$185 Million Settlement Against Ernst and Young for Negligent Bankruptcy Advice

Merry-Go-Round Enterprises operated nearly 1,500 mall clothing stores across the country when it filed for Chapter 11 bankruptcy protection in early 1994. The company hired Ernst and Young as its turnaround adviser, hoping the firm's expertise could guide a restructuring. Instead, creditors and the bankruptcy trustee later alleged, E&Y's involvement made things worse.

The trustee appointed to wind down Merry-Go-Round, Deborah H. Devan, sued Ernst and Young in Baltimore City Circuit Court in 1998. The complaint alleged two central failures. First, E&Y had concealed a material conflict: the Washington law firm Swidler and Berlin had recommended Ernst and Young for the engagement while simultaneously representing E&Y in unrelated litigation. Second, E&Y assigned junior personnel who lacked the experience the engagement demanded, violating the standard of care for professional consulting.

William H. Murphy Jr., a former judge and one of Baltimore's most prominent trial lawyers, joined a team of co-counsel including Stephen L. Snyder, Arnold M. Weiner, Robert J. Weltchek, and Larry S. Gibson. Together they built the case that E&Y's hidden conflict and substandard advice deprived creditors of any realistic chance at reorganization and drove the company into full liquidation.

In April 1999, Ernst and Young agreed to pay $185 million to settle the case, admitting no wrongdoing. Of that amount, $135 million was covered by the firm's professional liability insurance. Creditors recovered more than $100 million. The plaintiff's attorneys shared fees exceeding $70 million under a 40 percent contingency arrangement.

The settlement stood as the largest single-defendant civil settlement in Maryland history at the time, exceeded overall only by the multi-defendant $4.4 billion tobacco agreement. Beyond the dollar figure, the case was the first in which a turnaround consultant was held financially responsible for a company's failure to survive bankruptcy, setting a precedent for professional accountability in insolvency engagements.