A Baltimore Circuit Court jury should decide whether the accounting firm hired to revive Maryland-based retailer Merry-Go-Round Enterprises Inc. instead caused its collapse, a U.S. bankruptcy judge ruled yesterday.
Rather than decide the $4 billion fraud, negligence and malpractice case against Ernst & Young International Inc., Judge E. Stephen Derby said he will send it back to Circuit Court, where it was filed in December by the failed retailer's bankruptcy trustee, Deborah Hunt Devan.
A motion by Ernst & Young transferred the lawsuit to bankruptcy court, where Merry-Go-Round is going through a liquidation process.
But, after hearing arguments Tuesday on the move, Derby ruled that he would give Devan a chance for the jury trial she had requested.
Ernst & Young's attorneys fought to keep the case in bankruptcy court, because, they argued, the malpractice charges against the accounting and consulting firm had stemmed from the retailer's bankruptcy filing.
At the federal level, the case could be heard by a bankruptcy judge or by a U.S. District Court jury. However, Judge Derby said, he feared that the time spent making that decision and considering potential appeals from both sides could unreasonably delay the process. "The constitutional importance of a jury trial should not be lightly weighed," Derby said. "The plaintiff has elected a right to a jury trial and would get a jury trial in state court. In federal court, the right to a jury trial is in doubt."
The judge also ruled that the trustee's complaint is grounded in Maryland law and, thus, better decided by the state court.
"We are disappointed in the decision, and we're looking at our litigation options," said Patrice Ingrassia, an Ernst & Young spokeswoman.
"Ernst & Young was desperately attempting to avoid a jury trial of these very serious fraud and malpractice charges," said Arnold M. Weiner, an attorney for the trustee. "This case will now return to the court in which it belongs,"
Merry-Go-Round hired Ernst & Young in December 1993 to create a turnaround strategy for the retailer, which had suffered declines in sales and earnings after new fashions failed to catch on with young buyers.
Devan's lawsuit alleges that Ernst & Young mishandled the retailer's Chapter 11 reorganization, filed in January 1994, preventing Merry-Go-Round from salvaging itself.
When the company filed for bankruptcy, it had $113 million in cash, $18 million in refundable taxes, $71 million worth of pTC inventory and negligible secured debt, the suit said. Now, $60 million in creditors' claims remain outstanding.
Ernst & Young also failed to disclose its ties with the retailer's law firm, says the lawsuit, which seeks $1 billion in compensatory damages and $3 billion in punitive damages.
Experts in bankruptcy law characterized the case yesterday as unusual, and they predicted that the outcome could alter the way accountants, lawyers and consultants attempt to restructure companies.
"It's like a war; you have to pick and choose your battles when you're in the middle of a financial crisis and have to make quick decisions," said Richard Tilton, a bankruptcy attorney with Greenberg, Traurig in New York.
"The idea that you would be second-guessed by a jury that is not insolvency professionals, that is going to make the turnaround community think about how it approaches these engagements."
Randy Picker, a commercial law professor at the University of Chicago, said he was unaware of similar lawsuits.
"People who do this for a living want to know, is this a blip or the first of what will be a number of these?" he said.
Pub Date: 3/19/98