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An en banc Superior Court panel has ordered a new trial in a case in which a western Pennsylvania trial judge awarded $102.7 million in 2003 to one of the owners of a property company identified as being at the center of a mid-1980s Ponzi scheme. On the losing side of the verdict was Ernst & Young, a predecessor of which had been hired to help reorganize the property company and a group of related entities for the purposes of federal bankruptcy proceedings in the late 1980s. According to statewide verdict data maintained by The Legal, that award was the highest handed down a Pennsylvania trial court, at least between the years 2003 and 2006. In reversing Butler County Common Pleas Judge S. Michael Yeager, the panel in Reilly v. Ernst & Young appeared to scold another judge from that county for effectively sanctioning Ernst & Young by ruling that, following at least two procedural potholes, the company was bound by admissions put forward by the plaintiffs. According to attorneys involved in the case, the pre-trial judge in Reilly was Butler County Common Pleas Senior Judge John H. Brydon. According to the panel’s opinion, Thomas and Barbara Reilly jointly owned 50 percent of stock in Canterbury Village Inc. The other half was owned by Edward and Karen Krall. Judge Jack A. Panella wrote that the Ponzi scheme occurred when property owned by Canterbury Village Inc. in Butler County’s Seven Fields borough was oversold through a second company named Earned Capital Corp. In a footnote, Panella called attention to the fact that the male halves of Canterbury Village’s two couple-owners pleaded guilty to criminal charges stemming from the Ponzi scheme. In June 1986, after the Ponzi scheme collapsed, according to the opinion, Earned Capital, Canterbury Village and related entities sought bankruptcy protection in federal court in Pennsylvania’s Western District. The Reillys would later unsuccessfully oppose Canterbury Village’s inclusion in those proceedings. Arthur Young & Co. was retained to review and summarize the corporations’ financial records. “The disorder of the corporate records, however, prevented an exact determination of the liabilities of the debtor corporations, such that the liability figures included in the petitions had to be estimated,” Panella wrote. “Additionally, the disarray or absence of corporate records prevented an exact attribution of what debt belonged to which debtor corporation.” Under the reorganization plan that was ultimately adopted by the bankruptcy court in October 1987, the debtor corporations were joined into a single entity, and the Kralls and Reillys were prevented from any type of interest in either the debtor corporations or the single entity into which they were reorganized. By January 1997, the Reillys had filed a negligence suit against Ernst & Young, and that action later included claims for fraudulent misrepresentation and civil conspiracy. Their complaint focused on alleged inaccuracies in the report Arthur Young prepared for the bankruptcy proceedings. During the discovery phase in Reilly, the Reillys served Ernst & Young with requests for admissions, according to the opinion. Ernst & Young responded to those RFAs two weeks after the deadline prescribed by Pennsylvania’s civil procedure rules. Subsequently, Brydon granted a motion from the Reillys to deem Ernst & Young as having admitted to the statements laid out in the Reillys’ RFAs. But, given the essentially dispositive effect that development would have on the case, Brydon also gave Ernst & Young the opportunity to timely submit verified answers and objections to the Reillys’ RFAs. The contents of Ernst & Young’s verified answers matched those of other filings the defense had previously submitted, according to Panella. However, the verified version did not contain a verification from Ernst & Young’s associate general counsel, as the previous filings had. On the basis of that omission, Brydon ordered in November 2000 that Ernst & Young was deemed as admitting the statements the Reillys made in their RFAs. Yeager held a bench trial over the course of three months in mid-2002. A year later, a verdict was entered in favor of Barbara Reilly on all but her civil conspiracy claim. Her award included $34 million for her ownership interest in Canterbury Village – half of the $68 million appraised value – plus an additional $50,945,222 in interest, based on a rate of 6 percent per annum beginning in 1986, for a total compensatory damage award of $84,018,989. Yeager also awarded her $18.17 million in punitive damages for a total verdict of $102,718,989. “[Yeager] declined to enter judgment in favor of Thomas Reilly, finding that his own wrongdoings created the circumstances giving rise to his claims,” Panella wrote. Ernst & Young appealed, raising a number of issues, but the Superior Court limited its review to Brydon’s ruling concerning the RFAs. “As a sanction for Ernst & Young’s failure to attach [its associate general counsel's verification, Brydon] deemed Ernst & Young to have admitted the RFAs propounded by the Reillys,” Panella wrote. “We are constrained to conclude that the sanction was extremely disproportionate to the noncompliance at issue, in light of the positions taken by the parties and the magnitude of the litigation.” Panella was joined by President Judge Kate Ford Elliott and Judges Joseph A. Hudock, Correale F. Stevens, John L. Musmanno, Richard B. Klein, John T. Bender and Seamus P. McCaffery. Judge Michael T. Joyce sat on the panel but was not involved in the decision. In a concurring opinion, Bender wrote that “there is no need to waste our commonwealth’s judicial resources on matters which have already been resolved by bankruptcy court.” Two Superior Court panels have heard the case. In June 2005, a panel consisting of Panella, Bender and Judge Mary Jane Bowes heard arguments in the matter without issuing a decision. Following the arguments, Bowes recused herself for undisclosed reasons, according to William Lamb of Lamb McErlane in West Chester, who has represented Barbara Reilly on appeal. It’s also not clear why Joyce didn’t participate in the en banc decision following that panel’s September 2006 decision, said Lamb, whose co-appellate counsel in the case is William Pietragallo of Pietragallo Bosick & Gordon in Pittsburgh. Lamb said his client is considering her appellate options. “If we go back to Butler County, we’re going to be faced with more appeals again, so the dilemma is whether we suck it up and go ahead and retry the case, or whether we go ahead and appeal,” Lamb said. Ernst & Young has been represented on appeal by Robert Byer of Duane Morris in Pittsburgh and Kenneth Geller of Mayer Brown Rowe & Maw in Washington, D.C. Byer referred a request for comment to his client’s press office. An Ernst & Young spokesperson was not immediately available for comment. (Copies of the 19-page opinion in Reilly v. Ernst & Young , PICS No. 07-1104, are available from The Legal Intelligencer . Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information. Some cases are not available until 1 p.m.)

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