Thursday, April 10, 2008

Split Widened: Is There Appellate Jurisdiction to Review a Denial of a Motion to Stay Pending Arbitration in the Absence of an Arbitration Agreement?

Per Carlisle v. Curtis, Mallet-Prevost, Colt & Mosle, LLP, 2008 WL 942035, *3-*5 (6th Cir. Apr. 9, 2008)

After selling a construction business, plaintiff Carlisle sought advice on how to minimize his tax liability from Arthur Anderson, LP (accountants); Bricolage Capital LLC (‘financial boutique’); and Curtis, Mallet-Prevost, Colt & Mosle, LLP (law firm). These three institutions recommended a leveraged option strategy. Following this advice, Carlisle formed an LLC and entered into a management agreement with Bricolage, an agreement which called for arbitration of any controversy relating to the agreement. He additionally paid a retainer to the law firm, but did not enter into any agreement.

The IRS determined the leveraged option strategy to be an abusive tax shelter, but offered amnesty, subject to certain conditions, to taxpayers who had invested in them. Curtis Mallet failed to inform Carlisle of these rulings, and Carlisle was eventually required to pay more than $8 million in taxes, penalties and interest. Carlisle filed suit against the three institutions. Bricolage Capital moved to stay the proceedings pending arbitration. While that motion was pending, it filed for bankruptcy, resulting in an automatic stay. The other two institutions – Arthur Anderson and Curtis Mallet – argued that equitable estoppel should prevent the plaintiff from avoiding arbitration with regards to the claims against them as well. The District Court rejected the motion to stay, and the institutions appealed.

Section 16 of the Federal Arbitration Act creates a limited exception to the final judgment rule, allowing for interlocutory appeals of motions to stay pending arbitration. Section 3 of the Act, however, requires that such motions be based on “an agreement in writing. The question this panel of the Sixth Circuit considers is whether there is appellate jurisdiction over an interlocutory appeal of a denial of a motion to stay pending arbitration in the absence of a written arbitration agreement between the parties before the court.

Judge Daughtrey, on behalf of a unanimous panel, holds that the courts lack such jurisdiction. She notes that the circuits have split on this issue; the CAs 10,DC find such jurisdiction lacking as well, whereas the CAs 2 has held that it does have such jurisdiction. Finally, she notes that the Sixth Circuit is not deciding whether the district court should have applied equitable estoppel, quoting the CA 10 to show that the issue is whether the court has the jurisdiction to hear the case, not whether the district court got it right.

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