U.S. Bank Nat'Lass'N v. Verizon Commc'ns, Inc.

Citation761 F.3d 409
Decision Date02 September 2014
Docket NumberNo. 13–10752.,13–10752.
PartiesU.S. BANK NATIONAL ASSOCIATION, Litigation Trustee of the Idearc, Inc., et al, Litigation Trust, Plaintiff–Appellant v. VERIZON COMMUNICATIONS, INCORPORATED; GTE Corporation; John W. Diercksen; Verizon Financial Services, L.L.C., Defendants–Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)


Karen S. Precella, Esq., Haynes & Boone, L.L.P., Fort Worth, TX, Nicholas A. Foley, Esq., Neligan Foley, L.L.P., Anne McGowan Johnson, Patrick D. Keating, Robin Eric Phelan, Werner Anthony Powers, Esq., Haynes & Boone, L.L.P., Dallas, TX, for PlaintiffAppellant.

Scott Harris Angstreich, Esq., Reid Mason Figel, David Lawrence Schwarz, Esq., Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, DC, T. Ray Guy, Weil, Gotshal & Manges, L.L.P., James Robert Amett, II, Attorney, Edgar Leon Carter, Carter Scholer Amett Hamada & Mockler, Dallas, TX, for DefendantsAppellees.

Appeal from the United States District Court for the Northern District of Texas.

Before KING, HAYNES, and GRAVES, Circuit Judges.

KING and HAYNES, Circuit Judges:

Idearc, Inc. is a Delaware corporation that was spun-off from its parent corporation, Verizon Communications, Inc., in 2006. In March 2009, in the throes of the recession that began in 2008, Idearc filed for bankruptcy protection pursuant to Chapter 11. The confirmed plan of reorganization created a litigation trust to pursue, inter alia, Idearc's fraudulent transfer claims against Verizon and related parties. The Trustee, U.S. Bank National Association, filed this lawsuit against Verizon and two of its subsidiaries, GTE Corporation and Verizon Financial Services, L.L.C., and against former Idearc director John W. Diercksen, alleging various federal and state law claims in connection with the spin-off.

The Trustee requested a jury trial, but the district court struck the jury demand and bifurcated the trial into two phases. For the first phase, the district court held a ten-day bench trial on a single fact issue: the value of Idearc following the spin-off transaction. The district court found that Idearc was solvent on the date of the spin-off, and it ordered the Trustee to show cause as to why the district court should not enter judgment against the Trustee on all of its remaining claims. After the parties submitted briefing, the district court issued its conclusions of law and entered judgment against the Trustee. The Trustee now appeals: the order striking the jury demand; evidentiary rulings before and during the trial; the findings of fact; the conclusions of law; and several pre-trial rulings on dispositive motions. For the following reasons, we AFFIRM the judgment of the district court.

I. Factual and Procedural Background

In 2005, the board of directors of Verizon Communications, Inc. (Verizon) decided to spin-off Verizon's domestic print and electronic directories business into an independent company pursuant to 26 U.S.C. § 355. As a spin-off under § 355, the formation of the business would be tax-free to Verizon and its shareholders. To effectuate the spin-off, Verizon created Idearc, Inc. (“Idearc”), a Delaware corporation. Verizon chose John W. Diercksen, head of Verizon's strategic planning and former head of Bell Atlantic's yellow pages business, to lead the spin-off for Verizon and serve as the “pre-spin” director of Idearc.

On June 20, 2006, the certificate of incorporation for Idearc was filed, authorizing one hundred shares of common stock. The bylaws initially required that the corporation have a two-member board of directors and provided that those two members would constitute a quorum. Only Diercksen was originally appointed to the board of directors. Diercksen appointed Kathy Harless, who had previously run Verizon's directory business, as President of Idearc. Diercksen then authorized Harless to issue one share of common stock and to sell that share to Verizon. Idearc continued basically as a shell corporation until the consummation of the spin-off.

Verizon hired JP Morgan and Bear Sterns to conduct due diligence on the directories business and develop the proposed capital structure. JP Morgan and Bear Sterns estimated that Idearc's initial value would be between $11.7 and $12.5 billion, and they recommended that the capital structure include $9.1 billion in debt, some of which was to be held by Verizon and some of which was to be publicly held. Comprehensive disclosures of the risks associated with Idearc post-spin-off were made in documents filed with the Securities and Exchange Commission and in the offering documents for the publicly-held debt. Those disclosures included risks associated with the tax sharing agreement with Verizon, which was imposed to protect the tax-free status of the spin-off.

The spin-off occurred on November 17, 2006. Under the terms of the spin-off, Idearc received Verizon's print and online domestic directory business. In exchange, Verizon received 145,851,861 shares of common stock to be distributed to Verizon stockholders, $7.115 billion in Idearc debt, and $2.5 billion in cash. Idearc incurred a total of $9.1 billion in debt, which included the debt issued to Verizon. This debt comprised: (1) a $1.515 billion secured Term Loan A; (2) a $4.75 billion secured loan (“Tranche B debt”); and (3) $2.85 billion in 8% Senior Notes due in 2016 (“Unsecured Notes”). Idearc also received commitments from financial institutions to lend it up to $250 million through a revolving credit facility. On the day of the spin-off, Idearc's stock, which was trading on the New York Stock Exchange (“NYSE”), closed at $26.25 per share.

Following the spin-off, Idearc was an independent, publicly traded company. It paid quarterly dividends of approximately $50 million in 2007 and the first quarter of 2008. Six months after the spin-off, Idearc's shares traded at a high of $37.66 per share. In October 2008, Idearc acquired another company by using cash from its ongoing operations. The corporation also made every interest payment on its debt through March 2009.

Idearc's business, heavily dependent on revenues from the sale of advertising, was adversely affected during the recession that began in 2008. In March 2009, Idearc filed for Chapter 11 bankruptcy. The Bankruptcy Code authorizes a plan of reorganization to “provide for ... the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any ... claim or interest.” 1 Pursuant to that authorization,Idearc's Plan of Reorganization (the “Plan”), confirmed in late December 2009, created a litigation trust (the Litigation Trust) as the representative of Idearc to evaluate independently a variety of claims owned by Idearc, including claims against its officers and directors and fraudulent transfer claims against Verizon and its affiliates, and to pursue those claims thought promising for the benefit of holders of Idearc's unsecured claims. U.S. Bank National Association was appointed the trustee (the Trustee) of the Litigation Trust.

On September 15, 2010, the Trustee filed this action in federal district court against Verizon; two of its subsidiaries, GTE Corporation (GTE) and Verizon Financial Services, L.L.C. (VFS); and Idearc director John W. Diercksen (collectively, Appellees). According to the Trustee, Verizon created Idearc as a receptacle to place its “obsolete” directory, or “yellow pages,” business and “load it up” with over $9 billion of Verizon's debt. According to Appellees, Idearc was a successful business that became insolvent during the 2008 financial crisis. The Trustee's second amended complaint contained a jury demand and eleven counts, summarized ever so briefly as follows: (1) & (2) fraudulent transfer against Verizon and VFS in connection with the spin-off; (3) breach of fiduciary duty against Diercksen; (4) aiding and abetting a breach of fiduciary duty against Verizon and VFS; (5) fraudulent transfer against Verizon and VFS in connection with a loan made by Idearc's subsidiary to Idearc; (6) fraudulent transfer against GTE and Verizon in connection with the “GTW distribution”; (7) fraudulent transfer against Verizon in connection with the interest payments subsequent to March 31, 2007; (8) unlawful dividend against Diercksen and Verizon; (9) promoter liability and breach of fiduciary duty; (10) unjust enrichment; and (11) alter ego.

On March 21, 2012, upon a motion by Appellees, for the reasons more fully discussed below, the district court struck the Trustee's jury demand. The Trustee moved to reconsider the order striking the jury demand, which the court denied. On September 17, 2012, the Trustee petitioned this court for a writ of mandamus, seeking review of the district court's orders striking the jury demand and denying the motion to reconsider. The motions panel denied the petition on September 27, 2012.

On July 31, 2012, the district court granted in part and denied in part Appellees' motion to dismiss the amended complaint. It dismissed in part Counts One and Two for fraudulent transfer with respect to the Unsecured Notes and Tranche B debt. The district court also dismissed Count Ten for unjust enrichment and Count Eleven for alter ego insofar as it alleged a stand-alone claim.

Less than a month later, the district court issued a trial management order that bifurcated the four-week trial into two phases. The order stated that following the first phase, the court would decide Idearc's value at the time it was spun-off from Verizon in November 2006. The district court planned to make any other necessary factual determinations during the second phase of the trial, which was left unscheduled at the time of the order.

On September 14, 2012, the district court ruled on three pending motions for summary judgment. Among other things, the court's order limited the Trustee's recoveryon its breach of fiduciary duty claim against...

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