In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 01-3862

ERNST & YOUNG LLP and CHARLES J. ROACH,

Defendants-Appellants,

v.

BAKER O’NEAL HOLDINGS, INC., and AMERICAN

PUBLIC AUTOMOTIVE GROUP, INC.,

Plaintiffs-Appellees.

____________

Appeal from the United States District Court

for the Southern District of Indiana, Indianapolis Division.

No. 00 C 1538—David F. Hamilton, Judge.

____________

ARGUED FEBRUARY 26, 2002—DECIDED SEPTEMBER 23, 2002

____________

Before FAIRCHILD, COFFEY, and KANNE, Circuit Judges.

KANNE, Circuit Judge. Plaintiffs Baker O’Neal Holdings,

Inc. and American Public Automotive Group, Inc. filed for

relief under Chapter 11 of the Bankruptcy Code. Shortly

thereafter, the plaintiffs initiated an adversary proceeding against Ernst & Young LLP and Charles J. Roach

(“Ernst & Young”), asserting various claims. Ernst & Young

then objected to provisions of the plaintiffs’ Chapter 11 plan

of reorganization, arguing that provisions within the proposed plan would infringe upon Ernst & Young’s ability

to bring an action or assert a defense against third parties in the adversary proceeding. The plaintiffs then mod-
2 No. 01-3862

ified their proposed plan to Ernst & Young’s apparent

satisfaction, and the bankruptcy court confirmed the

plan as modified. As described in both the plan and the

plan’s confirmation order, the bankruptcy court expressly retained jurisdiction for the purpose of “[a]djudication

of any pending adversary proceeding, or other controversy

or dispute.” After the plan’s confirmation, Ernst & Young

filed a motion to dismiss the adversary proceeding or to

stay the proceeding pending arbitration based on prior

contractual language between the parties. The plaintiffs

objected, asserting that in light of their confirmed plan,

the bankruptcy court retained jurisdiction to adjudicate

the merits of the adversary proceeding. The bankruptcy

court agreed, denying Ernst & Young’s motion, and the

district court affirmed. For the reasons stated herein, we

affirm.

I. History

American Public Automotive Group is a wholly owned

subsidiary of Baker O’Neal Holdings. Together, they employed the services of Ernst & Young from 1994 to 1998,

working closely with Charles J. Roach, a partner at Ernst

& Young. In October 1996 and again in August 1997, Ernst

& Young entered into “Engagement Letters” with the

plaintiffs. The terms of the Engagement Letters included

a provision that required the parties to resolve any “controversy or claim arising out of or relating to the services

covered by this letter or hereafter provided by [Ernst &

Young]” through arbitration.

The plaintiffs filed for civil bankruptcy relief on October

30, 1998. On December 7, 1999, they initiated adversary

proceedings against Ernst & Young and Charles J. Roach,

seeking to avoid and recover fraudulent transfers of property, and to recover damages. In addition to professional

misconduct, the plaintiffs alleged that Charles J. Roach
No. 01-3862 3

assisted James O’Neal, Baker O’Neal Holdings’s former

president and chief executive officer, in obtaining a $3.7

million loan from Baker O’Neal Holdings.

On December 13, 1999, the plaintiffs filed a proposed

plan of reorganization and Ernst & Young filed an objection to that plan on January 19, 2000. The objection stated

that a settlement agreement and release in the plan

would limit Ernst & Young’s ability to bring an action or

assert a defense against Patrick J. Baker, the sole shareholder of Baker O’Neal Holdings and the Chairman of the

Board of Directors, or his wife Penny. On February 11,

2000, the plaintiffs modified the settlement agreement

and release in the plan, excluding Ernst & Young from

any limitation in pursuing an action or asserting a defense against the Bakers. The modification apparently

satisfied Ernst & Young, as they withdrew their objection to the plan. The plan was then confirmed on February 23, 2000 by the bankruptcy court.

Under the terms of both the plan and the confirmation order, the bankruptcy court retained jurisdiction for

the purpose of “[a]djudication of any pending adversary

proceeding, or other controversy or dispute.” On March 10,

2000, Ernst & Young filed a motion to dismiss or stay

the adversary proceeding pending arbitration, citing the

terms of the Engagement Letters. The plaintiffs objected. The bankruptcy court denied Ernst & Young’s

motion, and the district court affirmed, finding that arbitration was precluded by the terms of the confirmed

plan and that Ernst & Young, in any event, had waived

its right to arbitrate.

On appeal, Ernst & Young argues, inter alia, that the

district court erred in ruling that confirmation of the

plan altered the parties’ prior arbitration agreement. Citing language in the plan and the confirmation order,

Ernst & Young claims that the documents merely con-
4 No. 01-3862

firm the bankruptcy court’s ability to “retain control over

the case” and do not supersede the arbitration provisions

of the Engagement Letters. Ernst & Young also disputes

the lower court’s conclusion that its actions in the bankruptcy proceeding were sufficient to waive its right to

arbitrate. Ernst & Young contends that its actions were

“defensive” in nature and therefore should not constitute

waiver of the right to proceed in another forum.

II. Analysis

A. Terms of the Plan

Denial of a motion to stay proceedings pending arbitration is reviewed de novo, see Adamovic v. METME Corp.,

961 F.2d 652, 653 (7th Cir. 1992). In their Engagement

Letters, the parties provided for “arbitration of any ‘controversy or claim arising out of or relating to the services

covered by this letter or hereafter provided by [Ernst &

Young].’ ” However, the plaintiffs’ subsequent confirmed

plan of reorganization provides that the bankruptcy court

retains jurisdiction “to adjudicate” any “pending adversary proceeding, other controversy or dispute.”

A confirmed plan of reorganization is in effect a contract between the parties and the terms of the plan describe their rights and obligations. See In re Chicago,

Milwaukee, St. Paul and Pacific R.R., Co., 891 F.2d 159,

161 (7th Cir. 1989). Ernst & Young argues that the focus

of our analysis should be on the words “retains jurisdiction” and that the bankruptcy court can satisfy its obligation to retain jurisdiction over the pending adversary

proceeding by simply hearing arguments on the motion

to compel arbitration or to stay the proceedings. We

disagree. The plaintiffs’ plan expressly provides for the

bankruptcy court to retain jurisdiction to adjudicate pending adversary proceedings, controversies, and disputes.

While, as the district court explained, the terms of the
No. 01-3862 5

plan could have called for the bankruptcy court to retain

jurisdiction over a dispute while its merits are arbitrated,

the terms of this plan specifically called for the bankruptcy

court to retain jurisdiction to adjudicate such disputes.

See BARRON’S LAW DICTIONARY 11 (Ed. 1996) (defining “adjudication” as “the determination of a controversy and

a pronouncement of a judgment based on evidence presented, implies a final judgment . . . as opposed to a proceeding in which the merits of the cause of action were

not reached”). Consequently, we believe that the bankruptcy court’s retention of jurisdiction to adjudicate pending adversary proceedings, controversies and disputes

should not be read to limit the bankruptcy court’s jurisdiction to a ruling on Ernst & Young’s motion to compel

arbitration. See Merit Ins. Co. v. Leatherby Ins. Co., 581

F.2d 137, 143 (7th Cir. 1978) (“A motion to stay proceedings and to compel arbitration focuses judicial scrutiny

upon the arbitrability of the controversy, not upon the

controversy itself. . . . It has no effect on the merits themselves.”).

Had Ernst & Young wished to protect its right to arbitrate, it certainly could have done so in the same manner

in which it sought to protect its rights against the Bakers.

See, e.g., In re GWI, Inc., 269 B.R. 114, 118 (Bankr. D. Del.

2001) (finding that because the parties expressly adopted

arbitration provisions of pre-petition agreements into a

plan of reorganization, the prior arbitration provisions

were enforceable and not superceded by generalized language in the confirmed plan conferring jurisdiction on

the bankruptcy court). We believe that in this instance,

Ernst & Young’s right to arbitrate is superseded by the

terms of the confirmed plan.

B. Waiver of Rights of Arbitration

Regardless of how we interpret the term “adjudication” in

the plan, Ernst & Young waived any right to arbitrate. The
6 No. 01-3862

factual determinations that a district court predicates a

finding of waiver upon are reviewed for clear error, while

the legal question of whether the conduct amounts to

waiver is reviewed de novo. See Iowa Grain Co. v. Brown,

171 F.3d 504, 509 (7th Cir. 1999 ). Reviewing for “clear

error” means that the Court of Appeals will reverse only

if it reaches a firm and definite conviction that the district court made a mistake. See St. Mary’s Medical Center of

Evansville, Inc. v. Disco Aluminum Prods. Co., 969 F.2d

585, 589 (7th Cir. 1992).

A contractual right to arbitrate may be waived expressly

or implicitly, and a party that chooses a judicial forum

for the resolution of a dispute is presumed to have waived

its right to arbitrate. See Cabinetree, Inc. v. Kraftmaid

Cabinetry, Inc., 50 F.3d 388, 390 (7th Cir. 1995). Courts

must examine the totality of the circumstances and “determine whether based on all the circumstances, the [party

against whom the waiver is to be enforced] has acted

inconsistently with the right to arbitrate.” Grumhaus v.

Comerica Securities, Inc., 223 F.3d 648, 650-51 (7th Cir.

2000) (quotation omitted); see also Iowa Grain Co., 171 F.3d

at 510. Although several factors may be considered in

determining waiver, diligence or the lack thereof should

weigh heavily in the decision—“did that party do all it

could reasonably have been expected to do to make the

earliest feasible determination of whether to proceed judicially or by arbitration?” Cabinetree, 50 F.3d at 391 (emphasis added).

In Cabinetree, the plaintiffs filed a breach of contract

suit, which was removed to federal court by the defendant

due to diversity of citizenship. See id. at 389. Six months

later, the defendant moved to stay the action pending

arbitration. See id. On appeal, we noted that the defendant

had participated in pretrial activities without challenging the forum or moving for arbitration. See id. at 390-91.

Under these circumstances, we held that the defendant’s
No. 01-3862 7

actions were sufficient to demonstrate the party’s selection

of a forum and established a presumption of waiver of the

right to arbitrate. See id.

Similarly, the plaintiffs filed a complaint against Ernst

& Young on December 7, 1999. In the months following,

Ernst & Young’s actions indicated an intention to proceed with the adversary proceeding in litigation, not in

arbitration. As the district court highlighted below, Ernst

& Young did not pursue arbitration until after its objection to the plaintiffs’ plan was resolved. At this point, the

bankruptcy court had already evaluated all claims with

respect to the confirmation of the reorganization plan.

Further, Ernst & Young’s objection to the plaintiffs’ plan

emphasized its concern about its rights as against the

Bakers in the adversary proceeding. Because the Bakers

were not bound by the arbitration provisions in the Engagement Letters, Ernst & Young’s concern with respect

to the Bakers implied that Ernst & Young was intending to proceed judicially. Moreover, as we have already

discussed, the plan included terms that called for the

bankruptcy court “to adjudicate” any pending adversary

proceedings, and Ernst & Young did not raise any concerns about either the adjudication provision in the plan

or the plan’s effect, if any, on their right to arbitrate.

Ernst & Young argues that we should follow the Delaware Bankruptcy Court in In re Charter Behavioral Health

Sys., LLC, 277 B.R. 54 (Bankr. D. Del. 2002). In this case,

the debtor filed for Chapter 11 relief in February 2000 and

commenced an adversary proceeding against a creditor

in June 2001. See id. at 56. The creditor-defendant filed

its Answer in August but did not mention its contractual right to compel arbitration. See id. The creditordefendant then participated in limited scheduling and

discovery actions until December 2001, when it filed its

motion to dismiss the adversary proceeding in favor of

arbitration. See id. The bankruptcy court dismissed the
8 No. 01-3862

adversary proceeding in favor of arbitration, finding that

the creditor-defendant’s actions were not sufficient to

waive its right to arbitrate. See id. at 58-59.

We find the case at bar to be distinguishable from

Charter. Specifically, in Charter the creditor-defendant

seeking to proceed in arbitration did not actively participate in the process of confirming the debtor’s plan of reorganization. In contrast to the passive creditor-defendant

in Charter, Ernst & Young had actively participated in the

plan confirmation process prior to seeking arbitration. We

believe that Ernst & Young’s particular acts of participation were sufficient to waive its right to arbitrate.

Neither the bankruptcy court nor the district court

found any reason why Ernst & Young might not have

asserted its desire to arbitrate at an earlier date. We agree,

and because we find no error in the lower court’s assessment of the situation, we are similarly unable to excuse

Ernst & Young’s delay. Ernst & Young’s failure to assert

its desire to preserve its rights to arbitrate claims—while

having already filed an objection, which revealed an intent to pursue litigation—cannot amount to “all it could

reasonably have been expected to do to make the earliest feasible determination of whether to proceed judicially or by arbitration.” Cabinetree, 50 F.3d at 391. Because

Ernst & Young’s actions were inconsistent with its claimed

right to arbitrate and because Ernst & Young’s actions

were not exercised in a diligent manner, we find any right

to compel such a proceeding waived.

III. Conclusion

For the foregoing reasons, we AFFIRM the district court’s

denial of Ernst & Young’s motion to compel arbitration.
No. 01-3862 9

FAIRCHILD, Circuit Judge, dissenting. My colleagues

interpret the Plan so that it “superceded” Ernst & Young’s

right to arbitrate. In substance, they hold that Article 8.1

of the Plan limits the jurisdiction of the bankruptcy court

so as to exclude its otherwise unquestioned jurisdiction

to recognize and implement the parties’ promise to arbitrate. Article 8.1 begins, “Notwithstanding confirmation

of the Plan or occurrence of the Effective Date, the Bankruptcy Court shall retain jurisdiction for the following

purposes: . . . .” There follows a list of seventeen types

of actions that the bankruptcy court might be expected

to perform. This long and comprehensive list suggests

that an inclusive rather than an exclusive description of

retained jurisdiction was intended.

Paragraph (o), one of the seventeen, lists “[a]djudication

of any pending adversary proceeding, or other controversy or dispute, in the Debtors’ Chapter 11 Cases, which

arose pre-confirmation and over which the Bankruptcy

Court had jurisdiction prior to confirmation of the Plan.”

My colleagues limit the meaning of “adjudication” to a

process of final determination of the adversary proceeding on its merits, and exclude a determination of a motion

to dismiss or stay the adversary proceeding so as to enforce the promise to arbitrate.

In this context, this reading of adjudication seems too

narrow. Again, the language of (o) seems inclusive (“adversary proceeding, or other controversy or dispute”), and

the grant of a motion to compel arbitration would be a

decision on the merits of the controversy raised by that

motion.

Indeed, courts have often referred to the determination

of the right to arbitrate as an “adjudication.” The Supreme Court has recognized that, when presented with a

motion under § 3 of the Federal Arbitration Act (to stay

the underlying district court proceedings while the par-
10 No. 01-3862

ties arbitrate), a court may “adjudicate” the issue whether

the parties executed an enforceable arbitration agreement.

Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S.

395, 403-04 (1967). Other federal courts have reiterated

that resolution of motions brought under §§ 3 and 4 of

the FAA is “adjudication.” See, e.g., Walton v. Rose Mobile

Homes LLC, 298 F.3d 470, 473 (5th Cir. 2002) (elaborating how a two-step inquiry governs the “adjudication of

motions to compel arbitration under the FAA”); National

Iranian Oil Co. v. Mapco Int’l, Inc., 983 F.2d 485, 491 (3d

Cir. 1992) (“The Arbitration Act authorizes a district court

to adjudicate the substantive issues of the making and

performance of an arbitration agreement.”); Reed &

Martin, Inc. v. Westinghouse Elec. Corp., 439 F.2d 1268,

1276 (2d Cir. 1971) (the right to arbitrate is an issue “to

be adjudicated by the federal courts whenever such

courts have subject matter jurisdiction”) (internal quotation marks and citation omitted); Bothell v. Hitachi Zosen

Corp., 97 F. Supp. 2d 1048, 1050-51 (W.D. Wash. 2000)

(court had “jurisdiction to adjudicate” dispute over existence of valid arbitration agreement).

My colleagues support their narrow interpretation of

“adjudication” with a dictionary definition. They offer

BARRON’S LAW DICTIONARY, which defines “adjudication”

as “impl[ying] a final judgment . . . as opposed to a proceeding in which the merits of the cause of action were not

reached.” But though a dictionary collects common usages,

it hardly exhausts the “full range of nuances that context

lends to meaning.” Unelko Corp. v. Prestone Prods. Corp.,

116 F.3d 237, 241 (7th Cir. 1997); see also TE-TA-MA

Truth Foundation–Family of URI, Inc. v. World Church of

the Creator, 297 F.3d 662, 666 (7th Cir. 2002) (“[D]ictionaries reveal a range of historical meanings rather than

how people use a particular phrase in contemporary culture.”). A single word can take multiple meanings. Calderon

v. Witvoet, 999 F.2d 1101, 1104 (7th Cir. 1993). In BLACK’S
No. 01-3862 11

LAW DICTIONARY (7th ed. 1999), for instance, “adjudication”

has three definitions, the first of which emphasizes process: “[t]he legal process of resolving a dispute; the process

of judicially deciding a case.” A DICTIONARY OF MODERN

LEGAL USAGE (2d ed. 1995) introduces three more definitions, beginning with “the process of judging.”

In my view Article 8.1(o) effected no change in the

bankruptcy court’s pre-confirmation authority to enforce

the parties’ arbitration agreements. “Confirmation does

not alter the basic jurisdictional analysis applicable to

bankruptcy courts.” 8 COLLIER ON BANKRUPTCY ¶ 1142.04[1]

(15th ed. rev. 2002). This interpretation also conforms to

the strong federal policy favoring arbitration. See Green

Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 91

(2000).

My colleagues go on to conclude that, regardless of how

the term “adjudication” in the Plan is interpreted, Ernst

& Young waived any right to arbitrate. In support, they

state that Ernst & Young’s actions indicated an intention

to proceed with the adversary proceeding in litigation

rather than arbitration; that Ernst & Young’s active participation in the confirmation process was sufficient to

waive its right to arbitrate; and that Ernst & Young

did not seek arbitration in a diligent manner. With all

respect, I conclude that the record does not support any

of these propositions and therefore does not support a

conclusion of waiver.

The question of Ernst & Young’s diligence requires a

chronology of the adversary proceeding. The complaint

was filed on December 7, 1999. Summons was issued on

December 19, requiring an answer to be filed by January

19, 2000. Ernst & Young received consecutive extensions

to respond, first by February 18 and then by March 10,

2000. On March 10—only 16 days after confirmation of the

Plan—Ernst & Young filed in the district court its motion
12 No. 01-3862

for arbitration (the appellees, furthermore, do not dispute Ernst & Young’s representation on appeal that it

had raised its right to arbitrate informally with the plaintiffs “[w]ell before filing its Arbitration Motion”). Also on

March 10, Ernst & Young filed in the bankruptcy court

a motion to dismiss, or in the alternative, a motion to

stay proceedings pending arbitration. That very same

day, Ernst & Young sought (and later received) a third

extension to answer the complaint pending the court’s

ruling on its motion to dismiss or alternatively its motion

to stay.

The majority believes that this case is controlled by

Cabinetree, Inc. v. Kraftmaid Cabinetry of Wisconsin, Inc.,

50 F.3d 388, 391 (7th Cir. 1995), in which we explained

that “diligence or lack thereof” should, among other factors, “weigh heavily in the decision whether to send the

case to arbitration.” In that case, we found waiver because the party seeking an eleventh-hour arbitration

already had removed the case to federal court, actively

engaged in discovery, and compelled the opponent to produce almost 2,000 documents. See also St. Mary’s Med. Ctr.

of Evansville, Inc. v. Disco Aluminum Prods. Co., 969 F.2d

585, 591 (7th Cir. 1992) (party waived right to arbitrate

by spending ten months filing discovery requests and

participating in depositions); Creative Solutions Group, Inc.

v. Pentzer Corp., 252 F.3d 28, 33 (1st Cir. 2001) (party did

not waive right to arbitrate by moving to dismiss complaint and engaging in limited discovery because it did

not “substantially invoke[ ]” the “litigation machinery”)

(internal quotation marks and citation omitted). No such

substantial resort to litigation occurred here. In any event,

Ernst & Young did not delay: it asserted its right to arbitrate as soon as it was legally required to do so; beyond

that, it owed no explanation for the timing of its request.

The majority also believes that this case falls within

Cabinetree’s holding that an election to proceed before
No. 01-3862 13

a nonarbitral forum to resolve a dispute presumptively

waives the right to arbitrate, even if the opposing party

would not be prejudiced by an order compelling arbitration. 50 F.3d at 390. According to my colleagues, Ernst &

Young manifested an intent to proceed in a judicial forum

when it actively participated in the Plan confirmation

process before seeking arbitration. As they explain, because Ernst & Young did not assert its desire to arbitrate

“at an earlier date,” it acted “inconsistent[ly]” with—and

therefore waived—its claimed right to arbitrate.

In Cabinetree, we held that a presumptive waiver may

arise from recourse to the judicial process, but we also

recognized that this is just a presumption and not an

invariable rule. We noted that there may be situations in

which such recourse “does not signify an intention to

proceed in a court to the exclusion of arbitration.”

Cabinetree, 50 F.3d at 390. For instance, the “shape of

the case might so alter as a result of unexpected developments during discovery or otherwise that it might become

obvious that the party should be relieved from its waiver

and arbitration allowed to proceed.” Id. at 391. More

recently we interpreted Cabinetree as establishing the

proposition that a party waives its right to arbitrate

only when it “elect[s] a judicial forum rather than the

arbitral tribunal.” Iowa Grain Co. v. Brown, 171 F.3d 504,

509 (7th Cir. 1999).

Ernst & Young never elected a judicial forum over an

arbitral forum. Its only substantive act in the bankruptcy

proceeding was to file an objection (on January 19, 2000)

to the Plan. Article IX of the Plan incorporated a Baker

Settlement Agreement releasing Patrick J. Baker (sole

shareholder of debtor Baker O’Neal) and his wife from

all claims that any creditor of the debtors may have

against them. Ernst & Young, a creditor, objected to the

“nonconsensual release of claims of all creditors” against

the Bakers. The objection stated that the release would
14 No. 01-3862

“disadvantage creditors such as Ernst & Young in the

adversary proceeding and any other litigation.” It noted

Ernst & Young’s right to initiate a third-party complaint

against the Bakers in the adversary proceeding, which

right would be nullified by the release, as well as other

claims and non-party defenses “whether in the adversary

proceeding or outside of it.” The most that can be said

concerning this language is that Ernst & Young had not

yet decided to participate in merit litigation of the adversary proceeding. The obvious purpose of the objection

was to protect Ernst & Young from release of its claims

against the Bakers. The Bakers were not parties to the

arbitration agreement, and the language of the objection

showed that Ernst & Young was still considering the

adversary proceeding as one forum in which to pursue

those claims, although the objection made clear that there

were other fora. The language cannot be read as a statement that Ernst & Young intended to participate in the

adversary proceeding rather than to exercise its right

to arbitrate. See Iowa Grain Co., 171 F.3d at 510 (filing

a class action lawsuit rather than an arbitration claim

was insufficient to waive right to arbitrate individual

claims).

I respectfully dissent.

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-97-C-006—9-23-02