At the December 10, 1998, meeting, Ehlen, Weinhuff and Massey all
represented to the Holdens that each company being rolled-up would be
valued by the same formula. That statement was false, because of the
artificially inflated prices of ICRS and NBC, and because several other
companies included in the roll-up had different or better terms than
those offered to the Holdens. Additionally, Weinhuff, Massey and Ehlen
also stated that no EPS executive's compensation would exceed $250,000
because EPS management was relying on the anticipated IPO to be conducted
soon after the roll-up, and that the expected IPO offering price for EPS
stock was to be $35 per share. The written materials prepared by or under
the supervision of D&T, Massey, Coleman and Ehlen, and Jefferies's
Weinhuff, made the same representations. The representations with respect
to executive compensation and an early IPO were false and were known to
be false by Massey, Weinhuff, Ehlen, Schindler, D&T and Jefferies.
Massey, Ehlen, Schindler and others had salaries up to $500,000.
Moreover, all defendants knew, having been informed in a November 1998
meeting with Ernst & Young, that no successful IPO could occur before the
year 2000 because of EPS's financial condition and the SEC's "Cheap Stock
Negotiations continued with the similar misrepresentations made to the
Holdens to induce them to sell Holden Corp. to EPS. Ultimately the
Holdens entered into a stock purchase agreement with EPS on March 1,
1999, after having executed a non-binding letter of understanding at the
December 10, 1998, meeting.
The initial roll-up occurred on December 14, 1998, at which time EPS
acquired several companies including plaintiff HIC.*fn3 The alleged
misrepresentations continued, however, even after the initial roll-up. On
January 7, 1999, through January 10, 1999, EPS held its first
"President's Council meeting" in California. Massey, now CEO of EPS,
Weinhuff, Senior Partner at Jefferies, Coleman, CFO of EPS, and
Schindler, representing Gibson Dunn, addressed the attendees, who were
predominately former owners of companies that had been rolled-up on
December 14, 1998, or, like the Holdens, owners of companies that were
Massey represented that EPS was growing and that the price per share
was likely to reach $50. Massey further stated that the IPO was to take
place within a month or two. These representations were false, because no
successful IPO was possible before the year 2000.
At that meeting, Massey again represented an alliance in fact existed
between D&T and EPS, and that D&T would be a major source of new
business. D&T made several public presentations at the meetings, toting
D&T's ongoing relationship with EPS while failing to disclose the origin
of ICRS and NBC, and Massey's and Watts's self dealing relating to the
sale of these two companies.
During the course of these meetings, defendants held secret financial
briefings in which they acknowledged that EPS was over $10 million
dollars below compliance with loan covenants and needed to raise $25
million to $50 million through syndications. Although EPS was in
financial trouble and its existence was in doubt as of March 19, 1999,
defendants failed to disclose this information to the Holdens and instead
continued to represent a bright future for EPS, urging the Holdens to
close the transaction.
Soon after EPS acquired Holden, EPS's financial troubles worsened,
resulting in approximately $95 million in loses in 1999. Holden Corp. was
ultimately drained of its revenues to partially meet those loses.
Defendants, however, continued to conceal the true state of EPS's
finances and continued to represent EPS's future as bright.
Despite rosy reports published in business journals and newsletters,
EPS terminated Massey and Watts on November 24, 1999, and divested itself
of National Health Care Recovery Services ("NHRS"), a business entity
owned by Massey and Watts for which EPS paid $8 million but in fact had
little value. NHRS had cost EPS an average of over $1 million per month
until it was divested.
To stave off financial ruin, EPS began to liquidate itself by selling
off a significant number of bona fide operating companies. Because of the
sell-off of those operating companies and the massive defaults on bank
debt, all of which were caused by defendants' actions and failures, EPS
ceased to be a viable entity, and the plaintiffs' subordinated notes and
shares in EPS became valueless, leading to the instant lawsuits.
D&T and Jefferies have moved to dismiss or stay the proceedings and
compel arbitration in both cases, based on arbitration clauses contained
in the written contracts between EPS and plaintiffs. Massey and Watts
have joined those motions. Each of the contracts in question (the March
1, 1999 stock purchase agreement between EPS and Holden Corp., and the
November 19, 1998 asset purchase agreement between Profit Source Corp.
and DHR International, Inc.) contains the following clause:
(a)(1) Any controversy or claim arising out of or
relating to this Agreement shall be solely and finally
settled by arbitration administered by the American
Arbitration Association (the "AAA")
The Federal Arbitration Act ("FAA") provides that an arbitration clause
in a "contract evidencing a transaction involving commerce . . . shall be
valid, irrevokable, and enforceable save upon such grounds as exist in
law or in equity for the revocation of any contract." 9 U.S.C. § 2.
Any doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration. Moses H. Cohen Memorial Hospital v. Mercury
Construction Corp., 460 U.S. 1, 24-5 (1983). Thus, once it is clear that
the parties have a contract that provides for arbitration of some issues
between them, any doubts concerning the scope of the arbitration clause
are resolved in favor of arbitration. Mille v. Flume, 139 F.3d 1130, 1136
(7th Cir. 1998).
The touchstone of a motion to compel arbitration is a valid arbitration
agreement. Whisler v. H.J. Meyers & Co., Inc., 948 F. Supp. 798, 800
(N.D. Ill. 1996). In the instant case, there is no dispute that the
agreement is valid and enforceable between the parties to the contracts.
Nor is there any real dispute that the particular clauses in question are
extremely broad and cover plaintiffs' claims. Kiefer Specialty Flooring.
Inc. v. Tarkett, Inc., 174 F.3d 907, 909 (7th Cir. 1999). Plaintiffs
allege a scheme by defendants to acquire and improperly exploit their
assets, using the contracts as a principal instrument in the scheme.
Thus, plaintiffs' fraud claims arise out of and relate to the contracts.
See Messing v. Rosencrantz, 872 F. Supp. 539, 540-41 (N.D. Ill. 1995).
But neither D&T nor Jefferies is a party to either contract, and
plaintiffs argue that the proceedings should not be stayed because D&T and
Jefferies are not being sued under
the contracts but for independent acts
of fraud. See Britton v. Co-Op Banking Grp., 4 F.3d 742 (9th Cir.
Britton, however, hurts rather than helps plaintiffs' cause. In
Britton, the individual defendant had been acting as a director, agent
and employee during the time the corporate employer was committing
securities fraud relating to the sale of tax shelters. The defendant
later purchased the company and committed his own acts of fraud trying to
discourage lawsuits. The Ninth Circuit held that the defendant could not
rely on an arbitration clause contained in the original sales agreement
for the tax shelters, because the "sum and substance" of the allegations
against him were that "he in some way attempted to defraud the investors
into not pursuing their lawsuits against the persons who originally sold
the securities under the contract. These acts are subsequent, independent
acts of fraud unrelated to any provision or interpretation of the
contract." Id. at 748.
In the instant case, the "sum and substance" of the allegations against
D&T, Jefferies, Massey and Watts, are that they fraudulently induced
plaintiffs to enter into the contracts containing the arbitration
clauses. As such, unlike in Britton, plaintiffs' principal claims against
these defendants are not based on subsequent independent acts of fraud,
but rather pre-date and are directly related to and arise out of the
contracts in question. Thus, under Britton, D&T and Jefferies have
standing to compel arbitration.
The mere fact that D&T and Jefferies are not signatories to the
agreements does not defeat their right to compel arbitration. There are
various methods by which non-signatories may enforce arbitration
clauses. As this court has held, an agreement containing an arbitration
clause covers non-signatories under common-law contract and agency
principles. Messing, 872 F. Supp. at 541. A non-signatory may invoke the
agreement when, "under agency or related principles, the relationship
between the signatory and nonsignatory defendants is sufficiently close
that only by permitting the nonsignatory to invoke arbitration may
evisceration of the underlying arbitration agreement between the
signatories be avoided." MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942,
947 (11th Cir. 1999). Additionally, when the parties to the contract
agree to confer certain benefits thereunder upon a third party, affording
that third party rights of actions against them under the contract, the
third party may invoke the arbitration clause. Id.
Finally, equitable estoppel allows a non-signatory to compel
arbitration in two distinct circumstances. First, equitable estoppel
applies when the signatory "must rely on the terms of the written
agreement in asserting its claim" against a non-signatory. Id. Thus,
"[w]hen each of a signatory's claim against a nonsignatory `makes
reference to' or "presumes the existence of the written agreement, the
signatory's claims arise out of and relate directly to
agreement and arbitration is appropriate." Id. Second, equitable estoppel
also applies "when the signatory raises allegations of . . .
substantially interdependent and concerted misconduct by both the
nonsignatory and one or more of the signatories to the contract." Id.
All the exceptions listed above are applicable in one form or another
to the instant case. Obviously, plaintiffs' claims all make reference to
and presume the existence of the written agreements. Additionally,
plaintiffs claim that all the defendants conspired to induce them to
participate in the roll-up. Indeed, both complaints contain civil
conspiracy counts. The claims thus raise allegations of substantially
interdependent and concerted misconduct by both the signatory (EPS) and
the non-signatories. Therefore, plaintiffs are equitably estopped from
Moreover, the facts alleged in the complaints support a conclusion that
D&T and/or Jefferies were acting as EPS's agent(s) at the time some or
all of the alleged fraudulent misconduct occurred. The relationship
between EPS and D&T and Jefferies was so obviously intertwined that only
by allowing the non-signatories to invoke arbitration would evisceration
of the agreements be avoided.
Finally, the Holden contract and the Hoffman closing memo, which was
made part of the Hoffman contract, each contain a provision whereby the
sellers acknowledge for the benefit of D&T, that D&T was not related to
EPS and that EPS and the individuals related to EPS with whom the sellers
have dealt, have acted and will act on behalf of EPS and not D&T. These
provisions were intended to confer benefit on D&T, and under MS Dealer,
177 F.3d at 947, appear to give D&T and additional right to enforce the
For the reasons set forth above, the court concludes that D&T and
Jefferies can enforce the arbitration clauses. Accordingly, under
9 U.S.C. § 3, D&T's and Jefferies' motions to stay and compel
arbitration are granted. Because plaintiffs have raised no arguments
specific to Massey and Watts aside from those raised against D&T, Massey's
and Watts' motion to stay and compel arbitration is also granted.