NONSIGNATORY CAN’T COMPEL ARBITRATION
The Fourth Circuit rules today, April 25, that a nonsignatory to a document cannot rely upon the doctrine of equitable estoppel to compel arbitration. The case is Wachovia Bank v. Schmidt. This is the case’s second trip to Richmond in its odyssey through the federal legal system.
Schmidt is a physician who received a significant capital gain when he sold his physical therapy business. Wachovia approached him to invest that in a tax shelter involving something called the United Bank of Switzerland. He bit, and sunk plenty of money into the deal, which, you have already figured out, went south. Bad descended to worse when the IRS notified him that it considered the shelter arangement illegitimate, possibly exposing Schmidt to seven figures worth of penalties and interest. He then sued Wachovia in state court for fraud, breach of fiduciary duty, and several other things.
Wachovia then filed this suit, asking the district court to compel arbitration under certain language in a $100,000 note (which Schmidt had long ago paid in full) and in a warrant, to which Wachovia was not a signatory. The district court refused in 2003. The next year, the Fourth affirmed , in part on jurisdictional grounds. Wachovia then appealed on to Washington, where it obtained earlier this year its one and only victory in the case, a reversal of the jurisdictional ruling. The matter thus returned to the Fourth for a decision on the merits.
Today’s ruling is another loss for Wachovia; the court rules that none of Schmidt’s claims have a significant relationship with the note (instead, they relate to Wachovia’s advice to Schmidt to get involved in the first place). It also rejects the financial giant’s efforts to tie the warrant to the claims, holding that as a nonsignatory, it could not use the doctrine of equitable estoppel to compel arbitration. It’s noteworthy that the Comptroller of the Currency (an arm of the Treasury Department, as I understand it) filed an amicus brief on behalf of Wachovia; which brief the court evidently found unpersuasive.
Readers of this site will recall this post , in which I discussed a similar holding in the context of a homebuying couple.