Wednesday, April 26, 2006

Fourth Circuit holds state court claims arising before arbitration agreement were not subject to arbitration clause

In WACHOVIA BANK v. SCHMIDT, the Fourth Circuit upheld an order of the district denying Wachovia's motion for arbitration of certain state-law claims. The claims concerned an investment scheme in which Schmidt participated in at the behest of Wachovia. The Note involved contained an arbitration clause providing that either party could compel arbitration of "any claim or controversy arising out of, or relating to" the Note or other documents executed in connection with the loan. Because the Schmidt's state-court claims derived solely from actions Wachovia took as a financial advisor to induce Schmidt to participate in the investments and the events giving rise to these claims occurred before the Note was even executed, the Fourth Circuit held that the state-court claims were not significantly related to the Note. Hence, arbitration would not be the correct forum.

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