KPMG LLP v. Robert Cocchi Et Al.

Respondents were individuals and entities who bought limited partnership interests in one of three limited partnerships, all known as the Rye Funds. The Rye Funds were managed by Tremont Group Holding, Inc., and Tremont Partners, Inc., both of which were audited by KPMG. The Rye Funds were invested with financier Bernard Madoff and allegedly lost millions of dollars as a result of a scheme to defraud. Respondents sued the RyeFunds, the Tremont defendants, and Tremont’s auditing firm, KPMG.

Against KPMG, respondents alleged four causes of action: negligent misrepresentation; violation of the Florida Deceptive and Unfair Trade Practices Act (FDUTPA); professional malpractice; and aiding and abetting a breach of fiduciary duty. Respondents’ basic theory was that KPMG failed to use proper auditing standards with respect to the financial statements of the partnerships. The improper audits led to “substantial misrepresentations” about the health of the funds and resulted in respondents’ investment losses.

KPMG moved to compel arbitration based on the audit services agreement that existed between it and the Tremont defendants. The Florida Circuit Court of the Fifteenth Judicial Circuit Palm Beach County denied the motion. The Court of Appeal affirmed and held that the arbitration clause could only be enforced if respondents’ claims were derivative in that they arose from the services KPMG performed for the Tremont defendants pursuant to the audit services agreement. Applying Delaware law, which both parties agreed was applicable, the Court of Appeal concluded that the negligent misrepresentation and the violation of FDUTPA claims were direct rather than derivative. The court said nothing about the other claims at all. Finding “the arbitral agreement upon which KPMG relied would not apply to the direct claims made by the individual plaintiffs,” the Court of Appeal affirmed the trial court’s denial of the motion to arbitrate.

What was at issue before the Supreme Court was the Court of Appeal’s apparent refusal to compel arbitration on any of the four claims based solely on a finding that two of them, the claim of negligent misrepresentation and the alleged violation of the FDUTPA, were non arbitrable.

The Supreme Court observed that when a complaint contain both arbitrable and non arbitrable claims, the Act require courts to compel arbitration of pendent arbitrable claims when one of the parties file a motion to compel, even where the result would be the possibly inefficient maintenance of separate proceedings in different forums. The Court of Appeal listed all four claims, found that two were direct, and then refused to compel arbitration on the complaint as a whole because the arbitral agreement “would not apply to the direct claims.”  By not addressing the other two claims in the complaint, the Court of Appeal failed to give effect to the plain meaning of the Act. The petition for certiorari was granted, judgment of the Court of Appeal was vacated, and the case was remanded with direction to the Court of Appeal to examine the remaining two claims to determine whether either required arbitration.