Merry-Go-Round case to learn which court Trustee wants ** suit against Ernst & Young heard by a state jury


March 18, 1998|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

A U.S. bankruptcy judge is to decide today whether a federal or state court will handle a $4 billion negligence and fraud lawsuit blaming Ernst & Young International Inc. for the collapse of Maryland-based Merry-Go-Round Enterprises Inc.

Deborah Hunt Devan, the failed retailer's bankruptcy trustee, filed the lawsuit in Baltimore Circuit Court in December, but it was transferred to U.S. Bankruptcy Court on a motion by Ernst & Young.

At a hearing yesterday before Bankruptcy Judge E. Stephen Derby, Devan's attorneys argued that the case should be sent back to state court to be heard by a jury. If the case remains in bankruptcy court, where there are no juries, the judge would decide it.

Ernst & Young's attorneys asked Derby to keep the case in his jurisdiction, arguing that court would be best suited to decide issues central to the bankruptcy proceedings, such as the malpractice charges against the accountants.

The suit alleges that Ernst & Young, one of the nation's largest and most prestigious accounting and consulting firms, mishandled the retailer's Chapter 11 reorganization, thus preventing Merry-Go-Round from restructuring and digging out of its financial hole. Merry-Go-Round, which filed for bankruptcy protection in January 1994, had suffered declines in sales and earnings.

Ernst & Young, hired in December 1993 to create a turnaround strategy for Merry-Go-Round, also committed fraud by failing to disclose ties with the retailer's law firm, the lawsuit claims. It seeks $1 billion in compensatory damages and $3 billion in punitive damages.

Devan became the bankruptcy trustee after the case was converted to a Chapter 7 liquidation in March 1996. Currently, $60 million in creditors' claims remain outstanding, said Stephen L. Snyder, Devan's attorney.

In seeking to return the case to state court, Snyder argued that Devan has a constitutional right to demand a jury trial, adding that the charges of negligence and fraud are based on Maryland law.

"Why shouldn't citizens from this state sit in judgment of something that affects the citizens of this state?" Snyder said. "The issue is, they [Ernst & Young] don't want you as a judge. They want you as a juror, the one and only juror."

Neil J. Dilloff, an attorney with Piper & Marbury representing Ernst & Young, argued that a central question raised by the suit required the attention of the bankruptcy court.

"Can an adviser be held responsible for the death of a company?" he asked. "Every turn-around professional, for better worse, is looking at this case."

It would be an exception for a bankruptcy judge to remand such a case to the state, he said.

"State court would be at a loss to decide bankruptcy issues, because they never do it," Dilloff said, telling Judge Derby, "You should not accept this invitation to sluff this off to a state court."

Pub Date: 3/18/98

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