988 N.E.2d 463
Mass. App. Ct.2013Background
- KPMG appeals a Superior Court denial of its motion to compel arbitration under G. L. c. 251, § 18(a)(1).
- The Rye Funds are Delaware limited partnerships managed by Tremont Partners/Tremont Capital; plaintiffs are limited partners in Rye Funds.
- Rye Funds invested in Bernard Madoff’s Ponzi scheme; after 2008 fraud discovery, Rye Funds were valueless and investments unrecoverable.
- Plaintiffs filed suit in 2010 against Tremont Partners, Tremont Capital, KPMG, and others.
- Plaintiffs’ remaining KPMG claims are tort claims (fraud in the inducement, negligent misrepresentation, 93A violations, aiding and abetting fraud, professional malpractice) arising from KPMG’s audit/tax services to Rye Funds.
- KPMG argues the claims are derivative and bound by its engagement letters with Tremont Partners and Tremont Capital, which contain broad arbitration provisions; the trial judge held most claims were direct, not derivative, allowing them to proceed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs’ claims are direct or derivative under Tooley v. DLJ | Plaintiffs induce direct claims; harm to investors individual. | Claims are derivative, belonging to the Rye Funds; arbitration applies. | Some inducement-based claims are direct; not all claims are derivative. |
| Whether direct claims are subject to arbitration under engagement letters | Engagement letters bind only parties; plaintiffs did not sign them; claims are extra-contractual. | Arbitration provisions cover disputes arising out of the engagement letters. | Direct claims are not subject to arbitration; nonsignatories not bound. |
| Whether nonsignatories can be compelled to arbitrate under estoppel theories | No clear intent to be bound; no selective enforcement. | Nonsignatory estoppel can bind if intent shown. | No clear intent shown; not bound to arbitrate. |
Key Cases Cited
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (standard for direct vs. derivative under Delaware law)
- Stephenson v. Citco Group Ltd., 700 F. Supp. 2d 599 (S.D.N.Y. 2010) (recognizes direct vs. derivative survive for inducement claims)
- Poptech, L.P. v. Stewardship Inv. Advisors, LLC, 849 F. Supp. 2d 249 (D. Conn. 2012) (inducement constitutes a separate and individual injury supporting direct claims)
- KPMG LLP v. Cocchi, 132 S. Ct. 23 (S. Ct. 2011) (FAA requires arb of pendent arbitrable claims when mixed arbitrable/nonarbitrable claims exist)
- Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372 (S.D.N.Y. 2010) (investors may have direct claims against auditors under Delaware law)
- Grimes v. Donald, 673 A.2d 1207 (Del. 1996) (Delaware law on direct vs. derivative claims)