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RESOLUTION TRUST CORP. v. LATHAM & WATKINS

December 27, 1995

RESOLUTION TRUST CORPORATION, as conservator and/or receiver of CENTRUST SAVINGS BANK; COLUMBIA SAVINGS & LOAN ASSOCIATION; FARWEST SAVINGS & LOAN ASSOCIATION; FRANKLIN SAVINGS & LOAN ASSOCIATION; and/or in its corporate capacity, Plaintiff, against LATHAM & WATKINS and ROBERT J. ROSENBERG, Defendants. RESOLUTION TRUST CORPORATION, as receiver of FARWEST SAVINGS AND LOAN ASSOCIATION, F.A., and COLUMBIA SAVINGS AND LOAN ASSOCIATION, F.A., and as assignee of AMERICAN CAPITAL FIDELITY CORPORATION and LIBERTY SERVICE CORPORATION, Plaintiff, -against- LATHAM & WATKINS and ROBERT J. ROSENBERG, Defendants.


The opinion of the court was delivered by: MUKASEY

 Plaintiff Resolution Trust Corporation ("RTC"), on behalf of four failed thrift institutions, has sued the law firm of Latham & Watkins and one of its partners for securities fraud under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1994), and state law. Defendants move for summary judgment under Fed. R. Civ. P. 56 on all remaining claims in both of the above-captioned actions. For the reasons set forth below, the motion is granted, and the complaints are dismissed.

 I.

 The facts are essentially undisputed. Defendant Latham & Watkins ("Latham") is a California-based law firm. (Am. Compl. P 27) Defendant Robert J. Rosenberg is a partner at Latham's New York City office who directed the firm's work on the transaction at issue here. (Id. P 28) In 1988, Latham issued an opinion letter in connection with the leveraged buyout ("LBO") of the Jim Walter Corporation ("JWC") by Hillsborough Holdings Corporation ("Hillsborough").

 A. The Leveraged Buy-Out and the Latham Opinion Letter

 Prior to the LBO, JWC was a Florida holding company which, through its subsidiaries, engaged in a variety of construction-related businesses. (Id. P 29) One of JWC's subsidiaries was the Celotex Corporation ("Celotex"), a manufacturer of building products including insulation, roofing supplies, and plumbing fixtures, some containing asbestos. (Id. PP 31-32) Beginning in the late 1960's, Celotex became the target of thousands of personal injury and wrongful death lawsuits arising from asbestos exposure. (Id. P 33)

 In 1987, the investment banking firm Kohlberg Kravis Roberts & Company ("KKR") launched a friendly takeover bid for JWC and formed Hillsborough as an acquisition vehicle. (Id. PP 37-39) To fund part of a $ 2.44 billion tender offer for the outstanding securities of JWC, Hillsborough planned to issue high-yield debt instruments -- known popularly as "junk" bonds -- and common stock. These securities were slated for purchase by institutional investors in a private placement. (Id. PP 64, 79, 82, 87)

 To convince investors to purchase the securities, it was necessary to establish that Celotex's potential liability on asbestos claims could not reach JWC or any entity into which JWC would merge. To that end, KKR and its accountants, Deloitte Haskins & Sells ("Deloitte"), asked Latham to draft an opinion letter assessing the likelihood that a court might "pierce the corporate veil" of Celotex and hold JWC liable for damages in an asbestos suit. (Id. P 69) Latham prepared two substantively identical letters on this topic. The first, dated September 18, 1987, was appended to a solvency report delivered by Deloitte to Hillsborough and banks financing the LBO. The second (the "Opinion"), dated January 7, 1988, was distributed to purchasers of the Hillsborough securities and is the focus of this suit. (Id. PP 83, 88-90; McMillin Decl. Ex. D)

 The Opinion was written "solely for the purpose of analyzing the likelihood of success on the merits of a claim against [JWC] based on an 'alter ego' theory . . . for the manufacture and sale of asbestos-related products by [Celotex]." (Opinion at 1) Based upon an examination of JWC records and Florida law, Latham concluded:

 (Id. at 2)

 Latham cautioned that this conclusion was subject to numerous "limitations and qualifications." (Id.) First, Latham "expressed no opinion concerning the likelihood of alter ego claims being asserted against [JWC], or . . . the likelihood of [JWC's] successful prosecution of a motion for summary judgment with respect to such claims." (Id.) Second, Latham assumed for purposes of the Opinion that Florida law would govern a veil piercing claim against JWC, but advised that "choice of law principles could result in the application of the laws of a state other than Florida." (Id. at 2-3) Latham accordingly stressed that its conclusion was "based solely upon . . . case law precedents in Florida . . .." (Id. at 1) Finally, Latham explained that the firm expressed no opinion as to Celotex's own potential liability on asbestos-related tort claims. (Id.)

 B. The Celotex "Spin-Off," the Celotex and Hillsborough Bankruptcy Filings, and the Commencement of this Action

 The LBO was consummated on January 7, 1988 with the aid of short-term commercial bank financing and was followed by the first in a series of Hillsborough bond closings. At each closing, a copy of the Opinion was tendered to each bond purchaser as part of a package of closing documents. (Am. Compl. P 92) Among the bond purchasers were the savings and loan associations to whose rights plaintiff RTC has acceded. (Id. PP 20-26) Concurrently, through a complicated series of transactions, JWC was merged into Hillsborough, and most of the former JWC subsidiaries became subsidiaries of Hillsborough. (Id. P 101) Meanwhile, a "new" JWC was created whose holdings included only Celotex. (Id. P 102) The "new" JWC was transferred in April 1988 to the Jasper Corporation ("Jasper") along with Apache Building Products, another former subsidiary of the "old" JWC. The deal was structured so that Hillsborough actually paid Jasper nearly $ 50 million to take the "new" JWC off its hands. (Id. P 102-103)

 On October 12, 1990, Celotex filed for bankruptcy protection. On that date, over 140,000 asbestos lawsuits were pending against the company. (Id. PP 104-105) Many of the asbestos claimants, in search of alternative sources of recovery, had asserted veil piercing claims against Hillsborough. By 1990, over 2,000 such claims were pending in lawsuits around the country. (Id. P 105) The most significant veil piercing claim was in an action that had been filed on July 13, 1989 in a Texas state court. Larned v. Kohlberg, Kravis, Roberts & Co. (Tex. Dist. Ct., Jefferson County, 60th Judicial Dist., No. B-133554). (Id. P 106) The Larned plaintiffs purported to represent a nationwide class of 80,000 asbestos victims, although the court apparently never certified the lawsuit as a class action. (Koob Decl., July 8, 1994, P 4)

 Before the filing of the Larned action, Hillsborough had been selling off former JWC subsidiaries to pay debt incurred in the LBO. (Am. Compl. P 108) After Larned was filed, Hillsborough agreed -- under threat of an injunction -- to cease those asset sales. Meanwhile, negotiations between Hillsborough and commercial lenders for additional financing broke down, and the value of the Hillsborough securities plummeted. (Id. P 110-111) On December 27, 1989, with default looming, Hillsborough filed for bankruptcy protection in the United States Bankruptcy Court for the Middle District of Florida. (Id. P 116)

 Plaintiff RTC claims losses exceeding $ 43 million on the Hillsborough securities purchased by the failed thrift institutions. (Id. P 119) On June 28, 1993, the RTC filed the first of the above-captioned cases, No. 93 Civ. 4364. In its initial complaint, the RTC alleged securities fraud under federal and state law, negligent misrepresentation, and a third-party beneficiary claim. On December 2, 1993, I dismissed the negligent misrepresentation and third-party beneficiary claims in a ruling from the bench. In an amended complaint filed January 6, 1994, the RTC reasserted the securities fraud claims under Rule 10b-5, 17 C.F.R. § 240.10b-5 (1995), New York common law, and Cal. Civ. Code §§ 1709-1710 (West 1995).

 C. The Bankruptcy Court Decision and the Hillsborough Reorganization Plan

 Meanwhile, in the Hillsborough bankruptcy case, Hillsborough moved for a declaratory judgment that the JWC/Celotex corporate veil could not be pierced. Hillsborough's complaint named Celotex and the asbestos claimants as defendants. In August 1992, Hillsborough's motion for partial summary judgment was denied. In re Hillsborough Holdings Corp., 144 Bankr. 913, 919 (Bankr. M.D. Fla. 1992). On April 18, 1994, the Bankruptcy Court ruled in favor of Hillsborough after a trial on the merits. In re Hillsborough Holdings Corp., 166 Bankr. 461, 475-76 (Bankr. M.D. Fla. 1994).

 As a threshold matter, the Bankruptcy Court applied Florida choice of law principles, see Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941), and determined that either Florida or Delaware law governed the veil piercing claims because JWC and Celotex were Florida and Delaware corporations, respectively, and both companies maintained headquarters in Florida. 166 Bankr. at 468. The veil piercing law in these two jurisdictions, the Court found, was "functionally the same": courts in both Delaware and Florida pierce the corporate veil only upon "proof of deliberate misuse of the corporate form--tantamount to fraud." Id. at 469 (emphasis in original). Moreover, the Court noted, Florida requires a showing of "improper conduct"; that is, the claimant must establish that the corporate form was a "mere device or sham" or was deliberately used to accomplish "some fraud or illegal purpose." Id. (citations omitted) The Court found the evidence insufficient to support such a finding.

 First, the Court considered the cash management system utilized by JWC and Celotex. Under this system, payments owed to Celotex were deposited directly into central accounts controlled by JWC. The asbestos claimants had argued that this proved that JWC excessively manipulated Celotex's cash flows. The Court disagreed, finding that this accounting system was "totally consistent with sound business practices." Id. at 471. Similarly, the Court found that centralized record-keeping and the assessment of a fee by JWC for services rendered to Celotex were standard business practices that did not suggest abuse of the corporate form. Id. at 471-72.

 Second, the Court examined corporate governance. The Court noted that several members of the JWC board of directors also sat on the Celotex board and that Celotex needed approval from JWC for capital expenditures, acquisitions, and sales of capital assets. Nevertheless, the Court found that Celotex controlled its own day-to-day operations and that JWC's involvement as parent and 100% owner of Celotex was "within the accepted standards of the corporate business world." Id. at 472.

 Third, the Court considered accusations by the asbestos claimants that JWC improperly caused Celotex to sell off its subsidiaries in anticipation of asbestos-related liability. The proceeds from these sales had been used, in part, to pay down loans from JWC to Celotex. The Court determined that

 
there is no hard evidence in this record which would warrant the conclusion . . . that JWC embarked upon conduct using its dominating position as a parent to liquidate the assets of Celotex specifically for the purpose of evading any possible liability resulting from the asbestos litigation.

 Id. at 473. The asset sales were attributable, in the Court's view, to JWC's liquidity needs and to the historically poor performance of the subsidiaries that were sold off. Id. The Court found no evidence that the intercompany loans were anything other than legitimate obligations. Id. at 473-75.

 The Court, straining harder for a metaphor than the result warranted, concluded that the asbestos claimants' proof was a "slender reed, indeed, upon which to hang a sword with sufficient strength required under the law to pierce the corporate veil," Id. at 475-76, and entered judgment in favor of Hillsborough.

 After the appeal was filed, the parties to the bankruptcy action agreed to a plan of reorganization for Hillsborough. The plan included a settlement agreement between Hillsborough and the asbestos plaintiffs requiring Hillsborough to pay $ 375 million into a fund for all present and future claimants. (McMillin Decl. Ex. M at 151-67, Ex. N at 77) Pursuant to this agreement, the appeal was dismissed by stipulation. (Id. Ex. L)

 In an order issued March 2, 1995, the Bankruptcy Court approved the Hillsborough reorganization plan and the settlement agreement. The Court acknowledged that Hillsborough was paying a substantial sum to settle a claim that had been adjudged meritless by two courts, but reasoned that "notwithstanding the Debtors' probability of success on the merits, the Debtors have sound business reasons for eliminating the threat of future litigations." (McMillin Decl. Ex. N at 31) As part of its confirmation order, the Court permanently enjoined the prosecution of all actions seeking to pierce the JWC/Celotex corporate veil. (Id. at 77-79) Hillsborough emerged from bankruptcy on March 17, 1995. Latham and Rosenberg moved for summary judgment in the present action on June 30, 1995.

 II.

 Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). Rule 10b-5 provides, in relevant part:

 
It shall be unlawful for any person, directly or indirectly, . . . to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading . . . in connection with the purchase or sale of any security.

 17 C.F.R. § 240.10b-5 (1995). To recover under Rule 10b-5, a plaintiff must prove: (1) a false or misleading statement or omission, (2) scienter or recklessness, (3) reliance, and (4) loss causation. Citibank, N.A. v. ...


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