KPMG Peat Marwick v. Estate of Nelco, Ltd., Inc.

• Decision Date: 28 June 2000
• Docket Number: Civ.A. No. 3:00CV206.
• Citation: 250 BR 74
• Court: U.S. District Court — Eastern District of Virginia
• Parties: KPMG PEAT MARWICK, L.L.P., Plaintiff, v. ESTATE OF NELCO, LTD., INC., Defendant.

250 B.R. 74 (2000)

KPMG PEAT MARWICK, L.L.P., Plaintiff, v. ESTATE OF NELCO, LTD., INC., Defendant.

Civ.A. No. 3:00CV206.

United States District Court, E.D. Virginia, Richmond Division.

June 28, 2000.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Hugh McCoy Fain, III, Spotts, Smith, Fain & Buis, P.C., Richmond, VA, for KPMG Peat Marwick LLP.

James Joseph Burns, Williams, Mullen, Clark & Dobbins, Samuel Walter Hixon, III, Williams, Mullen, Clark & Dobbins, Richmond, VA, for Estate of Nelco, Ltd., by and through Ezra H. Cohen, Chapter 7 Trustee in Bankruptcy.

MEMORANDUM OPINION

SPENCER, District Judge.

THIS MATTER is before the Court on a Motion for Leave to Appeal brought by Plaintiff KPMG PEAT MARWICK, L.L.P. (herein "KPMG"). For the reasons discussed below, the Motion is DENIED.

I. Background

This case arises from a multimillion dollar bank fraud scheme. Third-party and Phillip Morris employee Edward J. Reiners (herein "Reiners") persuaded Defendant NELCO, LTD. (herein "Nelco"), a computer leasing firm which had leased computers to Phillip Morris in the past, to use proceeds from loans to "purchase" computers from a New York computer reseller (herein "CCS," one of Reiners' co-conspirators) and then "lease" those computers to Phillip Morris under the terms of a Master Lease. (Mot. § I; Resp. § I.). These computers were supposedly earmarked for a secret Phillip Morris project called "Project Star"; reflecting the secrecy of Project Star, the Master Lease and resulting schedules were often referred to as the "Stealth Leases." (Resp. § I.). Under this arrangement, the banks would disburse funds directly to CCS, which was required to then ship the computers to Phillip Morris. (Mot. § I.). KPMG provided tax and financial accounting services to Nelco during this time period. (Id.; Resp. § I.). In reality, no computers were ever purchased or delivered, and Reiners diverted the loan proceeds for his personal benefit. (Mot. § I.). KPMG did not discover the fraud; their duties (if any) to do so are at the center of the instant litigation, as well as KPMG's methods of accounting and information verification. (Id.). The banks learned eventually that the Stealth Leases were fraudulent on or about March 17, 1996, and they demanded that Nelco repay the loans immediately. (Id.; Bankr.Mem. Op. at 3.). Nelco refused and filed for Chapter 11 bankruptcy protection on March 25, 1996, having committed more than $300 million in loan proceeds to the Stealth Leases.¹ (Mot. § I.). This filing was converted to a Chapter 7 case on January 7, 1997; the Bankruptcy Court (Judge Tice) noted that as a consequence of this conversion, "Nelco lost the full value of the company as a going concern and was forced to liquidate its assets at a loss." (Bankr.Mem. Op. at 3.).

The Bankruptcy Trustee (herein the "Trustee") filed a complaint against KPMG on July 16, 1999, in which it brought three claims of accountant malpractice and three claims for breach of contract (herein collectively the "Complaint"). (Id. at 1.). There is some dispute as to whether the Complaint was brought on behalf of the banks, or on behalf of the Nelco bankruptcy estate; this dispute shall be discussed in greater detail below. The Complaint seeks damages in excess of $125 million, for the years 1993 through 1995. (Id.). KPMG moved to dismiss the Trustee's complaint on the following grounds:

(1) the trustee lacks standing to pursue the damage claims on behalf of Nelco against KPMG because Nelco did not suffer, and could not suffer, those damages; (2) the trustee lacks standing to pursue damage claims of the creditor banks consisting of the unpaid amounts on the nonrecourse loans made to Nelco to finance the fraudulent leases; (3) the trustee\'s claims for accountant malpractice and breach of contract stemming from the 1993 audit (Counts I and IV) are barred by the Statute of Limitations; and (4) the trustee\'s claim arising from the incomplete 1995 audit (Counts III and IV) should be dismissed because the trustee cannot show a causal link between the incomplete audit work and any loss suffered by Nelco.

(Id. at 5.). The Bankruptcy Court rejected all four arguments and denied the motion on March 10, 2000. KPMG filed the instant Motion for Leave to Appeal on March 20, 2000.

II. Standard of Review

Federal district courts are empowered to "hear appeals from final judgments, orders, and decrees, and with leave of court, from interlocutory orders and decrees, of bankruptcy judges. . . ." 28 U.S.C. § 158(a). Non-final orders or decrees are not appealable as a matter of right, however. Coopers & Lybrand v. Livesay, 437 U.S. 463, 474, 98 S.Ct. 2454, 57 L.Ed.2d 351 (1978) (citing The Interlocutory Appeals Act of 1958, 28 U.S.C. § 1292(b)). In seeking leave to appeal an interlocutory order or decision, the appellant must demonstrate "that exceptional circumstances justify a departure from the basic policy of postponing appellate review until after the entry of a final judgment." Coopers & Lybrand, 437 U.S. at 475, 98 S.Ct. 2454 (citing Fisons, Ltd. v. United States, 458 F.2d 1241, 1248 (7th Cir.1972)). When deciding whether to grant leave to appeal an interlocutory order or decree of a bankruptcy court, the district court may employ an analysis similar to that applied when certifying interlocutory review by the circuit court of appeals under 28 U.S.C. § 1292(b). Atlantic Textile Group, Inc. v. Neal, 191 B.R. 652, 653 (E.D.Va. 1996) (citations omitted). Under this analysis,

leave to file an interlocutory appeal should be granted only when 1) the order involves a controlling question of law, 2) as to which there is substantial ground for a difference of opinion, and 3) immediate appeal would materially advance the termination of the litigation.

Id. (citations omitted). The Fourth Circuit has stated regarding the term "controlling question of law" that "certainly the kind of question best adapted to discretionary interlocutory review is a narrow question of pure law whose resolution will be completely dispositive of the litigation, either as a legal or practical matter, whichever way it goes." Fannin v. CSX Transp. Inc., 873 F.2d 1438, 1989 WL 42583, *5 (4th Cir.1989) (unpublished).

When considering an appeal from the bankruptcy court, the district court must accept the bankruptcy court's findings of fact unless they are clearly erroneous. In re Johnson, 960 F.2d 396, 399 (4th Cir.1992). Put differently, decisions as to fact "made in the exercise of a bankruptcy court's discretion will not be set aside unless there is plain error or an abuse of discretion." See In re Suthers, 173 B.R. 570, 572 (W.D.Va.1994) (citing In re Lawless, 79 B.R. 850, 852 (W.D.Mo. 1987)). District courts will review de novo the bankruptcy court's conclusions of law, however. See In re Plumlee, 236 B.R. 606, 609 (E.D.Va.1999) (citing In re Johnson, 960 F.2d at 399).

III. Analysis

To grant leave to appeal the Bankruptcy Court's denial of the Motion to Dismiss, the Court must find that the denial involves a controlling question of law, as to which there is substantial ground for a difference of opinion, and that an immediate appeal of the Bankruptcy Court's denial of the Motion to Dismiss would materially advance the termination of the litigation. The Eastern District ruled in Atlantic Textile Group that all three elements must be satisfied in order to grant leave to appeal an interlocutory decision. Atlantic Textile Group, 191 B.R. at 653. If any one element is unsatisfied, leave to appeal cannot be granted. In addition, the language of Atlantic Textile demonstrates that the second element is related to and dependent upon the first element — the denial must involve a controlling question of law, and there must be substantial ground for a difference of opinion as to that controlling question of law, not generally as to the denial itself. This makes sense, for to read the second element as independent of the first element — i.e., that the court need only find a disagreement as to the Bankruptcy Court's ultimate decision, not as to the questions of law involved — renders the second element essentially meaningless. Opposing parties will usually have divergent opinions on any given decision by a court, but the courts themselves may or may not disagree as to the law underlying that decision. In the interest of judicial economy, it is appropriate that district courts not deem the second element satisfied whenever parties disagree as to a Bankruptcy Court's interlocutory order, but rather only where substantial ground for disagreement exists as to the controlling issues of law that informed the order. Doing so restricts interlocutory appeals to those cases in which the parties earnestly dispute the law, not simply the result. With this understanding, the three factors are discussed in turn.

A. Whether the Denial of the Motion to Dismiss Involved a Controlling Question of Law

The Court must determine first whether the Bankruptcy Court's denial of the Motion to Dismiss involved a controlling question of law, as interpreted by the Fourth Circuit in Fannin to mean a narrow, dispositive question of pure law. See Fannin, 873 F.2d 1438, 1989 WL 42583 at *5. KPMG suggests the following question meets this standard: "whether a bankruptcy trustee has standing to pursue claims to vindicate damages suffered by creditors in their individual capacities." (Mot. § II.). According to KPMG, any challenge to the Trustee's standing to bring the Complaint "obviously" qualifies as a controlling question of law. (Id. § III(1).). KPMG offers no further analysis to support this argument.

Nelco responds in the main that the question proposed by KPMG is actually more a question of fact than of law, and thus cannot satisfy the first requirement for interlocutory review. (Resp. § III(1).). Nelco does not explain why the standing issue is more a question of fact than of law, however, and there are problems with the cases...