Simpson v. Ernst & Young

• Citation: 850 F. Supp. 648
• Decision Date: 21 April 1994
• Docket Number: No. C-1-91-196.,C-1-91-196.
• Court: U.S. District Court — Southern District of West Virginia
• Parties: P. Larue SIMPSON, Plaintiff, v. ERNST & YOUNG, Defendant.

850 F. Supp. 648

P. Larue SIMPSON, Plaintiff, v. ERNST & YOUNG, Defendant.

No. C-1-91-196.

United States District Court, S.D. Ohio, Western Division.

April 21, 1994.

Janet Gilligan Abaray, Stanley Morris Chesley, Waite, Schneider, Bayless & Chesley, Cincinnati, OH, for Larue Simpson.

Michael Samuel Glassman, Dinsmore & Shohl, Cincinnati, OH, Elizabeth B. Healy, Ernst & Young, New York City, for Ernst & Young.

Michael Samuel Glassman, Dinsmore & Shohl, Cincinnati, OH, for Gerry Hill.

ORDER

STEINBERG, United States Magistrate Judge.

This case is before the Court following motions for summary judgment, arguments thereon, and responsive pleadings. (Docs. 162, 163, 165, 166). Plaintiff P. LaRue Simpson brings this action against Ernst & Young alleging claims under the Age Discrimination in Employment Act (ADEA), 29 U.S.C. § 621 et seq.; Age Discrimination By Employers, Ohio Revised Code § 4101.17; the Employee Retirement Income Security Act (ERISA); as well as an Ohio common law unjust enrichment claim. The Court dismissed the latter claim. (Doc. 101).

Simpson contends that he was Ernst & Young's employee; therefore, this Court has jurisdiction over his ADEA, Ohio age discrimination, and ERISA claims. Ernst & Young contends that Simpson was a partner, and, because these statutes apply only to employees, he has no claim as a matter of law. Following denial of both parties' initial motions for summary judgment, they consented to jury trial and entry of final judgment by the Magistrate Judge. A trial was held on the preliminary jurisdictional issue whether Simpson was an Ernst & Young employee. This resulted in a mistrial when the jury was unable to agree upon a verdict. (Doc. 154). Based on the trial evidence, the parties agreed there are no disputed questions of material fact on the jurisdictional issue and resubmitted it to the Court for summary judgment. The parties also submitted for summary judgment the issue whether Simpson was an employee within the meaning of ERISA. (Id.).

UNDISPUTED FACTS

The following facts are gleaned from the trial evidence and exhibits and are undisputed.

Simpson, a Certified Public Accountant (CPA), was born on September 27, 1943. Ernst & Young is a large accounting firm created in 1989 by the merger of the Ernst & Whinney and Arthur Young accounting firms. Prior to his relationship with Ernst & Young, Simpson was the Managing Partner for Arthur Young's Cincinnati, Ohio office.

I. The Ernst & Young Merger

In June 1989, Arthur Young distributed to its partners a Merger Agreement (Pl.Ex. 73) and an Information Document For Partners (Pl.Ex. 69). The Information Document represented that the "worldwide" combination of Arthur Young and Ernst & Whinney would result in the largest and strongest international professional services firm in the world. (Id., p. 3). The two firms were described as being compatible because, among other things, they "care for individuals by promoting and recognizing them based on performance" and have "mutual respect among partners." (Id., p. 5). Both were estimated to have good increases in their 1990 and 1991 cash earnings, despite merger costs. (Id., p. 36). The Information Document represented that Arthur Young partners would receive equal or better benefits under the Ernst & Young retirement plan. (Id., p. 55). Arthur Young and Ernst & Whinney represented to their partners and the public that the merger was not expected to result in a reduction in partners. (Doc. 144, p. 289).

The merger vote was conducted by signed ballot. Simpson voted in favor of the merger. At the time of the vote, no options were presented for the continuation of Arthur Young, and the merger was strongly recommended by those in high management positions.

On October 1, 1989, the merger was effected. The merged firm organized itself into two entities: Ernst & Young and Ernst & Young U.S. The Ernst & Young Partnership Agreement (the Partnership Agreement) required the signatories, who are termed "Partners," to be CPAs and to sign a second agreement, the Ernst & Young U.S. Partnership Agreement (the U.S. Agreement). The signatories to the U.S. Agreement were not termed "Partners," but were denominated "Parties" and consisted of individuals who were both CPAs and non-CPAs. The CPAs were referred to as "Capital Account Parties," and the non-CPAs were termed "Investment Account Parties."

II. The Merged Firms' Management

A Management Committee consisting of ten to fourteen Parties and a Chairman was responsible for the management of Ernst & Young U.S. (Pl.Ex. 46, Sec. 3(a), (d)). Its responsibilities included addition or discharge of Parties, decisions on mergers and acquisitions, allocation of earnings among the Parties, and appointment or removal of the Chairman. (Id., Sec. 3(d)). The Chairman selected new members of the Management Committee subject to the approval of the other members of the Management Committee and the Advisory Council. (Id., Sec. 3(a)). The Advisory Council consisted of the Chairman, not more than four members of the Management Committee, and eighteen other members elected by the Parties. (Id., Sec. 5(a)). It served in an advisory capacity to the Management Committee. (Id., Sec. 5(c)).

As an Ernst and Young U.S. Party, Simpson had one vote for each vacancy on the Advisory Council. (Id., Sec. 5(b)). A Nominating Committee, appointed by the Management Committee, nominated one Party for each vacancy as it occurred on the Advisory Council. Advisory Council nominees were unopposed. (Id.).

The makeup of Ernst & Young's Management Committee was identical to the Ernst & Young U.S. Management Committee. (Pl. Ex. 75, Sec. 2(b)). Upon the selection of a member to the Ernst & Young U.S. Management Committee, that person automatically became a member of Ernst & Young's Management Committee. (Id.) The Management Committee was responsible for Ernst & Young's general management. (Id., Sec. 2(a)).

III. The Parties' Investment In Ernst & Young U.S.

Both Capital Account Parties, such as Simpson, and Investment Account Parties were required to contribute funds into a Capital Account or an Investment Account, respectively. The Management Committee determined the amount each Party was required to contribute. (Pl.Ex. 46, Sec. 6(a)). Simpson appears to have contributed $84,000 to his Capital Account. (Df.Ex. 527). The Parties "capital contributions" were accomplished without any out-of-pocket expense to them. Ernst & Young U.S. arranged with Citibank to borrow the capital contribution funds on the Parties' behalf. (Pl.Ex. 69, p. 55). The firm did not guarantee these loans. (Doc. 147, p. 449). It did, however, pay the periodic interest due from the Parties to Citibank and debited the parties' accounts accordingly. (Id., p. 450). In addition, the Parties earned interest on their "capital contributions," which Ernst & Young U.S. paid to them.¹ The Parties were required to reduce the balance of their Accounts ten percent per year beginning the third year after the merger. (Id., p. 443).

Regarding Ernst & Young, the Partnership Agreement states that "At sic October 1, 1989, the amount of the Capital Account of each Partner shall be established by the Management Committee." (Pl.Ex. 75, Sec. 4(a)). Simpson did not establish a capital account for this entity.

Upon dissolution of Ernst & Young U.S., the Management Committee will determine the amount owing to former Parties and current Parties. (Pl.Ex. 46, Sec. 18). Upon dissolution of Ernst & Young, the Management Committee, in its discretion, will allocate to the Partners the liquidation proceeds. (Pl.Ex. 75, Sec. 9).

As a Capital Account Party, Simpson was stated to be jointly and individually liable for the losses of Ernst & Young U.S. (Pl.Ex. 46, Sec. 19); as a Partner, he was stated to be jointly and individually liable for Ernst & Young losses. (Pl.Ex. 75, Sec. 10).

IV. Simpson's Earnings

Ernst & Young U.S. paid Simpson an annual salary in an amount the Management Committee determined, which was charged as a business expense. (Pl.Ex. 46, Sec. 8(b)). For state tax purposes, Ernst & Young U.S. treated Simpson's salary as just that — a salary. (Doc. 147, p. 449). For federal tax purposes, however, Ernst & Young U.S. reported his salary on a Schedule K-1 as a distribution of partnership earnings. For the 1990 tax year, Simpson represented in his federal tax return that Ernst & Young U.S. was a partnership and that he was a partner.

The Partnership Agreement did not reference a payment of salary; it stated that Ernst & Young's profits and losses, if any, were allocated as the Management Committee in its sole discretion determined. (Pl.Ex. 75, Sec. 4(b)). Simpson, however, received no compensation from Ernst & Young.

In addition to a salary, Ernst & Young U.S.'s Management Committee determined the amount of an "allocation" payable to each Party. (Pl.Ex. 46, Sec. 8(b)). This allocation was based on performance, level of responsibility, years of service, and other factors. (Pl.Ex. 69, p. 54).

V. Simpson's Rights

As an Ernst & Young U.S. Party, Simpson had the right to vote on proposed major firm combinations in the manner determined by the Management Committee (Pl.Ex. 46, Sec. 17). He had the right to vote on amendments to the U.S. Agreement (Id., Sec. 22). He also had the right to vote on the dissolution of Ernst & Young U.S. (Id., Sec. 18). The Advisory Council, however, was responsible for approval of any matter submitted to the Parties for vote. (Id., Sec. 5(c)(v)). As an Ernst & Young Partner, Simpson had the right to vote for the dissolution of Ernst & Young. (Pl.Ex. 75, Sec. 9). He also had the right to vote on any amendment to the Partnership Agreement. (Id., Sec. 13).

Simpson did not have the right to vote for members of the merged firms' Management Committees, see supra, pp. 650-51; however, the Management Committee nominees were made known to Simpson and other members of Arthur Young and Ernst & Whinney prior to...