Ebs Litigation v. Barclays Global Investors, 01-1864.

Decision Date18 September 2002
Docket NumberNo. 01-1864.,01-1864.
Citation304 F.3d 302
PartiesEBS LITIGATION LLC v. BARCLAYS GLOBAL INVESTORS, N.A.; Greenway Partners, L.P.; Greentree Partners, L.P.; Wilshire Associates Incorporated; N.A. Mellon Bank; IBM Retirement Fund Trust; Drew Baebler; Laura Baebler Barclays Global Investors, N.A.; Greenway Partners, L.P.; Greentree Partners, L.P.; Third-Party Plaintiffs v. David B. Cooper; Julian I. Edison; Peter A. Edison; Jane Evans; Michael H. Freund; Karl W. Michner; Alan D. Miller; Andrew E. Newman; Alan A. Sachs; Craig D. Schunck; Martin Sneider; David O. Corriveau; James W. Corley; Walter S. Henrion; Mark H. Levy; Mark B. Vittert; Dave & Busters, Inc. Third-Party Defendants Barclays Global Investors, N.A. Greenway Partners, L.P., and Greentree Partners, L.P., individually and in their capacity as class representatives of all members of the defendant class certified in this action, and third-party plaintiffs, Appellants.
CourtU.S. Court of Appeals — Third Circuit

Edward M. McNally (argued), Michael J. Maimone, James E. Drnec, Morris, James, Hitchens & Williams LLP, Wilmington, for the Appellants.

A. Gilchrist Sparks, III (argued), R. Judson Scaggs, Jr., Megan E. Ward, Morris, Nichol, Arsht & Tunnell, Wilmington, for Edison Director Third-Party Defendants Below, Appellees.

Philip Trainer, Jr., Ashby & Geddes, Wilmington, James P. Reid (argued), Stacy R. Obenhaus, Gardere Wynne Sewell LLP, Dallas, for D & B Defendants Appellees.

Daniel J. DeFranceschi, Richards, Layton & Finger, Wilmington, Richard A. Chesley, Houlihan Lokey Howard & Zukin, Chicago, for EBS Litigation LLC Appellee.

Before SCIRICA and GREENBERG, Circuit Judges, and FULLAM,* District Judge.

FULLAM, District Judge.

This is an appeal from the dismissal of a third-party complaint, in an adversary action pending in the District Court for the District of Delaware (the reference to the Bankruptcy Judge having previously been withdrawn). The dismissal of the third-party complaint did not dispose of the entire adversary action, but has been certified as final for purposes of appeal, pursuant to Fed.R.Civ.P. 54(b).

BACKGROUND

As part of a corporate re-shuffling, Edison Brothers Stores, Inc., a publicly-held corporation (hereinafter "Edison") acquired the stock of Dave & Busters, Inc. ("D & B"). On June 29, 1995, pursuant to a unanimous resolution of the Edison Board, Edison distributed the D & B stock to all Edison shareholders, as a dividend. Each Edison shareholder received one share of D & B stock for every five shares of Edison stock held. In public filings at that time, the Edison Directors represented that Edison was in sound financial condition. A few months later, however, on November 3, 1995, Edison filed a voluntary petition in bankruptcy under Chapter 11.

In the course of the bankruptcy proceedings it became apparent that the 1995 stock dividend qualified as a voidable transfer under 11 U.S.C. §§ 544(b) and 548(a).

Edison's Plan of Reorganization was confirmed on September 9, 1997, effective as of September 19, 1997. The Plan contemplated the formation of a new entity, EBS Litigation, LLC ("EBS"), which would pursue litigation in order to retrieve, for the bankruptcy estate, debts owed to the estate, including recoveries of the previously-distributed D & B stock or its monetary equivalent. On September 30, 1997, EBS filed the present case, naming a class of defendants consisting of all of the shareholders who had received the D & B stock and had neither returned nor paid for it. The defendant class is represented by appellant Barclays Global Investors, N.A.

On March 29, 2000, Barclays filed a third-party complaint against the former Directors of Edison ("Edison defendants") and Directors of D & B ("the D & B defendants"). In the third-party complaint Barclays alleges that the Edison defendants breached their fiduciary duties in declaring the illegal stock dividend, misleading the Edison shareholders as to the financial condition of the company and the legitimacy of the dividend; and also asserts claims against the Edison defendants for contribution and subrogation. The D & B defendants are charged with aiding and abetting the breaches of fiduciary duty and other securities violations.

The District Court dismissed the third-party complaint in its entirety, ruling that the claims for breaches of fiduciary duty and securities violations in connection with the stock dividend were time-barred, and that the third-party complaint did not state valid claims for contribution or subrogation. This appeal followed.

STATUTE OF LIMITATIONS

All parties agree that the statute of limitations for the alleged breaches of fiduciary duty and related offenses is three years. It is also agreed that, under Delaware law, the limitations period begins when the wrongful acts are committed, even though the injured party may be ignorant of the existence of a cause of action. See e.g. In re Dean Witter P'ship Litig., 1998 WL 442456 at *4 (Del.Ch. July 17, 1998). Thus, in this case, the limitations period began to run on June 29, 1995, when the D & B stock was distributed as a dividend, and expired on June 29, 1998, unless the statute was tolled during part or all of that period.

Delaware law recognizes three potential sources of tolling: (1) the doctrine of inherently unknowable injuries; (2) the doctrine of fraudulent concealment; and (3) the doctrine of equitable tolling. See, In re Dean Witter P'ship Litig. supra; In re MAXXAM, Inc./Federated Dev. S'holders Litig., 1995 WL 376942 at *6-7 (Del. Ch. June 21, 1995). Barclays asserts that the statute of limitations was indeed tolled, under all three of these doctrines.

Under Delaware law, however, "if the limitations period is tolled under any of these theories, it is tolled only until the plaintiff discovers (or exercising reasonable diligence should have discovered) his injury. Thus, the limitations period begins to run when the plaintiff is objectively aware of the facts giving rise to the wrong, i.e., on inquiry notice." In re Dean Witter P'ship Litig., supra at *6 (emphasis in original).

The District Court ruled that Barclays was on "inquiry notice" as of the commencement of Edison's bankruptcy proceeding, since it knew that it had received the stock dividend less than one year earlier, and should have realized that there was a potential for an avoidance claim under 11 U.S.C. § 548(a). "Inquiry notice" requires only notice of "facts sufficient to put a person of ordinary intelligence and prudence on inquiry which, if pursued, would lead to the discovery." Becker v. Hamada, Inc. 455 A.2d 353, 356 (Del.1982).

The proper resolution of this issue requires careful analysis of (1) the precise nature of the claims now being asserted by Barclays, (2) whether an objectively reasonable person would have realized the need to investigate further, and (3) what information such an inquiry would have disclosed.

For purposes of analysis, at this stage of the proceedings we must assume that the Edison Directors did violate a fiduciary duty to the Edison stockholders and that they were aided and abetted by the D & B defendants. If the stock dividend occurred when Edison was insolvent, or rendered Edison insolvent, it was illegal under Delaware law, and voidable in bankruptcy. The General Corporation Law of Delaware provides, in § 174(a):

"In case of any wilful or negligent violation... the directors under whose administration the same may happen shall be jointly and severally liable, at any time within six years after paying such unlawful dividend or after such unlawful stock purchase or redemption, to the corporation and to its creditors in the event of its dissolution or insolvency, to the full amount of the dividend unlawfully paid ..."

§ 174(b) of the same statute provides:

"Any director against whom a claim is...

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