In re Verilink Corp.

• Decision Date: 15 April 2009
• Docket Number: Bankruptcy No. 06-80567.,Bankruptcy No. 06-80566-JAC-11.,Adversary No. 08-80072-JAC.
• Citation: 405 B.R. 356
• Court: U.S. Bankruptcy Court — Northern District of Alabama
• Parties: In re VERILINK CORPORATION, a Delaware Corporation, and Affiliates, Debtor(s). Darryl S. Laddin, as Trustee for the Liquidating Estate of Verilink Corporation and Larscom Incorporated, Plaintiff, v. Leigh S. Belden, Steven C. Taylor, Timothy Anderson, C.W. Smith, Powell Goldstein LLP, and Raymond James & Associates, Inc., Defendants.

Page 356

405 B.R. 356

In re VERILINK CORPORATION, a Delaware Corporation, and Affiliates, Debtor(s) Darryl S. Laddin, as Trustee for the Liquidating Estate of Verilink Corporation and Larscom Incorporated, Plaintiff, v. Leigh S. Belden, Steven C. Taylor, Timothy Anderson, C.W. Smith, Powell Goldstein LLP, and Raymond James & Associates, Inc., Defendants.

Bankruptcy No. 06-80566-JAC-11.

Bankruptcy No. 06-80567.

Adversary No. 08-80072-JAC.

United States Bankruptcy Court, N.D. Alabama, Northern Division.

April 15, 2009.

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David J. Worley, James M. Evangelista, Page Perry LLC, Rickman P. Brown, Scott A. Schweber, Scott E. Tinnon, Dietrick Evans Scholz & Williams LLC, Atlanta, GA, Glen Marshall Connor, Richard P. Rouco, Birmingham, AL, for Plaintiff.

Caroline A. Fuller, John S. Lutz, Michael R. McCurdy, Fairfield and Woods PC, Denver, CO, Harriot Ivy, Timothy M. Lupinacci, Baker Donelson, W. Patton Hahn, Christopher L. Hawkins, Bradley Arant Rose & White, Bradley Richard Hightower, Christian & Small LLP, Daniel D. Sparks, Birmingham, AL, Donald A. Loft, Atlanta, GA, Daniel D. Sparks, Christian & Small, LLP, Birmingham, AL, for Defendants.

ORDER GRANTING MOTION TO DISMISS OF RAYMOND JAMES & ASSOCIATES, INC.

JACK CADDELL, Bankruptcy Judge.

This is an action brought by the liquidating trustee ("Trustee") of a bankrupt company, Verilink Corporation ("Verilink") against various officers and directors, legal counsel, and an investment banking firm in relevant part, arising out of the acquisition by Verilink of Larscom Incorporated ("Larscom"). The Trustee contends that the acquisition of Larscom caused the financial demise of Verilink. The Trustee also asserts insider trading claims against the officers and directors, but those claims are not presently at issue. The case comes before the Court on a Motion to Dismiss filed by Defendant Raymond James & Associates, Inc. ("Raymond James"). The Trustee's allegations against Raymond James, as presently pled, are set forth in the Corrected Amended Complaint (the "Corrected Complaint"). For the reasons set forth below, the Motion to Dismiss is GRANTED.

I. BACKGROUND

Raymond James is a Florida corporation that provides various investment banking services, among other things. Verilink, a public company, was primarily a manufacturer and distributor of telecommunications components. In late 2003, Verilink began reevaluating a potential acquisition of Larscom, a company that also manufactured and marketed telecommunication components. By March 17, 2004, Verilink had been engaged in discussions with Larscom about a potential acquisition. In a Verilink board meeting held that day, some of the key terms of the proposed acquisition were discussed along with a proposal to engage Raymond James to provide investment banking services, including, but not limited to, a fairness opinion in connection with an offer to purchase Larscom. Raymond James had been previously engaged by Verilink to assist on one earlier acquisition.

Verilink's board eventually approved the retention of Raymond James and an engagement agreement ("the Contract," Doc. 63-1) was executed on or about March 25, 2004. Among other things, the Contract provides that:

... Raymond James is an independent contractor and that their respective rights and obligations as set forth herein are contractual in nature. Accordingly, [Verilink] disclaims any intention to impose fiduciary or agency obligations on Raymond James by virtue of the engagement contemplated by this Agreement, and Raymond James shall not be deemed to have any fiduciary or agency duties or obligations to ... [Verilink].

Contract, Section 5(c).

On July 28, 2004, Verilink completed its acquisition of Larscom by issuing stock and assuming debt. For almost two years after the acquisition, Verilink and Larscom continued in operation. Then, on April 9, 2006, they filed separate petitions for reorganization under Chapter 11 of the Bankruptcy Code and sought joint administration of their petitions. On May 4, 2006, this Court appointed Darryl S. Laddin to serve as counsel to the Official Unsecured Creditors' Committee.

Verilink filed a Second Amended Joint Plan of Reorganization (the "Plan") and related Disclosure Statement on December 7, 2006. On January 31, 2007, this Court entered an Order confirming the Plan, which became effective on February 13, 2007. Under the Plan, Mr. Laddin was appointed as the Liquidating Trustee.

As Liquidating Trustee, Mr. Laddin filed his original complaint in this adversary proceeding on April 8, 2008 (one day short of two years after the original bankruptcy filing or Order for Relief) against certain former Verilink officers and directors for claims unrelated to the Larscom acquisition. The Trustee filed an Amended Complaint on September 29, 2008 adding Raymond James and the Powell Goldstein law firm, Verilink's legal counsel, as defendants and asserted new claims based on the theory that the acquisition of Larscom caused Verilink's collapse due to Larscom's allegedly poor financial performance. The Trustee did not serve the Amended Complaint on Raymond James. The Trustee filed the Corrected Complaint on October 30, 2008.

Ob February 12, 2009, the Trustee filed a motion for leave to file a Second Amended Complaint where he alleged, for the first time, that Defendant Powell Goldstein fraudulently concealed certain Verilink documents from the Trustee until July 2008 which, among other things, allegedly tolled the running of the statute of limitations against Raymond James.

II. MOTION TO DISMISS STANDARD

Federal Rule of Civil Procedure 12(b)(6) requires courts to dismiss a cause of action if, as a matter of law, a plaintiff has failed to state a claim for which relief may be granted. In ruling on a motion to dismiss, courts accept a complaint's allegations as true and construe them in the light most favorable to the plaintiff. See Hill v. White, 321 F.3d 1334, 1335 (11th Cir.2003). In order to survive a motion to dismiss for failure to state a claim, the plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1974, 167 L.Ed.2d 929 (2007). Under this standard, "[f]actual allegations must be enough to raise a right to relief above the speculative level" and it is not sufficient that the pleadings merely leave "open the possibility that a plaintiff might later establish some set of undisclosed facts to support recovery." Id. at 1965, 1968.

III. DISCUSSION

The Corrected Complaint fails to state any claim against Raymond James upon which relief can be granted for numerous reasons, including but not limited to the following.

A. THE DOCTRINE OF IN PARI DELICTO BARS ALL CLAIMS AGAINST RAYMOND JAMES

The doctrine of in pari delicto is an equitable principle that provides "a plaintiff who has participated in wrongdoing may not recover damages resulting from the wrongdoing." Black's Law Dictionary 806-07 (8th ed.1999). It is a common law defense that "derives from the Latin, in pari delicto potior est conditio de-fendentis: `In a case of equal or mutual fault ... the position of the [defending] party ... is the better one.'" Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306, 105 S.Ct. 2622, 86 L.Ed.2d 215 (1985). The doctrine serves important public policy interests, that is, "courts should not lend their good offices to mediating disputes among wrongdoers" and "denying judicial relief to an admitted wrongdoer is an effective means of deterring illegality." ¹ Id.

The Eleventh Circuit and other federal appellate courts to have considered the issue have determined that the defense of in pari delicto precludes, as a matter of law, a bankruptcy trustee from asserting claims against a third-party service provider that allegedly facilitated wrongdoing committed by former management for the benefit of the debtor, even if the alleged misconduct also benefited the individual wrongdoers.² See Edwards, 437 F.3d at 1149-52; Nisselson v. Lernout, 469 F.3d 143, 151-68 (1st Cir.2006); Baena v. KPMG, 453 F.3d 1, 6 (1st Cir.2006); Grassmueck v. Am. Shorthorn Ass'n, 402 F.3d 833, 837 (8th Cir.2005); Official Comm. of Unsecured Creditors of Color Tile v. Coopers & Lybrand, LLP, 322 F.3d 147, 158-66 (2d Cir.2003); Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 356-57 (3d Cir.2001); Terlecky v. Hurd (In re Dublin Sec), 133 F.3d 377, 381 (6th Cir.1997); Sender v. Buchanan (In re Hedged-Inv. Assocs.), 84 F.3d 1281, 1285 (10th Cir.1996); see also Samuel C. Wasserman, Note, Can the Trustee Recover? Imputation of Fraud to Bankruptcy Trustees in Suits Against Third-Party Service Providers, 77 Fordham L.Rev. 365 (2008).

In the leading Eleventh Circuit case, the Trustee (Darryl Laddin, who is also the Liquidating Trustee in this action) of a debtor-corporation, ETS Payphones, Inc. ("ETS"), that had operated a Ponzi scheme, sued numerous third parties, including three banks that had served as custodians for investor funds from individual retirement accounts that were later transferred to ETS. Edwards, 437 F.3d at 1148. The banks moved to dismiss under Rule 12(b)(6), arguing that Mr. Laddin's claims were barred by the doctrine of in pari delicto, among other things, and the district court granted their motion. Id. at 1148-49.

Laddin appealed and argued to the Eleventh Circuit that the knowledge and wrongs of ETS were not imputable to him as a bankruptcy trustee. The Eleventh Circuit rejected his arguments, holding that under 11 U.S.C. § 541(a), Laddin could only assert claims that the debtor itself could have asserted at the time of the bankruptcy filing. Accordingly, the Trustee in this case can only assert such claims against Raymond James that Verilink could have asserted pre-bankruptcy and all those claims would have been barred, as a...