Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_04-cv-03210/USCOURTS-cand-5_04-cv-03210-1/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Other Contract

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MOTION DENYING WITHOUT PREJUDICE STAY OF PROCEEDINGS—C-04-03210

MAG

E-FILED on 7/11/05

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

THOMAS FALLON, an Individual, ROBERT

PUETTE, an Individual, CARL REDFIELD, an

Individual, RICK TIMMINS, an Individual, on

behalf of each, individually, and on behalf of the

general public,

 Plaintiffs,

v.

LOCKE, LIDDELL & SAPP, LLP, a Texas

limited professional partnership, and DOES 1

through 100, 

Defendants.

Case No. C-04-03210 RMW

MOTION DENYING WITHOUT PREJUDICE

STAY OF PROCEEDINGS

[Re Docket No. 37]

Defendant Locke, Liddell & Sapp moves to stay further proceedings in this case. Plaintiffs oppose

the motion. The motion was heard on July 1, 2004. The court has read the moving and responding papers

and considered the parties' arguments. For the reasons discussed below, the court denies without

prejudice defendant's motion to stay.

I. BACKGROUND

Plaintiffs Robert Puette, Carl Redfield, Rick Timmins, and Tom Fallon are individuals, all of whom

reside within the County of Santa Clara, California. Compl. ¶¶ 10-13. Defendant Locke, Liddell & Sapp,

LLP ("LL&S") is a Texas law firmbased inDallas, with offices in Austin, Houston, and New Orleans. Id. at

Case 5:04-cv-03210-RMW Document 48 Filed 07/11/05 Page 1 of 8
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MOTION DENYING WITHOUT PREJUDICE STAY OF PROCEEDINGS—C-04-03210

MAG 2

¶ 14. Plaintiffs allege thatLL&S renderslegal services to clients in the State of California, including plaintiffs.

Id.

In 1999, defendant learned that Ernst & Young ("E&Y") was looking for a tax opinionfor a new tax

strategy called the Contingent Deferred Swap strategy ("CDS strategy") that E&Y had beenpromoting. Mot.

to Dismiss at 2. This strategy was intended to provide participants with a tax savings by converting ordinary

income into capitalgainsto obtain a one year deferral of taxes. Id. E&Y contacted Brent Clifton, anattorney

at LL&S, to obtain his preliminary opinion on whether the International Revenue Service ("IRS") would

approve ofthe CDS strategy. Id. at 3. Clifton reported back to E&Y that he could provide a "should" opinion

on the CDS Strategy. Id. Clifton made evaluations for defendant's customers in the form of opinion letters.

Id.

Plaintiffs entered into contracts with defendant "concerning the nature and scope of LL&S's

engagement" that would provide plaintiffs with a legal analysis of E&Y's CDS strategy. Compl. ¶ 18. The

letters sent by defendant to plaintiffs stated that defendant has a special understanding of investment; that an

opinion would be provided of the "principle [sic] tax consequences of [plaintiffs'] investment"; that defendant

would review allof plaintiffs documents and discuss the investment withplaintiffs and give its opinionofthe tax

consequences; that investment should provide plaintiffs with "substantial tax benefits"; and that each plaintiff

would pay $50,000 for the opinion letter. Id. Plaintiffs each invested between $6 million and $20 million to

acquire a limited partnership interest in the CDS strategy sold to them by defendants. Id. at ¶¶ 10-13.

However, plaintiffs allege that defendant never met norspoke withthemconcerning their investment strategies.

Id. at ¶ 19.

Plaintiffs claim that defendant had decided to provide plaintiffs with "favorable tax opinion[s]" before

plaintiffs ever retained it as a legal advisor. Id. at ¶ 20. The opinion letters provided a detailed explanation of

tax shelters and distinctions between lawful tax avoidance and unlawful tax evasion. Id. at ¶ 21. The opinion

letters specifically stated that "partnership should be respected [by the taxing authorities] as a partnership for

federal income tax purposes." Id. The letters claimed to rely on "substantial authority" for this opinion. Id.

Plaintiffs allege that this wording communicated to plaintiffs a sense of confidence ondefendant's part that the

strategy would be effective. Id. Additionally, the letter failed to mention adverse tax law about which

defendant allegedly was aware. Id. at ¶ 22. 

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MOTION DENYING WITHOUT PREJUDICE STAY OF PROCEEDINGS—C-04-03210

MAG 3

On May 28, 2002, the IRS issued a notice declaring that the CDS strategy was "not allowable." Mot.

to Dismiss at 3. It advised individuals who had used thisstrategy to file amended returns. Watkins Decl. Ex.

A. It is not currently known how plaintiffs responded to the IRS notice, but plaintiffs have not yet received a

deficiencynotice outlining their taxliabilityfor using the CDS strategy. Mot. to Dismiss at 3. The IRS has not

yet assessed the penalties, if any, for which plaintiffs will be responsible. Id.

On June 15, 2004, plaintiffs filed a complaint against defendant alleging breach of contract, breach of

fiduciary duty, professional negligence, negligent misrepresentation, intentional misrepresentation, and unfair

business practices underCalifornia Business and Professions Code section17200. Compl. ¶¶ 29, 32-37, 41-

43, 46-48, 51-56. 

II. ANALYSIS

A. Discretion to Stay Further Proceedings

Defendant movesto staythese proceedings pending resolutionofplaintiffs'taxliability. "District courts

ordinarily have authorityto stayproceedings." Landis v. N. Am. Co., 299 U.S. 248, 254 (1936);see Clinton

v. Jones, 520 U.S. 681, 706-07 (1997) ("District Court has broad discretion to stay proceedings as an

incident to its power to control its own docket."); Bureerong v. Uvawas, 167 F.R.D. 83, 87 (C.D. Cal.

1996). "Even if the other proceedings do not control the outcome in the action before the court, a stay may

be appropriate." Agcaoili v. Gustafson, 844 F.2d 620, 624 (9th Cir. 1988). The Ninth Circuit held that:

"[a] trial court may, with propriety, find it is efficient for its own docket and the

fairest course for the parties to enter a stay of an action before it, pending

resolutionofindependent proceedings whichbear uponthe case. This rule applies

whether the separate proceedings are judicial, administrative, or arbitral in

character, and does not require that the issuesinsuchproceedings are necessarily

controlling of the action before the court."

Leyva v. Certified Grocers of California, Ltd., 593 F.2d 857, 863-64 (9th Cir. 1979) cert. denied, 444

U.S. 827 (1979); See Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co., 342 U.S. 180, 184 (1952)

("Necessarily, an ample degree ofdiscretion, appropriate for disciplined and experienced judges, must be left

to the lower courts."); Mediterranean Enters., Inc. v. Ssangyong Corp., 708 F.2d 1458, 1465 (9th Cir.

1983). It is clear that this court may employ its discretion in determining whether a stay of further proceedings

is appropriate in this action. Neither partyconteststhis point. Pl. Opp. at 6. However, the courts must apply

the balancing test outlined below.

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MOTION DENYING WITHOUT PREJUDICE STAY OF PROCEEDINGS—C-04-03210

MAG 4

B. Balancing Test to Stay Action

The Ninth Circuit sets out the factors that must be considered in order to issue a stay of further

proceedings in an action. It requires a balancing test where the "competing interests" at issue are weighed

against one another, including the damage that might result fromgranting a stay, the hardship that a partyforced

to go forward might face, and the "orderly course ofjustice." Cmax,Inc. v. Hall, 300 F.2d 265, 268 (9thCir.

1962). The court must look at the benefit to the court of granting the stay, the prejudice to plaintiffs the stay

maycause, and the prejudice to defendant ifthe stayis not granted. Rivers v. Walt Disney Co., 980 F. Supp.

1358, 1360 (C.D. Cal. 1997); Gray v. First Winthrop Corp., 133 F.R.D. 39, 40 (N.D. Cal. 1990).

Additionally, "the burden is on the party seeking the stayto showthat there is pressing need for delay, and that

neither the other party nor the public will suffer harm from entry of the order." Ohio Envtl. Council v. U.S.

Dist. Court, S. Dist. of Ohio, 565 F.2d 393, 396 (9th Cir. 1977). 

1. Interest of Justice and Benefits to the Court

Courts may stay proceedings to "control the disposition of the causes on its docket with economy of

time and effortforitself, for counsel, and forlitigants,"aslong as competing interests are weighed and a balance

is maintained. Barapind v. Reno, 72 F. Supp. 2d 1132, 1147 (E.D. Cal. 1999) (citing Landis, 299 U.S. at

254-55). In this case, it seems unlikely that judicial efficiency will be promoted if the court stays further

proceedings in this case. 

In Filtrol, there were two pending patent cases, one of which was in California and the other in

Connecticut. Filtrol, 467 F.2d at 244-45. Defendants asked the district court to stay all further proceedings,

but the court denied the motion. Id. The Ninth Circuit refused to reverse district court's denialof a stay, ruling

that it was within the power of the district court to make that determination. Id. at 244. A district court with

a justiciable controversybefore it is not required to "await the outcome ofa pending actioninanother district."

Id. at 245; see Blonder-Tongue Labs., Inc. v. Univ. of Ill. Found., 402 U.S. 313 (1971). The court in

Filtrol found that eventhough the indeterminate state ofthe Connecticut case could have substantively affected

the decisionforthe California case, this fact alone did not provide the court with an adequate interest to issue

a stay of further proceedings to preserve judicial economy. In this case, the IRS proceedings willnotresult in

a determination that could alter the substantive law in this case. Instead, the IRS administrative hearings will

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1 Plaintiffs also argue that their attorney's fees constitute damages in this case. However, the

court notes that this may not necessarily be the case. The "American Rule" states that "each party to a

lawsuit must generally bear his or her own costs; in other words, the prevailing litigant cannot collect

attorney fees from the losing litigant. All federal courts use this rule unless one of five specific exceptions to

MOTION DENYING WITHOUT PREJUDICE STAY OF PROCEEDINGS—C-04-03210

MAG 5

only alterthe amount ofdamages plaintiffs may seek against defendant. Thisis not anadequate reasonto issue

a stay of further proceedings in the interest of the court.

Defendant also cites United Gas Pipe Line Co. v. Tyler Gas Serv. Co., 247 F.2d 681 (5th Cir.

1957) and United Sweetener USA, Inc. v. Nutrasweet Co., 766 F. Supp. 212, 218 (D. Del. 1991) in

support ofitsmotiontostaythis actionpending the resolutionofthe IRS proceedings. While the courts in those

cases granted stays pending concurrent administrative agencyinvestigations, the cases are distinguishable from

the present action. In United Gas, the court stayed the action betweenthe parties, pending court of appeals

review of an administrative action decision on appropriate tariff rates. 247 F.2d at 681-83. That case is

distinguishable because the court of appeals made an administrative review of the validity of the tariff rates.

However, the IRS's determination of damages in the present action will not affect plaintiffs' ability to assert

causes of action against the defendant. Rather, it will alter the amount of damages that plaintiffs seek.

Similarly, United Sweetener involved a patent case in which the court granted a stay of further

proceedings pending a reexamination of the validity of the patent. 766 F. Supp. at 216. United Sweetener

is distinguishable fromthe present actionbecause the determinationofthe validityofthe patent directly affected

whetherfurtherlitigationofthe issue would be necessary. Here, by contrast, the determinationofthe damages

plaintiffs owe to the IRS will not affect whether the lawsuit goes forward, again, it will impact the amount of

damages.

As it appears that the decision to be made by the IRS regarding plaintiffs' taxes will alter the amount

of damages plaintiffs can seek against defendant, a delay in furtherjudicialproceedings is not in the interest of

judicialeconomy, particularly because the IRS has alreadydetermined the legality of the CDS strategy. Yong

v. I.N.S., 208 F.3d 1116, 1120-21 (9thCir. 2000) (stating that importance ofjudicialeconomy is undermined

when a stay presents the possibility of an "indefinite, and potentially lengthy delay to the advancement of the

case."). As both parties agree, some damages canbe accurately determined in the form of fees that plaintiffs

paid to E&Y and LL&S. Pl. Opp. at 5-7; Def. Reply at 2. Plaintiffs all cite damages of $50,000 for fees paid

to LL&S and between $500,000-$600,000 in fees paid to E&Y.1 Pl. Opp. at 5. Defendant claims that

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the rule applies. These five exceptions are: (1) statutory, when Congress specifically provides in a statute

that the prevailing litigant is entitled to attorney fees; (2) contractual, when a contract provision allows for

attorney fees in litigation on the contract, but only when the decision is based on state law; (3) when a

litigant purposely disobeys a court order; (4) when a losing litigant has acted in bad faith; and (5) when a

litigant recovers a common fund that benefits others." Alyeska Pipeline Serv. Co. v. Wilderness Soc.,

241 U.S. 240, 258 (1975); See F.D. Rich v. United States ex rel Indus. Lumber Co., 417 U.S. 116,

126 (1974); Ex rel Reed v. Callahan, 884 F.2d 1180, 1185 (9th Cir. 1989). Plaintiffs have not asserted

an exception to this rule that would allow them recovery for attorney's fees.

MOTION DENYING WITHOUT PREJUDICE STAY OF PROCEEDINGS—C-04-03210

MAG 6

plaintiffs' damages "are not legally cognizable" until the IRS investigation is complete. Mot. to Dismiss at 2.

However, defendant does not provide any support for this contention nor does it cite any authority showing

that an assessment of penalties is required for plaintiffs to seek redress from defendant. With ascertainable

damages for plaintiffs' causes of action, the court's interest in the orderly course of justice is best served by

proceeding with discovery in this action.

2. Prejudice to Plaintiffs

The court's interest in staying the proceedings is balanced against the possible prejudice to the parties.

Cmax, 300 F.2d at 268. Plaintiffs argue that a stay of proceedings would prejudice their ability to conduct

discovery in preparation for the litigation of this case. Pl. Opp. at 12. According to plaintiffs, out-of-state

witnesses for this action are currently available to be deposed, and staying these proceedings might increase

the difficultyofsecuring their testimony inthe future. Id. Additionally, the passage of time could fade memories

relevant to this action. Id. The court agrees that plaintiffs access to evidence should not be impeded to wait

for a determination from the IRS that will potentially only impact the amount of damages, rather than the

substantive basis for this complaint.

3. Prejudice to Defendant

The court also considers any prejudice that defendant will suffer if the court does not grant the stay.

Cmax, 300 F.2d at 268. Defendant claims that it will suffer prejudice in the formofsubstantiallitigationcosts

that could be unnecessary, depending upon the determination of the IRS of plaintiffs' tax status. Mot. to

Dismiss at 6. However, plaintiffs claim they have alreadysuffered damages. The IRS's decision will not affect

the damages that plaintiffs have allegedly incurred in the form of fees paid to LL&S and E&Y. Pl. Opp. at 5.

Even if the IRS chose to grant amnestyto plaintiffs for their use of the CDS strategy, plaintiffs argue that these

damages would still exist and this action could still go forward. 

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MOTION DENYING WITHOUT PREJUDICE STAY OF PROCEEDINGS—C-04-03210

MAG 7

Defendant merely speculates that plaintiffs' liability may be excused by the IRS. However, plaintiffs

assert existing damagesthat are independent ofthe IRS's administrative investigation. Based on the arguments

presented to the court, it is unclear that the IRS's failure to assess penalties would result ineliminating plaintiffs'

claims against defendant. Without further evidence of prejudice, it does not appear that defendant will be

disadvantaged if discovery and other proceedings go forward in this action. Defendant has the burden of

proving that a stay is necessary as the moving party. Ohio Envtl. Council, 565 F.2d at 396. The court

concludes that defendant has not met its burden of proving that there is a pressing need for delay. Balancing

the factors favors permitting this action to proceed with discovery as set forth at the parties' December 10,

2004 case management conference. Nevertheless, the court recognizes that the case could not proceed to trial

until the full extent of plaintiffs' tax liability is understood. Thus, although the court presently declines to stay

the actionpending determinationbythe IRS ofpossible taxpenaltiesto plaintiffs, defendants maybring another

motion to stay at a later point in the litigation. 

III. ORDER

For the foregoing reasons, the court, in its discretion, denies without prejudice defendant's motion to

stay further proceedings in this action.

DATED: 7/8/05 /s/ Ronald M. Whyte

RONALD M. WHYTE

United States District Judge

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MOTION DENYING WITHOUT PREJUDICE STAY OF PROCEEDINGS—C-04-03210

MAG 8

Notice of this document has been electronically sent to:

Counsel for Plaintiff(s):

Anthony B. Gordon law@anthonybgordon.com

David Lefkowitz dl@wplawgroup.com

Counsel for Defendant(s):

James A. Murphy jmurphy@mpbf.com

Harlan B. Watkins hwatkins@mpbf.com

Counsel are responsible for distributing copies of this document to co-counsel that have not registered for

e-filing under the court's CM/ECF program.

Dated: 7/11/05 /s/ MAG

Chambers of Judge Whyte

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