Rahl v. Bande

316 B.R. 127

J. Andrew RAHL, Jr., as Trustee of the Flag Litigation Trust, Plaintiff, v. Andres BANDE, Edward McCormack, Larry Bautista, Daniel C. Petri, Adnan Omar, Thomas Bartlett, Alfred Giammarino, David Riffelmacher, Dallah Albaraka Holding Company, Verizon Communications Inc., Qwest Communications International Inc., Andersen Worldwide S.C., Arthur Anderson Bermuda and Arthur Andersen & Co. n/k/a Arthur Andersen LLP, Defendants.

No. 04 Civ. 1019(WCC).

United States Bankruptcy Court, S.D. New York.

July 28, 2004.

Abbey Gardy, LLP, Judith L. Spanier, Stephanie Amin-Giwner, Of Counsel, New York, Grant & Eisenhofer, P.A., Jay W. Eisenhofer, Geoffrey C. Jarvis, Russell D. Paul, Of Counsel, Wilmington, DE, for Plaintiff.

Shearman & Sterling, Jerome S. Fortinsky, Tammy P. Bieber, Michael T. Rasnick, Panagiotis Katsambas, Of Counsel, New York, Attorneys for Defendant Daniel C. Petri.

Kirkland & Ellis, Thomas D. Yannucci, P.C., James P. Gillespie, Craig S. Primis, John C. O'Quinn, Of Counsel, Washington, D.C., Attorneys for Defendant Verizon Communications Inc.

O'Melveny & Myers LLP, Barry H. Goldstein, Matthew W. Close, Of Counsel, New York, Attorneys for Defendant Qwest Communications International Inc. Arnold & Porter, Kent Yalowitz, Of Counsel, New York, Attorneys for Defendant Arthur Andersen & Co. n/k/a Arthur Andersen LLP.

OPINION AND ORDER

WILLIAM C. CONNER, Senior District Judge.

Plaintiff J. Andrew Rahl, Jr. ("Rahl" or the "Trustee"), as Trustee of the Flag Litigation Trust (the "Litigation Trust" or "plaintiff"), filed this action in the Supreme Court of New York State, New York County, against Andres B. Bande, Edward McCormack, Larry Bautista, Daniel C. Petri, Adnan Omar, Thomas Bartlett, Alfred Giammarino, David Riffelmacher (collectively "the individual defendants"), Dallah Albaraka Holding Company ("Dallah"), Verizon Communications, Inc. ("Verizon"), Qwest Communications International, Inc. ("Qwest"), and Andersen Worldwide S.C., Arthur Andersen Bermuda and Arthur Andersen & Co. n/k/a Arthur Andersen LLP (collectively "Andersen"). Defendants removed the action to this Court asserting jurisdiction under 28 U.S.C. §§ 1334(b), 1367, 1331 and identified the matter as related to¹ In re Flag Telecom Holdings Ltd. Sec. Litig., No. 02 Civ. 3400(WCC) (the "Flag Securities Litigation"), which is currently pending before this Court. Plaintiff now moves to remand the action to state court, contending that this Court lacks subject matter jurisdiction. In the event that we conclude that this Court has subject matter jurisdiction, plaintiff requests that we abstain from exercising such jurisdiction pursuant to 28 U.S.C. § 1334(c) or remand the action on equitable grounds. Plaintiff also moves for an award of attorney's fees pursuant to 28 U.S.C. § 1447(c). For the reasons stated herein, plaintiff's motions to remand and for attorney's fees are denied. The Court will also accept this matter as related to the Flag Securities Litigation that is currently pending before the Court.

BACKGROUND

Unless otherwise noted, the following factual allegations appear in plaintiff's Complaint.² Flag Telecom Holdings Ltd. ("Flag" or the "debtor"), a company organized under the laws of Bermuda, was created in 1999 to serve as the holding company for several entities originally established by Verizon and other investors that operated in the international telecommunications market. (Complt. ¶¶ 2, 3.) Subsequent to its formation, Flag commenced an aggressive expansion that included a joint venture with GTS Transatlantic ("GTS") to build a fiberoptic cable connecting New York, London and Paris called the Flag Atlantic-1 System (the "FA-1 System"). (Id. ¶ 54.) By early 2000, Flag allegedly became insolvent after a glut of supply on the telecommunications market caused a rapid decline in the price of capacity on international fiber optic networks. According to plaintiff, even after becoming insolvent, the company continued "its reckless expansion program." (Id. ¶¶ 4-5.) For example, in March 2000, the company issued approximately $600 million in bonds and made significant investments in the FA-1 System, a separate program of expansion into north Asia and a fiber optic network in Europe. (Id. ¶ 5.) Flag then entered into a series of transactions with Verizon, on terms favorable to Verizon, that deepened Flag's insolvency. (Id.)

Rather than reveal Flag's insolvency, the individual defendants, who were officers and directors of Flag, allegedly concealed the company's financial woes by filing false financial statements with the SEC from 2000 until April 2002, and by making false statements in press releases each time Flag announced its financial results during that period. (Id. ¶ 6.) According to plaintiff, the individual defendants caused Flag to report its financial results in violation of Generally Accepted Accounting Principles ("GAAP"), (id. ¶ 45), and issued misleading "pro forma" financial reports. (Id. ¶ 151.) The individual defendants also allegedly caused the company to engage with competitors in numerous swaps of "dark" or unused fiber capacity to artificially inflate revenues, (id. ¶¶ 109-132), and failed to write-down timely the impairment to Flag's long-lived assets. (Id. ¶ 162.)

On February 13, 2002, Flag announced that it was reviewing its business "in light of deteriorating market conditions." (Id. ¶ 194.) On April 12, 2002, Flag and four of its subsidiaries filed Chapter 11 bankruptcy petitions. Shortly thereafter, other Flag subsidiaries filed Chapter 11 bankruptcy petitions. (Id. ¶ 195.) On September 26, 2002, the bankruptcy court approved Flag and its subsidiaries' Plan of Reorganization (the "Plan"). (Primis Decl., Exs. A, C.) The Plan became effective on October 9, 2002, (Pl. Mem. Supp. Mot. Remand at 2), and a new entity, Flag Telecom Group Ltd. ("New Holdco"), emerged from bankruptcy. Although the Plan has become effective, several matters, including an adversary proceeding filed by certain Flag subsidiaries against parties that are not involved in this action, are still pending before the bankruptcy court. (Primis Decl., Ex. C.)

Under the Plan, certain Flag bondholders and creditors (the "New Holdco shareholders" or the "Litigation Trust Beneficiaries") were granted ownership of 100% of the common shares of New Holdco. (Id., Ex. B ¶ 7.5.1.) On January 11, 2004, Reliance Gateway Net Private Ltd. acquired those shares after the New Holdco shareholders approved such sale. (Pl. Mem. Supp. Mot. Remand at 2.)

The Plan also created the Litigation Trust. The Plan provides:

On the Effective Date, the Debtors shall transfer and assign any choses in action then in existence possessed by the Debtors against any of their officers and directors, together with all insurance coverage applicable to such choses in action against insurers that sold insurance policies covering liabilities of the Debtors and their directors and officers, to the Litigation Trust, which will retain and liquidate these choses in action as the successor to the Debtors for these purposes. As and when there is any recovery on these choses in action, whether by settlement judgment or otherwise, such recovery shall be distributed on a Pro Rata Basis to the Litigation Trust Beneficiaries.

(Primis Decl., Ex. B ¶ 7.22.1.) The New Holdco shareholders are the Litigation Trust Beneficiaries, (id. ¶ 1.1.100), and Rahl is the Litigation Trust Trustee. (Id., Ex. C.) The Trustee brings the present action pursuant to this grant of authority.

Counts I, II and III of the Complaint assert claims for breach of fiduciary duty against the individual defendants and Andersen. In each of these counts, plaintiff refers to the Bermuda Companies Act of 1981 and to the general duty of good faith and loyalty that fiduciaries owe to their corporations. (Complt. ¶¶ 255, 265, 272.) Plaintiff alleges that the individual defendants breached their fiduciary duties by: (1) deepening Flag's insolvency to enhance their personal wealth (id., Count I); (2) issuing false financial statements (id., Count II); and (3) causing Flag to enter into certain transactions under terms that were unfavorable to Flag. (Id., Count III.) Count IX of the Complaint asserts a claim against only McCormack who allegedly caused one of Flag's subsidiaries to issue a dividend in violation of § 54 of the Bermuda Companies Act.

Count IV of the Complaint asserts a claim against Verizon wherein the Trustee seeks to avoid an allegedly fraudulent conveyance to Verizon pursuant to 11 U.S.C. § 544(b) which incorporates N.Y. DEBT. AND CREDITOR LAW §§ 270-281. Plaintiff alleges that Flag provided KPNQwest with capacity on its FA-1 System in exchange for capacity on KPNQwest's European network. Flag then sold the capacity on the European network to Verizon for prices below market value and far less than those Flag paid for the capacity. (Complt.¶ 69.) Count VII of the Complaint purports to state a claim against Verizon for aiding and abetting this allegedly fraudulent conveyance.

Count V of the Complaint asserts claims against Qwest and Verizon for aiding and abetting the breaches of fiduciary duty that plaintiff asserts in Count I of the Complaint.³ Count VI of the Complaint asserts a claim against Qwest for aiding and abetting the breaches of fiduciary duty that allegedly occurred in connection with the issuance of Flag's financial statements. In Count VIII, plaintiff claims that certain individual defendants were agents of Verizon or Dallah and that those companies are therefore liable for their agents' breaches under the doctrine of respondeat superior. Finally, Count X of the Complaint asserts a claim against Andersen for professional malpractice.

DISCUSSION

I. Jurisdiction Under 28 U.S.C. § 1334(b)

28 U.S.C. § 1441(a) provides:

Except as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original...