01-1864 | 3rd Cir. | Sep 18, 2002
Before: SCIRICA and GREENBERG, Circuit Judges ,(cid:13) and FULLAM,* District Judge(cid:13) (Filed: September 18, 2002)(cid:13) Edward M. McNally (argued)(cid:13) Michael J. Maimone(cid:13) James E. Drnec(cid:13) Morris, James, Hitchens &(cid:13) Williams LLP(cid:13) 222 Delaware Avenue - 10th Floor(cid:13) P.O. Box 2306(cid:13) Wilmington, DE 19899(cid:13) Attorneys for the Appellants(cid:13) A. Gilchrist Sparks, III (argued)(cid:13) R. Judson Scaggs, Jr.(cid:13) Megan E. Ward(cid:13) Morris, Nichol, Arsht & Tunnell(cid:13) 1202 N. Market Street(cid:13) P.O. Box 1347(cid:13) Wilmington, DE 19899-1347(cid:13) Attorneys for Edison Director Third-(cid:13) Party Defendants Below, Appellees(cid:13) _________________________________________________________________(cid:13) * Honorable John P. Fullam, Senior Judge of the United States District(cid:13) Court for the Eastern District of Pennsylvania, sitting by designation.(cid:13) 2(cid:13) Philip Trainer, Jr.(cid:13) Ashby & Geddes(cid:13) 222 Delaware Avenue - 17th Floor(cid:13) P.O. Box 1150(cid:13) Wilmington, DE 19899(cid:13) James P. Reid (argued)(cid:13) Stacy R. Obenhaus(cid:13) Gardere Wynne Sewell LLP(cid:13) 1601 Elm Street, Suite 3000(cid:13) Dallas, TX 75201(cid:13) Attorneys for D&B Defendants(cid:13) Appellees(cid:13) Daniel J. DeFranceschi(cid:13) Richards, Layton & Finger(cid:13) One Rodney Square(cid:13) P.O. Box 551(cid:13) Wilmington, DE 19899(cid:13) Richard A. Chesley(cid:13) Houlihan Lokey Howard & Zukin(cid:13) 123 North Wacker Drive, 4th Floor(cid:13) Chicago, IL 60606(cid:13) Attorneys for EBS Litigation LLC(cid:13) Appellee(cid:13) OPINION OF THE COURT(cid:13) FULLAM, District Judge:(cid:13) This is an appeal from the dismissal of a third-party(cid:13) complaint, in an adversary action pending in the District(cid:13) Court for the District of Delaware (the reference to the(cid:13) Bankruptcy Judge having previously been withdrawn). The(cid:13) dismissal of the third-party complaint did not dispose of the(cid:13) entire adversary action, but has been certified as final for(cid:13) purposes of appeal, pursuant to Fed.R.Civ.P. 54(b).(cid:13) BACKGROUND(cid:13) As part of a corporate re-shuffling, Edison Brothers(cid:13) Stores, Inc., a publicly-held corporation (hereinafter(cid:13) 3(cid:13) "Edison") acquired the stock of Dave & Busters, Inc.(cid:13) ("D&B"). On June 29, 1995, pursuant to a unanimous(cid:13) resolution of the Edison Board, Edison distributed the D&B(cid:13) stock to all Edison shareholders, as a dividend. Each(cid:13) Edison shareholder received one share of D&B stock for(cid:13) every five shares of Edison stock held. In public filings at(cid:13) that time, the Edison Directors represented that Edison(cid:13) was in sound financial condition. A few months later,(cid:13) however, on November 3, 1995, Edison filed a voluntary(cid:13) petition in bankruptcy under Chapter 11.(cid:13) In the course of the bankruptcy proceedings it became(cid:13) apparent that the 1995 stock dividend qualified as a(cid:13) voidable transfer under 11 U.S.C. SS 544(b) and 548(a).(cid:13) Edison’s Plan of Reorganization was confirmed on(cid:13) September 9, 1997, effective as of September 19, 1997. The(cid:13) Plan contemplated the formation of a new entity, EBS(cid:13) Litigation, LLC ("EBS"), which would pursue litigation in(cid:13) order to retrieve, for the bankruptcy estate, debts owed to(cid:13) the estate, including recoveries of the previously-distributed(cid:13) D&B stock or its monetary equivalent. On September 30,(cid:13) 1997, EBS filed the present case, naming a class of(cid:13) defendants consisting of all of the shareholders who had(cid:13) received the D&B stock and had neither returned nor paid(cid:13) for it. The defendant class is represented by appellant(cid:13) Barclays Global Investors, N.A.(cid:13) On March 29, 2000, Barclays filed a third-party(cid:13) complaint against the former Directors of Edison ("Edison(cid:13) defendants") and Directors of D&B ("the D&B defendants").(cid:13) In the third-party complaint Barclays alleges that the(cid:13) Edison defendants breached their fiduciary duties in(cid:13) declaring the illegal stock dividend, misleading the Edison(cid:13) shareholders as to the financial condition of the company(cid:13) and the legitimacy of the dividend; and also asserts claims(cid:13) against the Edison defendants for contribution and(cid:13) subrogation. The D&B defendants are charged with aiding(cid:13) and abetting the breaches of fiduciary duty and other(cid:13) securities violations.(cid:13) The District Court dismissed the third-party complaint in(cid:13) its entirety, ruling that the claims for breaches of fiduciary(cid:13) duty and securities violations in connection with the stock(cid:13) 4(cid:13) dividend were time-barred, and that the third-party(cid:13) complaint did not state valid claims for contribution or(cid:13) subrogation. This appeal followed.(cid:13) STATUTE OF LIMITATIONS(cid:13) All parties agree that the statute of limitations for the(cid:13) alleged breaches of fiduciary duty and related offenses is(cid:13) three years. It is also agreed that, under Delaware law, the(cid:13) limitations period begins when the wrongful acts are(cid:13) committed, even though the injured party may be ignorant(cid:13) of the existence of a cause of action. See e.g. In re Dean(cid:13) Witter P’ship Litig., 1998 WL 442456 at * 4 (Del.Ch. July(cid:13) 17, 1998). Thus, in this case, the limitations period began(cid:13) to run on June 29, 1995, when the D&B stock was(cid:13) distributed as a dividend, and expired on June 29, 1998,(cid:13) unless the statute was tolled during part or all of that(cid:13) period.(cid:13) Delaware law recognizes three potential sources of tolling:(cid:13) (1) the doctrine of inherently unknowable injuries; (2) the(cid:13) doctrine of fraudulent concealment; and (3) the doctrine of(cid:13) equitable tolling. See, In re Dean Witter P’ship Litig. supra;(cid:13) In re MAXXAM, Inc./Federated Dev.S’holders Litig., 1995 WL(cid:13) 376942 at *6-7 (Del.Ch. June 21, 1995). Barclays asserts(cid:13) that the statute of limitations was indeed tolled, under all(cid:13) three of these doctrines.(cid:13) Under Delaware law, however, "if the limitations period is(cid:13) tolled under any of these theories, it is tolled only until the(cid:13) plaintiff discovers (or exercising reasonable diligence should(cid:13) have discovered) his injury. Thus, the limitations period(cid:13) begins to run when the plaintiff is objectively aware of the(cid:13) facts giving rise to the wrong, i.e, on inquiry notice." In re(cid:13) Dean Witter P’ship Litig., supra at *6 (emphasis in original).(cid:13) The District Court ruled that Barclays was on "inquiry(cid:13) notice" as of the commencement of Edison’s bankruptcy(cid:13) proceeding, since it knew that it had received the stock(cid:13) dividend less than one year earlier, and should have(cid:13) realized that there was a potential for an avoidance claim(cid:13) under 11 U.S.C. S 548(a). "Inquiry notice" requires only(cid:13) notice of "facts sufficient to put a person of ordinary(cid:13) intelligence and prudence on inquiry which, if pursued,(cid:13) 5(cid:13) would lead to the discovery." Becker v. Hamada, Inc. 455(cid:13) A.2d 353, 356 (Del. 1982).(cid:13) The proper resolution of this issue requires careful(cid:13) analysis of (1) the precise nature of the claims now being(cid:13) asserted by Barclays, (2) whether an objectively reasonable(cid:13) person would have realized the need to investigate further,(cid:13) and (3) what information such an inquiry would have(cid:13) disclosed.(cid:13) For purposes of analysis, at this stage of the proceedings(cid:13) we must assume that the Edison Directors did violate a(cid:13) fiduciary duty to the Edison stockholders and that they(cid:13) were aided and abetted by the D&B defendants. If the stock(cid:13) dividend occurred when Edison was insolvent, or rendered(cid:13) Edison insolvent, it was illegal under Delaware law, and(cid:13) voidable in bankruptcy. The General Corporation Law of(cid:13) Delaware provides, in S174(a):(cid:13) "In case of any wilful or negligent violation . .. the(cid:13) directors under whose administration the same may(cid:13) happen shall be jointly and severally liable, at any time(cid:13) within six years after paying such unlawful dividend or(cid:13) after such unlawful stock purchase or redemption, to(cid:13) the corporation and to its creditors in the event of its(cid:13) dissolution or insolvency, to the full amount of the(cid:13) dividend unlawfully paid . . ."(cid:13) S174(b) of the same statute provides:(cid:13) "Any director against whom a claim is successfully(cid:13) asserted under this section shall be entitled to(cid:13) contribution from the other directors who voted for or(cid:13) concurred in the unlawful dividend . . .(cid:13) "(c) Any director against whom a claim is successfully(cid:13) asserted under this section shall be entitled, to the(cid:13) extent of the amount paid by such director as a result(cid:13) of such claim, to be subrogated to the rights of the(cid:13) corporation against stockholders who received the(cid:13) dividends on, or assets for the sale or redemption of,(cid:13) their stock with knowledge of facts indicating that such(cid:13) dividend, stock purchase or redemption was unlawful(cid:13) under this chapter in proportion to the amounts(cid:13) received by such stockholders respectively."(cid:13) 6(cid:13) Should the Edison shareholders represented by Barclays(cid:13) have realized, when the bankruptcy petition was filed, that(cid:13) the distribution of D&B stock five months earlier rendered(cid:13) Edison insolvent, or triggered its insolvency? They had been(cid:13) assured, by the Edison defendants, in public filings, that(cid:13) such was not the case. The filing of the bankruptcy petition(cid:13) undoubtedly should have alerted the Edison stockholders(cid:13) to the realization that the previously-expressed belief of the(cid:13) Edison defendants that Edison had adequate cash flows to(cid:13) support continued operations, and that its financial future(cid:13) was not in doubt, had ultimately proven incorrect, but we(cid:13) are not persuaded that an objectively-reasonable(cid:13) shareholder should have realized that the Edison Directors(cid:13) had breached their fiduciary obligations.(cid:13) There is no suggestion in the record before us that(cid:13) anyone believed, or contended, that the stock distribution(cid:13) had occurred when Edison was insolvent, or that the stock(cid:13) distribution caused its insolvency, until, in connection with(cid:13) the adoption of Edison’s Reorganization Plan, Edison filed a(cid:13) disclosure statement, on June 30, 1997. We conclude,(cid:13) therefore, that the statute of limitations was tolled until(cid:13) June 30, 1997, because the Edison defendants actively(cid:13) concealed the true financial condition of the company until(cid:13) the bankruptcy petition was filed, and thereafter concealed(cid:13) until June 30, 1997, the fact (if it was a fact) that the stock(cid:13) distribution may have contributed to the insolvency.(cid:13) Barclays’ third-party complaint, filed on March 29, 2000,(cid:13) was therefore timely.(cid:13) Moreover, we must not lose sight of the practical realities(cid:13) of the situation. We suspect it would not occur to an(cid:13) objectively-reasonable stockholder with full knowledge of(cid:13) the applicable law, even if he or she suspected that the(cid:13) distribution of D&B stock might be vulnerable to challenge,(cid:13) to do anything about it unless such a challenge became a(cid:13) reality. Until Edison’s creditors took action to recover the(cid:13) stock, the recipients of the stock dividend could scarcely be(cid:13) expected to challenge it themselves, and thus trigger an(cid:13) avalanche. It may well be, therefore, that the statute of(cid:13) limitations should be deemed to have been tolled until(cid:13) confirmation of the Reorganization Plan which provided for(cid:13) such litigation by EBS; the Plan was confirmed on(cid:13) 7(cid:13) September 9, 1997, and became effective on September 19,(cid:13) 1997.(cid:13) THE MERITS OF BARCLAYS’ FIDUCIARY-DUTY CLAIMS(cid:13) Interspersed throughout appellees’ briefs are suggestions(cid:13) that dismissal of the third-party complaint should be(cid:13) upheld on the alternative ground that Barclays has no valid(cid:13) claims against the Edison defendants for breach of(cid:13) fiduciary duties because the Edison shareholders(cid:13) represented by Barclays are only being asked to return(cid:13) something they did not pay for. But the merits of the(cid:13) underlying lawsuit are not before us. The third-party(cid:13) complaint which is before us at this time does undoubtedly(cid:13) contain adequate allegations to impose liability upon the(cid:13) Edison defendants, in the event that Barclays is held liable(cid:13) to EBS. Barclays may prevail in the underlying litigation,(cid:13) and may be able to charge the Edison defendants with(cid:13) reimbursement of defense costs. Or, Barclays may be held(cid:13) liable for a greater amount than the share prices(cid:13) contemplated in the settlement proposal embodied in the(cid:13) Reorganization Plan.(cid:13) Needless to say, we express no view as to the actual(cid:13) merits of any of the claims or defenses asserted in the(cid:13) underlying action. We hold merely that, at this stage, the(cid:13) possibility of successful third-party claims cannot be ruled(cid:13) out.(cid:13) CONTRIBUTION AND SUBROGATION(cid:13) All parties agree that, to support a claim for contribution,(cid:13) there must be a joint tortfeasor relationship (or a joint(cid:13) contractual obligation, plainly not present here); and that(cid:13) subrogation is available only if third-party plaintiffs are(cid:13) required to bear the burden of an obligation which is really(cid:13) that of the Edison defendants. The District Court ruled that(cid:13) neither doctrine was available in this case, but we are(cid:13) constrained to disagree.(cid:13) Under Delaware General Corporation Law, as quoted(cid:13) above, the Edison Directors would be liable in full for the(cid:13) entire stock dividend, and could recover from the recipients(cid:13) 8(cid:13) of the dividend only if the recipients had been aware of the(cid:13) impropriety in issuing the dividend. If EBS succeeds in the(cid:13) underlying litigation, the shareholders represented by(cid:13) Barclays might be held liable even though they were not(cid:13) aware of the impropriety of the dividend. In our view, this(cid:13) would, at least potentially, give rise to a subrogation claim,(cid:13) since innocent shareholders will have been paying sums(cid:13) which were the obligation of the Edison defendants.(cid:13) Alternatively, should it be established that the Edison(cid:13) shareholders represented by Barclays were not innocent(cid:13) recipients of the stock dividend, a joint tortfeasor(cid:13) relationship would thus have been established. And, if the(cid:13) Barclays shareholders are held liable for more than the(cid:13) share price paid by the Edison defendants and other(cid:13) culpable shareholders, there might be a basis for a(cid:13) contribution claim. In our view, all of these issues should(cid:13) be resolved in the course of the underlying litigation; they(cid:13) cannot appropriately be resolved at this point, on the basis(cid:13) of the pleadings.(cid:13) CONCLUSION(cid:13) For the reasons stated above, we hold that all of the(cid:13) claims asserted in the third-party complaint were timely(cid:13) filed, and that the third-party complaint is adequate in all(cid:13) respects to withstand dismissal under Fed.R.Civ.P. 12(b)(6).(cid:13) The judgment appealed from will therefore be reversed, and(cid:13) the case remanded for further proceedings.(cid:13) A True Copy:(cid:13) Teste:(cid:13) Clerk of the United States Court of Appeals(cid:13) for the Third Circuit(cid:13) 9