Rahl v. Bande

• Decision Date: 22 July 2005
• Docket Number: No. 04 Civ. 1019(WCC).,04 Civ. 1019(WCC).
• Citation: 328 B.R. 387
• Parties: J. Andrew RAHL, Jr., as Trustee of the Flag Litigation Trust, Plaintiff, v. Andres BANDE, Edward McCormack, Larry Bautista, Daniel C. Petri, Adnan Omar, Thomas Bartlett, Alfred Giammarino, David Riffelmacher, Dallah Albaraka Holding Company, Verizon Communications, Inc., Qwest Communications International, Inc., Andersen Worldwide S.C., Arthur Andersen Bermuda and Arthur Andersen & Co. n/k/a Arthur Andersen LLP, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

328 B.R. 387

J. Andrew RAHL, Jr., as Trustee of the Flag Litigation Trust, Plaintiff, v. Andres BANDE, Edward McCormack, Larry Bautista, Daniel C. Petri, Adnan Omar, Thomas Bartlett, Alfred Giammarino, David Riffelmacher, Dallah Albaraka Holding Company, Verizon Communications, Inc., Qwest Communications International, Inc., Andersen Worldwide S.C., Arthur Andersen Bermuda and Arthur Andersen & Co. n/k/a Arthur Andersen LLP, Defendants.

No. 04 Civ. 1019(WCC).

United States Bankruptcy Court, S.D. New York.

July 22, 2005.

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Abbey Gardy, LLP (Judith L. Spanier, Stephanie Amin-Giwner, of counsel), Grant & Eisenhofer, P.A. (Jay W. Eisenhofer, of counsel), New York City, Grant & Eisenhofer, P.A. (Geoffrey C. Jarvis, Russell D. Paul, of counsel), Wilmington, DE, for plaintiff.

Shearman & Sterling (Jerome S. Fortinsky, Tammy P. Bieber, Michael T. Rasnick Panagiotis Katsambas, of counsel), New York City, Kirkland & Ellis LLP (Thomas D. Yannucci, P.C., James P. Gillespie, Craig S. Primis, Matthew E. Papez, John C. O'Quinn, of counsel), Washington, D.C., Kirkland & Ellis LLP (Matthew O. Solum, of counsel), New York City, for defendant Verizon Communications, Inc.

O'Melveny & Myers LLP (Barry H. Goldstein, of counsel), New York City, O'Melveny & Myers LLP (Matthew W. Close, of counsel), Los Angeles, CA, for defendant Qwest Communications International, Inc.

Arnold & Porter LLP (Kent Yalowitz, Jonathan N. Francis, Aaron R. Kaalberg, of counsel), New York City, Arnold & Porter LLP (Scott B. Schreiber, John A. Freedman, of counsel), Washington, D.C., for Defendant Andersen Worldwide S.C., Arthur, Andersen Bermuda and Arthur, Andersen & Co. n/k/a Arthur, Andersen LLP.

OPINION AND ORDER

WILLIAM C. CONNER, Senior District Judge.

Plaintiff J. Andrew Rahl, Jr. ("Rahl" or the "Trustee"), as Trustee of the Flag Litigation Trust (the "Litigation Trust" or "plaintiff"), filed this action in the Supreme Court of New York State, New York County, against Andres B. Bande, Edward McCormack, Larry Bautista, Daniel C. Petri, Adnan Omar, Thomas Bartlett, Alfred Giammarino, David Riffelmacher (collectively, the "individual defendants"), Dallah Albaraka Holding Company ("Dallah"), Verizon Communications, Inc. ("Verizon"), Qwest Communications International, Inc. ("Qwest"), and Andersen Worldwide S.C., Arthur Andersen Bermuda and Arthur Andersen & Co. n/k/a Arthur Andersen LLP (collectively, "Andersen").¹ Defendants removed the action to this Court asserting jurisdiction under 28 U.S.C. §§ 1334(b), 1367, 1331 and identified the matter as related to² In re Flag Telecom Holdings Ltd. Sec. Litig., No. 02 Civ. 3400(WCC) (the "Flag Securities Litigation"), which is currently pending before this Court. Plaintiff moved to remand the action to state court, contending that this Court lacks subject matter jurisdiction; however, in an Opinion and Order dated July 28, 2004 (the "7/28/04 Order"), plaintiff's motion to remand was denied. Rahl v. Bande, 316 B.R. 127 (S.D.N.Y.2004) (Conner, J.). In addition, in the 7/28/04 Order we accepted this matter as related to the Flag Securities Litigation.

In the present motion, defendants Bartlett, Bautista, Giammarino, McCormack, Petri and Riffelmacher (collectively, the "D & O defendants"), Verizon, Qwest and Andersen move to dismiss the action in its entirety. For the foregoing reasons, we grant the motions of Verizon, Qwest and Andersen to dismiss the claims against them. The D & O defendants' motion to dismiss is granted in part and denied in part.

BACKGROUND

Unless otherwise noted, the following factual allegations appear in plaintiff's Complaint.³ Flag Telecom Holdings Ltd. ("Flag" or the "debtor"), a company organized under the laws of Bermuda, was created in 1999 to serve as the holding company for several entities originally established by Verizon and other investors that operated in the international telecommunications market. (Complt.¶¶ 2, 3.) Flag pursued an aggressive expansion program that included a joint venture with GTS Transatlantic ("GTS") to build a fiber optic cable connecting New York, London and Paris called the Flag Atlantic-1 System (the "FA-1 System"). (Id. ¶ 54.) By early 2000, Flag allegedly became insolvent after a glut of supply on the telecommunications market caused a rapid decline in the price of capacity on international fiber optic networks. According to plaintiff, even after becoming insolvent, the company continued "its reckless expansion program." (Id. ¶¶ 4, 5.) For example, in March 2000, the company issued approximately $600 million in bonds and made significant investments in the FA-1 System, a separate program of expansion into north Asia and a fiber optic network in Europe. (Id. ¶ 5.) Flag then entered into a series of transactions with Verizon, on terms favorable to Verizon, that deepened Flag's insolvency. (Id.)

Rather than reveal Flag's insolvency, the individual defendants, who were officers and directors of Flag, allegedly concealed the company's financial woes by filing false financial statements with the SEC from 2000 until April 2002, and by making false statements in press releases each time Flag announced its financial results during that period. (Id. ¶ 6.) According to plaintiff, the individual defendants caused Flag to report its financial results in violation of Generally Accepted Accounting Principles ("GAAP"), (id. ¶ 45), and issued misleading "pro forma" financial reports. (Id. ¶ 151.) The individual defendants also allegedly caused the company to engage with competitors in numerous swaps of "dark" or unused fiber capacity to artificially inflate revenues, (id. ¶¶ 109-132), and failed to timely write-down the impairment of Flag's long-lived assets. (Id. ¶ 162.)

On February 13, 2002, Flag announced that it was reviewing its business "in light of deteriorating market conditions." (Id. ¶ 194.) On April 12, 2002, Flag and four of its subsidiaries filed Chapter 11 bankruptcy petitions. Shortly thereafter, other Flag subsidiaries filed Chapter 11 bankruptcy petitions. (Id. ¶ 195.) On September 26, 2002, the bankruptcy court approved Flag and its subsidiaries' Third Amended and Restated Joint Plan of Reorganization (the "Reorganization Plan" or the "Plan"). (Andersen Defs. Mem. Supp. Mot. Dismiss at 2.) The Plan became effective on October 9, 2002, and a new entity, Flag Telecom Group Ltd. ("New Holdco"), emerged from the bankruptcy. (D & O Defs. Mem. Supp. Mot. Dismiss at 8.)

Under the Reorganization Plan, certain Flag bondholders and creditors (the "New Holdco shareholders" or the "Litigation Trust Beneficiaries") were granted ownership of 100% of the common shares of New Holdco. (Id. at 8.) On January 11, 2004, Reliance Gateway Net Private Ltd. acquired those shares after the New Holdco shareholders approved such sale. (Id.)

The Reorganization Plan also created the Litigation Trust which is described as a "`New York liquidating trust established as part of Flag's reorganization for the benefit of certain Flag creditors,' and establishes Rahl's authority to bring certain claims previously held by Flag (and/or certain subsidiaries or affiliates) and assigned by Flag to the Litigation Trust." (Id. (quoting Complt. ¶ 15).) The Litigation Trust Agreement (or the "Trust Agreement") provides:

[O]n or after the Effective Date of the Plan, the Litigation Trust and the Debtors hereby transfer, assign and deliver to the Trustee all of their right, title and interest in and to any and all choses in action, demands, claims for relief, causes of action, debts, losses and liabilities, or any combination of the same, of every type and nature whatsoever, whether known or unknown, whether suspected or unsuspected, and whether asserted or unasserted, against the Debtors' current or former directors and officers, together with all insurance coverage applicable to such choses in action, including all choses in action against insurers that sold insurance policies covering liabilities of the Debtors and their directors and officers (the "Causes of Action").... The Trustee agrees to accept and hold the Causes of Action in trust for the Litigation Trust Beneficiaries, subject to the terms of this Trust Agreement.

(Section 1.01 (provided as Goldstein Decl., Ex. C).) The New Holdco shareholders are the Litigation Trust Beneficiaries, (Reorganization Plan § 1.1.100 (provided as Goldstein Decl., Ex. B).), and Rahl is the Litigation Trust Trustee. (D & O Defs. Mem. Supp. Mot. Dismiss at 8.) The Trustee brings the present action pursuant to this grant of authority.

Counts I, II and III of the Complaint assert claims for breach of fiduciary duty against the individual defendants and Andersen. These claims are based on the Bermuda Companies Act of 1981 (the "Companies Act") and the general duty of good faith and loyalty that fiduciaries owe to their corporations. (Complt.¶¶ 255, 265, 272.) Plaintiff alleges that the individual defendants breached their fiduciary duties by: (1) deepening Flag's insolvency to enhance their personal wealth (id., Count I); (2) issuing false financial statements (id., Count II); and (3) causing Flag to enter into certain transactions under terms that were unfavorable to Flag. (Id., Count III.)

Count IV of the Complaint asserts a claim against Verizon whereby the Trustee seeks to avoid an allegedly fraudulent conveyance to Verizon pursuant to 11 U.S.C. § 544(b) which incorporates N.Y. DEBT. AND CRED. LAW §§ 270-281. Plaintiff alleges that Flag provided KPNQwest with capacity on its FA-1 System in exchange for capacity on KPNQwest's European network. According to plaintiff, Flag then sold the capacity on the European network to Verizon for prices below market value and far less than those Flag paid for the capacity. (Complt.¶ 69.) Count VII of the Complaint...