Jeffrey STEIN, Mark Watson, Philip Wiesner, Randall Bickham, Larry DeLap, Jeffrey Eischeid, David Greenberg, Steven Gremminger, Carl Hasting, John Lanning, John Larson, Robert Pfaff, Gregg Ritchie, Richard Rosenthal, Richard Smith, and Carol G. Warley, Plaintiffs-Appellees, v. KPMG, LLP, Defendant-Appellant.
Docket No. 06-4358-cv.
United States Court of Appeals, Second Circuit.
Argued: Nov. 21, 2006. Decided: May 23, 2007.
486 F.3d 753
For the reasons stated above, we hold that in applying Section 3(e) the burden of proof lies on the party that seeks to apply the credit. On remand Electric Boat will bear the burden of proof on the allocation of the Settlement.
III.
For the reasons set forth above, we hold that under Section 3(e) only the portion of the Settlement that covered Mrs. Barscz‘s state law death claims may be credited against her Longshoreman‘s Act death benefits. Further, we hold that on remand, the party claiming the Section 3(e) credit, Electric Boat, bears the burden of proof in establishing the apportionment of the Settlement. The September 29, 2005 decision and order of the Board is REVERSED, and we REMAND for further proceedings consistent with this Opinion.
Sheila L. Birnbaum, Skadden, Arps, Meagher & Flom LLP, New York, New York (Barbara Wrubel, J. Russell Jackson, Preeta D. Bansal, Haydan A. Coleman, Skadden, Arps, Meagher & Flom LLP, New York, NY, Amy Sabrin, Skadden, Arps, Meagher & Flom LLP, Washington D.C., Charles A. Stillman, Stillman, Friedman & Shechtman, P.C., New York, NY, on the brief), for Defendant Appellant.
David Spears, Spears & Imes LLP, New York, NY, for Plaintiffs-Appellees Jeffrey Stein and John Lanning.
Ronald E. DePetris, DePetris & Bachrach, LLP, New York, N.Y. (Marion Bachrach, on the brief), for Plaintiff-Appellee Richard Smith.
John A. Townsend, Townsend & Jones, LLP, Houston, TX, on the brief, for Plaintiff-Appellee Carol G. Warley.
David C. Scheper, Overland Borenstein Scheper & Kim LLP, Los Angeles, California, on the brief, for Plaintiff-Appellee Robert Pfaff.
John F. Kaley, Doar Rieck Kaley & Mack, New York, NY, on the brief, for Plaintiff-Appellee Steven Gremminger.
David C. Smith, McNamara Spira & Smith, Los Angeles, CA, on the brief, for Plaintiff-Appellee Gregg Ritchie.
Leonard F. Lesser, Simon Lesser P.C., New York, NY, on the brief, for Plaintiff-Appellee David Greenberg.
Michael S. Kim, Kobre & Kim LLP, New York, New York, on the brief, for Plaintiff-Appellee Mark Watson.
Marc A. Fenster, Russ, August & Kabat, Los Angeles, CA, on the brief, for Plaintiff-Appellee Randall Bickham.
Stanley S. Arkin, Arkin Kaplan Rice LLP, New York, NY, on the brief, for Plaintiff-Appellee Jeffrey Eischeid.
Robert S. Fink, Kostelanetz & Fink, LLP, New York, NY, on the brief, for Plaintiff-Appellee Richard Smith.
Stephen Willey, Savitt & Bruce LLP, Seattle, WA, on the brief, for Plaintiff-Appellee John Larson.
Susan R. Necheles, Hafetz & Necheles, New York, NY, on the brief, for Plaintiff-Appellee Richard Rosenthal.
Russell M. Gioiella, Litman, Asche & Gioiella, New York, NY, on the brief, for Plaintiff-Appellee Carl Hasting.
Before: WINTER, HALL, Circuit Judges, and GLEESON,* District Judge.
WINTER, Circuit Judge.
This appeal is an offspring of a criminal tax fraud prosecution. In the course of the criminal prosecution, Judge Kaplan asserted ancillary jurisdiction over a state law contract claim brought against KPMG, LLP, by sixteen of the defendants in the criminal case, all former partners and employees of KPMG, seeking to force it to pay their legal expenses. KPMG appeals from the decision allowing the ancillary proceeding and from the denial of its motion to compel arbitration of the contract*
BACKGROUND
The full history of the proceedings underlying this appeal is reported in United States v. Stein, 435 F.Supp.2d 330 (S.D.N.Y.2006) (Stein I); United States v. Stein (Stein v. KPMG LLP), 452 F.Supp.2d 230 (S.D.N.Y.2006) (Stein II). Familiarity with these opinions is assumed, and we recount here only those facts pertinent to the disposition of the present appeal.
The underlying criminal prosecution is said to be the largest criminal tax case in American history. Stein II, 452 F.Supp.2d at 237. Nineteen defendants are charged with conspiracy and tax evasion, including the appellees, who are former partners or employees of the accounting firm KPMG. Id. The defendants are alleged to have, inter alia, devised, marketed, and implemented fraudulent tax shelters that caused a tax loss to the United States Treasury of more than $2 billion. In connection with the alleged tax shelters, KPMG entered into a deferred prosecution agreement with the government, agreeing to cooperate fully with the government and to pay $456 million in fines and penalties. Stein I, 435 F.Supp.2d at 349-50. If KPMG performs its obligations under the agreement, it will escape prosecution. Id.
The particular dispute giving rise to this appeal concerns policies adopted by the Department of Justice in response to highly visible public concerns over the compliance by business firms with federal and state law. See Leonard Orland, The Transformation of Corporate Criminal Law, 1 Brook. J. Corp. Fin. & Com. L. 45 (2006). The policies were established in the so-called “Thompson Memorandum,” which set out standards to be followed by federal prosecutors in determining whether to bring criminal prosecutions against firms as well as their agents.1 See Mem. from Larry D. Thompson, Deputy Attorney General, U.S. Dep‘t. Of Justice, to Heads of Department Components, United States Attorneys, re: Principles of Federal Prosecution of Business Organizations (Jan. 20, 2003) (“Thompson Mem.“), http://www.usdoj.gov/dag/cftf/business-organizations.pdf. One such standard deemed a firm‘s voluntary payment of wrongdoing agents’ legal expenses a factor favoring prosecution of the firm. Id. at 7-8.
During the course of the investigation, and prior to the indictments in this matter, KPMG negotiated with and paid the legal fees of some, but not all, of the appellees. Upon indictment, however, KPMG stopped these payments. Stein I, 435 F.Supp.2d at 350. In Stein I, the district court found that the government had used the threat of prosecution to pressure KPMG into cutting off payment of the appellees’ legal fees and thereby violated appellees’ Fifth and Sixth Amendment rights to a fair trial and the effective assistance of counsel. Id. at 382. The merits of that ruling are not before us on this appeal.
The district court acknowledged a more obvious remedy for the constitutional violations it had found-dismissal of the indictment-and explicitly left that possibility open as an incentive for the government to strongarm KPMG to advance appellees’ defense costs. Id. at 380. In short, having found that the government violated appellees’ constitutional rights by threatening to bring one indictment, the district court sought to remedy the violation by threatening to dismiss another.
Following this invitation, the appellees filed the anticipated complaints against KPMG. In the complaints, fifteen of the sixteen appellees relied primarily on an “implied-in-fact” contract with KPMG based on KPMG‘s alleged history of paying its employees’ legal expenses. The sixteenth appellee, Jeffrey Stein, relied on an express breach of his written separation agreement with KPMG. In response, KPMG moved to dismiss for lack of subject matter jurisdiction and on the merits. It also argued that the case should be referred to arbitration under arbitration agreements between KPMG and the various appellees. The district court denied KPMG‘s motions in Stein II, 452 F.Supp.2d 230.
The Stein II opinion contained three principal holdings: (i) a reaffirmation of the court‘s earlier holding that ancillary jurisdiction existed over the contractual fee dispute between appellees and KPMG; (ii) a rejection of KPMG‘s argument that the “implied-in-fact” contract claims of all of the appellees, save Stein, were foreclosed by written agreements containing merger clauses; and (iii) a finding that enforcement of any applicable arbitration clause would be against public policy. The court concluded that arbitration might interfere with the district court‘s ability to ensure a speedy trial, could lead to a dismissal of possibly meritorious criminal charges, would endanger the appellees’ rights to a fair trial, and would risk imposing unnecessary costs on taxpayers if the appellees should become indigent. Id. at 238-39.
The opinion closed by setting the trial of appellees’ advancement claim for six weeks later, October 17, 2006, following an abbreviated period of limited discovery. Id. at 275. The procedural rules governing the trial were left to the future, the district court noting that “[i]t is not now entirely clear exactly how this will play out.” Id. at 274. Although the district court stated that KPMG would have “the protections inherent in the Federal Rules of Civil Procedure,” Id. at 275, the court elsewhere stated that the advancement claim, although civil in nature, “is a criminal case to which the Civil Rules do not apply,” Id. at 260. It further expressed its intention to apply the Civil Rules only “to the extent they are consistent with the Criminal Rules.” Id. at 269.
On appeal, KPMG argues that the district court lacks subject matter jurisdiction over appellees’ advancement claims and also that, if jurisdiction exists, the district court further erred by refusing to compel arbitration.
a) Appeal or Mandamus
Appellees argue that we have no appellate jurisdiction to review the district court‘s assertion of ancillary jurisdiction because the denial of KPMG‘s motion to dismiss appellees’ advancement complaint was an unappealable interlocutory order in a criminal case. KPMG responds that we have jurisdiction under the Federal Arbitration Act (the “FAA“) to review the district court‘s refusal to compel arbitration, and that we may then exercise pendent jurisdiction over the question of ancillary jurisdiction.
These arguments in turn spawn a tangle of counter- and counter-counter-arguments. Section 16 of the FAA provides for interlocutory appeal from a refusal to stay an action under Section 3 of the FAA, or of a refusal to compel arbitration under Section 4.
To undertake pendent jurisdiction, therefore, we would have to find that the issue of ancillary jurisdiction is inextricably intertwined with the denial of the motion to compel arbitration, presumably on the grounds that the district court‘s reasons for asserting ancillary jurisdiction and for finding that arbitration would be against public policy were the same, i.e., the need to afford an adequate and timely remedy for the constitutional violations. See Stein I at 377 (ancillary proceeding needed “[i]n order to guarantee [appellees‘] right to choose their own counsel ...“); Stein II at 245, 254 (having found the constitutional violations, “the overreaching issue is what to do about it” and need to promptly vindicate appellees’ Fifth and Sixth Amendment rights are factors rendering arbitration clauses contrary to public policy).
We decline to resolve the question of appellate jurisdiction. We suggested at oral argument that it might be more appropriate to exercise our mandamus power. The parties were invited to file supplemental briefs on the issue, and Judge Kaplan himself filed a submission on the issue.
We have in the past treated an appeal as a petition for leave to file a writ of mandamus. In re Repetitive Stress Injury Litigation, 11 F.3d 368, 373 (2d Cir. 1993); In re Hooker Investments, Inc., 937 F.2d 833, 837 (2d Cir.1991). However, we have generally done so only after finding a lack of appellate jurisdiction. Repetitive Stress Injury Litigation, 11 F.3d at 373; Hooker Investments, 937 F.2d at 837. There has been criticism of the practice of resorting to mandamus without first resolving the issue of appellate jurisdiction, ACF Indus., Inc. v. EEOC, 439 U.S. 1081, 1085 (1979) (Powell, J., dissenting from denial of cer-
In turning to mandamus, we simply recognize that “[t]he traditional use of the writ in the aid of appellate jurisdiction both [at] common law and in the federal courts has been to confine an inferior court to a lawful exercise of its prescribed jurisdiction....” Roche v. Evaporated Milk Ass‘n, 319 U.S. 21, 26 (1943). Because the actions of the district court were well outside its subject matter jurisdiction, our resort to mandamus does not in any way expand the potential use of that writ and avoids our unnecessarily addressing complex jurisdictional issues.
The jurisdictional issues are complex, but largely because, as we explain below, the proceeding challenged on this appeal-a state law contract action against a non-party within a federal criminal proceeding-is well outside the subject matter jurisdiction conferred by Congress on the federal courts. It is hardly surprising, therefore, that there is no statute or body of caselaw that clearly affords or clearly precludes appellate review of the commencement of such a proceeding. For example, the failure of Congress to mention Title 18 as well as Title 28 in Section 4 of the FAA is not evidence of an intent to preclude interlocutory appeals from orders refusing to compel arbitration in criminal cases. Rather, it is evidence that Congress did not expect such issues ever to arise in criminal cases. Indeed, the complexities surrounding our appellate jurisdiction underline the paucity of grounds supporting the district court‘s assertion of ancillary jurisdiction.
Were we to opine on the various arguments over appellate jurisdiction, we would have to address issues involving the FAA and pendent jurisdiction that arise only because of the happenstances of this unique case. There is no need for a precedent regarding appellate jurisdiction in this context because our issuance of the writ disposes of this matter and renders the existence of future such cases unlikely. However, opining on the jurisdictional issues does risk the making of statements that might be misleading in future cases in a different context. We therefore turn to the mandamus remedy without deciding the jurisdictional issues.
b) The Merits
As discussed above, mandamus is available to confine courts to their designated jurisdiction. Other “touchstones” of mandamus review are “usurpation of power, clear abuse of discretion and the presence of an issue of first impression.” Steele v. L.F. Rothschild & Co., Inc., 864 F.2d 1, 4 (2d Cir.1988) (internal quotation marks omitted). Three conditions must be satisfied before the writ may issue: first, the party seeking relief must have “no other adequate means to attain the relief he desires,” second, the petitioner must show that his right to the writ is “clear and indisputable,” and third, the issuing
Appellees argue that KPMG‘s right to relief is not “clear and indisputable” because the proper scope of ancillary jurisdiction is not well-settled by our caselaw. To be sure, “[t]he boundaries of ancillary jurisdiction are not easily defined and the cases addressing it are hardly a model of clarity.” Garcia v. Teitler, 443 F.3d 202, 208 (2d Cir.2006). However, because ancillary jurisdiction cannot be limitless and still be ancillary, boundaries there must be, and the exercise of ancillary jurisdiction here is clearly outside those boundaries.
As Garcia stated, “ancillary jurisdiction is aimed at enabling a court to administer justice within the scope of its jurisdiction.” Id. (internal quotation marks omitted). Ancillary jurisdiction is intended “to permit disposition of claims that are, in varying respects and degrees, factually interdependent by a single court, and ... to enable a court to function successfully, that is, to manage its proceedings, vindicate its authority, and effectuate its decrees.” Id. (quoting Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 379-80 (1994)).
The most common exercise of ancillary jurisdiction is, probably, to resolve fee disputes between a party and its attorney arising in litigation in which the attorney represented the party. See, e.g., Cluett, Peabody & Co., Inc. v. CPC Acquisition Co., Inc., 863 F.2d 251 (2d Cir.1988); Novinger v. E.I. DuPont de Nemours & Co., Inc., 809 F.2d 212 (3d Cir.1987). In Garcia, for example, we upheld the exercise of ancillary jurisdiction to compel an attorney to return a retainer obtained to represent a party in the underlying litigation after the district court had ordered the attorney to withdraw as counsel because of misconduct. Garcia, 443 F.3d at 208, 211-12. Exercise of ancillary jurisdiction over a fee dispute between a party and an attorney functioning as an officer of the court in litigation over which a court has jurisdiction is, however, a world away from the exercise of ancillary jurisdiction in a criminal proceeding to adjudicate a contract dispute between the defendants and a non-party former employer.
When a court undertakes to resolve claims arising from a relationship between a party to an action and the party‘s attorney in that action and involving the attorney‘s conduct of that litigation, the parties to the ancillary proceeding are already before the court as a litigant and officer of the court; the relevant facts are generally more accessible to that court than to another; and the ability of the court to conduct and dispose of the underlying litigation may turn on, or at least be greatly facilitated by, resolution of the issues raised in the ancillary proceeding. However, when a non-party to the primary proceeding is sought to be joined as a
An ancillary proceeding may subject the non-party to what may be a different forum and different procedural or even substantive rules than would normally be involved in disposing of the claim at issue. In addition, the assertion of ancillary jurisdiction over matters that are otherwise outside the jurisdiction conferred by the Constitution and the Congress can be justified only by compelling needs arising in the exercise of the jurisdiction that is conferred. While we do not exclude the possibility of a legitimate ancillary proceeding involving a nonparty to the primary litigation, we believe that the requisite compelling circumstances will be rare, as the need for such a proceeding generally will be far less pressing than in cases involving parties already before the court.2
In the present matter, the prejudice to KPMG is clear, and the need for the ancillary proceeding is entirely speculative. The claims to be resolved in the ancillary proceeding sound in contract, i.e. appellees claim that KPMG impliedly-in one case expressly-promised to pay their expenses in defending the present criminal charges. The prejudice to KPMG in having these claims resolved in a proceeding ancillary to a criminal prosecution in the Southern District of New York is clear. At stake are garden variety state law claims, albeit for large sums. KPMG believed that contractual disputes between it and the appellees would be resolved by arbitration. Instead, KPMG is faced with a federal trial of more than a dozen individuals’ multi-million dollar “implied-in-fact” contract claims. Moreover, because such a proceeding is governed by no express statutory authority, the district court has indicated its intention to apply to this expedited undertaking an ad hoc mix of the criminal and civil rules of procedure determined on the fly, as it were. See Stein II, 452 F.Supp.2d at 274-75. The resolution of the contract claims against KPMG is thus to occur in an entirely sui generis proceeding even though it may require the scrutinizing of decades of KPMG‘s conduct, determining the states of mind of dozens of individuals, applying the findings from those inquiries to the particular circum-
The need for the particular ancillary proceeding is also far less pressing than contemplated by the district court. First, the interrelationship of the factual issues underlying the finding of constitutional violations and the asserted contract claims is marginal. The Fifth and Sixth Amendment violations were found to be the government‘s implementation of the policy stated in the Thompson Memorandum with regard to decisions to indict or not indict firms. Stein I, 435 F.Supp.2d at 367. One aspect of that policy was to take into account whether the firm was voluntarily paying the legal expenses of members or employees who had been indicted, see Thompson Mem. at 7-8, a factor deemed to favor indictment under the Thompson Memorandum. Id. That document gave no such weight to payments required by contract. As a result, the constitutional issues before the district court went solely to what pressure the government put on KPMG not to pay fees voluntarily and to what KPMG‘s response was. See Stein I, 435 F.Supp.2d at 366, 343-49. A trial of claims to expenses based on contract-especially implied contract-will go over very different factual ground.
Second, while the ancillary proceeding is a major undertaking, its contribution to the efficient conclusion of the criminal proceeding is entirely speculative. Even if the holding that the government violated the Fifth and Sixth Amendments is correct-an issue on which we express no opinion-the ancillary proceeding will provide a “remedy” only if KPMG loses, hardly a foregone conclusion on the present record.3 But even if there are constitutional violations and even if KPMG was contractually obligated to pay appellees’ expenses, the ancillary proceeding is not an indispensable remedy and may not even constitute a full remedy. Dismissal of an indictment for Fifth and Sixth Amendment
Third, even if there were constitutional violations and even if KMPG is contractually obligated to advance appellees’ attorneys’ fees and costs, creating an ancillary proceeding to enforce that obligation was not the proper remedy. If the government‘s coercion of KMPG to withhold the advancement of fees to its employees’ counsel constitutes a substantive due process violation, or has deprived appellees of their qualified right to counsel of choice, more direct (and far less cumbersome) remedies are available. Assuming the cognizability of a substantive due process claim and its merit here, dismissal of the indictment is the proper remedy. As for the Sixth Amendment deprivation, if it turns out that the government‘s conduct separates appellees from their counsel of choice (an event that has not yet occurred), appellees may seek relief on appeal if they are convicted. We do not mean to exclude the possibility of other forms of relief. If, for example, a Sixth Amendment violation is the result of ongoing government conduct, the district court of course may order the cessation of such conduct. Having said that, we hold, however, that the remedies available to the district court in the circumstances presented here did not include its novel exercise of ancillary jurisdiction. The “summary advancement proceeding,” Id. at 381, it created may have been intended only as a vehicle for the government and KPMG to act on their “incentives” to somehow get appellees’ counsel funded and thereby “avoid any risk of dismissal of [the indictment of the appellees] or other unpalatable relief.” Stein I at 380. Or, as Stein II suggests, it might also have been envisioned as an uncharted hybrid legal proceeding for the expeditious resolution of numerous high-dollar and potentially complex contract claims. Either way, it was not an available remedy for either constitutional violation.
Finally, on the present record, a proceeding ancillary to a criminal prosecution was not necessary either to avoid perceived deficiencies in ordinary civil contract actions to enforce the alleged advancement contracts or to remove some barrier to the appellees’ bringing of such actions. The fee issue has been known since the criminal investigation began and, unlike the situation in Weissman, see Note 2 supra, did not suddenly arise at an awkward period in the case. Many of the appellees were in negotiation with KPMG during the investigation period. Some sixteen months before the indictment, most of the appellees signed a letter that clearly indicated their knowledge of KPMG‘s intent not to pay post-indictment fees and could-arguably must-be read as a waiver of any right to such fees. Stein II, 452 F.Supp.2d at 240-41. Nevertheless, appellees took none of the available steps to enforce their alleged contracts with KPMG until well after the indictment when the district court raised the possibility of an ancillary proceeding and indicated its willingness to exercise jurisdiction over it.
The traditional factors weighing against mandamus-the undesirability of casting a judge as a litigant and the desirability of avoiding piecemeal appeals-also weigh in favor of mandamus in this case. The dis-
CONCLUSION
We treat the appeal as a petition for writ of mandamus. We grant the petition, vacate the orders below to the extent that they find jurisdiction over the complaint against KPMG and dismiss appellees’ complaint against KPMG.