2000 WL 33985633 (9th Cir.)

 

For opinion see 28 Fed.Appx. 731

 

Briefs and Other Related Documents

 

United States Court of Appeals, Ninth Circuit.

 

Richard D. ROSENBLATT, Plaintiff - Appellant,

v.

ERNST & YOUNG, a general partnership; Ernst & Young, LLP; James Pope, Defendants - Appellees.

 

No. 00-56099.

October 10, 2000.

USDA No. 99-1163 RMB (JFS)

Appeal from the United States District Court Southern District of California Honorable Rudi M. Brewster, Sr., Judge

 

Opening Brief of Plaintiff - Appellant Richard D. Rosenblatt

Philip Burkhardt SBN 65351, Burkhardt & Larson, 6002 El Tordo, P.O. Box 1369, Rancho Santa Fe, CA 92067, (858) 756-3743, Attorneys for Plaintiff and Appellant Richard D. Rosenblatt.

 

*i TABLE OF CONTENTS

 

Table of Authorities ... i

 

Jurisdictional Statement ... 1

 

A. District Court's Subject Matter Jurisdiction ... 1

 

B. Court of Appeals Jurisdiction ... 1

 

C. Timeliness of Appeal ... 2

 

Statement of the Issues Presented for Review ... 2

 

Statement of the Case ... 2

 

Statement of the Facts ... 4

 

A. Rosenblatt's Membership in the Lloyds Insurance Market ... 4

 

B. Rosenblatt's Longstanding Fiduciary Relationship With Defendants and Their Predecessors ... 5

 

C. Asbestos Concealment by Defendants and Lloyds ... 5

 

D. Rosenblatt's Damages ... 6

 

Summary of the Argument ... 7

 

Argument ... 8

 

I. EYI IS NOT A CORPORATION AND MAY NOT INVOKE THE DIVERSITY JURISDICTION RULES APPLICABLE TO CORPORATIONS ... 8

 

*ii A. EYI is an "Exempted Company," Not a Corporation ... 9

 

B. The Carden Decision ... 11

 

C. EYI Has Described Itself as a Limited Liability Company in Prior Judicial Proceedings ... 12

 

D. EYI Does Not Possess the Characteristics of a Corporation ... 13

 

E. EYI'S Citizenship Must be Determined by its "Members"' Citizenship ... 14

 

II. THE TRIAL COURT ERRED IN FAILING TO APPLY THE SEPARATE ACCRUAL RULE ... 15

 

A. The Martinez-Ferrer Doctrine Allows Separately Accruing Causes of Action to be Maintained for Injuries Sustained After Earlier Appreciable Injury in Order to Avoid the Harsh and Unjust Results of the Rigid Application of the General Rule of Accrual ... 15

 

B. The Ninth Circuit Court of Appeals Follows the Martinez-Ferrer Doctrine ... 21

 

C. Miller v. Lakeside Village Condominium Assoc., Inc. is not Controlling Precedent for this Action ... 22

 

D. The Recent Decisions By the California Fourth District Court of Appeal Upon Which EYI Relied in the Lower Court Proceedings Are Distinguishable From the Case at Bar and Are Not Applicable to the Facts of This Case ... 25

 

*iii E. Martinez-Ferrer and Zambrano Remain Viable Precedent ... 27

 

F. Rosenblatt's Earlier Awareness of the Potential for Future Damage Does Not Prevent Recovery of that Damage When it Arises ... 28

 

Conclusion ... 29

 

Statement of Related Cases ... 30

 

Certificate of Compliance

 

Certificate of Service

 

Addendum to Opening Brief

 

Note: Table of Contents page numbers missing in original document

 

*i TABLE OF AUTHORITIES

 

Cases

 

Anderson v. W. R. Grace & Co. 628 F. Supp. 1219 (D. Mass. 1986) ... 18

 

Associated Indemnity Corp. v. Indus. Acc. Com 124 Cal. App. 378 (1932) ... 17

 

Bennett v. Shahhal 75 Cal. App. 4th 384 (1999) ... 25,26,27,29

 

Budd v. Nixen 6 Cal. 3d 195 (1971) ... 23,24

 

Carden v. Arkoma Associate 494 U. S. 185 (1990) ... 10,11,12,14

 

Coots v. Southern Pacific Co. 49 Cal. 2d 865 (1958) ... 17

 

Davies v. Krasna 14 Cal. 3d 502 (1975) ... 18

 

Gaus v. Miles, Inc. 980 F. 2d 564 (9th Cir. 1992) ... 8

 

Goodman v. Mead Johnson & Co. 534 F. 2d 566 (3d Cir. 1976) ... 18

 

Howe v. Pioneer Manufacturing Co. 262 Cal. App. 2d 330 (1968) ... 17

 

International Engine Parts, Inc. v. Feddersen and Company 64 Cal. App. 4th 345 (1998) ... 13

 

*ii Jolly v. Eli Lilly & Co. 44 Cal. 3d 1103 (1988) ... 27

 

Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison 18 Cal. 4th 739 (1998) ... 25,26,27

 

Kohl v. Lilienthal 81 Cal. 378 (1889) ... 13

 

Martinez-Ferrer v. Richardson-Merrell 105 Cal. App. 3d 316 (1980) ... 15,16,17,18,19,21,22,23,24,25,27,28,29

 

Miller v. Lakeside Village Condominium Assoc., Inc. 1 Cal. App. 4th 1611 (1991) ... 22,24

 

New v. Armour Pharmaceutical Co. 67 F. 3d 716 (9th Cir. 1995) ... 21,28

 

O'Connor v. Boeing North American, Inc. 12000 W. L. 1434471,5 (C. D. Cal., June 12, 2000) ... 27

 

Pierce v. Johns-Manville Sales Corp. 296 Md. 656, 464 A. 2d 1020 (1983) ... 18

 

Rosenblatt v. Ernst and Young, Ltd. 87 F. Supp. 2d 1048 (S. D. Cal. 2000) ... 9

 

Shamrock Oil & Gas Corp. v. Sheets 313 U. S. 100(1941) ... 8

 

Snell v. Commission 38 TCM (CCH) 635; T.C. Memo 1979-141 (Tax Court 1979) ... 5

 

*iii Toumajian v., Frailey 135 F. 3d 648 (9th Cir. 1998) ... 9,16

 

Urie v. Thompson 337 U. S. 163, 69 S. Ct. 1018, 93 L. Ed. 1232 (1949) ... 18

 

Wilson v. Johns-Manville Sales Corp. 684 F.2d 111 (D.C. Cir. 1982) ... 18

 

Zambrano v. Dorough 179 Cal. App. 3d 169 (1986) ... 20,21,25,27,28

 

Statutes

 

Cal. Code Civ. Proc., ¤ 339 ... 25

 

Cal. Code Civ. Proc., ¤ 340.5 ... 25,26

 

Cal. Code Civ. Proc., ¤ 340.6 ... 25

 

Cal. Code Civ. Proc., ¤ 472 ... 3

 

Cal. Corp. Code, ¤ 184 ... 13

 

Cal. Corp. Code, ¤ 200 ... 13

 

FRAP 4 ... 2

 

28 U.S.C.A. ¤ 1291 ... 1

 

28 U.S.C.A. ¤ 1332 ... 1

 

28 U. S. C. ¤ 1333 ... 11

 

*iv 28 U.S.C. ¤ 1441 ... 3

 

28 U.S.C. ¤ 1446 ... 3

 

Other Authorities

 

Black's Law Dictionary, Abridged (5th ed. 1983), p. 391, col. 2 ... 10

 

Cal. Practice Guide: Personal Injury (The Rutter Group 1998), ch. 5-B ... 27

 

3 Witkin, Cal. Procedure (4th ed. 1996), Actions, ¤ 544, pp. 687-690 ... 27

 

4 Witkin, Cal. Procedure (4th ed. 1997), Pleading, ¤ 26, p. 88 ... 27

 

Cayman Islands Companies Law ... 12,13,14

*1 JURISDICTIONAL STATEMENT

A. District Court's Subject Matter Jurisdiction.

On June 4, 1999, defendant and appellee Ernst & Young International ("EYI") filed a Notice of Removal of an action filed in state court based on diversity of jurisdiction (28 U.S.C.A. ¤ 1332(a)(2).) EYI asserted that plaintiff and appellant Richard D. Rosenblatt ("Rosenblatt") is a citizen of California, that EYI is allegedly a citizen of the Cayman Islands, and that defendants and appellees Ernst & Young, LLP ("EY-LLP") and James Pope ("Pope") (EYI, EY-LLP, and Pope are sometimes herein referred to collectively as "defendants") are "sham defendants" because Rosenblatt's claims against them are allegedly barred by the statute of limitations. EY-LLP and Pope joined in the removal on June 8, 1999. (ER 2-11)

B. Court of Appeals Jurisdiction.

In a March 1,2000, Order, the District Court ruled that EY-LLP and Pope were "sham defendants" because Rosenblatt's claims against them were allegedly barred by the statute of limitations. (ER 84-94) Subsequently, in a March 25, 2000, Order, the District Court granted two separate Motions to Dismiss brought by EY-LLP/Pope and EYI, respectively. (ER 95-97) A final Judgment was entered on May 26, 2000. (ER 98) The Court of Appeals has jurisdiction because Rosenblatt appeals from a final order or judgment. (28 U.S.C.A. ¤ 1291)

*2 C. Timeliness of Appeal.

The Notice of Appeal was filed on June 23, 2000, which is within 30 days of entry of the Judgment on May 26, 2000. (ER 99; FRAP 4)

 

STATEMENT OF ISSUES PRESENTED FOR REVIEW

The ultimate issue is whether this action should have been remanded to the Superior Court of California, County of San Diego, North County Division where it was originally filed. In order to resolve this issue, two subordinate issues must be resolved:

A. Whether EYI, an "exempted company" formed under the laws of the Cayman Islands, may assert corporation status for diversity jurisdiction purposes; and

B. Whether Rosenblatt's claims are time-barred, more specifically, whether losses incurred by Rosenblatt in 1996 and 1998 constitute new injuries under the separate accrual rule triggering a new statute of limitations period.

STATEMENT OF THE CASE

Rosenblatt originally filed this action in the Superior Court of California, County of San Diego, North County Division, Case No. N80207 on January 12, 1999, alleging the breach of fiduciary duty and fraud on the part of Rosenblatt's long time accountants/investment advisors. (ER 1) The Complaint seeks to recover for past, ongoing, and future losses arising from Rosenblatt's underwriting participation in the Lloyds of London ("Lloyds") insurance market. On June 4, 1999, EYI removed this *3 action to the United States District Court for the Southern District of California pursuant to 28 U.S.C. sections 1441(a) and 1446. In so doing, EYI argued that complete diversity exists in this action based upon its claim that EYI is a corporation organized under the laws of the Cayman Islands with its principal place of business in London, England, and is, therefore, a citizen of the Cayman Islands. EYI further asserted that EY-LLP and Pope (both California residents) should be disregarded as "sham defendants," contending that Rosenblatt's claims against them are time-barred. (ER 2-18)

On or about June 8, 1999, EY-LLP and Pope joined in the removal. (ER 9-11) EYI and EY-LLP and Pope filed Motions to Dismiss. Rosenblatt filed a timely Motion for Remand asserting that EYI, EY-LLP, and Pope are all California citizens and that his claims are not time-barred. On September 10, 1999, the District Court tentatively denied Rosenblatt's Motion for Remand, ruling that EYI was entitled to the benefit of corporate status, and was therefore a citizen of the Cayman Islands. The Court deferred ruling on the Motions to Dismiss and granted Rosenblatt leave to amend. (ER 39-48)

A Second Amended Complaint [FN1] was filed on September 24,1999. (ER 49-73) After additional briefing by the parties, on January 6, 2000, oral argument was heard *4 on the time-bar issue. At the hearing, the District Court requested that Rosenblatt provide it with supplemental authority on his contention that recent and ongoing losses caused a separate accrual of causes of action with respect to those losses. (RT 91:6-93:11; ER 79-81) After briefing on this issue by Rosenblatt and EYI, on March 1, 2000, the District Court entered an Order denying Rosenblatt's Motion for Remand holding that Rosenblatt's new losses did not create the separate accrual of a new cause of action and that therefore Rosenblatt's claims against EY-LLP and Pope are barred by the statute of limitations. (ER 84-94) On May 26, 2000, the District Court entered an Order granting Motions to Dismiss filed by EY-LLP and EYI. (ER 95-97)

 

    FN1. Prior to remand Rosenblatt had filed a First Amended Complaint under California Code of Civil Procedure section 472.

 

 

 

STATEMENT OF THE FACTS

A. Rosenblatt's Membership in the Lloyds Insurance Market.

Lloyds raises capital for its insurance business through individuals, like Rosenblatt, who act as underwriting members known as "Names." Names agree to provide insurance coverage for certain risks sought to be insured at Lloyds and are placed into groups called "Syndicates." As a Name, Lloyds required Rosenblatt to provide security that he would cover his share of potential losses incurred by Syndicates in which he participated. Over time, Rosenblatt increased the amount of his underwriting obligations, as well as the amount of his letters of credit. Rosenblatt *5 also maintained funds on reserve with Lloyds to cover any losses sustained. (ER 50-52, ¦¦ 9, 11, 16) [FN2]

 

    FN2. A description of how Lloyds operates is set forth in Snell v. Commission, 38 TCM (CCH) 635; T.C. Memo 1979-141 (Tax Court 1979).

 

 

 

B. Rosenblatt's Longstanding Fiduciary Relationship With Defendants and Their Predecessors.

Norman Raitz ("Raitz"), as a partner arid one of the top executives for defendants' predecessors, Josolyne, Layton-Bennett & Company and Arthur Young, served as the personal accountant and financial advisor regarding Lloyds' affairs to Rosenblatt during the 1970's and 1980's. After he retired, Raitz was succeeded in this role by J.F. Reed ("Reed"). During 1987 and 1988, staff from Arthur Young's San Diego office handled business for Rosenblatt concerning his Lloyds' affairs. This included Pope. EYI succeeded to and assumed all liabilities of Arthur Young. (ER 51-52, ¦¦ 12-15) The relationship between Rosenblatt and his accountants ultimately ended amicably in July of 1995. (ER 33, ¦ 2)

C. Asbestos Concealment by Defendants and Lloyds.

In 1981, meetings took place between representatives of the firms of Lloyds' panel of auditors, including Arthur Young, and in particular, Rosenblatt's personal accountant, Raitz, concerning the growing volume of information and evidence concerning the level of claims which were building up as a result of coverage of *6 asbestos-related risks by many Syndicates over a number of years. (ER 51, ¦¦ 12, 22) Raitz attended further meetings in 1981 and 1982 regarding the increasing level of exposure to asbestos-related claims. (ER 54, ¦¦ 23, 24]) On February 24, 1982, several accounting firms from Lloyds' panel of auditors, including Arthur Young, sent a letter of alarm notifying Lloyds of the impending asbestos-related claims and the inability of certain Syndicates to quantify their final liability ("Neville Russell Letter"). (ER 55, ¦ 26) As instructed by Lloyds, the panel of auditors, including Arthur Young, concealed the "impending asbestos disaster." (ER 55, ¦ 26) Thus, at the latest 1981, Arthur Young was fully aware of the serious financial danger to Rosenblatt and other Lloyds' Names in Syndicates which had originally insured asbestos-related risks and continued to reinsure such risks in 1982 and thereafter. (ER 55, ¦ 27) If Rosenblatt had been informed by Arthur Young and EY-LLP of their findings regarding the impending asbestos disaster, Rosenblatt could have avoided investing with Lloyds, or at least with Lloyds' Syndicates reinsuring asbestos-related policies. (ER 56, ¦ 30)

D. Rosenblatt's Damages.

Rosenblatt has been financially devastated due to past, ongoing, and continuing losses resulting from his investment participation in Syndicates insuring and/or reinsuring asbestos-related policies. (ER 57, ¦ 33) Those losses include Lloyds' first draw-down on Rosenblatt's original letter of credit with Lloyds on December 13, *7 1996, resulting in damage to Rosenblatt in the amount of £323,252.46 (or approximately $600,000.00). These losses also include a March 13, 1998, Judgment rendered in favor of Lloyds and against Rosenblatt in the United Kingdom for £413,500.00 (or approximately $682,000.00). (ER 57, ¦ 35, ER 34, ¦ 4)

The Judgment arose out of Lloyds' attempt to impose a premium on Rosenblatt and all other remaining Names in order to fund a company created by Lloyds on September 13, 1996, known as Equitas. Through the creation of Equitas, Lloyds unilaterally took it upon itself to pool together all asbestos-related underwriting and distribute the entire burden of resulting losses evenly among the Names. Rosenblatt and other Names refused to contribute to Equitas. As a result of the Judgment, Rosenblatt was deemed liable not only for asbestos-related losses incurred from claims made on underwriting Syndicates on which Rosenblatt personally participated, but also for losses on Syndicates in which he did not even participate. (ER 83)

SUMMARY OF THE ARGUMENT

Rosenblatt asserts two separate bases for the assertion that the District Court lacks subject matter jurisdiction over this action. First, for diversity purposes, all artificial entities, except corporations, are deemed citizens of each state in which any of its members are citizens. EYI is not a true corporation - it is an "exempted company" organized in the Cayman Islands. As such, EYI is an unincorporated association and therefore, may not avail itself of the rules regarding a corporate *8 citizenship for diversity purposes. Second, the "separate accrual rule" applies to the damages which Rosenblatt suffered as a result of the 1996 draw-down on his letter of credit and the 1998 Judgment discussed above. Therefore, despite the fact that Rosenblatt may have suffered earlier actual and appreciable injury beyond all statute of limitations periods, causes of action remain with respect to the 1996 and 1998 damages. As a result, EY-LLP and Pope are not "sham defendants" and complete diversity again fails to exist in this case. As shown below, then, Rosenblatt's cause should have been remanded by the District Court lo the Superior Court where it was originally filed.

ARGUMENT

I

EYI IS NOT A CORPORATION AND MAY NOT INVOKE THE DIVERSITY JURISDICTION RULES

APPLICABLE TO CORPORATIONS

The strong presumption against removal jurisdiction means that a defendant seeking removal of an action to federal court always has the burden of establishing that removal is proper. (Gaus v. Miles, Inc., 980 F. 2d 564, 566 (9th Cir. 1992).) Doubts as to removability are resolved in favor of remanding the case to the state court. (Shamrock Oil & Gas Corp. v. Sheets, 313 U. S. 100, 108-109 (1941); Gaus v. Miles, Inc., supra, at 566.)

*9 Two separate courts have rendered conflicting rulings on the classification of EYI. In the current case, the District Court specifically found in its Order Tentatively Denying Plaintiffs Motion for Remand filed September 10, 1999, that EYI is a corporation. (ER 43-44) In the published Order of March 1,2000, the District Court affirmed its ruling. (ER 85) (Rosenblatt v. Ernst and Young, Ltd., 87 F. Supp. 2d 1048, 1054 (S. D. Cal. 2000). In another recent case, another Court found that EYI is a Cayman Islands limited liability company. (Addendum 6-8; Goh v. Balder Electric Company, 1999 W. L. 20943 (N. D. Tex.)) A determination of EYI'S classification is important because if EYI is not deemed a corporation, complete diversity fails to exist in this case and the District Court had no subject matter jurisdiction. [FN3]

 

    FN3. Questions of subject matter jurisdiction and removal are reviewed de novo. (Toumajian v. Frailey, 135 F. 3d 648, 652 (9th Cir. 1998).)

 

 

 

A. EYI is an "Exempted Company," Not a Corporation.

The only evidence submitted to the District Court by EYI to support its claim that it is a corporation was a single document entitled "Certificate of Incorporation." The Certificate of Incorporation, however, does not state that a corporation has been created under Cayman Islands' law. It only indicates that an "exempted company" has been formed under Cayman Islands' law. (ER 28- 31; see also, ER 12-13) An *10 exempted company is nothing more than an association of members. (Addendum 31, 32, 33, 34, 35, 37, 38, 39, Companies Law, ¤¤ 5-7, 10, 25, 29, and 40-41)

By virtue of its title alone, the District Court determined that the "Certificate of Incorporation," was conclusive of EYI'S corporate status. (ER 6) In fact, during oral argument, the District Court refused to entertain any further discussion on this matter, and thus, effectively cut off any further discovery to determine the true nature of this entity. (RT 3:10-18, ER 78) While the tenn "incorporation" often does refer to the creation of a corporation, the term "incorporation" does have other meanings:

Incorporation. The act or process of forming or creating a corporation. The formation of a legal or political body, with the quality of perpetual existence and succession, unless limited by the act of incorporation. Incorporation procedures and requisites are governed by state statutes; many of which are patterned on the Model Business Corporation Act. (Black's Law Dictionary, Abridged (5th ed. 1983), p. 391, col. 2.) (Emphasis added) (Addendum 17)

An "exempted company" is a form of business enterprise that is not recognized by any state in the United States. Therefore, EYI is some form of hybrid entity and just one more form of unincorporated association among the "wide assortment of artificial entities possessing different powers and characteristics" (Carden v. Arkoma Associate, 494 U. S. 185, 197 (1990).)

As explained below in greater detail, the United States Supreme Court has declined to legislate exceptions for hybrid entities to the existing law, which states that only corporations can claim citizenship in their place of incorporation for *11 diversity purposes. (Carden v. Arkoma Associate, supra, 494 U. S. 185.) As with all non-corporate artificial entities, EYI'S citizenship for diversity purposes must be determined by its "members"' citizenship. (Ibid.)

B. The Carden Decision.

In Garden, a limited partnership argued that it was the functional equivalent of a corporation and that the citizenship of its limited partnership members should be disregarded for diversity purposes. The Supreme Court rejected this argument and found that "the tradition of the common law ... is to treat as legal persons only incorporated groups and to assimilate all others to partnerships." (Carden v. Arkoma Associates, supra, at 190.)

In making its ruling, the Supreme Court in Carden pointed to the fact in 1958 Congress revised the rule expanding the citizenship of corporations for diversity purposes (28 U.S.C. ¤ 1333(c)), but declined to offer the benefits of incorporation to other artificial entities in relationship to diversity jurisdiction. (Carden, supra, at 196-197.) Declining to legislate exceptions to existing law, the Supreme Court noted that the alleged need to accommodate various different commercial entities ...

... is performed more intelligently by legislation than by interpretation of the statutory word "citizen." The 50 states have created, and will continue to create, a wide assortment of artificial entities possessing different powers and characteristics, and composed of various classes of members with varying degrees of interest and control. Which of them is entitled to be considered a "citizen" for diversity purposes, and which of their members' citizen is to be consulted, are questions more readily *12 resolved by legislative prescription than by legal reasoning, and questions whose complexity is particularly unwelcome at the threshold stage of determining whether a court has jurisdiction. We have long since decided that, having established special treatment for corporations, we will leave the rest for Congress; we adhere to that decision. (Id. at 197).

C. EYI Has Described Itself as a Limited Liability Company in Prior Judicial Proceedings.

In a prior Northern District of Texas judicial proceeding, Goh v. Baldor Electric Company, EYI stated that EYI "is a Cayman Islands limited liability company." (ER 32) In the Affidavit of Kathryn A. Oberly, Vice-Chairman and General Counsel of EY-LLP, she affirmatively states that

E&Y LLP, E&Y Singapore, and E&Y Thailand are members of Ernst & Young International, Ltd. (E&Y International). E&Y International is a Cayman Islands limited liability company that has no shareholders and no share capital. E&Y International is a network of correspondent accounting firms that have agreed to conduct their individual practices in accordance with E&Y International's Articles of Association.... (Emphasis added) (ER 26, ¦ 5)

As a member of EYI, EY-LLP undoubtedly has access to its Memorandum of Association and Articles of Association required to be filed under the Cayman Islands Companies Law. [FN4] As such, it must be presumed that the above statement is correct. Further, judicial estoppel bars a party from making a factual assertion in a legal *13 proceeding which directly contradicts an earlier assertion made in a prior one. (International Engine Parts, Inc. v. Feddersen and Company, 64 Cal. App. 4th 345, 350 (1998).) In addition, at no time during the District Court proceedings did EYI state that Ms. Oberly was mistaken. Instead, EYI stated that it is "both a corporation and a limited liability company." (CR 20, Points and Authorities in Opposition to Motion for Remand, p. 4, fn. 6]) In other words, as previously stated, EYI is some sort of hybrid entity that is not recognized by any state in the United States.

 

    FN4. A company is formed by filing a Memorandum of Association. (Addendum 31, 36, and 37, Companies Law, ¤¤ 5 and 27) Articles of Association may then be adopted by the company. (Addendum 22, 23, and 24, Companies Law, ¤¤ 25 and 26)

 

 

 

D. EYI Does Not Possess the Characteristics of a Corporation.

EYI'S assertion that it is a corporation is also suspect on its face. A typical corporation is created by filing Articles of Incorporation with the Secretary of State. The company then issues shares to persons who purchase them. (See for example, Cal. Corp. Code, ¤ 184 and ¤ 200, subd. (a); Kohl v. Lilienthal, 81 Cal. 378, 385 (1889) [shares are the interest which the shareholder has in the corporation.].) A corporation has neither members nor Memorandum of Association/Articles of Association. As noted above, EYI does not have shareholders. EYI is a "network" of member accounting firms which have entered into not only a Memorandum of Association but also "Articles of Association" which have been filed in the Cayman Islands. (Addendum 13 and 31, Companies Law, ¤¤ 2 and 5; ER 13, ¦ 3; ER 26-27, ¦¦ 5-6)

*14 Moreover, a corporation is routinely allowed to conduct business in the state of incorporation. An exempted company, however, is not allowed to conduct business in the Cayman Islands! (Addendum 13, 41, 42, and 43, Companies Law ¤¤ 2, 182, 184, 187(b), and 193) It is absurd and patently unfair to allow an exempted company to claim that it is a citizen of the Cayman Islands when it is not even allowed to conduct business there.

E. EYI'S Citizenship Must be Determined by its "Members"' Citizenship.

Congress has not established special treatment for an "exempted company incorporated in the Cayman Islands with limited liability." Therefore, until Congress does establish a special rule for this hybrid entity, EYI'S citizenship for diversity purposes must be determined by its "members"' citizenship. (Carden v. Arkoma Associate, supra, 494 U. S. 185, 195.)

It is undisputed that Pope and EY-LLP are California citizens. (ER 3, ¦¦ 7-8) They are members of EYI. (ER 13, ¦ 13, ER 19, Ins. 20-22, ER 26, ¦ 5, ER 32) Since its members are California citizens, EYI is a California citizen. Complete diversity is lacking in this case and the District Court had no subject matter jurisdiction. This case must be remanded.

*15 II

THE TRIAL COURT ERRED IN FAILING TO APPLY THE SEPARATE ACCRUAL RULE

A. The Martinez-Ferrer Doctrine Allows Separately Accruing Causes of Action to be Maintained for Injuries Sustained After Earlier Appreciable Injury in Order to Avoid the Harsh and Unjust Results of the Rigid Application of the General Rule of Accrual.

In the lower court proceedings, defendants argued that Rosenblatt suffered "actual and appreciable" damages at the time a separate case known as Richards v. Lloyds of London ("Richards") was filed in October 1994 and therefore, because that date lies beyond the longest applicable statute of limitations period in this case, Rosenblatt's suit is time-barred. (ER 7-11) Ultimately, the District Court agreed with defendants' position. In so doing, the District Court held that "undisputed facts reveal that Rosenblatt discovered, or in the exercise of reasonable diligence could have discovered, that facts had been concealed [by his accountants] no later than October 5, 1994," the date the Richards complaint [FN5] was filed. (ER 91, p. 8, Ins. 18-22) The District Court further held that because Rosenblatt had suffered monetary damages in 1994, as evidenced by Richards, the statute of limitations on all *16 of his claims began to run. (ER 91-93, p. 8, in. 18 - p. 10, in. 22) In so doing, the District Court refused to apply the "separate accrual rule" of Martinez-Ferrer v. Richardson-Merrell, 105 Cal. App. 3d 316 (1980). The question of whether the separate accrual rule applies to this case must be reviewed de novo. (Toumajian v. Frailey, supra, at 652.)

 

    FN5. The Richards case was a prior action filed by Rosenblatt and other Names against Lloyds before Rosenblatt learned of the participation of the defendants in this case in the concealment of the asbestos liability.

 

 

 

In Martinez-Ferrer, the plaintiff, a surgeon, took a certain drug to treat his high cholesterol condition in 1960. A few months later, he experienced retinal swelling and severe dermatitis. Plaintiff and his doctors believed that the medication was the cause, and plaintiff discontinued its use. Plaintiff was unable to work for four to six weeks, thus incurring "actual and appreciable" injury around the time of the original ingestion. However, it was not until 1976, 16 years later, that plaintiff ultimately filed suit against the drug manufacturer after cataracts were discovered in plaintiffs eyes. Plaintiff claimed that the cataracts were caused by the medication taken back in 1960. The defendant drug manufacturer argued, however, that the plaintiff was not allowed to maintain a separate lawsuit for a new injury based on defendant's conduct, which was actually known by the plaintiff several years earlier. The Martinez-Ferrer Court held that plaintiff did have separate causes of action created by independent injuries of dermatitis and retinal swelling, on the one hand, and the development of cataracts, on the other. Thus, plaintiff was not barred by the statute of limitations *17 from proceeding on the latter cause of action, although he was barred from seeking redress for the injuries suffered in 1960.

In reaching its decision, the Martinez-Ferrer Court focused its attention on developments established in cases involving nuisance [FN6], progressive occupational diseases [FN7], and the growing number of recognized exceptions to the rule of merger, which indicate a "trend away from an unthinking enforcement of the rules" regarding the statute of limitations. (Id. at 326-327.) The holdings in these types of cases demonstrate a recognition that an equitable method is necessary to deal with significant injuries which arise years after the infliction of an underlying injury. (Associated Indemnity Corp. v. Indus. Acc. Com., 124 Cal. App. 378 (1932) [despite early symptoms years before filing suit, worker's claim did not accrue until injury progressed to silicosis]; Howe v. Pioneer Manufacturing Co., 262 Cal. App. 2d 330 (1968) [damages suffered over many years caused by an underlying gas leak created *18 separate accruals against the landlord as each illness arose]; Urie v. Thompson, 337 U. S. 163, 69 S.Ct 1018, 93 L. Ed. 1282 (1949) [same]; Wilson v. Johns-Manville Sales Corp., 684 F. 2d 111 (D. C. Cir. 1982) [mild asbestosis did not start limitations period running in 1973 for separate and distinct disease of mesothelioma first manifested in 1978]; Pierce v. Johns-Manville Sales Corp., 296 Md. 656, 464 A. 2d 1020 (1983) [in same factual situation as Wilson, held that policy considerations weighed in favor of recognizing separate causes of action lest plaintiff compelled to rush to court with questionably meritorious claims rather than risk losing all claims for future serious injury]; Goodman v Mead Johnson & Co., 534 F. 2d 566 (3d Cir. 1976) [plaintiff's cause of action for cancer did not accrue simultaneously with manifestation of thrombophlebitis although both caused by appellee's contraceptive device]; Anderson v. W R. Grace & Co., 628 F. Supp. 1219 (D. Mass. 1986) [in suit for injuries caused by contaminated water well, causes of action for increased risk of leukemia and other cancers not yet accrued because qualitatively different from present injuries].)

 

    FN6. The Court in Martinez-Ferrer stated that "the nuisance cases exemplify some recognition that under certain circumstances a plaintiff need not put all of his eggs in one basket, particularly when he does not know how many eggs he has and their eventual number is beyond his control." (Id. at 326.)

 

 

 

    FN7. In Coots v. Southern Pacific Co., 49 Cal. 2d 865 (1958), plaintiff knew everything there was to know to file a suit as early as July 1949 and a 3-year statute of limitations governed the action under the Federal

 

    Employers' Liability Act. However, plaintiff did not file suit until 1954. There, the California Supreme Court held that the suit was timely because plaintiffs condition did not become "real worse" until 1953.

 

 

 

In Martinez-Ferrer, the Court also discussed the fundamental purpose behind statutes of limitations, which is to protect potential defendants by affording them the opportunity to gather evidence while facts are still fresh. (Martinez-Ferrer v. Richardson-Merrell, supra, at 325 [citing Davies v. Krasna, 14 Cal. 3d 502, 512-514 (1975).].) In articulating the rationale in support of its ruling, the Court reasoned that *19 because the cataract-causing potential of the medication became known to appellee drug manufacturer in 1960 or 1961, the defendants had an adequate opportunity to gather evidence on the subject while the facts were as fresh and had two decades to refine the results of their research. (Id. at 325.) Here, the defendants and their predecessors have known since at least 1982 that asbestos-related claims could result in losses great enough to financially destroy Names who participated on Lloyds Syndicates which covered asbestos-related risks in that year and thereafter. In addition, the accountants simultaneously acted as accountants for Lloyds and for Rosenblatt with respect to his Lloyds-related affairs and other investment matters until July 1995. (ER 37, ¦ 2, ER 51, ¦¦ 12-13, ER 52, ¦ 19) Like the appellees in Martinez-Ferrer, defendants here had ample opportunity to collect evidence while it was fresh. Further, as much of the evidence relevant to Rosenblatt's claims was likely generated and maintained by the accountants, it likely remains in their possession.

The Martinez-Ferrer Court also pointed out "the sad fact that [the plaintiff] would have been laughed out of court" had he sued for his injuries occurring in or about 1960 and at the same time attempted to sue for the speculative possibility that his 1960 ingestion of cholesterol medication might cause cataracts at some point in the future, before that became a fact. (Id. at 323-324 (Emphasis added).) Rosenblatt would previously have faced the same obstacles. Equitas did not even exist until September 13, 1996, nor was its existence and resulting effect on Rosenblatt *20 foreseeable prior to such time. Therefore, Rosenblatt could not have sought compensation for such injury prior to March 13, 1998. Further, prior to December 13, 1996, Lloyds had not drawn on Rosenblatt's letter of credit. The serious financial losses (analogous to the cataracts ultimately suffered by Martinez-Ferrer) suffered by Rosenblatt in 1996, and then again in 1998, gave rise to causes of action which are separate and distinct from any other less serious expenses or losses (analogous to Martinez-Ferrer's dermatitis, macula, lost wages, and pain and suffering relating to those injuries) which Rosenblatt may have incurred at some earlier point in time.

In Zambrano v. Dorough, 179 Cal. App. 3d 169 (1986), the California Fourth District Court of Appeal again embraced the separate accrual rule and permitted a plaintiff to proceed against a defendant doctor for loss incurred within the statute of limitations period. The Court did so even though the plaintiff had suffered other "actual and appreciable" injuries as a result of the same negligence, which although minor compared with the loss complained of, were substantial enough to accrue a cause of action and plaintiff had knowledge of such damages and their source beyond the limitations period. In 1977, plaintiffs doctor mis-diagnosed a pregnancy from which plaintiff suffered a miscarriage and experienced subsequent complications requiring various operations involving her reproductive system. Later in 1979, plaintiff was informed that a complete hysterectomy was necessary. At that time, plaintiff discovered that there was a possible connection between the previous *21 misdiagnosis and the condition requiring the hysterectomy, therefore, in 1979, beyond the 1-year statute of limitations period applicable in such case, plaintiff filed a complaint. The Zambrano trial court found that as a matter of fact, the plaintiff had knowledge, or cause for knowledge, of sufficient facts to be put on inquiry regarding the defendant's alleged negligence beyond the applicable statute of limitations period. However, she filed the complaint within one year after learning of the need for a hysterectomy and was allowed to proceed for losses related thereto.

B. The Ninth Circuit Court of Appeals Follows the Martinez-Ferrer Doctrine.

In New v. Armour Pharmaceutical Co., 67 F. 3d 716 (9th Cir. 1995), a hemophiliac developed AIDS from the use of a blood coagulating product years earlier. In that case, this Court applied the principles of Martinez-Ferrer and held that even though plaintiff was diagnosed in 1988 with HIV, the accrual of his cause of action occurred only when he in fact developed AIDS. Likewise, here, Rosenblatt suffers from "financial HIV" with which he was infected in or about 1982 and diagnosed previously. However, until he contracted "financial AIDS" in 1996 and/or?? in 1998, his devastating losses had not yet been incurred and at that point, wer?? merely speculative. Thus, due to the nature of the facts of this case, an applicati?? of the Martinez-Ferrer doctrine is needed here to compensate Rosenblatt for sepa?? *22 injuries which he has suffered in recent years which are far more serious and distinct that any of the initial effects of the tortious conduct of defendants.

C. Miller v. Lakeside Village Condominium Assoc., Inc. is not Controlling Precedent for this Action.

In reaching its conclusion that Rosenblatt's action is time-barred, the District Court relied upon Miller v. Lakeside Village Condominium Assoc., Inc., 1 Cal. App. 4th 1611 (1991). The majority of the Court from Division Seven of the Second District Court of Appeal declined to follow Martinez-Ferrer because it was "easily distinguishable on its facts from the instant case... (Id. at 1625.) In dicta two Justices criticized the Martinez-Ferrer approach used by their brethren from Division Five of the Second District. However, in his concurring opinion, while Justice Johnson did agree that Martinez-Ferrer did not apply to the facts in Miller, he expressed disagreement with the majority's treatment of the "important rule and supporting rationale" enunciated in Martinez-Ferrer. Justice Johnson recognized that "[u]nder appropriate circumstances, the occurrence of some actual and appreciable harm will not foreclose a later suit for a serious, physically distinct injury which first manifests itself after the limitations period has expired as to the initial harm." (Id. at 1630.)

*23 Justice Johnson stated further that

Martinez-Ferrer highlighted the problem of plaintiffs who experience symptoms of 'actual and appreciable' harm early on but much later suffer a different type of harm, quantitatively and qualitatively, as a result of the initial tortious act." (Id. at 1630.)

Justice Johnson went on to explain that the doctrine established in Budd v. Nixen, 6 Cal. 3d 195 (1971) regarding accrual upon the occurrence of actual and appreciable damage was inadequate to prevent the inequities that arose in situations where exposure to deadly toxic substances caused not only immediate injuries but other injuries which did not manifest themselves until possibly decades later. (Id. at 1631.) In so doing, he specifically recognized the dangers created by asbestos and other toxic chemical substances ignorance of which exists regarding all the ramifications of our technologically advanced society. (Id. at 1632.) As a result, Justice Johnson stated that the preservation and amplification of the Martinez-Ferrer doctrine is needed to protect individuals who belatedly discover exposure to a new drug, solvent, or structural material caused not only by the initial "actual and appreciable" yet only modest illness or injury, but also injury which was far more serious and distinct from the initial manifestations of exposure. (Id. at 1632.)

Justice Johnson also discussed the fact that al lowing separate suits for different injuries promotes the interests of judicial economy in that it

avoids forcing a plaintiff to make speculative claims early on as a means to escape the bar of the statute of limitations. Also, recognizing a *24 separate accrual period for the separate injury when and if it occurs will prevent courts from being burdened with suits involving relatively minor injuries filed to avoid the bar of the statute of limitations should more serious injuries develop. It would also discourage the filing of premature or questionable claims. It would be more efficient, and society would be better served, if judicial resources were reserved for lawsuits which seek compensation for the more serious, yet physically distinct, harm when and if it materializes. (Id. at 1631-1632.)

He goes on to state that

where a plaintiff is forced to bring suit at the first indication of 'appreciable' harm, claims for a possible eventual [injury] will not be based on actual evidence of injury but on speculation or evidence of probabilities only." (Id. at 1632.)

He further explains that allowing suit for an actual injury based on current and reliable evidence prevents the inequity of giving a windfall to some plaintiffs and undercompensating others. (Id. at 1632.)

A majority of the Miller Court clearly took a different approach than did the Fourth District Court of Appeal in Martinez-Ferrer. However, this action arose within the jurisdiction of the Fourth Appellate District of California and must be governed by the precedent which applies there. Further, as pointed out in the dissent of Justice Johnson, the majority's disrespectful treatment of the Martinez-Ferrer doctrine is erroneous.

*25 D. The Recent Decisions By the California Fourth District Court of Appeal Upon Which EYI Relied in the Lower Court Proceedings Are Distinguishable From the Case at Bar and Are Not Applicable to the Facts of This Case.

In the lower court proceedings, EYI cited to two recent decisions, Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison, 18 Cal. 4th 739 (1998) and Bennett v. Shahhal, 75 Cal. App. 4th 384 (1999) stating that such cases supercede the Martinez-Ferrer and Zambrano. The District Court agreed. (ER 93, p. 10, Ins. 1-12) However, Jordache and Bennett do not deal with the same time-bar issue presented in this case. Rather, Jordache and Bennett involve statutes of limitations specifically enacted for suits involving claims of legal malpractice and medical malpractice, California Code of Civil Procedure sections 340.6 and 340.5, respectively. As the Court in each of those cases makes clear, the application of general accrual principles, as well as any exceptions made thereto, in cases of legal and medical malpractice is strictly confined to those authorized by the Legislature.

For example, in Jordache, the plaintiff cited to International Engine Parts, Inc. v. Feddersen & Co., 9 Cal. 4th 606 (1995) in arguing that its legal malpractice claim was not time-barred. Feddersen, however, dealt with California Code of Civil Procedure section 339, the limitations period applicable to oral contracts. The Court in Jordache distinguished section 339 from the legal malpractice limitations statute of section 340.6 by stating that "[t]he standards for beginning [the section 339] *26 limitations period result from judicial decisions rather than legislative enactment."" (Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison, supra, 18 Cal. 4th at 763-764) [FN8] The Court went on to point out that "the Legislature established a detailed, explicit, and exclusive scheme for commencing and tolling the legal malpractice limitations period," but did not establish a comparable scheme for all other limitations periods. (Id. at 764.) As a result, the court explained, Feddersen was not intended to provide rules for legal malpractice actions, which was the only subject addressed in Jordache. (Ibid.) Similarly, the Court in Bennett analyzed the legislative intent behind the enactment of section 340.5 in order to determine the tolling effect of the 90-day notice of the intent to bring suit required in medical malpractice actions.

 

    FN8. In a detailed examination of the legislative history of Code of Civil Procedure section 340.6, the Court noted that the Legislature had intentionally chosen the word "actual" over "significant" in order to preclude an inquiry "into whether various quantities of damage trigger the limitations period." (Id. at 749.) In its analysis, therefore, the Supreme Court recognized that such an inquiry would be properly made but for the enactment of Code of Civil Procedure section 340.6 with its inclusion of the term "actual injury."

 

 

 

This case does not involve legal or medical malpractice and thus, it does not involve the limitations statutes applied in Jordache and Bennett. Further, like section 339, the standards applied to the statutes of limitations applicable in this case are derived from judicial decisions, not the Legislature. Therefore, the rules and rationale of Jordache and Bennett have no application to the facts of this case.

*27 E. Martinez-Ferrer and Zambrano Remain Viable Precedent.

The Martinez-Ferrer line of cases remains good law. The California Supreme Court has cited Martinez-Ferrer without leveling any criticism at it. (See Jolly v Eli Lilly & Co., 44 Cal. 3d 1103, 1110, fn. 5 (1988).) Martinez-Ferrer is acknowledged as "still good law in California" by the Central District of California. (Addendum 9, O'Connor v. Boeing North American, Inc., 12000 W. L. 1434471,5 (C. D. Cal., June 12, 2000).)

Neither Jordache nor Bennett discuss or cite to Martinez-Ferrer, Zambrano, or any other case relied upon by Rosenblatt to support the maintenance of claims under the separate accrual theory. As a result, the Jordache and Bennett decisions have no effect on the authority relied on by Rosenblatt. Therefore, any assertion by defendants that Zambrano should be disregarded would ignore the fact that Zambrano has not been overruled and remains binding precedent in the Fourth Appellate District of California.

The Zambrano decision continues to be regularly cited in standard treatises used by the vast majority of the legal community. (See 3 Witkin, Cal. Procedure (4th ed. 1996), Actions, ¤ 544, pp. 687-690 (Addendum 21-24); 4 Witkin, Cal. Procedure (4th ed. 1997), Pleading, ¤ 26, p. 88 (Addendum 26); Cal. Practice Guide: Personal Injury (The Rutter Group 1998), ch. 3-B,B., When to Sue - Statute of Limitations (Addendum 19).) If the Fourth District had wanted to overrule Zambrano *28 by its holding in Bennett, it would have done so expressly. Its election not to do so, then, works to ratify the Zambrano decision, not to upset it.

F. Rosenblatt's Earlier Awareness of the Potential for Future Damage Does Not Prevent Recovery of that Damage When it Arises.

In this action, EYI has pointed vociferously to various statements by Rosenblatt regarding his awareness of his liability for potential future losses. However, the question is not "when does a plaintiff know that he will suffer damages in the future?", it is "when may a plaintiff sue for damages which arise at distinct points in time?" While defendants may choose to deny it, the point is clearly made in the cases cited by Rosenblatt which are discussed above. The fact that Rosenblatt may have foreseen certain losses does not make them actionable before they actually arose. Lloyds was not bound to pursue Rosenblatt for losses beyond those already held in the reserve accounts. When Lloyds drew-down on Rosenblatt's letter of credit in 1996, that damage became actionable, just as did the development of Martinez-Ferrer's cataracts in 1976 and New's development of AIDS in 1992. More illustrative of point, is the imposition of the 1998 Judgment arising from the formation of Equitas. The entry of Judgment against Rosenblatt upon the successful effort of Lloyds to collectivize losses from various Syndicates constitutes yet a separate occurrence of damage which no reasonable person in Rosenblatt's position *29 could have foreseen, even if foreseeability were the test to be used under Martinez-Ferrer.

Just like the later-sustained injuries of the plaintiffs in the Martinez-Ferrer line of cases, the damages suffered by Rosenblatt due to the draw-down on the letter of credit and the creation of Equitas are independent from those originally suffered. Therefore, Rosenblatt may maintain separate causes of action for losses which have accrued within the applicable statute of limitations periods. As a result, such claims are not time-barred, EY-LLP and POPE are not "sham defendants," and this case must be remanded to state court for lack of subject matter jurisdiction.

CONCLUSION

EYI is only an association of members. It is deemed a citizen of each state in which any one of its members is a citizen. Because Rosenblatt, EY-LLP, and Pope are all citizens of California, diversity jurisdiction is lacking in this case. Also, the separate accrual rule applies in this case to damages suffered by Rosenblatt in 1996 when Lloyds drew on Rosenblatt's letter of credit and in 1998 when the Judgment was rendered against Rosenblatt in the United Kingdom. Those later-acquired damages are not time-barred and EY-LLP and Pope are not "sham defendants." For both reasons, diversity jurisdiction fails. The Order dismissing the action should therefore be reversed and the action should be ordered remanded to the Superior Court of California for resolution on the merits.

*30 RELATED CASES

There are no known related cases to the instant appeal.

Appendix not available.