Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_05-cv-02562/USCOURTS-azd-2_05-cv-02562-1/pdf.json

Nature of Suit Code: 423
Nature of Suit: Bankruptcy Withdrawal 28 USC 157
Cause of Action: 28:0157 Motion for Withdrawal of Reference

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

MCA Financial Group, LTD, as Trustee

for the Fourthstage Technologies, Inc.

Liquidating Trust, 

Plaintiff, 

vs.

Gardere Wynne Sewell, L.L.P.; Indrajit

Bobby Majumder and Jane Doe

Majumder, 

Defendants. 

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No. CIV 05-2562-PHX-MHM

ORDER

Currently before the Court is Defendants' Gardere Wynne Sewell, LLP, Indrajit Bobby

Majumder and Jane Doe Majumder ("Defendants") Motion to Compel Arbitration and to

Dismiss or Stay Proceedings (Dkt.#16); Defendants' Motion to Adopt Bankruptcy Court's

Proposed Conclusion of Law Re Dismissal of Assigned Claims to Kevin Craig (Dkt.#17);

and Plaintiff MCA Financial Group, Ltd., as Trustee for the Fourthstage Technologies, Inc.

Liquidating Trust's ("Plaintiff" or "MCA") Motion to Remand to Bankruptcy Court All

Proceedings Prior to Empanelling a Jury. (Dkt.#20). After reviewing the papers, the Court

issues the following Order. 

I. Background 

MCA is the bankruptcy trustee of the bankruptcy estate of Fourthstage Technologies, Inc.

("debtor" or "Fourthstage"), in Case No.01-17604, which is currently pending in the United

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States Bankruptcy Court for the District of Arizona. On November 19, 2004 MCA asserted

an adversary action in that case, Adv. No. 03-1127 against Defendants Gardere Wynne

Sewell LLP ("Gardere") and Defendant Indrajit Bobby Majumder ("Mr. Majumder")

asserting common law tort claims arising out of the alleged representation Defendants

provided to the debtor. On August 23, 2005, Defendants moved to withdraw the reference

of the adversary proceeding from the Bankruptcy court to this Court. (Dkt.#1). Plaintiff

opposed the Defendants' request. (Dkt.#4). On March 25, 2006, the Court granted

Defendants' request to withdraw the reference of the adversary proceeding to this Court.

(Dkt.#7). The Court determined that the tort claims of professional negligence, breach of

fiduciary duty and aiding and abetting tortious conduct to be non-core claims. The non-core

nature of the claims and the fact that Defendants would not consent to any jury trial on these

claims before the Bankruptcy Court supported the Court's decision to withdraw the reference

of the adversary proceeding to this Court. In re Larry's Apartment, 210 B.R. 469, 472 (D.

Ariz. 1997) ("because bankruptcy courts cannot conduct jury trials on non-core matters,

withdrawal is mandated if a litigant is entitled to jury trial on such matters.") (citing In re

Cinematronics, Inc., 916 F.2d 1444, 1451 (9th Cir. 1990)). On May 15, 2006, Defendants

filed their instant motions to: (1) compel arbitration of the dispute involving the non-core

claims and to stay or dismiss the instant proceedings and (2) to adopt the Bankruptcy Court's

finding dismissing the assigned claims of Kevin Craig. (Dkt.#'s 16,17). On June 1, 2006,

Plaintiff moved to remand all proceedings, prior to the empanelling of a jury, back to the

Bankruptcy Court. (Dkt.#20). These motions are fully briefed and ripe for the Court's

consideration. 

II. Plaintiff's Motion to Remand to Bankruptcy Court.

In support of its position to remand this matter to the Bankruptcy Court for all

proceedings, prior to empanelling a jury, should it be necessary, Plaintiff notes that the Ninth

Circuit has articulated that district courts are permitted to consider the effect that withdrawal

will have on the litigation. See Security Farms v. Int'l Bd. of Teamsters, Chauffers,

Warehouseman & Helpers, 124 F.3d 999, 1008 (1997) (noting that in instances of withdrawal

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pursuant to 28 U.S.C. § 157(d), " a district court should consider the efficient use of judicial

resources, delay and costs to the parties, uniformity of bankruptcy administration, delay and

costs to the parties, uniformity of the bankruptcy administration, the prevention of forum

shopping, and other related factors.") (citation omitted). Plaintiff asserts that the removal

from the Bankruptcy Court of the non-core claims amounts to nothing more than forum

shopping by the Defendants and should not be supported. In addition, Plaintiff asserts that

remand to the Bankruptcy court is further supported because of the Bankruptcy court's

already-extensive "procedural and factual background with the events giving rise to

Plaintiff's causes of action detailing the acts and omissions of the Defendants." (Plaintiff's

Motion, Dkt.#20, p.2). Notably, Plaintiff notes that the Bankruptcy Court has already been

briefed on Defendants' instant motion to compel arbitration and to stay of dismiss

proceedings and even heard oral argument on the motion on November 16, 2005. (Dkt.#11,

Bankruptcy Court docket, Dkt.#32). Plaintiff cites the Court, consistent with its request for

remand, to several cases in which district courts have reserved authority over any jury trial,

but matters up to the empanelling of a jury were left to the bankruptcy courts. For instance,

Plaintiff notes that in Barlow & Peek, Inc., v. Manke Truck Lines, Inc., 163 B.R. 177 (D.

Nev. 1993) the district court denied debtor's motion to withdraw the reference of non-core

action. The district court noted that even though the bankruptcy court could not go as far

as conducting a jury trial over the non-core action, the bankruptcy court could entertain

significant motions and submit proposed findings of fact and conclusions of law to the

district judge. Id. at 179. Moreover, the district court found withdrawal to be unwarranted,

at that time, due to the intertwining of issues between the non-core claims and the bankruptcy

action. Id. 

Defendants firmly dispute any remand of the non-core claims to the Bankruptcy court.

Defendants take issue with Plaintiff's assertion of forum-shopping based upon Defendants’

action withdrawing the reference in the first place and now seeking arbitration. Specifically,

Defendants contend that the fact that they are seeking contractual arbitration before the

District Court is in no way inconsistent with their right to a jury trial over the non-core claims

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and that they have consistently sought arbitration pursuant to the terms of the representation

agreement between debtor and Defendants. Defendants argue that the relevant factor of the

"efficient use of judicial resources" supports their request of withdrawal as any legal ruling

on this issue by the bankruptcy court would be subject to de novo review by this Court. See

28 U.S.C. § 157(c)(1) (stating that bankruptcy judge may preside over a non-core proceeding

and submit proposed findings of fact and conclusions of law to the district court for de novo

review). Moreover, Defendants argue that contrary to Plaintiff's position, the Bankruptcy

Court does not have any type of special knowledge that makes the Bankruptcy court more

suitable to address the Defendants' motion to compel arbitration. Defendants note that the

Bankruptcy court stated that it would "allow evidence on the question of whether or not there

was a knowing waiver by the corporation;" (Bankruptcy Dkt.#33, p.28, ll. 21-23), however,

according to Defendants, simply setting the matter for additional evidence on this issue does

not somehow suggest that the Bankruptcy court is better suited to address the issue as

compared to this Court. 

In reviewing the arguments set forth by the Parties, the Court finds that there is no

persuasive reason to remand any portion of the non-core proceedings to the Bankruptcy

Court. The Court previously determined that withdrawing the reference of the non-core

proceedings was appropriate and sufficiently set forth its reasons in its order. (Dkt.#7).

There is nothing before the Court now that suggests that any type of remand is proper. For

instance, were the Court to remand the issue of whether the non-core claims are subject to

contractual arbitration, as noted by Defendants, the Court would again be required to address

the issue upon the Bankruptcy court's proposed findings of fact and conclusions of law,

subject to a de novo review. Such procedure to address this issue is not consistent with the

efficient use of judicial resources. Moreover, there is nothing before the Court to suggest

that it is not in a proper posture to adequately address the pending issues such as Defendants'

motion to set this matter for arbitration pursuant to the contractual agreement between the

debtor and Defendants. It is true that the Bankruptcy received briefing and heard argument

on this issue; however, as demonstrated by the bankruptcy record, the bankruptcy court

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deferred any ruling and ordered evidence to be received as to whether the debtor made a

"knowing waiver." The Bankruptcy court's reasoning is adequately addressed in the

transcript of the hearing and this Court can properly and efficiently address this issue without

any type of remand, which may further delay these proceedings. As such, consistent with

the Court's March 25, 2006 order (Dkt.#7), the Court will not remand in whole, or in part,

the instant litigation involving Plaintiff's non-core claims against Defendants. 

III. Defendants' Motion to Compel Arbitration and Dismiss or Stay Proceedings

Defendants assert that Plaintiff's non-core claims of professional negligence, breach of

fiduciary duty and aiding and abetting tortious conduct which allegedly arise out of the legal

representation afforded by Defendants to the debtor are subject to mandatory contractual

arbitration pursuant to the August 21, 2001, engagement letter signed by Fourthstage's CEO

Kevin Craig and Defendant Mr. Majumder, a partner with Gardere. (Defendants' Motion,

Dkt.#16, Exhibit A). The engagement letter possesses a specific provision addressing

contractual arbitration by stating in pertinent part:

Mediation/Arbitration

In the event of any dispute or controversy regarding or arising out of our representation

of you, it is agreed that the same shall be subject to mediation before a mutuallyagreeable mediator. If the mediation is unsuccessful, or if we are unable to agree upon

a mediator within thirty days after the dispute arises, then the dispute shall be subject

to binding arbitration at Dallas, Texas. The arbitration shall be administered by he

American Arbitration Association in accordance with its then current rules and

procedures. 

(Id. page 5). 

In addition, just above the signature line of Mr. Craig, is a provision in all capital letters

and bold that states "THIS LETTER CONTAINS AN AGREEMENT TO RESOLVE

DISPUTES BY ARBITRATION." (Id. p.6, emphasis original). Based upon this language,

Defendants contend that this Court lacks jurisdiction at this time to entertain the merits of

Plaintiff's state law claims as this matter must first proceed to arbitration as required by the

Federal Arbitration Act ("FAA"), 9 U.S.C. § 2. Defendants note that the Parties did attempt

to mediate these claims, but were unsuccessful, thus, pursuant to the terms of the engagement

letter contend that arbitration is the next required step. 

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Texas law is relevant as the arbitration provision sets forth that any arbitration is to

take place in Dallas, Texas. 

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Plaintiff asserts several arguments in support of its position contesting any notion of

mandatory contractual arbitration. For instance, Plaintiff contends that based upon the

limited discovery presented it is evident that, at the very least, it is unclear whether Mr. Craig

made a "knowing waiver" of his right to proceed to litigation in the event of a dispute.

Plaintiff also asserts that it would be contrary to Arizona law and public policy to arbitrate

the issue of legal malpractice in this case. In addition, Plaintiff contends that the arbitration

clause has no application to the non-core tort claims because some of the conduct and

allegations supporting those claims occurred prior to the engagement letter generating the

arbitration provision.

After reviewing the papers and the record on this issue, as a general matter, the Court finds

that the non-core claims are subject to the arbitration provision of the engagement letter

signed by Defendant Majumder and Mr. Craig on behalf of the debtor corporation,

Fourthstage Technologies, Inc. As noted by Defendants, both Arizona and Texas1

 do not bar

the arbitration of legal malpractice disputes. For instance, with respect to Arizona, the

Arizona Supreme Court has clarified that while ethically, agreements prospectively limiting

a lawyer's liability malpractice are prohibited, unless the client is represented by independent

counsel, there is no prohibition against "a lawyer ... entering into an agreement with the client

to arbitrate legal malpractice claims, provided such agreements are enforceable and the client

is fully informed of the scope and effect of the agreement." ER 1.8(h), cmt.14,

Ariz.Sup.Ct.Rules 42; see also Arizona Ethics Op., 94-05 (stating that fee agreement between

lawyer and his or her client may contain a clause requiring that any claims of attorney

malpractice be arbitrated). In addition, Texas also does not prohibit the inclusion of

arbitration provisions of attorney malpractice disputes between lawyers and clients. See In

re Hartigan, 107 S.W.3d 684, 689 (Tex.App. 2003) (finding that consistent with the

American Bar Association's position, mandatory arbitration provisions of attorney

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malpractice claims are not prohibited as such agreements do not limit the lawyer's liability,

but instead prescribe procedure for resolving these claims). While Plaintiff notes that some

states prohibit such arbitration provisions in agreements between attorneys and clients,

Plaintiff ignores that Arizona does not follow suit. As such, Plaintiff's citation to such outof-state authority for the proposition that arbitration provisions in engagement agreements

are unenforceable, such as the decision in Thornton v. Haggins, 2003 WL 23010100 (Ohio

App. 2003), is not persuasive in the instant case. 

With respect to the relevant considerations regarding arbitration provisions addressing

legal malpractice claims, the Court finds that such considerations have been met in this case.

For instance, as noted above, ER 1.8(h) permits lawyers to enter into an agreement with the

client to arbitrate legal malpractice claims, "provided such agreements are enforceable and

the client is fully informed of the scope and effect of the agreement." Plaintiff offers no

persuasive argument suggesting that the arbitration provision is not enforceable or contrary

to public policy in this case. Moreover, the Court also finds that Mr. Craig, on behalf of

Fourthstage, was "fully informed" as to the scope of the agreement. The plain language of

the engagement letter is clear and broad in scope in applying arbitration "[i]n the event of any

dispute or controversy regarding or arising out of our representation of you..." (Defendant's

Motion, Dkt.#16, Exhibit A, p.5). The engagement letter further notified Mr. Craig of the

arbitration provision with the conspicuous language directly above his signature line. (Id.

p.6). The limited discovery reveals that Mr. Craig, as the CEO of Fourthstage, was well

versed in such agreements, including agreements that possess arbitration provisions. (Id,

Exhibits B and C). Moreover, and perhaps more importantly, the limited discovery on this

issue reveals that the agreement at issue, signed by Mr. Craig, was in fact given to Mr. Craig

by the corporation's in-house counsel, Mr. Roger Friedman. (Id. Exhibit D, p.80, ll.7-9).

According to Mr. Craig's deposition testimony, Mr. Friedman ordinarily reviewed documents

that he gave to Mr. Craig to sign and raised questions, as necessary. (Id. at pp.123-124, ll.17-

3). As such, it appears that based upon the limited discovery, Mr. Craig had the benefit of

having the corporation’s own legal counsel review the terms and conditions of the

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engagement letter and signed the agreement after such review. Under such circumstances,

the Court finds that Mr. Craig was fully informed as to the scope and effect of the

engagement agreement. 

In addition, the Court also finds that the language of the engagement letter is sufficiently

clear and broad to encompass arbitration of claims alleging legal malpractice. As noted

above, the relevant language of the arbitration provision is triggered "[i]n the event of any

dispute of controversy regarding or arising out of [Defendants'] representation of

[debtor]..."(Defendants' Motion, Dkt.#16, Exhibit A). Here, Plaintiff has asserted claims

"regarding or arising out of" Defendants' representation of the debtor. Plaintiff's legal

malpractice claims clearly implicate the representation provided by Defendants. As such,

the Court finds unpersuasive Plaintiff's argument regarding the significance of the

engagement letter's absence of express mention of legal malpractice claims. 

Lastly, contrary to Plaintiff's argument, the Court finds that the scope of the arbitration

provision applies to alleged actionable conduct occurring both before and after the date the

engagement letter was signed by the debtor. Plaintiff notes that Kevin Craig has issued his

sworn affidavit stating that "[s]ome of the claims of Fourthstage Technologies and myself

against Attorney Majumder and the Gardere law firm pertain to acts and events occurring

prior to August 2001; while others pertain to acts committed after August 2001." (Adversary

Proceeding 03-1127, Dkt.#15, Exhibit 1). The engagement letter at issue was issued on

August 21, 2001. (Defendants' Motion, Dkt.#20, Exhibit A). Plaintiff cites the pre-August

2001 conduct as further support that the arbitration clause of the engagement letter is

inapplicable. In response to Plaintiff's position on this point, while disputing representation

prior to August of 2001, Defendants argue that because Plaintiff's claims are based upon the

alleged representation of Fourthstage both prior and subsequent to August of 2001 that the

arbitration clause applies to all of Plaintiff’s allegations against the Defendants. 

In addressing this issue, it is important to keep in mind that the arbitration clause was not

sent to Plaintiff until August of 2001. Thus, in order for the events occurring prior to August

of 2001 to be subject to mandatory arbitration, the arbitration clause must be applied

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retroactively to such events. Persuasive authority, cited by Defendants, on the application

of arbitration provisions' retroactivity to certain disputes is instructive to the Court's

determination of whether the arbitration provision in this case applies to both the pre and

post-August 2001 alleged conduct. For instance, in Kristian v. Comcast Corp., 446 F.3d 25,

(1st Cir. 2006), the First Circuit found the arbitration agreements between the cable television

provider and customers applied retroactively to pre-contract antitrust claims where the

contract did not limit the time frame of the agreements in stating that arbitration applied "if

we are unable to resolve informally any claim or dispute related to or arising out of this

agreement or the services provided." Id. at 31-36.(Emphasis added). In addition, in

Beneficial Nat. Bank, U.S.A. v. Payton, 214 F. Supp.2d 679 (S.D. Miss. 2001), the district

court noted a review of case law reveals that if an arbitration clause containing retroactive

time-specific language, i.e., a phrase such as "this agreement applies to all transactions

occurring before or after this agreement" then the court may apply the clause retroactively.

Id. at 689. Moreover, arbitration language stating that it applies "to all transactions between

us" or "all business with us" also suffices for retroactive effect. Id. In making these

observations, the district court found that the arbitration language sufficient to encompass

pre-arbitration provision claims by stating that the provision applies to "[a]ny claim, dispute,

or controversy (whether in contract, tort or otherwise) arising from or relating to this

Agreement or the relationships which result from this Agreement..." Id. at 689-90. 

In looking to the language of the engagement letter at issue, like the above cases, it also

does not limit the scope of application of arbitration. Rather, the engagement letter possesses

arbitration language broad in scope by stating that it applies to "any dispute or controversy

regarding or arising out of our representation of you." The provision does not limit the scope

of representation to only the representation commencing from August of 2001 forward, rather

it applies to any representation. This is significant considering that Plaintiff's allegations

against Defendants, both pre and post- August of 2001, are alleged to arise out of Defendants'

representation. For instance, Plaintiff's Complaint states that Defendants provided

representation "at all times relevant to this Complaint." (Adversary Proceeding 03-1127,

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Dkt.#1, Complaint, ¶5). As such, Plaintiff's claims are based entirely on Defendants' alleged

representation of Plaintiff. Thus, considering that the engagement agreement entered into

between Fourthstage and Defendants does not limit the scope of the application of the

arbitration agreement and Plaintiff's claims are based on the alleged representation provided

by Defendants, the arbitration provision is applicable to all of Plaintiff's legal malpractice

based claims. 

In making this determination, the Court finds that by finding the arbitration provision

controlling, the Court is not in some way limiting Plaintiff's legal rights. Rather than limiting

any liability, the arbitration provision simply prescribes a procedure for resolving the pending

claims. See AZ Ethics Opinion 94-05 p.2-3 (citing The Law of Lawyering: A Handbook on

the Model Rules of Professional Conduct, § 1.8:901, at 280 n.2.1 (2d ed. 1992)). In

addition, as a practical matter, the Supreme Court has made clear that "where [a] contract

contains an arbitration clause, there is a presumption of arbitrability..." AT&T Technologies,

Inc. v. Communications Workers of America, 475 U.S. 643, 650 (1986) (citing United

Steelworkers of America v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582-83 (1960)). The

presumption is further supported where the clause at issue is broad in scope. See Id. 

Thus, the Court finds that Plaintiff's tort claims based upon legal malpractice are governed

by the contractual arbitration agreement between the debtor and Defendants. In reaching this

conclusion, the Court must determine whether to stay the instant litigation or dismiss it

without prejudice. Based upon the Court's finding that all of Plaintiff's claims are subject to

mandatory arbitration, the Court finds that it is appropriate to dismiss Plaintiff's claims. See

Sparling v. Hoffman Const. Co., 864 F.2d 635, 638 (9th Cir. 1988) (dismissing plaintiff's

claims upon determining the claims are subject to contractual arbitration). 

Accordingly,

IT IS HEREBY ORDERED granting Defendants' Motion to Compel Arbitration and

Dismiss or Stay Proceedings. (Dkt.#16). Plaintiff's complaint is dismissed without prejudice

as Plaintiff's claims are governed by contractual arbitration as agreed by the parties. 

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IT IS FURTHER ORDERED denying Plaintiff's Motion to Remand to Bankruptcy

Court All Proceedings Prior to Empanelling a Jury. (Dkt.#20).

IT IS FURTHER ORDERED denying as moot Defendants Motion to Adopt Bankruptcy

Court's Proposed Conclusion of Law Re Dismissal of Assigned Claims to Kevin Craig

(Dkt.#17). 

IT IS FURTHER ORDERED directing the Clerk to enter Judgment accordingly.

DATED this 23rd day of March, 2007.

Case 2:05-cv-02562-MHM Document 28 Filed 03/27/07 Page 11 of 11