Coe v. BDO Seidman, LLP
40 N.E.3d 393
Ill. App. Ct.2015Background
- Douglas and Jacqueline Coe formed LLCs and hired BDO under a 2001 consulting agreement (and a 2002 tax services agreement) to implement a distressed-debt tax strategy; BDO issued an April 15, 2002 opinion letter about federal tax consequences.
- The IRS later audited and disallowed the strategy; the Coes settled for substantial back taxes, penalties, and interest.
- Plaintiffs sued BDO and an individual defendant alleging BDO designed, marketed, sold, and implemented strategies it knew the IRS would disallow and that it fraudulently induced them to enter the agreements.
- Plaintiffs sought a judicial declaration that the arbitration clauses were void for fraud and asked for damages (IRS settlement amount plus BDO fees).
- BDO moved to stay the litigation in favor of arbitration and for a protective order limiting discovery; the trial court granted the protective order and stayed the case pending arbitration. Plaintiffs appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are fraud allegations attacking the contract as a whole sufficient to avoid arbitration? | Fraud permeated the entire agreement (including arbitration); arbitration clause unenforceable. | Prima Paint line requires courts to decide only fraud directed at the arbitration clause itself; general-contract fraud goes to arbitrator. | Court: general allegations of fraudulent inducement of the whole contract belong to arbitrator; stay proper. |
| Did plaintiffs sufficiently plead fraud in inducement of the arbitration clause itself to allow judicial discovery? | Coe's affidavit: BDO represented arbitration as a bona fide dispute mechanism and he relied on that; discovery needed. | Plaintiffs failed to plead specific facts showing they never intended to agree to arbitration or were coerced. | Court: allegations insufficiently specific; no judicial inquiry into arbitration clause inducement; arbitration stands. |
| Do plaintiffs’ claims (based on BDO’s opinion letter / tax/legal advice) fall outside the arbitration clause? | Claims arise from BDO’s investment/legal advice and are expressly excluded from arbitration. | The consulting agreement affirmatively states BDO would issue an opinion regarding federal tax consequences and accepts responsibility for that opinion; such claims are arbitrable. | Court: because the agreement specifically includes issuance of a federal tax-opinion letter for which BDO accepts responsibility, those claims fall within the arbitration clause. |
| Is the arbitration clause unconscionable (procedurally or substantively)? | Clause procedurally unconscionable due to bargaining disparity and hidden misconduct; substantively unconscionable due to limited discovery and damage caps. | Coe was sophisticated; clause conspicuous; limitations are not grossly unreasonable; New York law permits such provisions; discovery limits are not unconscionable. | Court: no procedural unconscionability (no coercion, conspicuous term, sophisticated party); no substantive unconscionability; clause enforceable. |
Key Cases Cited
- H.W. Moseley v. Electronic & Missile Facilities, Inc., 374 U.S. 167 (Sup. Ct.) (court may decide fraud directed to making of arbitration agreement)
- Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (Sup. Ct.) (fraud in inducement of the contract generally is for arbitrator; only fraud specific to arbitration clause is for court)
- Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (Sup. Ct.) (challenge to validity of contract as whole goes to arbitrator)
- Khan v. BDO Seidman, LLP, 404 Ill. App. 3d 892 (Ill. App. Ct.) (interpreting scope of similar BDO consulting arbitration clause; legal-opinion claims outside arbitration where law firm review was contemplated)
- Brennan v. Bally Total Fitness, 198 F. Supp. 2d 377 (S.D.N.Y.) (discussing unconscionability of arbitration agreements)
- Gillman v. Chase Manhattan Bank, 73 N.Y.2d 1 (N.Y.) (test for substantive unconscionability)
- Sablosky v. Edward S. Gordon Co., 73 N.Y.2d 133 (N.Y.) (consideration for arbitration provision need not grant identical bilateral rights)
- Stewart v. Paul, Hastings, Janofsky & Walker, LLP, 201 F. Supp. 2d 291 (S.D.N.Y.) (rejecting argument that limited arbitration discovery renders clause unconscionable)