Wachovia Bank v. Schmidt involves a tax-shelter-gone-bad scheme in which the taxpayer received a promissory note and a warrant containing arbitration provisions. The taxpayer sued Wachovia Bank in state court. Wachovia Bank responded by filing a petition for an order compelling arbitration in federal court, which the district court denied. On appeal, the Fourth Circuit held that the court lacked subject matter jurisdiction. The U.S. Supreme Court reversed and remanded.
Back before the Fourth Circuit, Wachovia Bank had to convince the court that the state law claims must be arbitrated. It failed.
Wachovia Bank argued that the taxpayer's state law claims were significantly related to the promissory note containing the arbitration provision because the tax shelter and the loan evidenced by the note were part of a "single, integrated course of dealing." The court disagreed, finding that the taxpayers' claims relate to Wachovia Bank's role in inducing them to participate in the tax shelter--not to the tax shelter itself.
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