In BDO Seidman, LLP v. J.A. Green Development Corp., 05-09-01520-CV (Tex. App. – Dallas, Nov. 9, 2010) and Sidley Austin Brown & Wood, LLP v. J.A. Green Development Corp., 05-10-0008-CV (Tex. App. – Dallas Nov. 9, 2010), real estate development company Green sought tax advice from BDO Seidman and Sidley Austin predecessor Brown & Wood which included utilizing a distressed debt tax strategy. Green entered into a tax consulting agreement with BDO Seidman which contained an arbitration clause. Green also engaged Brown & Wood to draft a tax consequences opinion. The agreement between Green and Brown & Wood contained an arbitration provision as well. After Green implemented the tax strategies and recommendations of both BDO Seidman and Brown & Wood, the Internal Revenue Service (IRS) informed the company that the distressed debt strategy employed was an illegal tax shelter and its deductions would not be allowed. The IRS also assessed substantial penalties, fines and interest against Green. Green filed suit against BDO Seidman and Brown & Wood’s successor, Sidley Austin, alleging various claims, including fraud and malpractice. After separate hearings, both BDO Seidman’s and Sidley Austin’s motions to compel arbitration were denied.
In BDO Seidman, the Dallas Court of Appeals considered three issues: whether the Federal Arbitration Act or New York law controlled, whether Green’s claims fell under the arbitration agreement, and whether the arbitration agreement was unenforceable due to unconscionability. The Dallas Court relied on several New York cases to reach a conclusion that the agreement did not contain the necessary “enforcement language” to trigger enforcement under New York law. The court then held that the arbitration agreement was broad and clearly encompassed the claims brought by Green. Finally, the court held that Green’s claims were properly left to an arbitrator because they did not allege fraud in the creation of the arbitration agreement but rather were allegations of bad acts in the formation of the parties’ consulting agreement.
In Sidley Austin, the court considered three unconscionability arguments set forth by Green. Green’s first two arguments were based on theories of fraud and duress with regard to the engagement agreement. The court noted that the misrepresentations alleged by Green went to the entirety of the agreement and arbitration provisions are generally severable and enforceable aside from other provisions of a contract. Green also argued that Sidley Austin “did not explain the advantages and disadvantages of arbitration to Green before entering into the agreement.” Green failed to make other arguments against the validity of the arbitration agreement, however, and the court found that the terms were neither so unusual nor so one-sided as to be facially unconscionable. The court then held that it was an abuse of the trial court’s discretion to deny Sidely Austin’s motion to compel arbitration.
In both cases, the Dallas court reversed and remanded the lower court’s order with instructions for the trial court to compel arbitration.
Earlier this year, Disputing blogged here about a case in which the Houston Court of Appeals [14th] enforced an attorney-client arbitration agreement.