In re Ernst & Young, Llp

• Decision Date: 09 October 2009
• Docket Number: No. 424PA08.,424PA08.
• Citation: 363 N.C. 612,684 S.E.2d 151
• Court: North Carolina Supreme Court
• Parties: In the Matter of the Summons Issued to ERNST & YOUNG, LLP and All Subsidiaries, Affiliated and Associated Entities.

684 S.E.2d 151

363 N.C. 612

In the Matter of the Summons Issued to ERNST & YOUNG, LLP and All Subsidiaries, Affiliated and Associated Entities.

No. 424PA08.

Supreme Court of North Carolina.

October 9, 2009.

On discretionary review pursuant to N.C.G.S. § 7A-31 of a unanimous decision of the Court of Appeals, 191 N.C.App. 668, 663 S.E.2d 921 (2008), affirming an order denying a motion to dismiss entered on 21 June 2007 and remanding an order to comply entered on 15 June 2007, both by Judge Donald W. Stephens in Superior Court, Wake County. On 5 February 2009, the Supreme Court allowed intervenor's conditional petition for discretionary review as to additional issues. Heard in the Supreme Court 5 May 2009.

Roy Cooper, Attorney General, by Gregory P. Roney, Assistant Attorney General, for petitioner-appellant/appellee Secretary of the North Carolina Department of Revenue.

Alston & Bird LLP, by Jasper L. Cummings, Jr., Raleigh, for intervenor-appellee/appellant Wal-Mart Stores, Inc.

TIMMONS-GOODSON, Justice.

The dispositive issue in this appeal is whether the Rules of Civil Procedure apply to summons enforcement proceedings under N.C.G.S. § 105-258(a). We hold that the Rules of Civil Procedure do not apply to such proceedings, and we therefore modify, affirm in part, and remand the decision of the Court of Appeals.

I. Background

Beginning in 1995 Ernst & Young, LLP ("Ernst & Young"), a global professional-services firm, sold to Wal-Mart Stores, Inc. ("Wal-Mart") a number of tax shelters designed to reduce Wal-Mart's income tax liability to various states, including North Carolina. In 1996, with the assistance of Ernst & Young, Wal-Mart underwent corporate restructuring to implement these tax shelters and placed substantially all of its real estate interests in real estate investment trusts ("REITs"). In 2001 Ernst & Young assisted Wal-Mart in restructuring to implement additional tax shelters.

On 6 February 2007, pursuant to N.C.G.S. § 105-258,¹ the Secretary of Revenue ("the Secretary") issued a summons directing a representative of Ernst & Young to appear before the Secretary or his designee to provide testimony under oath and produce books, papers, records, and other data relevant to the Secretary's inquiry regarding Wal-Mart. The Secretary requested, inter alia, the following: (1) all documents regarding the creation or existence of certain subsidiaries and affiliated companies, including certain REITs; (2) all documents created between 1 January 1990 and 31 December 2000 "which either are not directed to a specific client or involve Wal[-]Mart discussing the ... tax savings of [REITs], regulated investment companies, trusts, and/or holding companies owning trusts"; and (3) all documents created between 1 January 1990 and 31 January 2005 relating to "the creation, elimination, and/or restructuring of entities within Wal[-]Mart ... that would produce federal and/or state tax savings." The summons also directed that if Ernst & Young withheld any documents on the basis of a claim of privilege, Ernst & Young must provide a complete list of documents withheld and a statement of the grounds upon which each document was considered privileged.

Although it partially complied with the summons, Ernst & Young withheld thousands of pages of documents. Moreover, Ernst & Young produced an incomplete list of the withheld documents, asserting only that the withheld documents were "work product."

On 11 April 2007, the Secretary filed in the Superior Court, Wake County, a verified "Application for an Order for the Production of Certain Books, Papers, Records, and Other Data" ("the application"). The Secretary sought a court order compelling Ernst & Young to withdraw all objections and fully comply with the summons. The Secretary asserted that Ernst & Young and Wal-Mart failed "to establish the applicability of the work product privilege" to the withheld documents and therefore waived the privilege. In the alternative, the Secretary sought a court order directing Ernst & Young "to produce a complete and detailed privilege log for all of its withheld documents" and an in camera review by the court of the withheld documents to determine the applicability of the work product privilege.

On 11 April 2007, the superior court, Judge Donald W. Stephens presiding, conducted a hearing on the Secretary's application. By an order dated 30 April 2007, the superior court continued the matter until 5 June 2007 and directed the Secretary to give Wal-Mart and its subsidiaries notice of the upcoming hearing. The court ordered Wal-Mart to deliver a complete list of the withheld documents to the Secretary and to support any asserted privileges with details sufficient for the court to evaluate the claims.

On 4 May 2007, Wal-Mart filed motions to intervene and to dismiss the application for failure to comply with the North Carolina Rules of Civil Procedure.² Wal-Mart argued that the Secretary violated the Rules of Civil Procedure "in multiple respects, including: (1) fail[ing] to ... fil[e] a complaint; (2) fail[ing] to identify and serve process upon defending parties; (3) fail[ing] to provide defending parties with an opportunity to answer a complaint; and (4) fail[ing] to provide a mechanism for discovery and proper issue development." Wal-Mart also sought dismissal for failure to state a claim under Rule 12(b)(6). Wal-Mart argued that the Rules of Civil Procedure apply to summons enforcement proceedings and that application of the Rules of Civil Procedure was "the only way to assert its due process rights under the North Carolina and United States Constitutions." On 23 May 2007, Wal-Mart filed a brief in support of its work product privilege claim.

Although the superior court allowed Wal-Mart's motion to intervene on 6 June 2007, the court denied Wal-Mart's motion to dismiss pursuant to subdivisions (1), (2), (4), (5), and (6) of Rule 12(b). By order dated 14 June 2007, the superior court rejected Wal-Mart's work product privilege claim and ordered Ernst & Young to comply fully with the summons within thirty days of the order. The superior court stayed execution of the order on the condition that Ernst & Young deposit the contested documents under seal. On 2 July 2007, Wal-Mart filed its notice of appeal.

The Court of Appeals affirmed the trial court's order denying Wal-Mart's motion to dismiss and remanded the trial court's order rejecting Wal-Mart's work product claim. In re Summons Issued to Ernst & Young, LLP, 191 N.C.App. 668, 680, 663 S.E.2d 921, 929 (2008). With regard to Wal-Mart's motion to dismiss, the Court of Appeals opined that summons enforcement proceedings under N.C.G.S. § 105-258(a) are civil actions and are therefore subject to the Rules of Civil Procedure. Id. at 674, 663 S.E.2d at 926. However, because N.C.G.S. § 105-258(a) confers jurisdiction on the superior court upon application by the Secretary, the Court of Appeals concluded that the Secretary's failure to file and serve a complaint by civil process was a non-jurisdictional defect and did not warrant dismissal. Id. at 676, 663 S.E.2d at 927. Further, because the application contained facts sufficient to inform Ernst & Young of the nature of the claim, the Court of Appeals determined that the application stated a claim for relief. Id. at 677, 663 S.E.2d at 928.

With regard to Wal-Mart's work product privilege claim, the Court of Appeals concluded that it was unclear from the record on appeal whether the withheld documents were created in anticipation of litigation. Id. at 679, 663 S.E.2d at 929. Consequently, the Court of Appeals remanded for the trial court to review the documents in camera. Id. On 5 February 2009, we allowed the Secretary's petition for discretionary review to determine whether the Rules of Civil Procedure apply to summons enforcement proceedings under N.C.G.S. § 105-258(a) and Wal-Mart's conditional petition for discretionary review to determine whether the Court of Appeals erred in failing to dismiss the Secretary's application pursuant to Rule 12(b).

II. Analysis

On appeal, the Secretary argues that the Court of Appeals erred in holding that the Rules of Civil Procedure apply to summons enforcement proceedings under N.C.G.S. § 105-258(a). According to the Secretary, N.C.G.S. § 105-258(a) establishes an expedited procedure for summons enforcement proceedings and gives the superior court jurisdiction to take any actions reasonably necessary to adjudicate summons enforcement applications. In its response, Wal-Mart contends that the Rules of Civil Procedure apply to summons enforcement proceedings under N.C.G.S. § 105-258(a) because the statute does not prescribe "a `differing procedure' that completely replaces" the Rules of Civil Procedure.

Questions of statutory interpretation are ultimately questions of law for the courts and are reviewed de novo. Brown v. Flowe, 349 N.C. 520, 523, 507 S.E.2d 894, 896 (1998) (citing Wood v. J.P. Stevens & Co., 297 N.C. 636, 642, 256 S.E.2d 692, 696 (1979)). "The primary rule of construction of a statute is to ascertain the intent of the legislature and to carry out such intention to the fullest extent." Burgess v. Your House of Raleigh, Inc., 326 N.C. 205, 209, 388 S.E.2d 134, 137 (1990) (citing Buck v. U.S. Fid. & Guar. Co., 265 N.C. 285, 290, 144 S.E.2d 34, 37 (1965)).

In interpreting a statute, we first look to the plain meaning of the statute. Where the language of a statute is clear, the courts must give the statute its plain meaning; however, where the statute is ambiguous or unclear as to its meaning, the courts must interpret the statute to give effect to the legislative intent.

Frye Reg'l Med. Ctr., Inc. v. Hunt, 350 N.C. 39, 45, 510 S.E.2d 159, 163 (1999) (citations omitted).

With these principles of statutory interpretation in mind, we address whether the Rules of Civil Procedure apply to summons enforcement proceedings under N.C.G.S. § 105-258(a). As set forth in Rule 1, the Rules...