, 1998, Wachovia loaned Schmidt $3.5 million for his use in connection with the UBS FLIP, in exchange for a promissory note executed by Schmidt to Wachovia (the "Note").³ The Note contained an arbitration clause providing that either party could compel arbitration of "any claim or controversy arising out of, or relating to" the Note or other documents executed in connection with the loan.⁴ Schmidt fully satisfied the Note, by payment of the principal and interest, sometime in 1999, and the Note was thereafter cancelled.

The investments comprising the UBS FLIP were directed by Quadra, for whose services Schmidt paid $1.75 million. As relevant here, Quadra arranged for Schmidt to purchase a warrant from Sandpiper for eighty-five percent of Sandpiper's stock (the "Warrant"). The Warrant was issued on September 24, 1998, and included a provision requiring arbitration of "[a]ny dispute, controversy or claim arising out of or relating to" the Warrant. Schmidt ultimately executed the Warrant, through what was called an "election to put," on December 23, 1998.

The UBS FLIP was apparently a disaster all the way around. Not only did the investment fare poorly as a profit-generating enterprise, but its use as a tax shelter caught the attention of the IRS. On July 26, 2001, the IRS issued its Notice 2001-45, advising that "Basis Shifting Tax Shelters" could be subject to disallowance for tax purposes, interest on unpaid taxes, and potentially penalties as well. At the time Wachovia took this appeal, the Schmidt Defendants were engaged in negotiations on the matter with the IRS and expected to be liable for back taxes in excess of $3 million, in addition to interest and possible penalties.

The IRS investigation of the matter prompted the Schmidt Defendants to file their state-court lawsuit, against Wachovia, KPMG, and Quadra, on June 2, 2003, seeking restitution and damages. As relevant here, the Schmidt Defendants' state-court complaint alleged the following claims against Wachovia: civil conspiracy, fraud, constructive fraud, negligent misrepresentation, promissory estoppel, unfair trade practices, and breach of fiduciary duties. Each of the claims in the state-court complaint derived from the same primary allegation: that Wachovia, in conjunction with KPMG and Quadra, wrongfully induced Schmidt to participate in the UBS FLIP.

On June 18, 2003, Wachovia filed its petition for an order compelling arbitration in the district court, invoking the court's diversity jurisdiction under 28 U.S.C. § 1332. By its petition, Wachovia asserted, pursuant to the Federal Arbitration Act (FAA), that the Schmidt Defendants were required to arbitrate their state-court claims under the arbitration clauses found in both the Note and the Warrant. By its Order of August 1, 2003, the district court declined to compel arbitration, concluding that the Schmidt Defendants' state-court claims bore no significant relationship to the Note, and that Wachovia, as a nonsignatory to the Warrant, had failed to establish that it was entitled to enforce the arbitration clause in the Warrant. See Order at 7-9.

Wachovia promptly appealed the Order to this Court and, by opinion of November 1, 2004, a divided panel remanded the matter to the district court with instructions to dismiss Wachovia's petition for lack of subject matter jurisdiction. See Wachovia Bank, N.A. v. Schmidt, 388 F.3d 414, 432 (4th Cir.2004). Wachovia thereafter successfully petitioned the Supreme Court for certiorari, and the Court reversed our jurisdictional ruling and remanded the matter to us for further proceedings. Wachovia Bank, N.A. v. Schmidt, ___ U.S. ___, ___, 126 S.Ct. 941, ___, 952, 163 L.Ed.2d 797 (2006). We are thus now obliged to assess the merits of Wachovia's contentions that the Schmidt Defendants are required to arbitrate their state-court claims against Wachovia.

II.

Because a district court's determination concerning the arbitrability of a dispute is ordinarily a matter of contract interpretation, we generally review such determinations de novo. See Cara's Notions, Inc. v. Hallmark Cards, Inc., 140 F.3d 566, 569 (4th Cir.1998). Where a district court's ruling rests on an application of the doctrine of equitable estoppel, however, we review for an abuse of discretion only. See Brantley v. Republic Mortgage Ins. Co., 424 F.3d 392, 395 (4th Cir. 2005).

III.

The Supreme Court has long recognized that the purpose of the FAA was "`to reverse the longstanding judicial hostility to arbitration agreements ... and to place arbitration agreements upon the same footing as other contracts.'" EEOC v. Waffle House, Inc., 534 U.S. 279, 289, 122 S.Ct. 754, 151 L.Ed.2d 755 (2002) (quoting Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991)). Thus, our task in assessing the arbitrability of a dispute "primarily is one of contract interpretation," Summer Rain v. Donning Co., 964 F.2d 1455, 1460 (4th Cir.1992), and we are obliged to give effect to the intentions of the parties as expressed in their agreement, see Cara's Notions, Inc. v. Hallmark Cards, Inc., 140 F.3d 566, 569 (4th Cir.1998) (observing that "a court may not require a party to submit to arbitration any dispute which he has not agreed so to submit" (internal quotation marks omitted)). Any ambiguities regarding the scope of an arbitration clause, however, are to be resolved in favor of arbitration. See Volt Info. Sci., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 475-76, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989). Against the backdrop of these controlling principles, we assess in turn Wachovia's...