Gray v. Evercore Restructuring L.L.C.

• Decision Date: 06 October 2008
• Docket Number: No. 07-2588.,07-2588.
• Citation: 544 F.3d 320
• Parties: 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.
• Court: U.S. Court of Appeals — First Circuit

544 F.3d 320

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.

No. 07-2588.

United States Court of Appeals, First Circuit.

Heard June 4, 2008.

Decided October 6, 2008.

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.

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.

Before HOWARD and SELYA, Circuit Judges, and STAFFORD,^* Senior District Judge.

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.

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 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 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 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 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, 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...