July 13, 2006
KPMG Defendants File for Their Attorney's Fees
The unique mechanism set up by U.S. District Judge Lewis Kaplan when he found that the government's pressure on KPMG to refuse to pay attorney's fees for its former partners and employees was unconstitutional has now been put in motion. The sixteen KPMG defendants charged with conspiracy related to the sales of tax shelters have filed a civil suit (Stein v. KPMG available below) seeking payment of the fees, and the suit asserts that this claim is not meant to preclude a separate claim for "breach of contract or tortious conduct." Now that KPMG has been brought before the court, a host of interesting issues may arise. Because the firm is not a party to the criminal action, I don't think it can appeal the judge's order directly, but it may be able to raise the remedial portion of that opinion, at least once there is a judgment against it. The court's jurisdiction, as explained in Judge Kaplan's opinion, is that the attorney's fee claim is based on the court's ancillary jurisdiction over matters related to the criminal matter. That may be open to challenge, especially in light of the fact that the usual basis for a federal claim arising under state contract law and corporate law would be diversity jurisdiction, which may not be present here.
The defendants have different claims, some based on an implied contract with the firm, one with an employment agreement containing an express term on attorney's fees, and others with a statutory claim based on California law. Should they be considered together, or in separate actions? The sixteen defendants filed a single case, but the judge may have to sort them out separately. Moreover, the earlier opinion made brief reference to an arbitration clause governing employment-related matters, which may trigger a claim by KPMG to send the case to an arbitrator. The usual rule in this area is that the arbitrator decides most issues, including the issue of whether a claim is subject to arbitration.
Finally, and perhaps most ominously for KPMG, would be if the firm filed a motion asking Judge Kaplan to recuse himself because he has already decided the issues without KPMG being a party to the earlier decision. The opinion in U.S. v. Stein makes it rather clear that the judge believes KPMG is required to pay the fees, and even urges the firm to do so voluntarily. A recusal motion is in effect the "nuclear option" for KPMG, but then from reading the opinion I'm not sure things could go much worse for the firm. If required to pay the attorney's fees for sixteen defendants in a case that will involve a three-month trial (at a minimum), KPMG will be facing cost well over $100 million, and perhaps more than a quarter of a billion dollars if all the defendants go to trial and then appeal the verdict if found guilty. That is a substantial hit to a firm that has already paid $456 million in fines and penalties. (ph)
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