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Esrey v. United States

United States District Court, S.D. New York

March 23, 2017



          J. PAUL OETKEN United States District Judge.

         Plaintiffs 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).

         I. Background

         The following facts are taken from the Complaint and are presumed true for the purposes of this motion.

         Plaintiffs 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.)

         On 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. ¶ 58.)

         In 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.)[1]These investigations by the IRS, CID, and SDNY created a conflict of interest between EY and the Plaintiffs. (Id. ¶ 3.)

         The 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.)

         In the 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.)

         The 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.[2] (Id. at 12.)

         Plaintiffs 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.)

         II. Discussion

         Although 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)).

         “Generally, 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 ...

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