The opinion of the court was delivered by: Cedarbaum, District Judge.
The plaintiff is the Official Committee of Unsecured Creditors of Color
Tile, Inc. (the "Committee") which was appointed in the 1996 bankruptcies
of Color Tile, Inc. ("Color Tile") and Color Tile Holdings, Inc. ("CT
Holdings"). The Committee is empowered to prosecute certain claims,
including the claims in this action, on behalf of the estates of Color
Tile and CT Holdings, the Unsecured Creditors' Trust, and the Consumer
Deposit Trust pursuant to an Order of the United States Bankruptcy Court
for the District of Delaware approving the Global Settlement Agreement
dated September 17, 1997 (the "Settlement").
The Committee, standing in the shoes of Color Tile, sues Coopers &
Lybrand ("Coopers") for breach of fiduciary duty, aiding and abetting
breach of fiduciary duty, and breach of contract in connection with a
transaction that Color Tile completed in 1993 (the "1993 Transaction").
In addition, the Committee sues Coopers for negligence after the 1993
Transaction in performing the 1994 and 1995 annual audits of Color Tile's
On July 31, 1998, I granted Coopers' motion to dismiss the Amended and
Consolidated Complaint against it on grounds that it alleged that all the
decision-makers for Color Tile were involved in the alleged malfeasance
surrounding the 1993 Transaction, and that, under New York law, their
knowledge of the negative financial aspects of the 1993 Transaction was
imputed to Color Tile, stripping Color Tile (and the Committee on behalf
of the Color Tile estate) of standing to sue Coopers for not informing
Color Tile that the 1993 Transaction would probably have negative
In an effort to keep Coopers in the case, the Committee has filed the
Second Amended and Consolidated Complaint (the "Complaint") which adds
new allegations in paragraphs 76 through 82 that Color Tile's three
management directors, who sat on Color Tile's board of directors in
1993, were ignorant of Coopers' negative conclusions about the 1993
Transaction, and that, had Coopers made full disclosure to them, the 1993
Transaction would not have been carried out. The Committee argues that
the new allegations about the management directors are sufficient to
prevent the imputation of the guilty knowledge of Color Tile's board of
directors and controlling shareholder group from being imputed to Color
The Complaint is unchanged with respect to the allegations that Coopers
performed the 1994 and 1995 audits negligently.
Coopers, reciting the same arguments that it made in support of its
prior motion, moves to dismiss the Complaint pursuant to Fed.R.Civ.P.
12(b)(1) and 12(b)(6) for lack of standing and failure to state a claim
for which relief may be granted. On June 30, 1999, the parties were
directed to supplement the motion papers with briefs on the issue of
which state's law New York courts would choose to apply to the
Committee's claims against Coopers. For the reasons that follow, Coopers'
motion to dismiss is granted.
The Complaint alleges the following facts.
Until it ceased doing business, Color Tile, a Delaware corporation
headquartered in Fort Worth, Texas, was the largest specialty retailer of
floor covering products in North America. In 1989, Investcorp S.A. and
affiliated entities and individuals referred to in the Complaint as the
"Investcorp Group" acquired Color Tile. The Investcorp Group formed a
holding company, CT Holdings, to hold all the common stock of Color
Tile. Through CT Holdings, the Investcorp Group exercised control over
the management and operations of Color Tile and had the power to vote all
of the common stock of Color Tile and to elect all of the directors of
Color Tile. The management of Color Tile owned non-voting stock in CT
Holdings. Entities not affiliated with the Investcorp Group owned two
classes of preferred stock in Color Tile.
At least as early as 1992, the Investcorp Group began preparing for a
future public equity offering for the purpose of cashing out its interest
in Color Tile. In 1993, the Investcorp Group determined that in order to
effectuate a satisfactory public offering, Color Tile had to increase the
multiple of its earnings by acquiring a high growth company. The
Investcorp Group decided that Color Tile would acquire the assets (the
"ABF Assets") of American Blind Factory, Inc., a Michigan-based business
that sold blinds and wallpaper. The Investcorp Group dictated the price
that Color Tile paid ABF Acquisition for the ABF Assets. This purchase
price was more than twice the fair value of the ABF Assets. To undertake
the purchase, Color Tile was forced by the Investcorp Group to issue $200
million of Senior Notes, the proceeds of which were used to pay for the
ABF Assets and to replace lower interest bank debt. "The Investcorp Group
forced Color Tile to acquire the ABF Assets at a grossly inflated price
and to issue $200 million of expensive junk bond debt in order to further
its own objective of cashing out its investment in Color Tile despite the
fact that the  Transaction was detrimental to Color Tile." (Compl.
¶ 50.) "To justify the purchase of the ABF Assets and the financing,
the Investcorp Group used highly unrealistic projections of Color Tile's
and ABF's sales and EBITDA growth." (Id.)
At the time of the 1993 Transaction in December 1993, Color Tile had a
five member board. Two of its directors, Paul W. Soldatos and Walter F.
Loeb, were "Investcorp affiliated," because they worked for the
Investcorp Group in capacities other than as Color Tile directors. The
remaining three directors, however, had no interest in the Investcorp
Group other than through their work as directors and managers of Color
Tile (the "Management Directors"). They were the CEO, CFO, and President
of Color Tile.
Beginning in 1990, Coopers served as Color Tile's financial advisor,
consultant, due diligence advisor, accountant and auditor. It served in
these capacities over a period of more than six years. In the course of
the relationship, Coopers became intimately familiar with Color Tile's
finances and financial condition, including its budgeting process and the
reliability of its projections.
Coopers performed several accounting functions in connection with the
1993 Transaction. It reviewed Color Tile's operations for the nine months
ended October 3, 1993, reaffirmed its audit results for Color Tile, and
participated in the drafting of the prospectus and registration statement
for the $200 million Senior Notes Offering. In addition, Coopers
reviewed, analyzed and reported on the financial position of the target,
ABF. Coopers performed the vast majority of Color Tile's due diligence of
ABF; this due diligence gave Coopers knowledge about ABF and its future
prospects which was superior to that of Color Tile's management. Coopers
was also retained to review and report on the future performance
projections of ABF, Color Tile, and the combined Color Tile-ABF entity.
Because of its substantial knowledge of the operating and financial
condition of both Color ...