Palmer Ventures LLC v. Deutsche Bank AG ( 2007 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
November 19, 2007
No. 06-30584 Charles R. Fulbruge III
Clerk
PALMER VENTURES LLC; JOHN M ENGQUIST
Plaintiffs-Appellees
v.
DEUTSCHE BANK AG
Defendant-Appellant
Appeal from the United States District Court
for the Middle District of Louisiana, Baton Rouge
USDC No. 3:04-CV-0706
Before DENNIS, CLEMENT, and PRADO, Circuit Judges.
PER CURIAM:*
In this appeal, Defendant-Appellant Deutsche Bank AG (“Deutsche Bank”)
urges us to reverse the order of the district court denying Deutsche Bank’s
motion to compel arbitration. Deutsche Bank is not a signatory to the
arbitration agreement it seeks to enforce, but instead relies on equitable estoppel
and agency principles to establish grounds to compel arbitration. Having
reviewed the record and the district court’s order, we AFFIRM the decision to
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
No. 06-30584
deny arbitration and return this case to the district court for further proceedings
consistent with this opinion.
I. FACTUAL BACKGROUND
The underlying claims in this case arise from a tax strategy gone awry.
Specifically, Plaintiff-Appellee Palmer Ventures, L.L.C. (“Palmer Ventures”) and
its sole owner Plaintiff-Appellee John M. Engquist (“Engquist”) (collectively,
“Plaintiffs”) allege that the defendants conspired to fraudulently induce
Plaintiffs into participating in a tax strategy known as Bond Linked Issue
Premium Structure (“BLIPS”). Plaintiffs assert that Deutsche Bank, KPMG,
L.L.P. (“KPMG”), Presidio Advisory Services (“Presidio”), and the law firm of
Sidley, Austin, Brown and Wood, L.L.P. (“Sidley”), among others, devised BLIPS,
were aware of its potential illegality, and fraudulently conspired to market it to
others.
The idea behind the BLIPS tax strategy was to use various trades in
foreign currencies to create capital losses in order to offset capital gains for tax
purposes. As described by the parties, to facilitate the BLIPS strategy, Deutsche
Bank loaned Palmer Ventures $58.7 million, which was put into a “Funding
Account” at Deutsche Bank. The amount in the Funding Account was then
transferred to an “Investment Account” that Palmer Ventures maintained with
Deutsche Bank Securities, Inc. (“DBSI”), an indirect subsidiary of Deutsche
Bank. To this amount, Palmer Ventures added a capital contribution of $1.54
million, which it received from Engquist. Deutsche Bank maintained a lien on
its loan to Palmer Ventures as collateral and perfected a security interest in the
Investment Account. Palmer Ventures then assigned the funds in the
Investment Account to Castle Strategic Investment Fund, L.L.C. (“Castle”),
which conducted the foreign currency trades. The IRS ultimately determined
that BLIPS and other similar strategies were abusive tax shelters, leading to a
multitude of suits across the country, including the instant case.
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No. 06-30584
To participate in the BLIPS strategy, Plaintiffs entered into numerous
agreements, several of which are relevant to this appeal. Deutsche Bank and
Palmer Ventures signed a Credit Agreement on September 30, 1999, which set
the terms of Deutsche Bank’s $58.7 million loan to Palmer Ventures. The Credit
Agreement stated that the loan proceeds were to first go to the Funding Account
maintained by Palmer Ventures at Deutsche Bank and then be transferred to
Palmer Ventures’ Investment Account at DBSI. The Credit Agreement also
provided that Deutsche Bank would maintain a lien on the loan proceeds as
collateral for the loan by means of the Account Control Agreement. The Account
Control Agreement was attached as Exhibit C-2 to the Credit Agreement and
was made between DBSI, Deutsche Bank, and Palmer Ventures. It was used to
perfect Deutsche Bank’s security interest in the loan proceeds.
Palmer Ventures and DBSI signed a Customer’s Agreement on September
16, 1999. The Customer’s Agreement created Palmer Ventures’ bank account at
DBSI, which became the Investment Account for the BLIPS strategy. This is
also the agreement that contains the arbitration clause at issue in this case,
which states as follows:
14. Arbitration:
(i) Arbitration is final and binding on the parties.
(ii) The parties are waiving their right to seek remedies in court,
including the right to jury trial.
***
The UNDERSIGNED AGREES, and by carrying an Account of the
Undersigned you agree, that except as inconsistent with the
foregoing, all controversies which may arise between us concerning
any transaction of [sic] construction, performance, or breach of this
or any other agreement between us, whether entered into prior, on
or subsequent to the date hereof, shall be determined by arbitration.
The Customer’s Agreement goes on to state that the arbitration will be governed
by the rules of the National Association of Securities Dealers, Inc.
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No. 06-30584
The final relevant agreement is the September 15 Representation Letter,
which was sent to Engquist on September 15, 1999, and states “[i]n
consideration of our execution of the Transactions, you hereby represent,
warrant and acknowledge to us, Deutsche Bank AG, Cayman Islands Branch
and to our affiliates for which we act as agent in connection with the
Transactions (collectively, ‘Deutsche Bank’) that . . . .” The letter then goes on
to list various disclaimers, such as that Deutsche Bank had made no
representations or guarantees regarding the Transactions, including the tax
consequences, and that “you” (Engquist) had not relied on any such
representations or guarantees. The letter is on DBSI letterhead and contains
a signature line for DBSI; however, given the quotation above, it is possible to
construe the reference to “us” as Deutsche Bank AG instead of DBSI.
II. PROCEDURAL HISTORY
Following the IRS’s determination that the BLIPS strategy was an abusive
tax shelter, Plaintiffs filed suit in Louisiana state court against Deutsche Bank,
KPMG, Presidio, and Sidley, among others, for breach of fiduciary duty, fraud,
and conspiracy. Deutsche Bank removed the case to federal court on October 1,
2004, based on the Convention on the Recognition and Enforcement of Foreign
Arbitral Awards, 9 U.S.C. § 205, claiming that the Convention covered the
arbitration agreement found in the Customer’s Agreement between Palmer
Ventures and DBSI.1 Plaintiffs filed a motion to remand, which the district
court denied with the caveat that a closer look at whether Deutsche Bank could
actually enforce the arbitration agreement might ultimately result in a remand
for lack of subject matter jurisdiction.
Deutsche Bank then filed a motion to compel arbitration based on the
Customer’s Agreement. On May 16, 2006, the district court denied the motion
1
Section 205 permits the removal of cases that “relate[] to an arbitration agreement”
that falls under the Convention.
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No. 06-30584
to compel arbitration, finding that Deutsche Bank, as a non-signatory to the
agreement, could not enforce it. The district court then noted that its ruling
meant that no subject matter jurisdiction existed under 9 U.S.C. § 205 and gave
Deutsche Bank twenty days to assert another basis for federal jurisdiction. On
June 2, 2006, Deutsche Bank filed a notice of appeal of the order denying
arbitration pursuant to 9 U.S.C. § 16(a). We stayed any further action in the
district court and now consider Deutsche Bank’s appeal.
III. STANDARD OF REVIEW
The standard of review applicable to this case depends on the theory of
arbitration being discussed. We generally review the grant or denial of
arbitration de novo. Garrett v. Circuit City Stores, Inc., 449 F.3d 672, 674 (5th
Cir. 2006). However, we use an abuse of discretion standard to review the
district court’s application of equitable estoppel to decide whether to compel
arbitration. Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 528 (5th
Cir. 2000). We have also indicated that a district court’s conclusion regarding
the existence of an agency relationship should be reviewed for clear error.
Bridas S.A.P.I.C. v. Gov’t of Turkmenistan, 345 F.3d 347, 356 (5th Cir. 2003)
(noting that the Fifth Circuit appears to review agency findings for clear error,
but declining to reach the issue).
In general, courts recognize a strong federal policy in favor of arbitration,
and any doubts about the scope of an agreement are to be resolved in favor of
arbitration. Safer v. Nelson Fin. Group, Inc., 422 F.3d 289, 294 (5th Cir. 2005).
However, we have also stated that “we will allow a nonsignatory to invoke an
arbitration agreement only in rare circumstances.” Westmoreland v. Sadoux,
299 F.3d 462, 465 (5th Cir. 2002).
IV. DISCUSSION
Deutsche Bank makes two arguments that its non-signatory status should
not pose a bar to enforcing the arbitration agreement. First, Deutsche Bank
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No. 06-30584
asserts that this case falls within the equitable estoppel principles outlined in
Grigson that permit non-signatories to enforce arbitration agreements. Second,
Deutsche Bank claims that DBSI’s status as an agent for Deutsche Bank permits
Deutsche Bank to compel arbitration based on DBSI’s agreement with Palmer
Ventures. We will address each argument in turn.
A. Equitable Estoppel
Deutsche Bank’s first argument that it should be able to compel
arbitration is one of equitable estoppel, as defined by this court in Grigson. 210
F.3d at 527. Grigson set forth two separate tests under which equitable estoppel
may be used by a non-signatory to compel arbitration. Id. “‘First, equitable
estoppel applies when the signatory to a written agreement containing an
arbitration clause must rely on the terms of the written agreement in asserting
its claims against the nonsignatory.’” Id. (quoting MS Dealer Serv. Corp. v.
Franklin, 177 F.3d 942, 947 (11th Cir. 1999)) (emphasis omitted). “‘Second [and
alternatively], application of equitable estoppel is warranted when the signatory
to the contract containing an arbitration clause raises allegations of
substantially interdependent and concerted misconduct by both the nonsignatory
and one or more of the signatories to the contract.’” Id. (quoting MS Dealer, 177
F.3d at 947) (emphasis omitted). As discussed below, Deutsche Bank contends
that it meets both of these tests.
1. General Challenges to the District Court’s Decision
Before addressing whether the district court abused its discretion in
applying the equitable estoppel tests in Grigson, we consider Deutsche Bank’s
arguments that the district court used an incorrect legal standard, unsupported
by Grigson, to reach its result.
Deutsche Bank first contends that the district court erred by requiring
Deutsche Bank to meet the test set out in Bridas, 345 F.3d at 356, rather than
the test set out in Grigson in order to compel arbitration. The test set forth in
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No. 06-30584
Bridas concerns whether a signatory can compel arbitration against a non-
signatory—the opposite situation presented in this case. Id. The Bridas
standard is a different and stricter standard than that used when a non-
signatory seeks to compel a signatory to arbitrate.2 See id. at 360-61. While we
agree that an application of the Bridas standard would be erroneous in this case,
we do not agree that the district court held Deutsche Bank to the Bridas
standard. The district court in this case did cite Bridas at the beginning of its
analysis, but it then described and applied Grigson. Indeed, the district court’s
ultimate conclusion rests on Deutsche Bank’s failure to meet the Grigson
standard, rather than Bridas. Thus, although the district court’s opinion could
have been clearer, review of the entire opinion shows that the district court
relied on Grigson. Consequently, the district court’s inclusion of the Bridas
standard in its opinion does not constitute reversible error.
Deutsche Bank also contends that the district court erred in requiring an
“express agreement” to arbitrate between Deutsche Bank and Plaintiffs, which
is at odds with the equitable estoppel tests set forth in Grigson. In its discussion
of Grigson, the district court cited the Bridas court’s description of Grigson,
which states that “the result in Grigson and similar cases makes sense because
the parties resisting arbitration had expressly agreed to arbitrate claims of the
very type that they asserted against the nonsignatory.” Bridas, 345 F.3d at 361
(emphasis added). The district court then noted that Plaintiffs did not
“expressly agree” to arbitrate any of the types of claims that they asserted
against Deutsche Bank. Deutsche Bank contends the use of “expressly agree”
is erroneous.
2
To compel a non-signatory to arbitrate under Bridas, the movant must rely on one of
the following theories: (a) incorporation by reference; (b) assumption; (c) agency; (d)
veil-piercing/alter ego; (e) estoppel; or (f) third-party beneficiary. Id. at 356.
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While it is unclear what type of “express agreement” the district court was
looking for, the district court’s subsequent analysis shows that it concluded that
Plaintiffs’ claims against Deutsche Bank are simply too attenuated from any
conduct by DBSI to make the equitable estoppel tests found in Grigson
applicable. Again, although the district court could have better articulated its
reasoning, its use of the phrase “expressly agree” does not indicate that it was
holding Deutsche Bank to any higher standard than that mandated by Grigson,
especially given the district court’s subsequent analysis of the Grigson standard.
Therefore, the district court’s use of this phrase does not merit reversal, and we
now proceed to review the district court’s Grigson analysis.
2. Grigson’s First Test
As noted above, the first Grigson test permits a non-signatory to enforce
an agreement to compel arbitration through equitable estoppel when the
signatory must rely on the terms of the agreement to bring its claim against the
non-signatory. Grigson, 210 F.3d at 527. This standard is met when each of the
signatory’s claims makes reference to or presumes the existence of the
agreement. Id. The rationale behind this test is that equity does not permit a
signatory to hold a non-signatory liable on the basis of the agreement containing
the arbitration clause while denying the effect of the arbitration clause to the
non-signatory. Id. at 528.
In this case, our focus is on the Customer’s Agreement and the September
15 Representation Letter. As described earlier, the Customer’s Agreement
mandates arbitration of “all controversies which may arise between [Palmer
Ventures and DBSI] concerning any transaction of [sic] construction,
performance, or breach of this or any other agreement . . . .” Deutsche Bank
argues that this language requires the parties to arbitrate any allegations
regarding the September 15 Representation Letter and that the September 15
Representation Letter contains disclaimers which are central to Deutsche Bank’s
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No. 06-30584
defense in this case. We must therefore determine whether Plaintiffs “must rely
on the terms of the [September 15 Representation Letter] in asserting [their]
claims” against Deutsche Bank. See Grigson, 210 F.3d at 527.
Review of Plaintiffs’ entire state court petition shows that Plaintiffs are
not relying on the September 15 Representation Letter as the source of any of
their claims. Instead, most of Plaintiffs’ claims are based on prior
misrepresentations generally made by KPMG. Plaintiffs’ petition does, however,
mention the September 15 Representation Letter in two of its 254 paragraphs,
which state as follows:
138.
At approximately the same time, KPMG gave Engquist a letter
dated September 15, 1999 from Deutsche Bank. In that letter,
Deutsche Bank asked Engquist to represent to the bank that
“Deutsche Bank has had no involvement in, and accepts no
responsibility for the establishment or promotion of the Growth
Strategies [BLIPS].”
139.
At the urging of KPMG, Engquist signed the September 15, 1999
letter from Deutsche Bank and made the above representation
because Engquist believed it to be true, based upon representations
made to him at the time by KPMG and Presidio.
From these paragraphs, it appears that Plaintiffs are attempting to set up a
defense should Deutsche Bank argue that the September 15 Representation
Letter bars Plaintiffs’ claims. Plaintiffs are not, however, relying on the letter
in asserting any of their claims against Deutsche Bank.3
In reaching its decision, the district court cited Hill v. G.E. Power Systems,
Inc., for the conclusion that even if a plaintiff’s claims “touch matters” relating
3
Deutsche Bank also contends that Plaintiffs “artfully” pleaded around DBSI by
stating that the letter came from Deutsche Bank instead of DBSI. However, as noted above,
while the letter is on DBSI letterhead, the text of the letter indicates it may be from Deutsche
Bank. This uncertainty prevents us from concluding that Plaintiffs deliberately
misrepresented DBSI’s role in the September 15 Representation Letter in their petition.
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No. 06-30584
to the arbitration agreement, the claims are not arbitrable unless the plaintiff
relies on the agreement to establish its cause of action. 282 F.3d 343, 348-49
(5th Cir. 2002). That principle is equally applicable here. While the September
15 Representation Letter may play a role in the ultimate outcome of this suit,
it is not a part of Plaintiffs’ causes of action. Again, we return to the concept of
equitable estoppel we articulated in Grigson—a signatory to an arbitration
agreement cannot “‘have it both ways’: it cannot, on the one hand, seek to hold
the non-signatory liable pursuant to duties imposed by the agreement, which
contains an arbitration provision, but, on the other hand, deny arbitration’s
applicability because the defendant is a non-signatory.” Grigson, 210 F.3d at
528. In this case, Plaintiffs are not trying to “have it both ways” because
Plaintiffs are not relying on the September 15 Representation Letter to hold
Deutsche Bank liable. As a result, equitable estoppel does not permit Deutsche
Bank to enforce the arbitration agreement. Consequently, the district court did
not abuse its discretion in determining that Deutsche Bank failed to meet the
first Grigson test.
3. Grigson’s Second Test
The second Grigson test permits a non-signatory to compel arbitration
when the signatory “raises allegations of substantially interdependent and
concerted misconduct by both the nonsignatory and one or more of the
signatories to the contract.” Id. (internal quotation marks and emphasis
omitted). Deutsche Bank suggests this test is not difficult to meet and quotes
language from Brown v. Pacific Life Insurance Co., which states that the test is
met when the claims against the non-signatory depend “in some part” on the
tortious conduct of the signatory. 462 F.3d 384, 398-99 (5th Cir. 2006).
Deutsche Bank then concludes that, because Deutsche Bank and DBSI were part
of the BLIPS strategy, this test is met. We disagree.
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No. 06-30584
Key to the decision in Brown was the fact that none of the claims against
the non-signatories could be considered without analyzing the “tortious acts” of
the signatories. Id. In the instant case, although DBSI was involved in the
BLIPS strategy by holding Plaintiffs’ Investment Account, Deutsche Bank does
not explain how Plaintiffs’ claims against it necessarily require the court to
consider any tortious acts committed by DBSI. Although Deutsche Bank may
be understandably reluctant to identify any tortious actions or misconduct by
DBSI (its indirect subsidiary), Deutsche Bank must do more than simply
conclude that DBSI is intertwined with the facts of this case. As stated in
Grigson, the standard is “substantially concerted and interdependent
misconduct . . . .” Grigson, 210 F.3d at 527 (internal quotation marks omitted
and emphasis modified).
According to Plaintiffs’ petition and briefing, DBSI did nothing more than
hold the Investment Account, and Plaintiffs do not contend such conduct is
tortious in any way. While we do not deny the possibility that DBSI was more
involved in the BLIPS strategy than Plaintiffs contend, Deutsche Bank has not
shown that to be the case through information about specific individuals at DBSI
or specific statements or events that demonstrate DBSI’s involvement in the
alleged misconduct. Instead, we are left only with the facts that DBSI held
Plaintiffs’ Investment Account and that DBSI had an unclear role in the
September 15 Representation Letter. Therefore, given the lack of information
regarding DBSI’s role in any alleged misconduct, we cannot say that the district
court abused its discretion in concluding that Deutsche Bank failed to meet the
second Grigson test.
B. Agency
Deutsche Bank next contends that it is entitled to enforce the arbitration
agreement because DBSI was acting as its agent. In support of this proposition,
Deutsche Bank relies on two cases from the Second and Fourth Circuits. See
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No. 06-30584
JLM Indus., Inc. v. Stolt-Nielsen S.A., 387 F.3d 163, 177 (2d Cir. 2004); J.J.
Ryan & Sons, Inc. v. Rhone Poulenc Textile, S.A., 863 F.2d 315, 320-21 (4th Cir.
1988). However, in neither of those cases did the court determine that an agency
relationship alone was sufficient to permit a non-signatory to enforce the
arbitration agreement. See JLM Indus., 387 F.3d at 177; J.J. Ryan, 863 F.2d at
320-21. Rather, the courts still looked at the connection between the claims, the
arbitration agreement, and the parties—an analysis similar to the Grigson tests
used in the Fifth Circuit. See JLM Indus., 387 F.3d at 177; J.J. Ryan, 863 F.2d
at 320-21.
Fifth Circuit precedent also indicates that an agency relationship alone is
insufficient to permit a non-signatory to compel arbitration. In Westmoreland
v. Sadoux, we held that “a nonsignatory cannot compel arbitration merely
because he is an agent of one of the signatories.” 299 F.3d 462, 466 (5th Cir.
2002). Instead, the court in Westmoreland subjected the alleged agent to the
Grigson analysis to determine if he could enforce the arbitration agreement. Id.
at 467. Thus, even if DBSI is Deutsche Bank’s agent, Deutsche Bank must still
satisfy the Grigson analysis, which it has failed to do.4 Therefore, any alleged
agency relationship between DBSI and Deutsche Bank is insufficient to
overcome Deutsche Bank’s inability to establish the elements of equitable
estoppel identified in Grigson.
C. Other Case Law
Throughout its briefing, Deutsche Bank makes much of the fact that many
other cases involving Deutsche Bank, DBSI, and similar tax strategies have all
reached the conclusion that Deutsche Bank could compel arbitration. However,
4
Although we need not determine whether DBSI was actually Deutsche Bank’s agent,
we note that the evidence presented thus far is not conclusive. The only evidence identified
in support of an agency relationship is the unclear September 15 Representation Letter and
the fact that DBSI is an indirect subsidiary of Deutsche Bank, neither of which is dispositve
of the issue.
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No. 06-30584
the cases that Deutsche Bank cited are all distinguishable from the instant
lawsuit. In many of the cases, the signatory was a party to the lawsuit, and the
plaintiff specifically pleaded that the non-signatory and signatories conspired
together or that the signatory was guilty of other wrongdoing. See Amato v.
KPMG, L.L.P., 433 F. Supp. 2d 460, 485-87 (M.D. Pa. 2006), vacated in part, No.
06CV39, 2006 WL 2376245, at *6 (M.D. Pa. Aug. 14, 2006); Keeter v. KPMG,
L.L.P., No. 1:04-CV-3759-WSD, slip op. at 15-17 (N.D. Ga. Sept. 29, 2005);
Galtney v. KPMG, L.L.P., No. Civ. H05583, 2005 WL 1214613, at *5 (S.D. Tex.
May 19, 2005); Hansen v. KPMG, L.L.P., No. CV-04-10525-GLT, 2005 U.S. Dist.
LEXIS 38137, at *10 (C.D. Cal. Mar. 28, 2005). Similarly, in Chew v. KPMG,
L.L.P., 407 F. Supp. 2d 790, 799 (S.D. Miss. 2006), the district court permitted
Deutsche Bank to compel arbitration based on an agreement between the
plaintiff and DB Alex Brown because both Deutsche Bank and DB Alex Brown
were parties to the litigation and the plaintiff did not dispute that DB Alex
Brown was the agent for Deutsche Bank. Also, in Alfano v. BDO Seidman,
L.L.P., 925 A.2d 22, 27-28 (N.J. Super. Ct. App. Div. 2007), the New Jersey
Court of Appeals compelled arbitration based on the Customer’s Agreement
because DBSI actually conducted the trades at issue, and the complaint
discussed the acts of the broker. Finally, in Reddam v. KPMG, L.L.P., No.
SACV04-1227GLT, 2004 WL 3761875, at *4-6 (C.D. Cal. Dec. 14, 2004), the
district court permitted the non-signatories to compel arbitration through
DBSI’s Customer’s Agreement. Although DBSI was not a named defendant, the
complaint alleged that DBSI and the defendants were all agents of each other
and engaged in interdependent misconduct. Id.
In sum, although the instant lawsuit may go against the prevailing trend,
it is with good reason. Unlike the above-referenced cases, there are no specific
allegations by any party in this case that DBSI had any role in the BLIPS
strategy other than to be the home for the Investment Account. Again, while the
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No. 06-30584
facts may ultimately show that DBSI had a greater role than currently
described, Deutsche Bank did not meet its burden of demonstrating DBSI’s
involvement in the alleged misconduct. Consequently, this case is different than
those relied upon by Deutsche Bank, and the district court did not abuse its
discretion in determining that Deutsche Bank could not compel arbitration.
V. CONCLUSION
For the foregoing reasons, we AFFIRM the decision of the district court
and return this case to the district court for further proceedings consistent with
this opinion.
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