Jones et al v. KPMG, LLP et al
Memorandum Opinion and Order filed 3/29/2016 in case 1:14cv447LG-RHW. Signed by District Judge Louis Guirola, Jr. on 3/29/2016 (wld)
Case 1:14-cv-00447-LG-RHW Document 161 Filed 03/29/16 Page 1 of 12
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF MISSISSIPPI
THOMAS JONES, JOSEPH CHARLES
LOHFINK, SUE BEAVERS, RODOLFOA
REL, and HAZEL REED THOMAS, on behalf
of themselves and other similarly situated
CAUSE NO. 1:14CV447-LG-RHW
SINGING RIVER HEALTH SERVICES
FOUNDATION, et al.
REGINA COBB, SUSAN CREEL, and
PHYLLIS DENMARK, on behalf of
themselves and others similarly situated
CAUSE NO. 1:15CV1-LG-RHW
SINGING RIVER HEALTH SYSTEM, et al.
MARTHA EZELL LOWE, individually
and on behalf of a class of similarly
CAUSE NO. 1:15CV44-LG-RHW
SINGING RIVER HEALTH SYSTEM, et al.
MEMORANDUM OPINION AND ORDER CONCERNING
KPMG’S MOTIONS TO COMPEL ARBITRATION
BEFORE THE COURT are the Motion to Compel Arbitration and Stay
Proceedings Pending Arbitration, or in the alternative to Dismiss Plaintiffs’ Claims
 that was filed by KPMG LLP in the Jones action, cause number 1:14cv447-
Case 1:14-cv-00447-LG-RHW Document 161 Filed 03/29/16 Page 2 of 12
LG-RHW1, and the Motion to Compel Arbitration and Stay Proceedings Pending
Arbitration, or in the alternative to Dismiss Plaintiff’s Claims  filed by KPMG
LLP in the Lowe action, cause number 1:15cv44-LG-RHW. The Motions have been
fully briefed by the parties. After reviewing the submissions of the parties, the
record in this matter, and the applicable law, the Court finds that the Motion to
Compel Arbitration and for a stay should be granted as to the Jones lawsuit and
denied as to the Lowe lawsuit. The request for dismissal of the Jones plaintiffs’
claims against KPMG is also denied.
These three putative class actions – Jones, Cobb, and Lowe – arose out of the
alleged under-funding of the Singing River Health System Employees’ Retirement
Plan and Trust. The Jones plaintiffs and Martha Ezell Lowe have sued KPMG, the
company that audited the annual financial statements of Singing River Health
Services (SRHS) and the Plan.2
A. THE JONES ACTION
In their Second Amended Complaint, the Jones plaintiffs assert that KPMG’s
audits “expressed opinions regarding the funding policy of the [P]lan, the annual
KPMG originally filed its Motion to Compel Arbitration in the Jones action
on March 27, 2015, but the Motion was refiled after the Jones plaintiffs amended
their complaint. The Court has reviewed the briefs related to the original Motion
 to reach its decision.
The Cobb plaintiffs did not sue KPMG. Therefore, it is not necessary to
address the Cobb action in this opinion.
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pension costs and net pension liability, trend information, and that the Plan was
adequately funded when it was not.” (3d Am. Compl. at 13, ECF No. 151, Cause
No. 1:14cv447-LG-RHW). They claim:
KPMG’s misstatement of the true financial situation relating to the
Plan was the result of an ongoing conspiracy between the Defendants
to suppress the true financial picture of the Plan and the hospital.
Alternatively, the failure to disclose the true financial situation
relating to the underfunded liability was the result of negligence in the
performance of the audit.
(Id.) The Jones plaintiffs note that KPMG and SRHS entered into engagement
letters that required KPMG to perform its accounting duties in accordance with
Generally Accepted Auditing Standards (“GAAS”), Generally Accepted Government
Auditing Standards (“GAGAS”), and Generally Accepted Accounting Principles
(“GAAP”). (Id.) According to the Third Amended Complaint, KPMG issued audit
reports that did not comply with those standards. (Id. at 14, 52-53). The Jones
plaintiffs have filed the following claims against KPMG: breach of fiduciary duty,
Section 1983 conspiracy, negligence and professional malpractice, and fraud,
fraudulent misrepresentation, and deceit.
B. THE LOWE ACTION
In her Complaint, Lowe alleges that KPMG was either aware of the fact that
SRHS had stopped contributing to the Plan, or in the alternative, it recklessly
disregarded the fact that SRHS had stopped contributing to the Plan. (Lowe
Compl. at 5, ECF No. 1, Cause No. 1:15cv44-LG-RHW). Lowe also claims that
KPMG provided consulting services related to the $70 million purchase of a new
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electronic record retention system that allegedly contributed to SRHS’s inability to
fund the Plan. (Id. at 6). She further alleges that KPMG either knowingly
participated in or aided and abetted a breach of fiduciary duty. (Id. at 14). In
support of this claim, she asserts:
The Defendant KPMG knew or should have known that the Defendant
SRHS had defaulted on its pension contributions since 2009. In its
audits of SRHS (which included auditing the Plan) for both fiscal years
2010 and 2011, Defendant KPMG allowed or did not correct
statements that attributed the Trust’s under-funding to returns on
investments and changed actuarial assumptions. Defendant KPMG
knew or should have known that these statements were misleading.
C. KPMG’S MOTIONS TO COMPEL ARBITRATION
KPMG argues that these claims must be submitted to binding arbitration
pursuant to the Dispute Resolution clause contained in an attachment to
engagement letters entered into by KPMG and SRHS. The clause attached to the
April 23, 2008 engagement letter provides:
Any dispute or claim arising out of or relating to this Engagement
Letter or the services provided hereunder, or any other audit or attest
services provided by or on behalf of KPMG or any of its subcontractors
or agents to [SRHS] or at its request, shall be submitted . . . to binding
arbitration in accordance with the Rules for Non-Administered
Arbitration of the International Institute for Conflict Prevention and
Resolution then in effect (“CPR Arbitration Rules”). Any issue
concerning the extent to which any dispute is subject to arbitration, or
any dispute concerning the applicability, interpretation, or
enforceability of these dispute resolution procedures, including any
contention that all or part of these procedures is invalid or
unenforceable, shall be governed by the Federal Arbitration Act and
resolved by the arbitrators. By operation of this provision, the parties
agree to forego litigation over such disputes in any court of competent
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(Affidavit of Ashley Willson, Ex. A, ECF No. 89-1, Cause No. 1:14cv447-LG-RHW).
The March 31, 2009 engagement letter contains the same language. (Id. at Ex. B).
The 2010, 2011, and 2012 letters incorporate the arbitration clause in the 2009
engagement letter by reference. (Id. at Ex. C, Ex. D, and Ex. E).
After KPMG filed the present Motions to Compel Arbitration, this Court
entered a Memorandum Opinion and Order  consolidating the three putative
class actions. Consolidation “does not merge suits into a single cause, or change the
rights of the parties, or make those who are parties in one suit parties in another.”
In re Excel Corp., 106 F.3d 1197, 1201 (5th Cir. 1997). Therefore, this Court must
consider the Motions filed in the Jones and Lowe lawsuits separately.
A. THE MOTION TO COMPEL ARBITRATION FILED IN THE JONES
The Court must first determine whether the arbitration clause is otherwise
enforceable.3 “To determine whether the parties agreed to arbitrate this dispute, we
ask two questions: (1) is there a valid agreement to arbitrate the claims and (2) does
the dispute in question fall within the scope of that arbitration agreement.” Sharpe
v. AmeriPlan Corp., 769 F.3d 909, 914 (5th Cir. 2014). Courts also “consider
whether any federal statute or policy renders the claims non-arbitrable.” Will-Drill
The Court recognizes that the engagement letters at issue contain
delegation clauses providing that an arbitrator should address gateway questions of
arbitrability; however, KPMG has voluntarily submitted this issue to this Court.
See Rent-a-Center, West, Inc. v. Jackson, 561 U.S. 63, 68 (2010).
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Res., Inc. v. Samson Res. Co., 352 F.3d 211, 214 (5th Cir. 2003).
Since none of the parties addressed the issue of whether there is a valid
agreement to arbitrate, this Court entered an Order  requiring the parties to
submit supplemental briefs regarding this issue. The Mississippi Constitution
provides: “No obligation or liability of . . . any county . . . shall ever be remitted,
released or postponed, or in any way diminished by the Legislature, nor shall such
liability or obligation be extinguished . . . .” Miss. Const. Art. 4, § 100. The
Mississippi Attorney General has opined that this provision of the Constitution
prohibits county entities from entering into binding arbitration agreements unless
authorized to do so by the Legislature. See MS Att'y Gen. Op., No. 2002-0295, 2002
WL 1579650 Clark (June 7, 2002); see also MS Att'y Gen. Op., No. 2001-0016, 2001
WL 283630 Austin (Feb. 16, 2001). This Court has previously held that Miss. Code
Ann. § 41-13-35(5) impliedly authorizes community hospitals to enter into
arbitration agreements. See Hancock Med. Ctr. v. Quorum Health Res., LLC, No.
1:14cv55-HSO-RHW, 2015 WL 1387469, at *3-4 (S.D. Miss. Mar. 25, 2015). As a
result, the Court finds that SRHS and KPMG entered into a valid arbitration
The scope of the arbitration agreement is the second consideration. The
clause contained in the Engagement Letters at issue is broad in scope,
encompassing “any dispute or claim arising out of or relating to” the engagement
letters. The Fifth Circuit has explained that “courts distinguish narrow arbitration
clauses that only require arbitration of disputes arising out of the contract from
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broad arbitration clauses governing disputes that relate to or are connected with
the contract.” Pennzoil Exploration & Prod. Co. v. Ramco Energy Ltd., 139 F.3d
1061, 1067 (5th Cir. 1998). For broad clauses, it is only necessary that the parties’
dispute “touches on” matters covered by the agreement containing the arbitration
clause. Id. When determining the scope of an arbitration clause, courts must “focus
on the factual allegations in the complaint rather than the legal causes of action
asserted.” Harrison Cnty. Commercial Lot, LLC v. H. Gordon Myrick, Inc., 107 So.
3d 943, 956 (Miss. 2013) (quoting Waste Mgmt., Inc. v. Residuos Industriales
Multiquim, S.A., 372 F.3d 339, 344 (¶27) (5th Cir. 2004)).
The Jones plaintiffs’ claims fall within the scope of the arbitration clause
because their claims rely upon and arise out of the engagement letters, particularly
the professional standards required by the letters. Finally, the Jones plaintiffs
have not raised and the Court has not found any federal policy or statute, such as
unconscionability, that would prevent enforcement of the arbitration clause.
However, the Jones plaintiffs argue that they are not bound by the
arbitration clauses, because they did not sign the engagement letters containing the
arbitration clauses. KPMG counters that the plaintiffs are bound by the arbitration
clauses pursuant to the doctrine of estoppel. The United States Supreme Court has
held that the issue of whether a non-signatory is bound by an arbitration clause
pursuant to the doctrine of equitable estoppel is governed by state law. Arthur
Andersen LLP v. Carlisle, 556 U.S. 624, 630-31 (2009); see also Crawford Prof’l
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Drugs, Inc. v. CVS Caremark Corp., 748 F.3d 249, 255 (5th Cir. 2014). The
Mississippi Supreme Court has held that “[e]quitable estoppel is an extraordinary
remedy that should be used with caution.” Simmons Hous., Inc. v. Shelton ex rel.
Shelton, 36 So. 3d 1283, 1287 (¶15) (Miss. 2010).
[T]he doctrine [of estoppel] recognizes that a party may be estopped
from asserting that the lack of his signature on a written contract
precludes enforcement of the contract’s arbitration clause when he has
consistently maintained that other provisions of the same contract
should be enforced to benefit him. To allow [a plaintiff] to claim the
benefit of the contract and simultaneously avoid its burdens would
both disregard equity and contravene the purposes underlying
enactment of the [Federal] Arbitration Act.
Id. at 1287-88 (¶16) (quoting Terminix Int’l, Inc. v. Rice, 904 So. 2d 1051, 1058
In a more recent case, the Mississippi Supreme Court held that “[d]irectbenefit estoppel involve[s] non-signatories who, during the life of the contract, have
embraced the contract despite their non-signatory status, but then, during
litigation, attempt to repudiate the arbitration clause in the contract.” Scruggs v.
Wyatt, 60 So. 3d 758, 767 (Miss. 2011) (quoting Noble Drilling Servs., Inc., v. Certex
USA, Inc., 620 F.3d 469, 473 (5th Cir. 2010) (emphasis added)). There are two ways
in which a party can embrace a contract: “(1) by knowingly seeking and obtaining
‘direct benefits’ from that contract; or (2) by seeking to enforce the terms of that
contract or asserting claims that must be determined by reference to that contract.”
Id. at 768.
The Jones plaintiffs claim that KPMG failed to comply with the standards –
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GAAP, GAAS, and GAGAS – imposed by the engagement letters. (3d Am. Compl.
at 13, 53, ECF No. 151, Cause No. 1:14cv447-LG-RHW). Therefore, the Jones
plaintiffs seek to enforce the terms of the engagement letters. Pursuant to the
doctrine of estoppel, the plaintiffs cannot contend that KPMG owed a particular
standard of care under the engagement letters while at the same time denying
enforcement of the arbitration clause contained in the letters.
Nevertheless, the Jones plaintiffs argue that KPMG should be prevented
from invoking equitable estoppel pursuant to the unclean hands doctrine, because
KPMG has committed fraud and participated in a conspiracy. This Court cannot
determine whether KPMG committed fraud or participated in a conspiracy without
reaching the merits of the plaintiffs’ claims. As a result, the unclean hands doctrine
cannot be applied on this basis. See Scruggs, 60 So. 3d at 766 (¶16) (“The courts . . .
have no business weighing the merits of a particular claim . . .” while considering
arbitration). The Jones plaintiffs’ claims are explicitly based on duties KPMG owed
under the engagement letters; thus, the Jones plaintiffs’ claims against KPMG
must be submitted to arbitration. Since the Jones plaintiffs also filed claims filed
against other defendants that are not subject to arbitration, the Court finds that a
stay of the arbitrable claims, as opposed to dismissal, would be most appropriate.
See Alford v. Dean Witter Reynolds, Inc., 975 F.2d 1161, 1164 (5th Cir. 1992)
(holding that dismissal of arbitrable claims is only permissible where all of the
claims presented in a lawsuit are subject to binding arbitration). The stay will only
apply to the Jones plaintiffs’ claims against KPMG.
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B. THE MOTION TO COMPEL ARBITRATION FILED IN THE LOWE
In her Complaint, Lowe merely claims that KPMG’s audits contained
misleading and incorrect statements that caused or contributed to her damages.
She does not seek and has not obtained direct benefits from the engagement letters.
Furthermore, she does not ask the Court to enforce the terms of the engagement
letters; nor does she assert any claims that would require reference to the
engagement letters. She does not rely on any of the standards imposed by the
engagement letters; she merely relies on common law. In fact, Lowe does not even
reference the engagement letters in her Complaint, and she has signed an affidavit
stating that she had no knowledge of the engagement letters before she filed this
lawsuit. Lowe “is not required to base [her] claims on the [engagement letters] and
can, as [she] has, disclaim any reliance thereupon.” See Noble Drilling, 620 F.3d at
Nevertheless, KPMG argues that Lowe’s claims are arbitrable, because its
audits arose out of the engagement letters. KPMG has not cited any binding
authority that supports its argument that such a tenuous relationship is a sufficient
basis for invoking the extraordinary remedy of equitable estoppel; rather all of the
cases KPMG relies upon invoked equitable estoppel because the non-signatory
specifically mentioned and relied upon the terms of the contract containing the
While the Noble decision is a federal decision, its reasoning has been
adopted by the Mississippi Supreme Court. See Scruggs, 60 So. 3d at 767.
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arbitration clause. See, e.g., Wash. Mut. Fin. Grp., LLC v. Bailey, 364 F.3d 260, 267
n.5 & 268 (5th Cir. 2004) (nonsignatory’s case hinged on rights arising from her
husband’s loan transaction that included arbitration clause); Scruggs, 60 So. 3d at
770-71 (¶¶ 27-29) (non-signatory sought payment for work he performed pursuant
to a joint venture agreement that contained an arbitration clause); Origen Fin.,
LLC v. Thompson, No. 3:07cv318-WHB-LRA, 2007 WL 3407391, at *8 (S.D. Miss.
Nov. 15, 2007) (non-signatory sought, inter alia, to recover payments made
pursuant to a contract that contained an arbitration clause and was signed by his
wife). As a result, KPMG’s Motion to Compel Arbitration must be denied as to the
For the foregoing reasons, the Court finds that the Motion to Compel
Arbitration filed by KPMG should be granted as to the Jones lawsuit and denied as
to the Lowe lawsuit. The distinction is that Lowe did not rely on the terms of the
engagement letter in any way when asserting her claims against KPMG, while the
Jones plaintiffs have explicitly relied on the standards imposed by the engagement
letters when asserting their claims. KPMG’s request for dismissal of the Jones
plaintiffs’ claims is denied, but its request for a stay of the Jones plaintiffs’ claims
against KPMG is granted.
IT IS, THEREFORE, ORDERED AND ADJUDGED that the Motion to
Compel Arbitration and Stay Proceedings Pending Arbitration  that was filed
by KPMG LLP in the Jones action, cause number 1:14cv447-LG-RHW, is
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GRANTED. The Jones plaintiffs’ claims filed against KPMG are STAYED
IT IS, FURTHER, ORDERED AND ADJUDGED that the Motion to
Dismiss Plaintiffs’ Claims  that was filed by KPMG LLP in the Jones action,
cause number 1:14cv447-LG-RHW, is DENIED.
IT IS FURTHER, ORDERED AND ADJUDGED that the Motion to
Compel Arbitration and Stay Proceedings Pending Arbitration, or in the alternative
to Dismiss Plaintiff’s Claims  filed by KPMG LLP in the Lowe action, cause
number 1:15cv44-LG-RHW, is DENIED.
SO ORDERED AND ADJUDGED this the 29th day of March, 2016.
Louis Guirola, Jr.
LOUIS GUIROLA, JR.
CHIEF U.S. DISTRICT JUDGE
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