United States District Court, S.D. New York
WILLIAM T. ESREY and RONALD T. LEMAY, Plaintiffs,
THE UNITED STATES OF AMERICA, Defendant.
OPINION AND ORDER
PAUL OETKEN United States District Judge.
William T. Esrey and Ronald T. LeMay initiated this action on
April 22, 2016, against the United States of America (the
“Government”), alleging wrongdoing by the
Internal Revenue Service (“IRS”), under the
Federal Tort Claims Act (“FTCA”), 28 U.S.C.
§§ 2671-80, for aiding and abetting a breach of
fiduciary duty. (See Dkt. No. 1
(“Compl.”).) The Government moves to dismiss the
Complaint for lack of subject matter jurisdiction pursuant to
Federal Rule of Civil Procedure 12(b)(1) and for failure to
state a claim upon which relief may be granted under Federal
Rule of Civil Procedure 12(b)(6). (Dkt. No. 18.) For the
reasons that follow, the Government's motion is granted
pursuant to Rule 12(b)(1).
following facts are taken from the Complaint and are presumed
true for the purposes of this motion.
are former executives of Sprint Corporation
(“Sprint”). (Compl. ¶ 2.) Esrey served as
Sprint's Chief Executive Officer from 1985 through 2003,
and Sprint's Chairman from 1990 to 2003. (Id.
¶ 12.) LeMay served as Sprint's Chief Operating
Officer from 1996 to 2003, except for a brief stint as
Chairman and Chief Executive Officer of another company.
(Id. ¶ 13.) As of 2002, Ernst & Young (EY),
a global accounting firm, had been tax advisor and financial
planner for Esrey for over two decades and for LeMay for over
a decade. (Id. ¶ 14-15.) EY was also
Sprint's certified public accountant while Plaintiffs
were employed by Sprint. (Id. ¶ 17.)
EY's advice, Plaintiffs engaged in two transactions
relevant to the present dispute: a Contingent Deferred Swap
(“CDS”) transaction in 1999 and 2000 and a CDS
Add-On transaction in 2000 and 2001. (Id. ¶
18.) On February 26, 2001, knowing that Plaintiffs had
entered into these transactions, the Sprint Board authorized
new employment agreements with Plaintiffs. (Id.
March 2002, the IRS initiated an audit of EY's promotion
of certain tax shelters (the “Promoter Audit”).
(Id. ¶ 19.) That same year, the IRS also began
to audit taxpayers who had actually participated in those tax
shelters (the “Investor Audits”). (Id.
¶ 21.) EY represented Plaintiffs before the IRS in
connection with the Investor Audits. (Id.
¶¶ 22-23.) In June 2003, the IRS agents involved in
the Promoter Audit informed EY that the IRS Criminal
Investigation Division (“CID”) was investigating
the conduct of certain EY employees, and that the Promoter
Audit team was sharing its documents with CID. (Id.
¶¶ 32, 44.) On June 21, 2002, the United States
Attorney's Office for the Southern District of New York
(“SDNY”) informed EY that it was initiating an
investigation into EY's conduct in promoting the tax
shelters. (Id. ¶ 24.)These investigations by the
IRS, CID, and SDNY created a conflict of interest between EY
and the Plaintiffs. (Id. ¶ 3.)
Sprint Board became concerned about the conflict of interest
between Plaintiffs and EY due to the audits of Plaintiffs,
and, beginning in 2002, Sprint required Plaintiffs to certify
every quarter that they had no intention to sue EY.
(Id. ¶ 60.) In December 2002, Plaintiffs
presented a solution to the conflict of interest problem to
the Sprint Board, recommending that Sprint cease using EY as
its auditor in order to resolve the potential conflict of
interest between EY and Plaintiffs. (Id. ¶ 61.)
And though EY knew that it was under criminal investigation
for these actions and advice, it also met with the Sprint
Board and told the Board that its advice to Plaintiffs was
sound and its actions were proper. (Id.)
end, the Sprint Board agreed with Plaintiffs that the
potential conflict of interest was too great, but concluded
that firing EY would result in negative publicity.
(Id. ¶ 63.) As a result, the Sprint Board asked
for Plaintiffs' resignations instead. (Id.
¶ 64.) LeMay left Sprint in April 2003. (Id.
¶ 65.) Esrey left Sprint in May 2003. (Id.)
gravamen of Plaintiffs' claim is that the IRS and EY hid
information from Plaintiffs, preventing them from adequately
defending themselves to the Sprint Board, which led to their
forced resignations from Sprint in 2003. (Dkt. No. 1
¶¶ 5-7, 58-65.) Plaintiffs did not know about the
IRS criminal investigation of EY until May 25, 2004, when the
investigation was publicly disclosed. (Id.
¶¶ 49-50.) But while EY was under criminal
investigation by the IRS and SDNY for promoting fraudulent
tax shelters, it was also representing Plaintiffs before the
IRS, creating a conflict of interest and breaching its
fiduciary duty to Plaintiffs. (Id. ¶¶
46-48.) Essentially, Plaintiffs' claim is that the IRS
knowingly participated in EY's breach of its fiduciary
duty in violation of the laws of New York (id.
¶ 73), through its “active concealment of the
criminal investigations, ” such that “Plaintiffs
were unable to tell Sprint that EY's tax shelter
promotion activities were being criminally
investigated” (id. ¶ 7). Esrey and LeMay
seek $42, 550, 000 and $116, 800, 000,
respectively. (Id. at 12.)
asserted administrative claims against the IRS, contending,
among other thing, that alleged “concealment by the IRS
of the criminal investigation [of EY] and the truth regarding
the promoter audit of EY prevented Mr. Esrey from defending
himself before the Sprint Board of Directors, and ultimately
led to the Board choosing to retain EY, it's [sic]
certified public accounting firm, and forcing Mr. Esrey to
resign as Chief Executive Officer of Sprint in 2003.”
(Dkt. No. 20-1.) The IRS denied Plaintiffs'
administrative claims on October 22, 2015. (See Dkt.
No. 20-2; Dkt. No. 20-4.)
Defendants move to dismiss for failure to state a claim
pursuant to both Rule 12(b)(1) and Rule 12(b)(6), a court
presented with motions to dismiss under Rules 12(b)(1) and
12(b)(6) must resolve the former first. Al Naham v. U.S.
Dep't of State, No. 14 Civ. 9974, 2015 WL 3457448,
at *2 n.6 (S.D.N.Y. June 1, 2015) (citing McKevitt v.
Mueller, 689 F.Supp.2d 661, 664 (S.D.N.Y. 2010)).
a claim may be properly dismissed for lack of subject matter
jurisdiction where a district court lacks constitutional or
statutory power to adjudicate it.” Kingsley v. BMW
of N. Am. LLC, No. 12 Civ. 234, 2012 WL 1605054, at *2
(S.D.N.Y. May 8, 2012) (citing Fed.R.Civ.P. 12(b)(1));
Makarova v. United States, 201 F.3d 110, 113 (2d
Cir. 2000)). In considering a motion to dismiss for lack of
subject matter jurisdiction under Rule 12(b)(1), a court must
accept as true all the material factual allegations contained
in the complaint, but a court is “not to draw
inferences from the complaint favorable to plaintiffs.”
See J.S. ex rel. N.S. v. Attica Cent. Sch., 386 F.3d
107, 110 (2d Cir. 2004). “A district court properly
dismisses an action under Rule 12(b)(1) if the court
‘lacks the statutory or constitutional power to