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IN RE CROWN VANTAGE

July 12, 2004.

In re: CROWN VANTAGE, INC., Debtor.


The opinion of the court was delivered by: MAXINE CHESNEY, District Judge

ORDER GRANTING DEFENDANTS' MOTIONS TO DISMISS FIRST AMENDED COMPLAINT IN LIQUIDATING TRUST CASE; GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS FIRST AMENDED COMPLAINT IN CROWN VANTAGE CASE (Docket Nos. 88, 91, 93, 208, 210, 211, 213, 216, 226, 278)
The above-titled consolidated proceeding consists of three matters: (1) Crown Paper Liquidating Trust v. PricewaterhouseCoopers, et al., C 02-3836 MMC ("the Liquidating Trust case"); (2) Fort James Corporation v. Crown Vantage, Inc., et al., C 02-3838 ("the Fort James case"), and (3) Crown Paper Co., et al., v. Fort James Corp., et al., C 02-3839 MMC ("the Crown Vantage case").

By order filed September 25, 2003, the Court granted in part and denied in part nine motions to dismiss filed by defendants in the Liquidating Trust case and the motion to dismiss filed by defendants in the Crown Vantage case. In its order, the Court dismissed (1) all claims in the First Amended Complaint in the Liquidating Trust case ("the PWC FAC"), as well as 10 of the 13 counts in the First Amended Complaint in the Crown Vantage case ("the FJ FAC"), "to the extent the claims are based on conduct occurring while JRC [James River Corporation] was Crown's*fn1 sole shareholder," (see Order Granting in Part and Denying in Part Defs. Mots. to Dismiss, Deferring Ruling on Certain Issues, filed September 25, 2003, ("Order of September 25, 2003") at 27:9-11, 27:16-17); (2) dismissed 18 of the 86 counts in the PWC FAC and 1 of the 13 counts in the FJ FAC without leave to amend, (see id. at 27:13, 27:18-19); (3) dismissed 2 of the 86 counts in the PWC FAC and 1 of the 13 counts in the FJ FAC with leave to amend, (see id. at 27:12, 27:20); and (4) deferred ruling on portions of three of the motions to dismiss the PWC FAC, specifically, the portions addressing claims based on "conduct occurring after JRC was no longer Crown's sole shareholder," until such time as other defendants had the opportunity to file motions to dismiss to address claims based on "conduct occurring after JRC was no longer Crown's sole shareholder," (see id. at 27:24-28:7).

  Now before the Court is the motion of defendants Fort James Corporation, Fort James Operating Company, Fort James Fiber Company, and Fort James International Holdings, Ltd. (collectively, "Fort James") to dismiss, pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure, the FJ FAC. Also before the Court are five motions to dismiss, pursuant to Rules 12(b)(6) and 9(b), the PWC FAC, filed, respectively, by the following defendants: (1) McGuireWoods LLP, as successor to McGuire Woods Battle & Boothe, LLP ("McGuire Woods"); (2) Merrill Lynch & Co., Merrill Lynch Pierce Fenner & Smith, (collectively, "Merrill Lynch") and Salomon Brothers ("Salomon"); (3) Houlihan Lokey Howard & Zukin ("Houlihan Lokey"); (4) Ernest Leopold ("Leopold"), William Daniel ("Daniel"), Joseph T. Piemont ("Piemont"), and E. Lee Showalter ("Showalter"); and (5) Clifford Cutchins ("Cutchins"), Stephen Hare ("Hare"), and Robert C. Williams ("Williams"). Each of the above-referenced motions addresses Crown's claims based on conduct occurring after JRC was no longer Crown's sole shareholder. Additionally, before the Court are the deferred portions of three motions to dismiss, filed, respectively, by (1) PricewaterhouseCoopers LLP, f/k/a Coopers & Lybrand ("PWC"); (2) Ernst & Young LLP ("E & Y"); and (3) Credit Suisse First Boston Corporation, as successor to Donaldson, Lufkin & Jenrette ("DLJ"), i.e., the portions addressing claims based on conduct after JRC was no longer Crown's sole shareholder.

  Having considered the papers filed in support and in opposition to the motions, the Court deems the matters appropriate for decision thereon, VACATES the hearing scheduled for July 13, 2004, and rules as follows.

  FACTUAL BACKGROUND

  Crown's claims arise out of a series of transactions, which Crown refers to as the "Spin," and from the aftermath of those transactions. In the pleadings, Crown defines the "Spin" as "a scheme by Fort James [] to unload vastly over-valued but under-performing assets onto Crown, and to cause Crown to borrow well over half a billion dollars, all of which monies were then taken by Fort James, while Crown remained obligated to pay on the loans." (See FJ FAC ¶ 627; see also PWC FAC ¶¶ 12-17.)*fn2

  The following facts, taken from the FJ FAC and from the PWC FAC, are assumed true solely for the purposes of the motions to dismiss:*fn3

  Prior to the transactions comprising the Spin, JRC, defendant Fort James' predecessor, was Crown's sole shareholder. (FJ FAC ¶¶ 249-50, 260(a); PWC FAC ¶¶ 254-55, 265(a).)*fn4 After the transactions comprising the Spin, JRC distributed "all of the outstanding shares of Crown Vantage to the JRC shareholders," which was the first time there existed a "public market" for Crown stock. (FJ FAC ¶¶ 257, 260(o); PWC FAC ¶ 262, 265(o).) After the stock distribution, JRC continued to "exercise[] adverse dominion and control" over the Crown directors, and the "vestiges of JRC's control of Crown continued through and up to the time Crown filed for bankruptcy." (FJ FAC ¶¶ 346, 389; PWC FAC ¶¶ 351, 394.) JRC, assisted by the other defendants, "continued to misrepresent and/or conceal Crown's true financial condition . . . long after Crown became insolvent." (FJ FAC ¶ 389; PWC FAC ¶ 394.) The "concealment of Crown's true financial condition artificially prolonged the life of Crown while giving the illusion . . . that Crown's business was prosperous when, in fact, it was not." (FJ FAC ¶ 393; PWC FAC ¶ 398.)

  Defendant McGuire Woods, a law firm who represented Crown, concealed from Crown after the Spin "all documents and information related to the Spin." (FJ FAC ¶ 350; PWC FAC ¶ 355.) Defendants Merrill Lynch and Houlihan Lokey, after the transfers, provided "false and misleading opinions" that the Spin had been "fair and equitable and not a fraudulent transfer." (FJ FAC ¶ 351; PWC FAC ¶ 356.) Defendant PWC prepared and disseminated "false and misleading financial statements" to assist JRC in "the perpetuation of the illusion of growth and prosperity and artificially prolonging Crown's life." (FJ FAC ¶ 489; PWC FAC ¶ 494.) Defendant Salomon, who "conducted due diligence regarding Crown's post-Spin operations," did not advise Crown of "the true nature of the assets." (FJ FAC ¶¶ 357-58; PWC FAC ¶¶ 362-63.) DLJ, defendant Credit Suisse First Boston Corporation's predecessor, who was Crown's financial advisor beginning in 1997, did not advise Crown of the true value of its assets and should have advised Crown to file for bankruptcy, rather than to continue as a "going concern." (FJ FAC ¶¶ 360, 379-80; PWC FAC ¶¶ 365, 384-85.)

  Defendant E & Y, an accounting firm that began performing services for Crown after the Spin, prepared audits for Crown that falsely represented Crown's financial position. (FJ FAC ¶¶ 20, 538; PWC FAC ¶¶ 23, 543.) In particular, E & Y "intended to hide the fact" that other defendants had "failed to properly write-down" the value of certain assets. (FJ FAC ¶ 608; PWC FAC ¶ 612.) Defendant Showalter, a Crown director, worked with E & Y to approve each of E & Y's audits of Crown so as "to conceal Crown's deepening insolvency, to hide the over-valuing of the transferred assets and to conceal his wrongdoing and that of [the other] Defendants." (FJ FAC ¶¶ 30, 436; PWC FAC ¶¶ 33, 441.) Defendants Daniel and Piemont, both of whom were Crown directors, had "conflicts of interest at the time of the Spin" and failed thereafter to take any steps to "remedy the Spin." (FJ FAC ¶¶ 442-43; PWC FAC ¶ 447-48.) Defendant Leopold, a Crown director, defendant Williams, JRC's President and CEO, and defendants Cutchins and Hare, both JRC Senior Officers, all "were aware of Crown's insolvency, under capitalization, its inability to pay debts as they matured and the fraudulent nature of the [] transfers," but failed to disclose such information to Crown after the Spin. (FJ FAC ¶¶ 341-43; PWC FAC ¶¶ 346-48.)

  On March 18, 1998, JRC and Crown entered into an Option and Settlement Agreement, under which Crown's obligations to JRC were modified and Crown released any "potential claims arising out of the Spin" that Crown had against JRC and certain "generically described parties." (FJ FAC ¶¶ 323-24, 333; PWC FAC ¶¶ 328-29, 338.) "Crown received nothing in return for the release of claims." (FJ FAC ¶ 335; PWC FAC ¶ 340.)

  Showalter, in his capacity as a Crown director but acting in the best interest of JRC, voted to approve the Option and Settlement Agreement. (FJ FAC ¶ 438; PWC FAC ¶ 443.) Piemont and Daniel voted to approve the Option and Settlement Agreement even though it provided no benefit to Crown. (FJ FAC ¶ 443; PWC FAC ¶ 448.) Leopold signed the Option and Settlement Agreement on behalf of Crown, thereby "potentially absolv[ing] JRC of any liability for certain prior wrongful acts done to Crown," even though Leopold had, four months earlier, stated to JRC that one of the Spin transactions had been "a one-sided deal, drafted only in favor of JRC." (FJ FAC ¶¶ 431-32; PWC FAC ¶¶ 436-37.) E & Y, knowing there was "no economic justification" for the Option and Settlement Agreement, "failed to identify, record, or disclose that the Agreement was absent arms length fairness or proper consideration." (FJ FAC ¶¶ 517-18; PWC FAC ¶¶ 522-23.) DLJ advised Crown to enter into the Option and Settlement Agreement in order to "protect" JRC and other defendants from liability as a result of the Spin. (FJ FAC ¶¶ 386-87; PWC FAC ¶¶ 391-92.)

  On March 15, 2000, Crown, having "become insolvent by well in excess of $1 Billion," filed for bankruptcy protection. (FJ FAC ¶ 13.)

  LEGAL STANDARD

  A motion to dismiss under Rule 12(b)(6) cannot be granted unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." See Conley v. Gibson, 355 U.S. 41, 45-46 (1957). Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory. See Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). In analyzing a motion to dismiss, the court must accept as true all material allegations in the complaint and construe them in the light most favorable to the nonmoving party, see NL Industries, Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986), and may take judicial notice of matters of public record, see Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001).

  DISCUSSION

  Defendants argue that the remaining claims in the FACs should be dismissed on numerous grounds. The primary issue*fn5 is whether Crown has stated any viable claims against defendants based on conduct occurring on or after August 25, 1995.*fn6 Other than the claims brought on behalf of creditors, all of plaintiffs' remaining claims arise from plaintiffs' allegations that defendants, acting on their own, as members of a conspiracy, and/or as aiders and abetters of other defendants, (1) engaged in various acts in an effort to prevent Crown from learning the truth about the fraudulent "Spin" transactions and/or otherwise caused Crown's deepening insolvency, and (2) caused Crown, in 1998, to enter into the Option and Settlement Agreement that itself constituted a fraudulent transaction.*fn7

  A. Effect of Imputation

  In its prior order, the Court found that plaintiffs' claims brought on behalf of Crown are barred by the doctrine of in pari delicto, to the extent the claims are based on conduct occurring while JRC was Crown's sole shareholder. Under the doctrine of in pari delicto, the acts of a corporation's agents taken at the behest of the corporation's sole shareholder are imputed to the corporation, even if the acts could be considered adverse to the corporation. "In explaining the basis for this result, the Second Circuit has stated: `This rule imputes the agent's knowledge to the principal notwithstanding the agent's self-dealing because the party that should have been informed was the agent itself albeit in its capacity as principal. Where, as here, a sole shareholder is alleged to have stripped the corporation of assets, the adverse interest exception to the presumption of knowledge cannot apply.'" (See Order of September 25, 2003 at 15:12-17 (quoting Mediators, Inc. v. Manney (In re Mediators), 105 F.3d 822, 827 (2nd Cir. 1997).) In the instant case, as a result of the doctrine of in pari delicto, Crown is deemed to have known the details of the Spin transactions, for example, that it received from JRC "heavily depreciated, overvalued and in some cases environmentally contaminated assets" and "enormous liabilities" that left Crown "fatally wounded." (See FJ FAC ¶ 13). Defendants argue that the knowledge imputed to Crown while it was owned by JRC remains within the knowledge of Crown after JRC distributed its shares to third parties. As a consequence, defendants argue, plaintiffs' post-Spin claims fail because the success of such claims depends upon Crown lacking knowledge of the details of the Spin transactions. (See Defs.' Joint ...


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