Rosenblatt v. Ernst & Young

2000 WL 33985634 (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,

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

No. 00-56099.

November 27, 2000.

USDA No. 99-1163 RMB (JFS)

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

Reply 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

I EYI SHOULD NOT BE CONSIDERED A CORPORATION FOR DIVERSITY PURPOSES ... 1

A. The Policy Underlying section 133 2 Mandates a Review of an Artificial Entity's Corporate Characteristics ... 1

B. This Court Should Focus on Substance not Form ... 2

C. EYI Does not Share Common Corporate Characteristics ... 4

D. Carden is Micharacterized ... 5

E. ROSENBLATT'S Contentions are Mischaracterized ... 7

F. The Standard of Review is de novo ... 8

II THE SEPARATE ACCRUAL DOCTRINE IS APPLICABLE TO THIS ACTION ... 9

A. This Case Involves Exactly the Type of Unusual Circumstances for Which the Separate Accrual Doctrine was Developed ... 9

1. ROSENBLATT Could not have Recovered for Losses Resulting from a Draw on his Letter of Credit Before it Occurred ... 10

*ii 2. ROSENBLATT Could not Have Recovered Losses Resulting from the Creation of Equitas Prior to its Existence ... 11

B. Not all of the Cases Applying the Separate Accrual Doctrine Involved Physical Injury ... 12

*i TABLE OF AUTHORITIES

Cases

Avner v. Longridge Estates 272 Cal. App. 2d 607 (1969) ... 14

Carden v. Arkoma Associates 494 U. S. 185 (1990) ... 5,6

Chu v. Canadian Indemnity Co. 224 Cal. App. 3d 86 (1990) ... 15,16

Davies v. Krasna 14 Cal. 3d 502 (1975) ... 12

Harrison v. SF Broadcasting 1998 WL 355461 (E.D.La) ... 3

Hellon & Associates, Inc. v.Phoenix Resort Group 958 F. 2d 295 (9th Cir. 1992) ... 9

Manhattan Construction Company v. K & E Construction Company 1988 WL 150690 (N.D.Ga) ... 3

Martinez-Ferrer v. Richardson-Merrell 105 Cal. App. 3d 316 (1980) ... 9,10,12,14

New v. Armour Pharmaceutical Co. 67 F. 3d 716 (9th Cir. 1995) ... 9,12

Nike, Inc. v. Comercial Iberica 20 F. 3d 987 (9th Cir. 1994) ... 6

Pierce v. Johns-Manville Sales Corp. 296 Md. 656, 464 A. 2d 1020 (1983) ... 13

*ii Say & Say, Inc. v. Ebershoff 20 Cal. App. 4th 1759 (1993) ... 3

Wilson v. Johns-Manville Sales Corp. 684 F. 2d 111 (D.C. Cir. 1982) ... 13

Zambrano v. Dorough 179 Cal. App. 3d 169 (1986) ... 9,12

Statutes

Cal. Corp. Code, § 5140 ... 7

Cal. Corp. Code, § 15674 ... 1

Cal. Corp. Code, § 16502 ... 1

Cal. Corp. Code, § 16503 ... 1

Cal. Corp. Code, § 17303 ... 1

11 U.S.C. § 1332(c)(1) ... 1,2,5,8,9

Other Authorities

BAJI 14.60 ... 10

Cal. Practice Guide: Corporations (TRG 2000), § 2:63, p. 2-39 ... 1

77 Harv.L.Rev. 1426 ... 2

*1 I

EYI SHOULD NOT BE CONSIDERED A CORPORATION FOR DIVERSITY PURPOSES

A. The Policy Underlying section 1332 Mandates a Review of an Artificial Entity's Corporate Characteristics.

In enacting 11 U.S.C. section 1332(c)(1) Congress recognized that there are critical differences between an ownership interest in a corporation in comparison to an ownership interest in other artificial entities such as partnerships, limited partnerships, and limited liability companies that require different rules for determining citizenship for diversity purposes. One primary distinction is that shares of corporate stock are freely transferable. In contrast, partnership and limited liability company interests are not. Unless a partnership agreement or articles of a limited liability company (or operating agreement) expressly so provide, no one can be substituted as a partner or a member without the consent of all other general partners (and a majority interest of any other limited partners) or a majority in interest of other members of the limited liability company. (See, for example, Cal. Corp. Code, §§ 15674, subd. (a), 16502, 16503, subd. (a)(2), and 17303; see also, Cal. Practice Guide: Corporations (TRG 2000), § 2:63, p. 2- 39.)

Without section 1332(c)(1) (and supporting common law), shareholders could instantly either defeat or trigger diversity jurisdiction by simply transferring shares *2 to a third person. The same opportunities for abuse are not available to the owners of other artificial entities since their interests are not freely transferable.

This Court should also note that the overriding purpose of section 1332(c)(1) was to restrict the jurisdiction of federal courts. (77 Harv. L. Rev. 1426, 1431.) A second purpose of this code section was to prevent "the evil whereby a local institution ... is enabled to bring its litigation into the Federal Courts simply because it has obtained a corporate charter from another State." [Citations omitted] (Id. at 1432.)

In order to comply with the policy reasons behind section 1332(c)(1), the corporate characteristics of an exempted company incorporated in the Cayman Islands should be examined. Otherwise, the common sense policy reasons for enacting section 1332(c)(1) could easily be defeated by simply purchasing the guise of incorporation for $410 per year. [FN1]

FN1. The annual fee for an exempted company without share capital, such as

EYI, is $410. (Addendum 42, Companies Law § 188(a))

B. This Court Should Focus on Substance not Form.

Defendant/appellee ERNST & YOUNG INTERNATIONAL'S ("EYI") argument can be summed up in one phrase "form over substance." As long as there is a "Certificate of Incorporation," the Court should end its inquiry. Wrongdoers often herald "form over substance" to shield them from their wrongdoing. *3 Nevertheless, California and Federal Courts routinely focus on substance, not form, in order to prevent injustice.

As a separate personality of the corporation is a statutory privilege, it must be used for legitimate business purposes and must not be perverted. When it is abused it will be disregarded and the corporation looked at as a collection or association of individuals. (Say & Say, Inc. v. Ebershoff, 20 Cal. App. 4th 1759, 1767 (1993).) (Emphasis added)

A corporation's nerve center does not have to be located within the corporate shell, but is found wherever the nerve center actually exists. It is more important to consider substance over form in determining the nerve center. (Harrison v. SF Broadcasting, 1998 WL 355462 (E.D.La.) [using a "totality of the facts" analysis in reaching a determination of diversity for federal jurisdiction purposes].) (Emphasis added)

Accordingly, using such expressions as alter ego, piercing the corporate veil, mere instrumentality, and looking at substance over form, the courts have not hesitated to disregard a corporation's separate legal identity when to do so would defeat public convenience, justify wrong, promote injustice or protect fraud. (Manhattan Construction Company v. K & E Construction Company, 1988 WL 150690 (N.D.Ga.).) (Emphasis added)

This Court has never been required to determine whether or not an exempted company "incorporated" in the Cayman Islands with limited liability should be considered a corporation for diversity purposes. In order to resolve this issue fairly, this Court should look past the Certificate of Incorporation and toward the actual substance of this exempted company in order to determine its proper classification for diversity purposes.

*4 C. EYI Does not Share Common Corporate Characteristics.

As the Vice Chair and General Counsel of Ernst and Young, LLP, Kathryn A. Oberly stated:

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 [i.e., members] that have agreed to conduct their individual practices in accordance with E&Y International's Articles of Association. (ER 26, ¶ 5)

An exempted company is nothing more than an association of members. (Addendum 31,32-35, 37-39, Companies Law, §§ 5-7, 10, 25,29, and 40-41) Since EYI is a "network of correspondent accounting firms," with "no share capital," a membership interest in EYI does not appear to be freely transferable. [FN2]

FN2. EYI'S Memorandum of Association and its Articles of Association were not produced for ROSENBLATT, or the Court, despite discovery requests for those documents.

In a footnote, EYI also attempts to dismiss the fact that an exempt company is prohibited from doing business in the Cayman Islands. Nevertheless, the Cayman Islands law is clear. EYI is prohibited from doing business in the Cayman Islands. The only business it is allowed to conduct in the Cayman Islands must be "in furtherance of the business ... carried on outside the Islands." (Addendum 43, Companies Law § 193) A Cayman Islands' exempt company is clearly prohibited from engaging in any business on the Islands which would earn it a profit.

*5 Despite the fact that the word "incorporation" may be used indiscriminately in the Companies Law of the Cayman Islands, it is clear that EYI has few if any corporate characteristics traditionally found in a corporation. It is simply an association of members who have no right to freely transfer their interest. Thus, the policy concerns underlying section 1332(c)(1) which require a corporation's citizenship to be determined by its place of incorporation instead of the citizenship of its shareholders simply do not exist. More importantly, the "exempted company" entity is a perfect vehicle to circumvent the section 1332(c)(1) policy to restrict access to federal courts. For a mere annual fee of $410, any group of local entities could "incorporate" in the Cayman Islands, set up the principal office outside the United States, and thus invoke federal diversity jurisdiction for this parent entity. A result which could not be obtained through the use of a partnership or limited liability company. Consequently, the most prudent course would be for this Court to decide that EYI'S citizenship for diversity purposes should be determined by its members' citizenship.

D. Carden is Mischaracterized.

EYI mischaracterizes the findings set forth in Carden v. Arkoma Associates, 494 U. S. 185 (1990). Garden does not stand for the proposition that a Court should mechanically focus on form not substance in determining whether or not an entity is actually a corporation. The Court in Garden simply rejected another attempt by an *6 artificial entity such as a limited partnership to be treated as a corporation for diversity purposes simply because it possessed certain corporate characteristics. Carden did not deal with the proper classification of a foreign entity which (1) has no shareholders, (2) has no share capital, (3) is exempt from any future income tax, [FN3] and (4) statutorily prevented from transacting business in the state of "incorporation" except in the furtherance of business abroad. (ER 26, ¶ 5, Addendum 30,41,42, and 43, Companies Law, §§ 2, 182, 184, 187(b), and 193) In light of the fact that a hybrid entity's citizenship is determined by the location of its members, it is doubtful that the Garden Court would have found that a Cayman Islands' exempt company be considered a corporation for diversity purposes. The Carden Court would have recognized that the Cayman Islands' exempt company simply provides a guise of incorporation for an annual fee of $410. It is really nothing more than an association of members. [FN4]

FN3. There are numerous websites that tout the advantages of an exempt company. One of these so-called advantages is a renewable 20-year exemption from any future Cayman Islands' income or capital gains taxes. See, for example, the website promoted by the accounting firm of Deloittee & Touche at www.deloitte.com.ky/offshore.htm

FN4. Similarly, Nike, Inc. v. Comercial Iberica, 20 F. 3d 987, 990 (9th Cir. 1994) was not required to address the issue of whether or not a foreign entity should be considered a corporation for diversity purposes.

*7 EYI also points out that certain non-profit corporations include members. EYI conveniently ignores that these non-profit corporations, however, have common corporate characteristics such as the ability to do business in the state of incorporation and to hold title to property. (See, for example, Cal. Corp. Code, § 5140 [a public benefit corporation has the powers of a natural person].)

E. ROSENBLATT'S Contentions are Mischaracterized. In order to discredit plaintiff/appellant RICHARD D. ROSENBLATT, EYI puts an unfair spin on the background facts and on ROSENBLATT'S contentions. EYI presents ROSENBLATT as merely a disgruntled investor who has concocted for his own benefit a fictitious alliance between various offices of Ernst & Young in the United Kingdom and the United States. (Brief of EYI, pp. 2-4) This action, however, is based on the fact that ROSENBLATT'S personal accountants and financial advisors deliberately assisted Lloyds of London in defrauding him. (ER 51-57, ¶¶ 12-15, 22-30)

His accountants were partners in accounting firms known as "Arthur Young" and eventually "Ernst & Young." (ER 50, ¶¶ 5-6, ER 51, ¶ 12, ER 56, ¶ 29) Also, the members of the office of Arthur Young (later Ernst & Young) in San Diego, California, including defendant/appellee JAMES POPE, worked in conjunction with the accounting firm's office located in London, England, in providing accounting services to ROSENBLATT with respect to his Lloyds affairs.

*8 The entities bearing the name "Ernst & Young" routinely hold themselves out to the public as a worldwide accounting firm. (See, for example, the website known as www.ey.com/global/gcr.nsf/International/International_Home and go to "Corporate Finance" page under "Services"; ER 56, ¶ 29; ER 57, 1 32) As a worldwide accounting firm/partnership, the entities bearing the name "Ernst & Young" are responsible for the torts of their individual accountants. ROSENBLATT simply seeks the opportunity to prove up the existence of the worldwide partnership, the existence of the fraud, and his right to damages.

F. The Standard of Review is de novo.

The proper standard of review in the present case should be de novo. The District Court did not make any findings of fact. The District Court simply relied upon the "Certificate of Incorporation." (ER 44) The District Court's refusal to look behind the "Certificate of Incorporation" precluded any factual analysis of the nature of the entity. EYI was not even required to produce its Articles of Association or other formation documents for review by ROSENBLATT or the Court. (See n. 3, supra, at p. 5)

The question posed for review is whether or not a Cayman Islands' exempt company should be considered, per se, to be a corporation under section 1332(c)(1). In order to make this determination, this Court must necessarily look toward the Cayman Islands Companies Law to determine whether or not an exempt company *9 "incorporated" in the Cayman Islands has the type of corporate characteristics that Congress had in mind when it enacted section 1332(c)(1). Since statutory construction is generally a question of law, a de novo standard of review is appropriate. (Hellon & Associates, Inc. v. Phoenix Resort Group, 958 F. 2d 295, 297 (9th Cir. 1992).)

THE SEPARATE ACCRUAL DOCTRINE IS APPLICABLE TO THIS ACTION

A. This Case Involves Exactly the Type of Unusual Circumstances for Which the Separate Accrual Doctrine was Developed.

In its Brief, EYI states that "[c]ommon to Martinez-Ferrer [FN5], Zambrano [FN6] and New [FN7] was the fact that the plaintiff in each case would not have been able to sue for the later, different, and more serious damages at the time the earlier, lesser injury occurred." (Emphasis added) By so doing, EYI suggests that such circumstances are not present in ROSENBLATT'S case. On the contrary, ROSENBLATT faces *10 precisely the same dilemma that the plaintiffs in the Martinez-Ferrer line of cases [FN8] faced.

FN5. Martinez-Ferrer v. Richardson-Merrell, 105 Cal. App. 3d 316 (1980)

FN6. Zambrano v. Dorough, 179 Cal. App. 3d 169 (1986)

FN7. New v. Armour Pharmaceutical Co., 67 F. 3d 716 (9th Cir. 1995)

FN8. EYI asserts that "separate accrual is not the law." (EYI Brief, p.

23) This is blatantly untrue. The Martinez-Ferrer line of cases have not been overruled and EYI has cited no legal authority so stating. (See Appellant's Opening Brief, pp. 21-2 7) From the mere fact that some intermediate appellate courts (outside of California's Fourth District) have declined to apply the separate accrual doctrine, it does not follow that an application of the doctrine is unwarranted in all cases.

1. ROSENBLATT Could not Have Recovered for Losses Resulting from a Draw on his Letter of Credit Before it Occurred.

At the time of the Richards v. Lloyds case in 1994, ROSENLBATT could not have recovered for losses on Lloyds draw on his letter of credit. At that time, Lloyds had not taken steps to do so, was not obligated to do so and for all anyone knew then, might never do so. Any claim for losses related to a draw on ROSENBLATT'S letter of credit in 1994, then, would have been based on a claim for speculative damages, which is not actionable under California law. BAJI 14.60 provides:

You are not permitted to [award a party] [include] speculative damages, which means compensation for future loss or harm which, although possible, is conjectural or not reasonably certain. [¶] However, [if you determine that a party is entitled to recover,] you should compensate a party for loss or harm caused by the injury in question which is reasonably certain to be suffered in the future.

*11 It was not until December 13, 1996, that Lloyds drew on ROSENBLATT'S letter of credit. Thus, it was at that time that ROSENBLATT'S claim for damages related thereto became actionable and not a moment sooner.

2. ROSENBLATT Could not Have Recovered Losses Resulting from the Creation of Equitas Prior to its Existence.

Even if this Court concludes that the 1996 losses from the draw on ROSENBLATT'S letter of credit were somehow actionable in 1994, the Court cannot deny that ROSENBLATT'S Equitas losses were not actionable in 1994. Equitas did not exist, nor was its creation and effect on ROSIENBLATT even imaginable at such time.

On March 13, 1998, a judgment was rendered in favor of Lloyds and against ROSENBLATT in the United Kingdom in the amount of £413,500.00 or approximately $682,000.00. (ER 57, ¶ 35) Earlier, Lloyds sought to impose a premium on ROSENBLATT and all other remaining Names in order to fund a company known as Equitas, which was created by Lloyds on September 13, 1996. Through the creation of Equitas, Lloyds mutualized and centralized all asbestos liabilities from all syndicates. In other words, Lloyds took it upon itself to pool together all asbestos-related underwriting and distribute the entire burden of resulting losses evenly among the Names. Such unilateral action on the part of Lloyds was performed without the consent or knowledge of the Names, including *12 ROSENBLATT. The judgment represented the affirmation of Lloyds' conduct by the High Court in England. Therefore, on March 13, 1998, ROSENBLATT was deemed liable not only for asbestos-related losses incurred from claims made on underwriting syndicates on which plaintiff personally participated, but also for losses on syndicates in which he did not participate.

Therefore, on March 13, 1998, ROSENBLATT incurred "new, different and more serious damages" for which he could not previously sued, just like the plaintiffs in Martinez-Ferrer, Zambrano and New. The "new, different, and more serious damages" consisted of damages arising from the losses on syndicates in which ROSENBLATT did not participate. Thus, like those cases, this case involves more than the "uncertainty as to the amount of damages" that the general accrual rule of Davies v. Krasna, 14 Cal. 3d 502, 514 (1975) sought to address and which the District Court applied here. This case involves a category of damages which until recently were not even imaginable! Therefore, the District Court's application of general accrual principles over the separate accrual rule was in error.

B. Not all of the Cases Applying the Separate Accrual Doctrine Involved Physical Injury.

While the majority of cases cited in favor of the separate accrual doctrine involve losses sustained from a physical injury, no legal authority exists which would prohibit the Court from applying the separate accrual doctrine to claims involving a *13 purely economic loss. Ironically, some of the cases applying the doctrine stem from injuries caused by exposure to asbestos. In Wilson v. Johns-Manville Sales Corp., 684 F. 2d 111 (D.C. Cir. 1982) mild asbestosis did not start the statute of limitations running in 1973 although the underlying condition ultimately resulted in mesothelioma which manifested itself in 1978. In Pierce v. Johns-Manville Sales Corp., 296 Md. 656, 464 A. 2d 1020 (1983) the Court recognized that a failure to recognize the reality of separately accruing injuries resulting from an original harm would unfairly compel plaintiffs to rush to court with questionably meritorious claims rather than risk losing all claims for future serious injury. Unfortunately, ROSENBLATT'S situation is virtually identical. The asbestos exposure which created separately accruing liabilities for those inflicted with physical injuries has also created separately accruing distinct losses (the original investment, loss of the letter of credit, imposition of judgment as a result of "Equitas" liability, and future losses which have not yet been claimed). (ER 68, prayer, ¶ 2)

Moreover, EYI'S assertion that all the cited cases simply deal with physical injuries is not true. For instance, the separate accrual rule is applied in cases *14 involving nuisance. [FN9] Also, in Avner v. Longridge Estates, 272 Cal. App. 2d 607 (1969), the Court addressed the defendants' contention that the stipulated awareness of subsidence-related losses by the plaintiffs in 1962 barred a subsequent claim for damages arising in 1965 because the complaint for those damages was not filed within three years after plaintiffs became aware of the original injuries. Citing the rule that a new and separate cause of action can arise with each separate manifestation of an underlying injury, the Court held:

FN9. The Court in Martinez-Ferrer stated that "the nuisance cases exemplify 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." (Martinez-Ferrer v. Richardson-Merrell, supra, 105 Cal. App. 3d at 326.)

We hold that the allegations of plaintiffs' complaint bring the plaintiffs within the exception noted; that if plaintiffs can prove that there were two new causes of action arising in 1965, their action is not barred by [the statute of limitations]; that if only a single cause existed, the one arising in 1962, as contended by defendants, then the action is barred. (Id. at 617.)

EYI continually points to the Richards lawsuit against Lloyds in which ROSENBLATT participated and contend that no subsequent action may be *15 maintained by operation of the statute of limitations. [FN11] [FN12] That identical argument was made and rejected in Chu v. Canadian Indemnity Co., 224 Cal. App. 3d 86 (1990). The defendants in Chu pointed to the fact that the plaintiff had prior knowledge of certain injuries to his property, and the fact that he had actually filed a lawsuit in 1983 alleging the existence of unspecified defects which rendered his property "unsaleable" and "uninhabitable." In reversing an order for summary judgment, the Court noted that the problems which formed the basis of the new lawsuit appeared to be "distinct from and unrelated to the earlier discovered defects" although certain questions of fact in that regard certainly needed to be explored at trial. (Id. at 100.) With respect to the 1983 lawsuit itself, the Court held that while Chu's admissions in that lawsuit were admissible on the underlying factual questions relating to the statute of *16 limitations issues, they were not dispositive because of the inherently complex nature of the litigation. (Id. at 102-103.) Although Ch u v. Canadian Indemnity Co., supra, 224 Cal.App.3d 86 arises in the context of an insurance coverage case, it presents the same issues confronted by this Court. Similarly, the current case arises out of ROSENBLATT'S personal losses concerning his letter of credit and the subsequent creation of Equitas. These two issues were not involved in the Richards case.

FN11. EYI falsely states that all of the documents attached to ROSENBLATT'S Complaint filed on January 12, 1999 were attached to a

Declaration he filed in the Richards case back in 1994. Exhibits 1 and 2 to the Complaint have never been made part of any Court proceeding other than this one.

FN12. EYI also references threats of litigation against "accounting firms" and "Ernst & Young" made by ROSENBLATT in or about 1994. The remarks made by ROSENBLATT regarding suits against accountants were done in his capacity as President of the American Names Association and made with respect to Names who had participated on the same syndicate as British Names who had successfully sued Ernst & Whinney in England. Such persons were participants in the Merrett 418/1985 syndicate. ROSENBLATT did not participate on such Syndicate and ROSENBLATT was never a client of Ernst & Whinney. (ER 37, ¶ 2, ER 38, ¶ 4, ER 50, ¶ 6, ER 51, ¶¶ 12-13, ER 52, ¶ 15, ER 56, 29, ER 57, 32)

Based on the foregoing, the District Court erred in holding that EYI is a corporation. Further, District Court erred in holding that the separate accrual doctrine does not apply to the facts of this case. Consequently, the District Court's ruling should be reversed in its entirety.

Rosenblatt v. Ernst & Young

2000 WL 33985634

Briefs and Other Related Documents (Back to top)

• 2000 WL 33985633 (Appellate Brief) Opening Brief of Plaintiff - Appellant Richard D. Rosenblatt (Oct. 10, 2000)Original Image of this Document with Appendix (PDF) View and print document in PDF format exactly like the original filing

• 00-56099 (Docket) (Jun. 28, 2000)

END OF DOCUMENT