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FIRST AMERICAN CORP. v. PRICE WATERHOUSE LLP

December 17, 1997

In the Matter of the Petition of FIRST AMERICAN CORPORATION and FIRST AMERICAN BANKSHARES, INC., Petitioners, - against - PRICE WATERHOUSE LLP, a limited liability partnership registered under the laws of the State of Delaware, and PRICE WATERHOUSE UNITED KINGDOM FIRM, a partnership organized under the laws of England, United Kingdom, Respondents.

ROBERT W. SWEET, U.S.D.J.


The opinion of the court was delivered by: SWEET

Sweet, D.J.

 First American Corporation ("FAC") brings this petition for an order pursuant to Rules 37 and 45, Fed. R. Civ. P., compelling discovery from an entity FAC calls Price Waterhouse-World Wide, and from various Price Waterhouse firms, namely, Price Waterhouse-United Kingdom ("PW-UK"), Price Waterhouse North Caribbean Firm ("PW-Cayman"), Price Waterhouse Luxembourg Firm ("PW-Lux"), and Price Waterhouse Arab Emirates Firm ("PW-Emirates"). For the reasons set forth below, the petition will be granted as to PW-UK only, and denied as to PW-Lux, PW-Cayman, PW-Emirates and Price Waterhouse Worldwide.

 Parties

 FAC is a Virginia corporation with its principal place of business in Washington D.C. During the events which led to the DC Action, FAC was a privately-held bank holding company wholly owned by Credit and Commerce American Holdings Co. N.V. ("CCAH").

 PW-US is a registered limited liability partnership of independent accountants organized under Delaware law that engages in the practice of accountancy in the United States. Its principal office is in New York.

 PW-UK is an English partnership set up under the Partnership Act (1890) of England. It is located and operates principally in the United Kingdom.

 Clive D.J. Newton ("Newton") is a partner in PW-UK who is currently residing in New York and working for PW-US.

 Facts and Prior Procedure

 The instant discovery motion was brought in relation to an action pending in the United States District Court for the District of Columbia, entitled First American Corp., et al. v. Sheikh Zayed Bin Sultan al-Hahyan, et al., Civ. Nos. 93-1309 and 95-0877 (JHG/PJA) (the "DC Action"). The action is just one proceeding of many spawned by the largest bank fraud in world history perpetrated by the Bank of Credit and Commerce International ("BCCI"). During BCCI's growth to an organization of international proportions, it created fictitious loans, stole deposits, incurred hundreds of millions of dollars in losses from reckless trading operations, accepted illicit funds from drug launderers and corrupt dictators, and blatantly violated banking and criminal laws in virtually every jurisdiction in which it operated. The result was a $ 10.5 billion bank failure, and the loss of billions of dollars of depositors' savings.

 The Underlying Action

 The DC Action was initiated by FAC to recover for alleged fraud perpetrated by the BCCI, which allegedly obtained ownership and control of FAC in contravention of U.S. banking laws, by acquiring FAC through a series of fictitious loans to nominee shareholders of CCAH, the ultimate holding company for First American, with CCAH shares pledged as security for those loans. In so doing, BCCI evaded requirements of U.S. banking law that a bank receive approval from U.S. bank regulators, such as the Federal Reserve Board, before acquiring a U.S. bank. The DC Action includes claims for civil RICO violations, common law fraud, breach of fiduciary duty, reckless and negligent misconduct, and civil conspiracy.

 Activities of Various Price Waterhouse Firms in Relation to BCCI

 The Price Waterhouse firms were the auditors of BCCI (Overseas) Limited ("BCCI-Overseas"), a Cayman Islands bank, from its inception in 1975, and were the worldwide auditors for the entire BCCI group from 1987 until the bank was closed in June 1991. Specifically, Price Waterhouse-Cayman acted as auditor of BCCI-Overseas from its incorporation until closure. Price Waterhouse-Luxembourg was the auditor of BCCI International S.A. ("BCCI-International") and BCCI Holdings (Luxembourg) S.A. ("BCCI-Holdings") from 1987 onwards. PW-US was appointed by BCCI to issue an audit opinion of BCCI's operations in this country.

 In October 1990, PW-UK became members of a Committee of Investigation set up by the Abu Dhabi Government to investigate problem lending within BCCI. This investigation was conducted in conditions of strict secrecy. In early 1991, PW-UK was also appointed by the Bank of England to report on irregularities in BCCI's business. On July 5, 1991, based in part on PW-UK's reports, banking regulators around the world took steps to close BCCI.

 After BCCI's closure, the liquidators of BCCI-Overseas, BCCI-Holdings, and BCCI-International commenced proceedings in England (the "Liquidators' Action") against PW-UK, PW-Cayman, and PW-Lux for breach of contract and/or negligence. The Liquidators are seeking damages for losses incurred by the BCCI Group arising out of loans to CCAH shareholders.

 The Subpoenas

 The instant motion to compel discovery arises from two subpoenas served by FAC on PW-US and on Newton, a partner of PW-UK now residing in New York (the "Subpoenas"). The first subpoena was addressed to "Price Waterhouse" and was served in August 1997, at PW-US' main office at 1251 Avenue of the Americas. A second subpoena, (the "Subpoena"), requesting the same information and addressed to "Price Waterhouse c/o Mr. Clive Newton" was served at the Connecticut home of Newton, a partner of PW-UK who is currently residing in the United States and working for PW-US. At PW-UK, Newton had worked as the partner responsible for human resources issues relating to management consultancy services in Europe. At PW-US, Newton works in a similar position.

 "Schedule A" attached to the Subpoenas defined "Price Waterhouse" as:

 
the worldwide accounting firm of Price Waterhouse that operates or has operated as a partnership by estoppel in the United States, United Kingdom, Cayman Islands and Luxembourg, including, but not limited to any other affiliated divisions, entities or Price Waterhouse firms, and any affiliated parents, subsidiaries, partnerships, divisions, affiliates, successors and predecessors, and each of their partners, employees, agents, representatives or any other persons acting or purporting to act for or on their behalf.

 The Subpoenas separately define "Price Waterhouse-US", "Price Waterhouse-UK", "Price Waterhouse-Cayman", and "Price Waterhouse-Emirates each as an "entity or division of [the purported worldwide firm of] Price Waterhouse" operating in the designated location.

 The Subpoenas requested documents from "Price Waterhouse (including Price Waterhouse-UK, Price Waterhouse-Luxembourg, Price Waterhouse-Cayman and Price Waterhouse-Emirates)" related to CCAH and BCCI, and any services performed by "Price Waterhouse" for those companies.

 On September 3, 1997, PW-US served its objections to the Subpoena on the following grounds: (1) there is no single legal entity "Price Waterhouse" that includes the various Price Waterhouse partnerships or entities operating in the United State, the United Kingdom, the Cayman Islands, the United Arab Emirates and Luxembourg, nor is there any "partnership by estoppel" between these entities; (2) the documents listed in the Subpoenas which are in the possession of the other Price Waterhouse partnerships were not in the control of PW-US; (3) PW-US is not the appropriate vehicle for serving, obtaining jurisdiction over and/or taking discovery from any of the individual Price Waterhouse firms operating outside the U.S., therefore no proper service had been made on these firms, and no jurisdiction established by serving PW-US; (4) the Subpoena is an attempt to circumvent available procedures under the Hague Convention for taking discovery from foreign entities, and violates the principles of comity; (5) the document requests were unreasonably cumulative and duplicative of a subpoena served on PW-US in September 3, 1996, in response to which PW-US produced over 33,000 pages of documents.

 One meeting occurred between counsel of FAC and PW-US to discuss the Subpoenas, but no resolution was reached. FAC's counsel thereupon brought an application by ex parte order to show cause dated September 30, 1997, asserting that service of the Subpoenas provided jurisdiction to this Court to compel all the named Price Waterhouse firms to produce documents. The Honorable Robert P. Patterson, sitting in Part 1, granted the Order to show Cause and set forth a briefing schedule. The petition was heard in Part 1 before this Court on October 28, 1997.

 Discussion

 Jurisdiction over All Price Waterhouse Firms via Partnership By Estoppel

 FAC asserts jurisdiction over PW-UK, PW-Cayman, PW-Luxembourg and PW-Emirates via service on PW-US on the grounds that Price Waterhouse must be treated as a world-wide partnership, according to the doctrine of partnership by estoppel. The doctrine of partnership by estoppel, which is part of the ...


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