In re Ernst & Young, Llp

Decision Date05 August 2008
Docket NumberNo. COA07-1219.,COA07-1219.
Citation663 S.E.2d 921
CourtNorth Carolina Court of Appeals
PartiesIn the Matter of the Summons Issued to ERNST & YOUNG, LLP and all Subsidiaries, Affiliated and Associated Entities.

Alston & Bird LLP, by Jasper L. Cummings, Jr., Raleigh, and Robin L. Greenhouse, Washington, DC, for intervenor-appellant.

CALABRIA, Judge.

Wal-Mart Stores, Inc. ("intervenor") appeals an order denying intervenor's motion to dismiss and an order compelling Ernst & Young, LLP ("E & Y") to comply with a North Carolina Department of Revenue Administrative summons. We affirm the order denying the motion to dismiss and remand for an in camera review to determine whether E & Y's documents are privileged.

In 1995, E & Y provided consulting services to intervenor to implement tax shelters designed to reduce state corporate income taxes. In 1996, E & Y also provided consulting services to establish real estate investment trusts ("REITs") to reduce intervenor's state corporate income tax liability. Intervenor restructured its operations and requested that E & Y analyze intervenor's litigation risks.

On 6 February 2007, the Secretary of Revenue ("petitioner") issued a summons to E & Y, pursuant to N.C. Gen.Stat. § 105-258, directing E & Y to appear, give testimony and produce books, papers, records or other data, relevant or material to the petitioner's inquiry regarding Wal-Mart Stores, Inc. and subsidiaries, including all limited liability companies, trusts, regulated investment companies, and any other affiliated entities. The summons also requested production of all documents "created at any time regarding the creation or existence of the New Entities...." Petitioner defined the "New Entities" as Wal-Mart Stores East, Inc., Wal-Mart Property Co., Wal-Mart Real Estate Business Trust, Sam's West, Inc., Sam's East, Inc., Sam's Property Co., and Sam's Real Estate Business Trust. Petitioner requested production of all documents created between January 1, 1990 and December 31, 2000 which are either not directed to a specific client or involve Wal-Mart "discussing the marketing of, sale of, risks of, implementation of, use of, benefits of, and/or tax savings of real estate investment trusts, regulated investment companies, trusts, and/or holding companies owning trusts" as well as all documents created between January 1, 1990 and January 31, 2005 "proposing or analyzing transactions that require the creation, elimination, and/or restructuring of entities within the Wal Mart corporate structure and that would produce federal and/or state tax savings."

On 11 April 2007, petitioner filed a verified "Application for an Order for the Production of Certain Books, Papers, Records, and other Data" ("the application"). Petitioner alleges it granted E & Y multiple extensions of time to produce the responses to the summons. E & Y produced tens of thousands of pages of documents. However, thousands of pages of documents were withheld on the basis of privilege. E & Y produced a privilege log for 760 of those withheld documents. Petitioner alleged that E & Y and intervenor had failed to show the withheld documents were subject to the work product privilege.

On 4 May 2007, intervenor moved to intervene and to dismiss petitioner's application for failure to comply with the Rules of Civil Procedure.1

On 23 May 2007, intervenor filed a Preliminary Statement asserting that the documents withheld are protected by the work-product privilege. Intervenor also submitted an Affidavit by David Bullington, Vice President of Taxes for Intervenor during the years at issue ("Bullington Affidavit") and a privilege log describing the date, author, recipient and summary of each contested document ("privilege log").

Judge Donald W. Stephens ("Judge Stephens") granted intervenor's motion to intervene and denied intervenor's motion to dismiss ("order denying motion to dismiss"). On 15 June 2007, Judge Stephens rejected intervenor's claim of work product privilege and ordered E & Y to comply fully with petitioner's summons within thirty days of the order ("Order to Comply"). Judge Stephens stayed execution of the Order to Comply on the condition that E & Y deposit the contested documents under seal. E & Y deposited the contested documents under seal on 16 July 2007. Intervenor appeals the Order to Comply and the order denying the motion to dismiss.

I. Interlocutory Appeal

Petitioner argues the Order to Comply and order denying intervenor's motion to dismiss are interlocutory and not immediately appealable. We disagree.

"An order is interlocutory if it does not determine the entire controversy between all of the parties." Abe v. Westview Capital, 130 N.C.App. 332, 334, 502 S.E.2d 879 (1998). Interlocutory orders are generally not subject to immediate appeal. N.C. Gen.Stat. § 7A-27(b) (2007); N.C. Gen.Stat § 1A-1, Rule 54(b); Veazey v. Durham, 231 N.C. 357, 362, 57 S.E.2d 377, 381 (1950). One exception is where the denial of an immediate appeal affects a substantial right. N.C. Gen.Stat. § 7A-27(d)(1) (2007); N.C. Gen.Stat. § 1-277(a) (2007).

Intervenor argues the order granting petitioner's application was a final judgment and even if not a final judgment, the denial of an appeal would affect a substantial right. We agree.

The only matter before the trial court was whether to grant petitioner's application to order E & Y to comply with the petitioner's summons. This controversy was resolved upon entry of the Order to Comply with petitioner's summons. Therefore, intervenor's appeal is from a final judgment.

The order denying the motion to dismiss is immediately appealable because "[u]pon an appeal from a judgment, the court may review any intermediate order involving the merits and necessarily affecting the judgment." N.C. Gen.Stat. § 1-278 (2007). The order denying intervenor's motion to dismiss was an intermediate order that involved the merits and affected the final judgment because if it had been granted, the trial court would not have issued the Order to Comply.

In addition, we note that even if the appeal was not from a final judgment, appeals of discovery orders asserting a statutory or a common-law privilege affect a substantial right. Evans v. United Servs. Auto. Ass'n, 142 N.C.App. 18, 541 S.E.2d 782 (2001) (holding the common law privilege of attorney-client is equivalent to a statutory privilege and affects a substantial right) (citing Sharpe v. Worland, 351 N.C. 159, 522 S.E.2d 577 (1999)); Isom v. Bank of Am., N.A., 177 N.C.App. 406, 628 S.E.2d 458 (2006) (discovery order that required bank to disclose documents concerning bank's dispute with check vendor despite bank's assertion that documents were protected by attorney-client privilege or work-product doctrine was immediately appealable because it affected a substantial right).

II. Motion to Dismiss

Intervenor contends the trial court erred in denying the motion to dismiss because petitioner violated the North Carolina Rules of Civil Procedure by failing to issue a civil summons, file a complaint, or serve process on either E & Y or intervenor. We disagree.

A. Jurisdiction and Service of Process

Intervenor argues proceedings pursuant to N.C. Gen.Stat. § 105-258 should be treated as either a civil action or a special proceeding subject to the Rules of Civil Procedure.

Petitioner argues N.C. Gen.Stat. § 105-258 confers subject matter jurisdiction on the trial court to enforce the administrative summons. Petitioner contends the North Carolina Rules of Civil Procedure do not apply because the procedure for summons enforcement is a "differing procedure" governed by N.C. Gen.Stat. § 105-258 and § 5A-23(a).

A civil action is "an ordinary proceeding in a court of justice, by which a party prosecutes another party for the enforcement or protection of a right, the redress or prevention of a wrong, or the punishment or prevention of a public offense." N.C. Gen.Stat. § 1-2 (2007); see also Gillikin v. Gillikin, 248 N.C. 710, 712, 104 S.E.2d 861, 863 (1958). "Every other remedy is a special proceeding." N.C. Gen.Stat. § 1-3 (2007).

We agree that the North Carolina Rules of Civil Procedure apply to actions brought under N.C. Gen.Stat. § 105-258. N.C. Gen. Stat. § 105-258(a) allows the Secretary of Revenue to examine data and summon persons to appear, produce documents, and testify under oath "for the purpose of ascertaining the correctness of any [tax] return, making a[tax] return where none has been made, or determining the liability of any person for a tax or collecting any such tax." N.C. Gen.Stat. § 105-258(a) (2007).

If any person so summoned refuses to obey such summons or to give testimony when summoned, the Secretary may apply to the Superior Court of Wake County for an order requiring such person or persons to comply with the summons of the Secretary, and the failure to comply with such court order shall be punished as for contempt.

Id. N.C. Gen.Stat. § 105-258(b-c) authorizes the department employees of the Secretary of Revenue to sign, verify and serve process for any civil papers in which the Secretary of Revenue is a party.

N.C. Gen.Stat. § 105-246, under the same subchapter and article as N.C. Gen.Stat. § 105-258, provides that: "All actions or processes brought in any of the superior courts of this State, under provisions of this Subchapter, shall have precedence over any other civil causes pending in such courts, and the courts shall always be deemed open for trial of any such action or proceeding brought therein." N.C. Gen.Stat. § 105-258 is a process brought under this Subchapter, and therefore is a civil action. See also Charns v. Brown, 129...

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