The opinion of the court was delivered by: Gerard E. Lynch, District Judge
The Global Crossing Ltd. Estate Representative ("Estate Representative") filed this action on behalf of now-bankrupt Global Crossing ("GC") against (1) Canadian Imperial Bank of Commerce ("CIBC"), CIBC Wood Gundy Capital (SFC) Inc. ("CIBC Wood Gundy"), CIBC Oppenheimer Corp. ("CIBC Oppenheimer"), and CIBC World Markets Corp. ("CIBC World Markets"); (2) ULLICO, Inc. ("ULLICO") and MRCo., Inc. ("MRCo."); and (3) Continental Casualty Company ("CCC"). It is alleged that prior to GC's bankruptcy, the defendants -- who held GC stock, designated members to GC's board of directors, and/or provided certain financial services to GC -- engaged in a multiyear campaign of insider selling of GC shares and improper self-dealing transactions that, among other things, drained GC of capital, leaving its creditors holding the bag. On the basis of this alleged conduct, the Consolidated Amended Complaint ("Compl." or "complaint")*fn1 advances three sets of claims: claims arising under federal bankruptcy law and state debtor law seeking a return of funds and property allegedly fraudulently transferred to defendants (Count 1); claims alleging that defendants, either directly or through the conduct of their board designees, violated (or aided and abetted violations of) fiduciary duties owed to GC, and seeking various forms of legal and equitable relief (Count 2-7); and a "corporate waste" claim arising under New York statutory law (Count 4). Defendants have now moved to dismiss the complaint under Fed. R. Civ. P. 12(b)(6). For the following reasons, defendants' motions will be granted in part and denied in part.
The plaintiff in this case is the GC Estate Representative, which was formed in the course of the bankruptcy proceedings of GC and numerous related entities (which commenced in 2002). (Compl. ¶ 9.) The Estate Representative -- consisting of five individuals -- was constituted to pursue claims belonging to the GC debtors for the benefit of their creditors, whose $6.2 billion in allowed claims "remain largely unsatisfied." (Id. ¶¶ 13-18.)
The defendants are former GC shareholders. The CIBC defendants -- consisting of CIBC, a Canadian chartered bank, and various subsidiaries it "owned," "operated through," and "controlled" (id. ¶ 19) -- were original GC investors who acquired over 48 million shares of GC stock as well as the right to name five members of the GC board, which during the relevant period had thirteen or more members.*fn2 (Id.) During the relevant period, it is alleged that the CIBC defendants sold over 28 million shares of GC stock for in excess of $2.4 billion. (Id.) In addition, they "provided commercial and investment banking services, underwriting services, and advisory services" to GC. (Id.)
The ULLICO defendants -- defendant ULLICO, a Washington D.C.-based financial services company, and its wholly-owned subsidiary MRCo. -- are also GC stockholders and had one seat on the GC board. (Id. ¶¶ 20-22.) The complaint alleges that the ULLICO defendants made over $200 million in two stock sales during the relevant period. (Id.) CCC, a wholly owned subsidiary of CNA Financial Corp. (which is in turn 85% owned by the Loews Corporation), was also a GC shareholder with one seat on the board, and is alleged to have made over $1.7 billion in stock sales during the relevant period. (Id. ¶ 23.)
The complex allegations of the complaint are summarized in plaintiff's opposition memorandum: In 1997, defendants invested in a company named GT Parent Holdings, LDC ("GT Parent"), and obtained seats on GT Parent's 13-member board (5 for the CIBC defendants, 1 for the ULLICO defendants, 1 for CCC). (Pl. Mem. 2-3.) From 1997 to early 1998, GT Parent, through its subsidiaries, began to develop the Global Crossing fiber optic cable network, (id.), and in March 1998, GT Parent formed GC "to assume all its functions and assets." (Id. 3.) The GT Parent directors became GC directors, and the GT Parent shareholders, with the exception of the CIBC defendants, exchanged their GT Parent shares for GC shares. (Id.) The CIBC defendants became the sole owner of GT Parent, which itself held 26.5% of GC's stock: in effect, the CIBC defendants used GT Parent as an intermediary to hold its GC stock, and the complaint alleges that, in fact, GT Parent had no function other than that. (Pl. Mem. 3; Compl. ¶ 148.)
In August 1998, just before GC's IPO, GC issued 7 million restricted shares to various managers, the CIBC defendants, and the ULLICO defendants. That stock was issued to buy out rights which early GT Parent investors had secured under so-called "Advisory Service Agreements," which plaintiff claims were "vehicles under which these insider*fn3 shareholders, acting through their designees on the GT Parent board of directors," obtained the right to a share of a small percentage (2%) of GC's revenues over a 25-year period. (Pl. Mem. 3-4.) Plaintiff attacks both the issuance of the ASAs by GT Parent, and the buyout of those agreements by GC, among other transactions, "as voidable transfers spawned by directorial breaches of fiduciary duty to [GC] and its creditors." (Id.) Upon completion of GC's IPO a few days later, plaintiff claims that corporate insiders, including defendants, were left with 88% of GC's 201.9 million outstanding shares, with the CIBC defendants holding 48.5 million, CCC holding 21.3 million, and the ULLICO defendants holding 16.9 million. (Id. 4.)
During this time, plaintiff claims that GC's revenue, and thus its stock price, became progressively (artificially) inflated due to accounting improprieties at GC concerning sales and swaps of internet bandwidth (which the Court has previously discussed at length*fn4 ). The complaint alleges that defendants, who along with other corporate insiders controlled the GC board, were well aware of GC's misstated financials and exploited GC's inflated stock price in a series of self-dealing stock transactions. (Compl. ¶¶ 2-5, 54.) For instance, plaintiff claims that in May 1999, the insider-controlled board approved a merger with US West that included a tender offer to GC's shareholders at a premium over the stock's all-time high trading price, the principal benefit going to the insiders since they held most of GC's outstanding stock. Plaintiff claims that defendants themselves realized nearly $1 billion on this transaction. Plaintiff claims that the deal could, and should, have been structured so that the principal benefit of the takeover would go to the corporate treasury, as opposed to the shareholders, especially considering the high amount of debt -- over $3.6 billion -- that GC was incurring at the time. (Pl. Mem. 6-7.) Further, when Qwest Communications entered the picture with an alternative merger proposal that US West was legally required to consider, and ultimately did take, the GC board passed up an opportunity to terminate the US West merger agreement early and secure an $850 million breakup fee for GC, and instead negotiated a deal with US West and Qwest whereby the tender offer still went through, and the breakup fee was reduced from $850 million to $210 million. (Id. 7-8.) The complaint "seeks to hold the defendants responsible for the actions of the designated board members which enabled [defendants] to benefit enormously from the tender offer while leaving [GC] broke." (Id.)
The complaint alleges that defendants engaged in similar self-dealing transactions, such as negotiating with (a then-insolvent) GC an agreement whereby defendants could sell their restricted shares to the public. The CIBC and ULLICO defendants thereafter did just that, participating in a secondary offering of GC stock that took place in April 2000, and in which the insiders and GC each sold about half of the stock being tendered. Once again, plaintiff claims that had GC sold more stock in that offering, it could have raised more funds for its beleaguered corporate treasury. (Id. 8.) All in all, the complaint alleges that the CIBC defendants realized $2.4 billion on its stock sales during the relevant period, CCC realized over $1.7 billion, and the ULLICO defendants realized over $200 million.
Defendants' GC board designees resigned at various times between September 1999 and March 2001, and in January 2002, GC (and various subsidiaries) filed for Chapter 11 bankruptcy relief. (Id. 10.)
The legal theory of the complaint is threefold: First, plaintiff claims that the stock acquired under the ASA and buyout agreements, the sales of GC stock from 1998-2000, and also certain financial services fees paid to the CIBC defendants, constituted fraudulent transfers under the federal Bankruptcy Code, 11 U.S.C. §§ 544 and 550, and the New York Debtor and Creditor Law ("DCL") §§ 270-81, in that the stock, "opportunities" to sell stock, and service fees were acquired in exchange for inadequate consideration, and at a time when GC was "insolvent or was left, as a result of the transfers, with unreasonably small capital." (Count 1, Compl. ¶¶ 242-46.) The twenty or so transfers at issue are listed at paragraph 243 of the complaint. Second, the complaint alleges that defendants, either directly or through the participation of their designees on GC's board, owed fiduciary duties to GC, and breached those duties by, inter alia, engaging in massive self-dealing (in the form of the transactions for which recovery is sought under Count 1), insider trading, and other misconduct. (Counts 2-7, id. ¶¶ 247-84.) The complaint seeks various forms of monetary and equitable relief on these claims (including disgorgement of defendants' profits). Finally, the complaint asserts a statutory claim under N.Y. Bus. Corp. L. § 720(a) to hold defendants liable for alleged waste of corporate assets (again, the self-dealing transactions complained about in Count 1) committed by their designees while serving on GC's board. (Count 4, id. ¶¶ 265-70.)
I. Count I: Fraudulent Transfer Claims under 11 U.S.C. §§ 544 and 550
The Estate Representative, in Count 1, claims that the defendants received property from GC while the company was insolvent or undercapitalized, or which caused insolvency or undercapitalization, and that those transfers are voidable under federal bankruptcy and state debtor law. As previously noted, paragraph 243 of the complaint contains a table of the voidable transfers, including:
- transfer of GC stock then worth approximately $19.7 million to the CIBC defendants and ULLICO in connection with the buyout of the ASA agreements (Compl. ¶¶ 132-40); - transfer to the defendants of opportunities to sell stock, and to secure a larger corporate breakup fee, worth approximately $1 billion, in connection with the 1999 US West tender offer (id. ¶¶ 152-70); - transfer to the CIBC and ULLICO defendants of the right, worth over $300 million, to sell previously restricted GC stock by means of a secondary offering in 2000 (id. ¶¶ 143--46, 171--79); and - transfers to the CIBC defendants of approximately $58.7 million in fees for various transactions from 1998-2000 (id. ¶ 142) and to ULLICO's subsidiary MRCo. of $194,696 in advances in 1998 in connection with the termination of the ASAs (id. ¶ 130).
The Estate Representative seeks to void the listed transfers and recover their value under 11 U.S.C. §§ 550(a) and 544(b). Section 550 provides that: (a) . . . [T]o the extent that a transfer is avoided under Section 544 . . . of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from . . . the initial transferee of such transfer or the entity for whose benefit such transfer was made.
Section 544, in turn, states that:
(b)(1) . . . [T]he trustee may avoid any transfer of an interest of the debtor in property . . . that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title.
The "applicable law" in this instance is the New York Debtor and Creditor Law, section 247 of which provides as follows:
Every conveyance made without fair consideration when the person making it is engaged or is about to engage in a business or transaction for which the property remaining in his hands after the conveyance is an unreasonably small capital, is fraudulent as to creditors and as to other persons who become creditors during the continuance of such business or transaction without regard to his actual intent.
Section 273 further provides:
Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.
Defendants make a number of procedural and substantive arguments in opposition to the Estate Representative's fraudulent transfer claim.
1. Statute of Limitations
Section 546 of the Code, entitled "Limitations on avoiding powers," states as follows:
(a) An action or proceeding under section 544, 545, 547, 548, or 553 of this title may not be commenced after the earlier of
(A) 2 years after the entry of the order for relief; or
(B) 1 year after the appointment or election of the first trustee under section 702, 1104, 1163, 1202, or 1302 of this title if such appointment or such election occurs before the expiration of the period specified in subparagraph (A); or
(2) the time the case is closed or dismissed.
The order for relief in GC's bankruptcy was entered on the date the bankruptcy commenced, January 28, 2002, and no trustee was ever appointed. Thus, under section 546(a), any avoidance claim asserted by the Estate Representative (all of which arise under section 544) after January 28, 2004, is untimely. In this case, all claims against CCC, and the claims against the ULLICO defendants relating to the US West merger and tender offer, and the April 2000 secondary offering, were first asserted in May and June of 2005, over a year late. ...