Nat'l Wine & Spirits, Inc. v. Ernst & Young, LLP

• Decision Date: 23 October 2012
• Docket Number: No. 49S02–1203–CT–137.,49S02–1203–CT–137.
• Citation: 976 N.E.2d 699
• Court: Indiana Supreme Court
• Parties: NATIONAL WINE & SPIRITS, INC., National Wine & Spirits Corporation, NWS, Inc., NWS Michigan, Inc., and NWS, LLC, Appellants (Plaintiffs below), v. ERNST & YOUNG, LLP, Appellee (Defendant below).

976 N.E.2d 699

NATIONAL WINE & SPIRITS, INC., National Wine & Spirits Corporation, NWS, Inc., NWS Michigan, Inc., and NWS, LLC, Appellants (Plaintiffs below),

v.ERNST & YOUNG, LLP, Appellee (Defendant below).

No. 49S02–1203–CT–137.

Supreme Court of Indiana.

Oct. 23, 2012.

Todd J. Kaiser, John K. Henning, Indianapolis, IN, Attorneys for Appellants.

Karl L. Mulvaney, Brian W. Welch, Phil L. Isenbarger, Indianapolis, IN, Attorneys for Appellee.

On Petition to Transfer from the Indiana Court of Appeals, No. 49A02–1012–CT–1289

DAVID, Justice.

In this case, a company hired an accounting firm to provide auditing services. Their agreement provided that any claim arising from the services would be submitted to arbitration. During the years covered by the agreement, an employee of the company committed fraud and theft, causing significant losses to the company.

The company alleged negligence, breach of contract, and unjust enrichment against the accounting firm and demanded arbitration. The arbitration panel ultimately found the accounting firm negligent and the company comparatively negligent. The company then filed the present suit, claiming the accounting firm committed deception because the documents that the accounting firm produced during the arbitration were misleading and caused the arbitration panel to find the company comparatively at fault.

We hold that, under the facts of this case, the issue underlying the deception claim is the veracity of the documents produced at arbitration, which was an issue necessarily decided by the arbitration panel. Accordingly, issue preclusion bars the company's deception claim, and we affirm the trial court's grant of summary judgment in favor of the accounting firm.

Facts and Procedural History

In 1998, National Wine and Spirits (NWS) hired Ernst & Young (E & Y) to perform auditing services for NWS's fiscal years 1998 through 2001. NWS and E & Y agreed that “[a]ny claim or controversy arising out of or relating to the services covered by” the auditing agreement “shall be submitted ... to binding arbitration.”

During the fiscal years covered by the auditing agreement, an employee in NWS's accounts-receivable department, Diane Woodrum, committed fraud and theft and caused approximately $4.2 million in losses to NWS. In late 2001, NWS filed a complaint in trial court, asserting claims of negligence, breach of contract, and unjust enrichment against E & Y. E & Y responded with a motion to compel arbitration and stay proceedings, which the trial court granted. Accordingly, in 2002, NWS filed a demand for arbitration, asserting the same claims against E & Y as those asserted to the trial court.

Approximately seven months before arbitration, E & Y produced about 40,000 pages of documents from its audits of NWS. Among the documents was a memo by E & Y auditor David Sems (“Sems Memo”). The Sems Memo was written after the discovery of Woodrum's fraudulent activity and references the audit team's contacts with Woodrum: “There were several incidences where questions where [sic] raised and the audit team contacted Ms. Woodrum for answers and explanations. These explanations are recorded in the audit work papers.”

Just ten days before the arbitration hearing, E & Y produced additional computer records called “cell notes” that the previously produced documents did not contain. According to E & Y, the copier service had inadvertently failed to print the documents with the cell notes, which were additional remarks about the figures contained in the main body of the documents. Given the timing of the cell-notes disclosure, the arbitration-panel chairman asked NWS's counsel whether NWS was prepared to proceed or whether NWS wanted more time. NWS's counsel stated NWS wanted to proceed.

The cell notes indicated that E & Y had spoken with NWS employees Matt Albrecht and Cindy Sullivan about suspicious increases in accounts receivable. E & Y used the cell notes at arbitration as evidence that NWS was guilty of comparative fault. NWS presented evidence to refute the information contained in the cell notes. In particular, Albrecht and Sullivan testified that they never talked to anyone from E & Y, and Albrecht, Sullivan, and other NWS employees testified that information contained in the cell notes was inaccurate.

The arbitration panel concluded that E & Y was negligent and that NWS was comparatively negligent and responsible for 40% of its own losses. Accordingly, the panel ordered E & Y to pay NWS 60% of its losses, which amounted to approximately $2.25 million. E & Y sent NWS a check for that amount, and the parties entered a joint stipulation for dismissal of the court case with prejudice. In September 2004, the trial court dismissed the case with prejudice.

Less than two years later, NWS sued E & Y for fraud and deception in connection with the records E & Y produced and relied upon during arbitration. The complaint alleged several theories of deception: (1) E & Y may have altered the cell notes once litigation began to make it appear that E & Y auditors did not act negligently; (2) E & Y auditors may have entered false information initially that would incorrectly cause a finder of fact to determine E & Y acted properly, and E & Y intentionally produced the false cell notes in the arbitration proceedings; and (3) E & Y scrubbed the work papers of incriminating documents, and E & Y intentionally produced them in this misleading form during the arbitration proceedings. E & Y moved for summary judgment, and the trial court granted E & Y summary judgment on NWS's fraud claim but denied the motion as to the deception claim. E & Y then filed a second motion for summary judgment on NWS's deception claim, producing an expert's opinion that the cell notes were not altered after they were created. The trial court granted E & Y's second motion for summary judgment.

On appeal, NWS contended that, as a threshold matter, the trial court should have dismissed E & Y's second summary judgment motion as an “improper” successive motion. Nat'l Wine & Spirits, Inc. v. Ernst & Young, LLP, 954 N.E.2d 1017, 1020 (Ind.Ct.App.2011). NWS further contended that the trial court should have denied the motion because a material issue of fact existed regarding its second and third theories of deception. Id. The Court of Appeals rejected NWS's threshold argument, but it concluded that the evidence does allow an inference in favor of NWS on its second and third theories of deception and, accordingly, summary judgment was improper. Id. at 1020–22. In reaching this conclusion, the Court of Appeals rejected E & Y's alternative arguments that NWS's allegations do not give rise to theories of deception and that res judicata bars NWS's claims. Id. at 1021–23.

We granted transfer. We summarily affirm the decision of the Court of Appeals that E & Y's successive motion for summary judgment was proper. Ind. Appellate Rule 58(A)(2).

Standard of Review

In reviewing summary judgment, this Court applies the same standard as the trial court: summary judgment is proper when the moving party demonstrates that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Ind. Trial Rule 56(C). If the trial court's summary judgment can be sustained on any basis in the record, we affirm. Harris v. Traini, 759 N.E.2d 215, 221 (Ind.Ct.App.2001), trans. denied.

Issue Preclusion

E & Y contends that both components of res judicata—issue preclusion and claim preclusion—preclude NWS's deception claim and support summary judgment in E & Y's favor. E & Y argues that the matter NWS now seeks to litigate either was decided or could have been decided in the arbitration proceeding. Specifically, E & Y maintains that NWS simply “seeks to use a deception claim to overturn the arbitration panel's decision to attribute 40% comparative fault to it.”

We agree with E & Y that, under these circumstances, issue preclusion bars NWS's deception claim. Accordingly, we need not address whether claim preclusion also applies.¹

Issue preclusion, or collateral estoppel, bars subsequent relitigation of the same fact or issue where that fact or issue was necessarily adjudicated in a former lawsuit and that same fact or issue is presented in a subsequent suit. Hayworth v. Schilli Leasing, Inc., 669 N.E.2d 165, 167 (Ind.1996). This rule applies even if the second adjudication is on a different claim. Tofany v. NBS Imaging Sys., Inc., 616 N.E.2d 1034, 1037 (Ind.1993).

The present scenario involves defensive collateral estoppel, as E & Y, the defendant, seeks to prevent NWS, the plaintiff, from relitigating an issue that NWS has already litigated and lost in the arbitration proceeding. See Small v. Centocor, Inc., 731 N.E.2d 22, 28 (Ind.Ct.App.2000), trans. denied. There are three requirements for the doctrine of collateral estoppel to apply: (1) a final judgment on the merits in a court of competent jurisdiction; (2) identity of the issues; and (3) the party to be estopped was a party or the privity of a party in the prior action. Id. Furthermore, two additional considerations are relevant in deciding whether the defensive use of collateral estoppel is appropriate: “whether the party against whom the judgment is pled had a full and fair opportunity to litigate the issue, and whether it would be otherwise unfair under the circumstances to permit the use of collateral estoppel.” Id. Because there is no dispute that the parties to the current action are the same as those involved in the arbitration, we need not address that requirement.

A. Final Judgment on the Merits

Issues determined in arbitration are binding and conclusive and may bar relitigation of those issues. Brougher Agency, Inc. v. United Home Life Ins. Co., 622 N.E.2d 1013, 1016 (Ind.Ct.App.1993). In essence, a final judgment or award resulting from an arbitration proceeding is accorded the same force of res judicata as a judgment of a court. See id.

NWS...