United States Court of Appeals
For the First Circuit
No. 07-2588
STEPHEN S. GRAY, in his capacity as the Trustee of the
High Voltage Engineering Liquidating Trust,
Plaintiff, Appellant,
v.
EVERCORE RESTRUCTURING L.L.C.,
a Delaware Limited Liability Company;
JEFFERIES & COMPANY, INC., a Delaware Corporation;
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON LLP,
a Delaware Limited Liability Partnership;
EVERCORE RESTRUCTURING L.P., a Delaware Limited Partnership,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Rya W. Zobel, U.S. District Judge]
Before
Howard and Selya, Circuit Judges,
and Stafford,* Senior District Judge.
Mark L. Weyman, with whom Michael J. Venditto, Reed Smith LLP,
George W. Tetler, III, Mark W. Powers, and Bowditch & Dewey, LLP,
were on brief, for appellant.
Sabin Willett, with whom John J. Curtin, Jr., Rheba Rutkowski,
Francesca L. Miceli and Bingham McCutchen LLP, were on brief for
appellee, Fried, Frank, Harris, Shriver & Jacobson LLP.
*
Of the District of Northern Florida, sitting by designation.
Alexandra A.E. Shapiro, with whom Robert J. Rosenberg, James
Brandt, Henry P. Baer, Jr., Latham & Watkins LLP, Andrew Z.
Schwartz, Adam M. Weisberger, and Foley Hoag LLP, were on brief,
for appellee Jefferies & Company, Inc.
Joseph G. Blute, with whom Kevin M. McGinty, Nancy D. Adams,
Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C., Mark Thompson,
Elisha D. Graff, and Simpson Thacher & Bartlett LLP, were on brief,
for appellee Evercore Restructuring LLC.
October 6, 2008
HOWARD, Circuit Judge. In 2004, High Voltage Engineering
Corporation (HVE), a Massachusetts corporation that was on the
ropes financially, submitted a restructuring plan to a bankruptcy
court in a Chapter 11 proceeding. Although confirmed, the
restructuring plan proved unsuccessful and HVE's businesses and
assets were liquidated.
In 2006, the appellant in this case, a trustee
representing the HVE liquidating trust,1 filed a complaint in
federal district court against various professionals who had
assisted HVE with its restructuring efforts. The defendants were
financial advisors Evercore Restructuring L.L.C. (Evercore), and
Jefferies & Company, Inc. (Jefferies), and legal counsel Fried,
Frank, Harris, Shriver & Jacobson LLP (Fried Frank).2
The claims brought against Evercore and Fried Frank
concern services they rendered in the bankruptcy proceedings.
Specifically, HVE alleges that Evercore and Fried Frank formulated
and promoted an unworkable restructuring plan to the bankruptcy
court. The complaint charges both defendants with gross negligence
and breach of fiduciary duty under Massachusetts law.
1
The appellant, in his capacity as the trustee of the HVE
liquidating trust, stands in the shoes of HVE and its various
affiliates. HVE and these affiliates are referred to in various
parts of the complaint as the "2004 debtors." We refer to the
appellant as "HVE."
2
After briefing and oral argument, one of the defendants --
Jefferies -- entered into a global settlement with HVE. HVE
subsequently discontinued the appeal as to Jefferies.
-3-
Evercore filed a motion for judgment on the pleadings
(Fed. R. Civ. P. 12(c)), and Fried Frank filed a motion to dismiss
(Fed. R. Civ. P. 12(b)(6)). These motions assert the defense of in
pari delicto, among others. The defense, a refined form of finger-
pointing, applies where the plaintiff is at least equally
responsible for the wrong he seeks to remedy.3
The district court concluded that the in pari delicto
defense defeated the claims against Evercore and Fried Frank. On
appeal, HVE argues that the district court erred in dismissing its
claims on these grounds. We disagree and affirm the rulings below.
I. Facts
We sketch the facts here, fleshing them out where
necessary to our discussion. We state the facts as they are set
forth in HVE's amended complaint. Palmer v. Champion Mortg., 465
F.3d 24, 25 (1st Cir. 2006).
This action stems from HVE's restructuring efforts.
These efforts contemplated a Chapter 11 proceeding. To assist it
with the restructuring efforts, HVE enlisted various professional
entities including Evercore and Fried Frank.
As part of the Chapter 11 proceeding, HVE was required to
submit a restructuring plan to the bankruptcy court. This plan
included a slew of financial data. In due time HVE, Evercore, and
3
The alleged "wrong" in this case is the formulation and promotion
of an unworkable restructuring plan to the bankruptcy court.
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Fried Frank presented the plan to the bankruptcy court for
confirmation. When presented, however, the plan included stale
financial data.
When HVE, Evercore, and Fried Frank filed the plan with
the bankruptcy court they were all aware that the plan: (1)
included outdated information, and (2) did not accurately reflect
HVE's financial situation. The plan, however, was pitched to the
court as feasible and confirmed. At the confirmation hearing,
neither HVE, nor the defendants Evercore and Fried Frank, objected
to the plan's confirmation. After the bankruptcy court confirmed
the plan, Evercore and Fried Frank had no further involvement in
HVE's restructuring efforts.
The plan proved infeasible and barely six months after
confirmation HVE found itself in yet another bankruptcy proceeding.
In this proceeding, the bankruptcy court appointed a Chapter 11
trustee who subsequently filed a liquidation plan.4 This plan gave
the trustee authority to pursue litigation claims on HVE's behalf.
The trustee, acting on HVE's behalf, filed a complaint in
federal district court asserting claims of gross negligence and
breach of fiduciary duty against Evercore and Fried Frank.5 The
4
The liquidation plan paid all administrative, secured, and
unsecured claims in full with interest.
5
Specifically, the complaint alleges: gross negligence against
Evercore (Count V); breach of fiduciary duty against Evercore
(Count VI); gross negligence against Fried Frank (Count VII); and
breach of fiduciary duty against Fried Frank (Count VIII).
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district court granted Evercore's motion for judgment on the
pleadings and Fried Frank's motion to dismiss.
II. Discussion
We review dismissals under Rule 12(b)(6) and judgments on
the pleadings under Rule 12(c) de novo. See DeMayo v. Nugent, 517
F.3d 11, 13 (1st Cir. 2008). In doing so, we view the well-pleaded
facts in the light most favorable to the non-moving party, drawing
all reasonable inferences in its favor. Gagliardi v. Sullivan, 513
F.3d 301, 305 (1st Cir. 2008) (motion to dismiss); Curran v.
Cousins, 509 F.3d 36, 43 (1st Cir. 2007) (motion for judgment on
pleadings). "[T]o survive a Rule 12(b)(6) motion (and, by
extension, a Rule 12(c) motion) a complaint must contain factual
allegations that 'raise a right to relief above the speculative
level.'" Perez-Acevedo v. Rivero-Cubano, 520 F.3d 26, 29 (1st Cir.
2008) (citation omitted). Put differently, we will affirm a
dismissal or judgment on the pleadings if the complaint fails to
state facts sufficient to establish a "claim to relief that is
plausible on its face." Trans-Spec Truck Serv. v. Caterpillar
Inc., 524 F.3d 315, 320 (1st Cir. 2008) (citation omitted).
The district court relied on the affirmative defense of
in pari delicto to dismiss HVE's claims against Evercore and Fried
Frank. Where a court grants a Rule 12(b)(6) or Rule 12(c) motion
based on an affirmative defense, the facts establishing that
defense must: (1) be "definitively ascertainable from the complaint
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and other allowable sources of information," and (2) "suffice to
establish the affirmative defense with certitude." Nisselson v.
Lernout, 469 F.3d 143, 150 (1st Cir. 2006).
Before proceeding to HVE’s arguments, we briefly discuss
the in pari delicto defense.6 The defense has two components. It
applies where “(i) the plaintiff, as compared to the defendant,
bears at least substantially equal responsibility for the wrong he
seeks to address and (ii) preclusion of the suit would not
interfere with the purposes of the underlying law or otherwise
contravene the public interest.” Id. at 152. We refer to these
parts as the “responsibility” and “public policy” components.
HVE contends that the district court erred in dismissing
its complaint on in pari delicto grounds. It presents four
arguments in support of this contention. Three of these relate to
the responsibility component of the defense and the fourth concerns
the defense's public policy component.
A. Responsibility Component
First, HVE argues that the court erred in deciding the
merits of the in pari delicto defense at the motion to
dismiss/judgment on the pleadings stage. This is because, HVE
6
The defense, which "has long been woven into the fabric of
federal law," is recognized under Massachusetts law. Nisselson,
469 F.3d at 151-52 ("Massachusetts courts, like the federal courts,
have warmly embraced the in pari delicto defense.") (citing cases).
-7-
posits, a more developed record was needed before the court could
accurately assign responsibility among the various wrongdoers.
Second, HVE argues that even if the court in this case
could accurately assign responsibility at this stage, the court
erroneously concluded that HVE was at least equally responsible for
the wrong. On this score, HVE argues that the professionals, by
dint of their expertise, were clearly more responsible than HVE.
Third, HVE says that even if the court could legitimately
conclude that HVE was at least equally responsible for the wrong,
the court should not have applied the doctrine of in pari delicto
because an exception to the doctrine –- the "adverse interest"
exception –- applies in this case. This exception, if applicable,
would absolve HVE from any wrongdoing by shifting the blame to its
corporate management. The exception applies where the wrongdoing
was "motivated by [management's] desire to serve [themselves] or a
third party, and not the [corporation]." Baena v. KPMG LLP, 453
F.3d 1, 8 (1st Cir. 2006) (citing corporate "looting" as the
classic example); see also Breeden v. Kirkpatrick & Lockhart LLP,
336 F.3d 94, 100 (2d Cir. 2003) ("[The] adverse interest exception
is applied only when the agent has totally abandoned the
principal's interests.") (internal quotation marks omitted)). HVE
argues that its complaint indicates that HVE's management sought
confirmation of the unworkable plan, not to benefit the company,
-8-
but rather in order to collect bonus payments contingent on the
plan's confirmation.
HVE's arguments fail to persuade us. First, recent
precedent in this circuit makes clear that the in pari delicto
defense can be successfully asserted at the motion to dismiss stage
so long as the facts establishing the defense are: (1)
"definitively ascertainable from the complaint and other allowable
sources of information," and (2) "suffice to establish the
affirmative defense with certitude." Nisselson, 469 F.3d at 150.
Both requirements are met in this case. It is evident from the
face of the complaint, as drafted, that despite being aware that
the plan was based on stale financial data and did not accurately
reflect HVE's financial situation, HVE, Evercore, and Fried Frank
all presented the plan to the bankruptcy court as workable.
With respect to the plan's incorporation of stale data,
HVE alleges that (1) although it revised its financial forecasts
prior to the plan's confirmation, the plan failed to reflect those
revised forecasts and (2) it was aware at the time of the
confirmation hearing that the plan it presented to the bankruptcy
court failed to reflect a number of "significant variations from
the post-confirmation cash requirements."
Additionally, HVE's complaint makes plain that it
presented a plan it knew did not paint an accurate picture of its
financial situation. HVE alleges that (1) despite the fact that
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its chief executive officer had promised to pay a foreign non-
debtor subsidiary approximately $ 10.2 million upon confirmation of
the plan, the plan only allocated $ 2.4 million to this subsidiary
and (2) a day before the confirmation hearing, HVE's chief
financial officer informed "[HVE's] chief executive officer and
[HVE's] post-Effective Date board of directors that the operating
projections in [the plan] 'had underestimated the customers'
reaction to the bankruptcy' and that this had materially affected
[HVE's] collections."7 HVE's complaint also adds, critically, that
"[the professionals and HVE]. . . knew or should have known that
[the plan] did not accurately depict [HVE's] financial situation
immediately prior to the confirmation hearing."
Given these allegations in the complaint, HVE bears at
least equal responsibility for the passage of an unworkable plan.
See Baena, 453 F.3d at 6 (claims against accounting firm dismissed
on in pari delicto grounds where corporation's management misstated
its earnings despite fact that accounting firm knowingly tolerated
and abetted the corporation's fraud).
Second, that HVE retained sophisticated professionals who
were partly responsible for the passage of the plan does not change
our analysis. Even where professionals are involved, the question
is, at bottom, whether the plaintiff is at least equally
7
We note here that apart from HVE's "adverse interest" exception
argument, no party contests that the actions of HVE's management
may be imputed to HVE.
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responsible for the alleged wrong. Baena is instructive. In that
case, a trustee, litigating on a corporation's behalf, filed a
complaint against a professional accounting firm. Id. at 3. The
complaint claimed that the professionals engaged in unfair or
deceptive trade practices in violation of Mass. Gen. Laws ch. 93A,
§§ 1-11 by tolerating and abetting a fraud committed by the
corporation. Id. The fraud at issue was the corporation's
misstatement of its earnings. Id. at 6. The complaint alleged
that the professionals "knowingly tolerated [the corporation's]
patently improper accounting practices." Id. at 4. But, in
addition to these allegations, the complaint noted that the
corporation's management, acting on the corporation's behalf, were
knowing parties to the statements and oversaw and approved them.
Id. at 7. Accordingly, we concluded that the doctrine of in pari
delicto defeated the trustee's claim. Id. at 10.
Here, although the complaint alleges that the
professionals placed their imprimatur on the faulty reorganization
plan, thereby greasing the wheels of confirmation, it also reveals
that HVE was fully aware that the plan which both it and the
professionals touted as feasible suffered from inherent flaws. HVE
cannot avoid the consequences of its own actions by shifting blame
to its hired professionals.
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Third, the "adverse interest" exception is not available
to HVE.8 Although HVE argues that its complaint indicates that its
management sought confirmation of the plan in order to collect
bonus payments, this is an unsupportable characterization of the
complaint. The complaint states in relevant part: "Evercore
revised the Sources and Uses to reflect nearly $ 3 million in
unaccounted for expenses, including certain professional fees and
bonus payments to [HVE's] management." Even read liberally,
nothing in that allegation, or in the complaint as a whole,
suggests that management sought confirmation based on a desire to
serve themselves and not HVE. See Baena, 453 F.3d at 8. The bare
fact that management received bonuses upon confirmation is not
sufficient to establish the exception. See id. at 7-8 ("[T]hat the
implicated managers also may have seen benefits to themselves [does
not alone] make their interests adverse.") (emphasis added).
B. Public policy component
HVE argues that dismissing this case would not serve the
public interest for two reasons. First, dismissal would pardon
professionals who betrayed their professional obligations, harmed
third parties, and misinformed the bankruptcy court. Second,
dismissing the case will make it impossible for other plaintiffs to
8
Evercore and Fried Frank argue that HVE waived the "adverse
interest" exception argument by not presenting it below. Because
we resolve the merits in their favor, we need not decide the waiver
question.
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hold professionals retained in the bankruptcy context accountable
for gross negligence and breaches of fiduciary duty.
HVE's public policy argument lacks force. Although HVE
contends that dismissing the case will effectively pardon the
professionals, in seeking to proceed with this lawsuit HVE asks for
a pardon of its own. According to HVE's complaint, it sought the
plan's confirmation despite being fully cognizant of the plan's
shortcomings. Now, after the plan predictably failed to bear
fruit, HVE seeks to recover from the professionals who facilitated
its passage. For the court to entertain this dispute between
equally culpable wrongdoers would waste valuable resources and
would itself offend the public interest. See Nisselson, 469 F.3d
at 151 (noting that the in pari delicto defense is grounded in part
on the premise that "'courts should not lend their good offices to
mediating disputes among wrongdoers'") (quoting Bateman Eichler,
Hill Richards, Inc. v. Berner, 472 U.S. 299, 306 (1985)). As for
HVE's second asserted reason, it exaggerates the precedential value
of this case. The result here is driven by HVE's own allegations,
and is thus limited to the circumstances of this case.
As a postscript, we note that HVE contends that the
district court erred in denying it the opportunity to amend its
complaint for the second time. Because HVE had already amended its
complaint once as of right, any additional amendment required leave
of court. See Fed. R. Civ. P. 15(a).
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Although a court's denial of a motion to amend is
typically reviewed for an abuse of discretion, in this case the
district court neither granted nor denied a motion to amend. This
is because HVE never moved to file a second amended complaint.
Rather, in its omnibus opposition to the defendants' various
dispositive motions, HVE stated “in the event that the Court finds
that the Amended Complaint fails to state a claim, Plaintiff
requests leave to replead.” This statement does not constitute a
motion to amend a complaint. See Confederate Memorial Ass'n v.
Hines, 995 F.2d 295, 299 (D.C. Cir. 1993) (“a bare request in an
opposition to a motion to dismiss –- without any indication of the
particular grounds on which amendment is sought [,cf. Fed. R. Civ.
P. 7(b)] –- does not constitute a motion within the contemplation
of Rule 15(a)”) (citation omitted) (alteration in original); see
also Wayne Invest., Inc. v. Gulf Oil Corp., 739 F.2d 11, 15 (1st
Cir. 1984) (concluding that plaintiff's assertion that it would
request leave to amend if the court dismissed its complaint, which
the plaintiff made in its memorandum in opposition to the
defendant's motion to dismiss, did not "[constitute] a motion to
amend the complaint sufficient to preserve the issue for appeal”).
As HVE failed to request leave to amend, the district court cannot
be faulted for failing to grant such leave sua sponte. See
Confederate Memorial Ass'n, 995 F.2d at 299.
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There may be exceptional circumstances in which a request
to amend will become the functional equivalent of a motion to amend
-- but no such circumstances are present here. In any event, even
if we treated HVE's statement in its memorandum as a motion to
amend, we would consider the court's implicit denial of this motion
to be well within its discretion. To this day, HVE has failed to
allege any facts that would suffice to avoid dismissal on in pari
delicto grounds. See ACA Fin. Guar. Corp. v. Advest Inc., 512 F.3d
46, 57 (1st Cir. 2008). Moreover, given what is already alleged in
the second amended complaint, in our view any additional amendment
would be futile in this case. See Correa-Martinez v. Arrillaga-
Belendez, 903 F.2d 49, 59 (1st Cir. 1990) (finding district court
did not abuse discretion in denying leave to amend where "nothing
[could] repair the holes in [the plaintiff's] case"); see also ACA
Fin. Guar. Corp., 512 F.3d at 55-56 ("We defer to the district
court's decision if any adequate reason for the denial is apparent
on the record.") (internal quotations and citation omitted).
III. Conclusion
For the reasons provided above, the judgment below is
affirmed.
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Gray v. Evercore Restructuring L.L.C.
Court: Court of Appeals for the First Circuit
Date filed: 2008-10-06
Citations: 544 F.3d 320
Copy Citations