Sontchi, J.
Before the Court are two questions: 1) Whether, in light of earlier federal litigation, Plaintiff is entitled to summary judgment dismissing Defendants' affirmative defenses of claim and issue preclusion, and 2) Whether Plaintiff is entitled to summary judgment dismissing Defendants' timeliness defenses. For the reasons discussed below, the Court finds that Plaintiff's arguments fail as a matter of law, and therefore will deny Plaintiff's motions for partial summary judgment.
This is an adversary proceeding alleging breach of fiduciary duty. The Plaintiff is Eugenia VI Venture Holdings, Ltd. ("Eugenia"), on behalf of AMC Investors, LLC and AMC Investors II, LLC (together, "Debtors"). At all relevant times, the Debtors were shareholders of AMC Computer Corp. ("Computer" or "AMC")
By May 2005, Computer was insolvent. Its board of directors voted to cease operations and approved an assignment for the benefit of creditors. In response, Eugenia notified Computer that it was in default under the Credit Agreement, accelerated the outstanding obligations, and demanded immediate payment. Eugenia also demanded payment from the Debtors under their guarantees.
Eugenia filed suit against the Debtors in New York State court to collect on the guarantees. In July 2007, the court entered judgment in favor of Eugenia, awarding damages of approximately $10.7 million. The Debtors appealed a portion of the award. Prior to oral argument before the appellate court, Eugenia filed involuntary petitions against the Debtors.
In addition to the state court case, Eugenia brought seven related suits in the U.S. District Court for the Southern District of New York (the "District Court"). Suing both directly and derivatively on behalf of Computer, Eugenia alleged fraud and breaches of fiduciary duty in connection with AMC's default under the Credit Agreement. Defendants in these actions were officers, directors, and/or shareholders of AMC.
As to the fraud claims, which Eugenia brought in its individual capacity, the allegations were that defendants "fraudulently induced Plaintiff to execute the Credit Agreement with AMC by making false, material statements of fact, and by intentionally concealing material facts about AMC's financial situation and history."
Granting defendants' joint motion for summary judgment, the District Court dismissed all actions in a single judgment. Specifically, Eugenia did not show either that its reliance on defendants' representations was reasonable, or that it was damaged by defendants' alleged fraud. As to breach of fiduciary duty, plaintiff's claims failed, as a matter of law, because it could not prove damages. The court reasoned that deepening a company's insolvency does not, on its own, demonstrate that the company has been damaged. To survive summary judgment on breach of fiduciary duty, Eugenia had to show that defendants deepened Computer's insolvency in breach
The Second Circuit affirmed the District Court's judgment in 2010: "We agree with the district court's conclusion that Eugenia's derivative claims for breach of fiduciary duty fail as a matter of law because Eugenia failed to raise a genuine issue of material fact as to damages."
In addition, Eugenia's claims for fraud failed as a matter of law because "Eugenia suffered no out-of-pocket loss."
In July 2014, Eugenia brought this adversary complaint for breach of fiduciary duty on behalf of Debtors AMC Investors and AMC Investors II. There are no accompanying claims for fraud. As to its claims for breach of fiduciary duty, Plaintiff alleges that "Computer's governance was marked by widespread improprieties and irregularities that contributed to Computer's deteriorating financial condition. Defendants actively initiated and directed these improprieties, or took no action to prevent or halt them."
Answering together, Defendants raised the affirmative defenses of issue and claim preclusion.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. Venue is proper in this District pursuant to 28 U.S.C. §§ 1408 and 1409. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2) and this Court has the judicial power to enter a final order.
Federal Rule of Civil Procedure 56(c), made applicable to these proceedings pursuant to Federal Rule of Bankruptcy Procedure 7056, provides that summary judgment should be granted if the movant shows that "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law,"
In deciding a motion for summary judgment, all factual inferences must be viewed in the light most favorable to the nonmoving party.
In order to demonstrate the existence of a genuine issue of material fact in a jury trial, the nonmovant must supply sufficient evidence (not mere allegations) for a reasonable jury to find for the nonmovant.
Courts in this jurisdiction routinely decide matters of preclusion through summary judgment.
As the earlier action came into the District Court under diversity jurisdiction, the parties agree that New York preclusion law governs. Indeed, "[f]or or federal court judgments in suits based on diversity jurisdiction, federal law requires us to look to the rules of preclusion of the state where the court that rendered the first
The essence of res judicata, or claim preclusion, is "that a party who once has had a chance to litigate a claim before an appropriate tribunal usually ought not to have another chance to do so."
To prove the affirmative defense res judicata, a party must show that the previous action involved the plaintiffs or those in privity with them. New York courts have established that "privity does not have a single well-defined meaning. Rather, privity is `an amorphous concept not easy of application.'"
One test New York courts have used to decide privity asks if the connection between parties is "such that the interests of the nonparty can be said to have been represented in the prior proceeding."
By contrast, in Parkoff v. Gen. Tel. & Electronics Corp., the New York Court of Appeals held that:
Further, in Ex rel. Spitzer v. Applied Card Sys., Inc., the settlement of a national class action in a California court prevented the New York Attorney General from later seeking additional restitution on behalf of in-state class members.
New York courts have also found privity in the following situations: a determination in a declaratory judgment action brought by a union was binding in a later action by a member; a judgment against an insured barred a subsequent action against his liability insurer; and a judgment in an action brought by a trustee in bankruptcy precluded a subsequent action by a creditor.
Analyzing privity, another test asks if a party, though not formally involved, nevertheless exercised control over the earlier litigation.
Applying another test, the court in Juan C. v. Cortines looked to whether parties, though arguably the same, appeared in the same capacity in both actions.
In Syncora Guarantee Inc. v. J.P. Morgan Securities LLC, a case factually similar to the present, the New York Supreme Court, Appellate Division, applied a totality of the circumstances test to discern the "actual relationship" between litigants.
When EMC refused to comply, Syncora brought an action for breach of contract in the Southern District of New York. Syncora later moved to add fraud claims against both EMC and Bear Sterns. Plaintiff alleged that the two "acted `in concert and as a single entity without regard to corporate formality' to perpetrate the alleged fraud."
The final prong of the res judicata test is that the earlier- and later-filed claims are the same. Two claims are the same where they arise from the "same transaction or series of connected transactions."
In determining whether claims are part of the same transaction, New York courts use a so-called pragmatic approach, examining "whether the facts are related in time, space, origin, or motivation, whether they form a convenient trial unit, and whether their treatment as a unit conforms to the parties' expectations or business understanding and usage."
Noting that plaintiff pleaded the same conduct in both a state petition and a later federal complaint, the court in Sheffield v. Sheriff of Rockland County Sheriff Dept. determined that the two claims were transactionally related. It did not matter that the allegations in the earlier complaint were broad (plaintiff alleged "minority discrimination" and a "hostile work environment") and those in the federal complaint included more specific examples of discriminatory conduct. Applying New York preclusion law, the Second Circuit held that the claims were part of the same series of connected transactions.
In Board of Managers of 195 Hudson St. Condo v. Jeffrey M. Brown Assocs., Inc., the S.D.N.Y. looked to the injury suffered to determine whether claims were transactionally related. In the case before it, plaintiff sought to hold defendants liable for breach of contract in connection with alleged construction defects. The earlier litigation, however, involved plaintiff's contribution and indemnification cross-claims for nonpayment of a project. Because the two were not based on the same harm, they did not arise out of the same transaction.
A threshold issue to determining both claim and issue preclusion is whether Eugenia suing in S.D.N.Y., as an AMC Computer shareholder, is in privity with Eugenia suing in this court on behalf of Debtors. There is a strong argument to make that Plaintiff has attempted to use each suit as a conduit for its own interests. That is, the practical reality is that Eugenia consistently has been acting on its own behalf. In that case, the analysis is straightforward: Plaintiff Eugenia is in privity with Plaintiff Eugenia. Even if one accepts that Eugenia was truly acting on behalf of AMC Computer before and Debtors now, there is privity because AMC Computer and Debtors are in privity.
The language in the earlier-filed, consolidated complaint for breach of fiduciary duty shows the nature of Eugenia's interest. To begin, Eugenia proposes that, because Computer was insolvent, the defendants owed fiduciary duties both to
Even if the court takes each breach of fiduciary action as truly derivative, Eugenia itself emphasizes the link between Debtors, the current plaintiffs (derivatively), and AMC Computer, the previous plaintiff. The present Complaint states, "[t]he Debtors were shareholders of AMC Computer Corp."
There is also privity under the test that asks whether a plaintiff's interests were represented in the earlier action. As shareholders, Debtors' interest in the present case is to recover for the alleged mismanagement and eventual collapse of AMC Computer. In the previous litigation, Eugenia brought suit, as a shareholder, for the alleged mismanagement and eventual collapse of AMC Computer. Both actions were brought to vindicate the interests of AMC Computer shareholders.
The holding in Green does not disturb the conclusion that there is privity between Debtors and AMC Computer. In that case, the Greens brought the earlier action in an individual capacity and not as a derivative action on behalf of all Santa Fe shareholders.
Likewise, because the only relevant connection between the prosecutor and school officials in Cortines was that they were both governmental entities, that case is not directly applicable. As Defendants' Opposition points out, "[Cortines] simply stands for the proposition that two subdivisions of New York state — one in the judicial branch and the other in the executive branch — were not in privity with each other..."
What is less clear is the extent to which either Debtors or Eugenia controlled the earlier litigation. Plaintiffs in both actions have used Gibson, Dunn & Crutcher LLP. Citing Watts, where the Court noted the use of the same law firm, Defendants therefore reason that "parties in privity [include] `those who control an action although not formal parties to it.'"
Even without Watts, there is more than enough case law pointing to privity between Eugenia on behalf of AMC Computer and Eugenia on behalf of Debtors. The cornerstone of the preclusion doctrines is flexibility. New York courts "have repeatedly explained that privity is not susceptible to a hard-and-fast definition."
Furthermore, the prior and present actions clearly arise out of the same transaction. Both cases focus on the alleged mismanagement of AMC Computer during the life of the Credit Agreement, which was entered into in 2003 and terminated by Computer's default in 2005. Most of relevant factual allegations take place during this roughly two-year period. To a greater extent than the plaintiff in Sheffield, Plaintiff here pleads the same conduct — self-dealing, lack of ordinary corporate governance, and accounting improprieties — as in the earlier case. And unlike in Board of Managers, these successive actions are predicated on the same harm: judgment against AMC Computer in the amount of over $10 million.
Res judicata applies if 1) the earlier decision was a final judgment on the merits, 2) plaintiffs in both suits are the same or in privity, and 3) the claims raised are the same. If Plaintiff can show it is entitled to summary judgment on any of the three elements of res judicata the motion must be granted. It cannot. The parties agree that the earlier decision was a final judgment. In addition, rather than Plaintiff being able to establish that the plaintiffs in both suits are not in privity the exact opposite is true. The undisputed facts clearly indicate that the parties are in privity.
Under New York law, collateral estoppel bars future litigation, between the same parties or their privies, of issues that have already been determined in an earlier proceeding. Thus there are two requirements for collateral estoppel to apply: 1) "There must be an identity of issue which has necessarily been decided in the prior action and is decisive of the present action" and 2) "There must have been a full and fair opportunity to contest the decision now said to be controlling."
In evaluating collateral estoppel, and as with res judicata, New York courts have rejected a rigid test in favor a flexible, case-by-case approach. And so the above requirements are meant merely as a starting point for a broader inquiry.
However, indicating than an implicit determination might not be enough, the courts have also said that the issue to be precluded must have been actually determined. That is, "preclusive effect may be given to issues that were actually litigated, squarely addressed and specifically decided."
The second requirement of collateral estoppel is that the party to be barred had a full and fair opportunity to contest the earlier proceeding. In evaluating whether a party has had its day in court, New York courts have turned to nine factors: the size of the claim, the forum of the prior litigation, the use of initiative, the extent of the litigation, the competence and experience of counsel, the availability of new evidence, indications of a compromise verdict, differences in the applicable law, and foreseeability of future litigation.
Applying these factors to decide whether drivers, who were plaintiffs in the pending motor vehicle case, had a full and fair opportunity as defendants in passenger's earlier case, the N.Y. Court of Appeals held,
Finally, a prerequisite to collateral estoppel is that both actions involve the same parties or their privies. The analysis of privity under collateral estoppel is the same as under res judicata.
The Second Circuit found that AMC Computer was already insolvent when it entered the Credit Agreement. This factual finding was both "actually determined" and necessary to the Court's dismissal of Eugenia's claims for breach of fiduciary duty. It was explicitly mentioned in the Second Circuit's opinion that AMC was already insolvent. Thus, this is a specific finding of fact. Further, the Court makes clear that its decision rests squarely on this finding: "at the time the parties entered the Credit Agreement, AMC was already insolvent. As a result, Eugenia cannot demonstrate that thereafter defendants-appellees' mismanagement rendered the corporation insolvent. Eugenia's derivative fiduciary claims thus fail."
Because the present action is also for breach of fiduciary duty, the timing of AMC's insolvency is decisive here. It does not matter that Plaintiff now seeks to pin the blame on the MapleWood entities (in addition to Glaser and Reale). If the company was already insolvent, then it is immaterial whether it was this set of defendants or the previous that was responsible for mismanaging AMC during the life of the Agreement. The bottom line is that, as decided by the Second Circuit, AMC's insolvency predated the Agreement and related events. Thus, the problem of causation and damages persists.
The next question is whether Debtors had a full and fair opportunity to participate in the earlier litigation. Most of the factors enunciated in Schwartz v. Public Admr. of Bronx Co. come out in favor of Defendants.
Additionally, the fact that Gibson, Dunn & Crutcher is being used again indicates that Debtors do not question the adequacy of legal representation. Debtors likewise do not question the impartiality of the earlier forum, nor do they suggest that the prior defendants had any tactical advantages. On the other hand, current Defendants themselves suggest there is remaining evidence to discover.
Plaintiff has the burden of proof to establish it is entitled to judgment as a matter of law. As with privity under res judicata, the undisputed facts lead not to the conclusion that there was no identity of issue which was necessarily decided in the prior action that is decisive of the present action but just the opposite. As to the second question, i.e., whether there was a full and fair opportunity to contest the decision now said to be controlling, there is a genuine issue of material fact. Thus, Plaintiff has failed to meet its burden that it is entitled to judgment as a matter of law that the affirmative defense of collateral estoppel is unavailable.
Plaintiff also moves for summary judgment on Defendants' timeliness defenses. The question here is whether Plaintiff's breach of fiduciary duty claims are time-barred, even though Eugenia did not have standing to pursue these derivative claims during the applicable limitations period. Both sides agree that Delaware law governs this matter.
A court of equity is not bound by the legal statute of limitations. However, "[e]quity follows the law and in appropriate circumstances will apply a statute of limitations by analogy."
Delaware law sets a three-year statute of limitations for breach of fiduciary duty.
Under Delaware law, there are three bases for tolling the statute of limitations:
In Bren v. Capital Realty Grp. Senior House., Inc., the Chancery Court clarified that a plaintiff's lack of standing is not an independent basis for tolling the statute of limitations.
It also appears that Delaware courts do not recognize adverse domination — when a corporation's board is controlled by culpable directors — as a basis for tolling a breach of fiduciary duty action.
The record on summary judgment does not justify tolling the statute of limitations. Eugenia clearly knew about Defendants' conduct by June 2005, when it commenced the litigation in the Southern District of New York. Therefore, the tolling mechanisms recognized by Delaware courts do not apply. In addition, Section 108(a) of the Bankruptcy Code is not available because Plaintiff filed its involuntary bankruptcy petition in September 2008, after the limitations period expired. Absent establishing that it is entitled to judgment as a matter of law that tolling is available, Plaintiff cannot prevail on its motion.
For the reasons set forth above, the Court will deny Plaintiff's motions for partial summary judgment. An order will be issued.
