Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_05-cv-00428/USCOURTS-cand-5_05-cv-00428-4/pdf.json

Nature of Suit Code: 423
Nature of Suit: Bankruptcy Withdrawal 28 USC 157
Cause of Action: 28:0157 Motion for Withdrawal of Reference

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United States District Court

For the Northern District of California

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1At the hearing, counsel for Carlyle Fortran Trust in related case Carlyle v. nVidia , 05cv427JW

presented arguments that this Court understands to be common to Carlyle and CarrAmerica. The Court's

order in the related case is at Order Dismissing Third Amended Complaint, Docket No. 133.

United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

CARRAMERICA REALTY

CORPORATION,

Plaintiff,

 v.

NVIDIA CORPORATION, et al.,

Defendants.

 /

NO. C 05-00428 JW 

ORDER DISMISSING SECOND

AMENDED COMPLAINT WITH LEAVE

TO AMEND;

SETTING FURTHER CASE

MANAGEMENT CONFERENCE

I. INTRODUCTION

The former directors and officers of 3dfx Interactive, Inc. (3dfx Defendants), the nVidia individual

defendants, and nVidia Corporation, nVidia U.S. Investment (nVidia Defendants), (collectively

"Defendants") seek dismissal of the newly asserted claims set forth in the Second Amended Complaint

("SAC") filed by CarrAmerica Realty Corporation ("CarrAmerica"). On October 18, 2005, this Court

held a hearing on Defendants' motions.1 For the following reasons, this Court dismisses the claims in the

SAC for lack of standing and grants CarrAmerica leave to amend in accordance with this Order.

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II. BACKGROUND

Based on the papers filed by the parties, the following facts are uncontested: 3dfx was a public

company in the business of developing and selling graphic chips, graphics boards, and related technology. 

Pursuant to a lease dated July 23, 1998, CarrAmerica leased approximately 26,000 square feet of

commercial space in Austin, Texas to 3dfx. The lease ran through August 2004. nVidia was a competitor

of 3dfx also in the business of developing and selling graphics technology. In late 2000, nVidia and 3dfx

structured and entered into an Asset Purchase Agreement ("APA") where nVidia paid $70 million in cash

plus 1,000,000 shares of nVidia common stock for certain assets from 3dfx including its portfolio of

patents, trademarks, and applications. The APA also provided that 3dfx would dissolve after

consummating its transaction with nVidia. The exact effects and motivations behind the structuring of the

APA's terms are at issue in the present litigation. 

Subsequent to the APA, 3dfx ceased paying rent to CarrAmerica. CarrAmerica filed a collection

action against 3dfx in Texas and obtained a judgment. On June 28, 2005, this Court entered an Order

granting CarrAmerica leave to file the SAC. Presently before the Court are nVidia and 3dfx Defendants'

motions to dismiss the SAC's allegations that Defendants' breached their fiduciary duties.

III. STANDARDS

Under Rule 12(b)(6), a plaintiff's claims or entire complaint may be dismissed by the court for

"failure to state a claim upon which relief can be granted." Rule 12(b)(6). See, e.g., Jack Russell Terrier

Network of N. Cal. v. Am. Kennel Club, 407 F.3d 1027, 1032 (9th Cir. 2005) (affirming district court's

partial Rule 12(b)(6) dismissal). A Rule 12(b)(6) motion tests the legal sufficiency of the claims stated in

the complaint. The court must decide whether the facts alleged, if true, would entitle plaintiff to some form

of legal remedy. Unless the answer is unequivocally in the negative, the motion must be denied. Conley v.

Gibson, 355 U.S. 41, 45-46 (1957); De La Cruz v. Tormey (9th Cir. 1978). In resolving a Rule 12(b)(6)

motion, the court must (1) construe the complaint in the light most favorable to the plaintiff, (2) accept all

well-pleaded factual allegations as true, and (3) determine whether plaintiff can prove any set of facts to

support a claim that would merit relief. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir.

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2

In the motions presently before the Court, Defendants do not apply their standing argument to

every claim in the SAC. However in the interests of judicial efficiency, and in accordance with a district

court's "power and...duty to raise the adequacy of [plaintiff]'s standing sua sponte," Bernhardt v. County of

Los Angeles, 279 F.3d 862, 868 (9th Cir. 2002), this Court will determine Plaintiffs' standing as to each

claim in the SAC.

3

1996). Because of the liberal federal pleading rules, a 12(b)(6) dismissal is proper only in "extraordinary"

cases. U.S. v. Redwood City, 640 F.2d 963, 966 (9th Cir. 1981). 

IV. DISCUSSION

As an initial matter, CarrAmerica must have standing to pursue the claims it asserts in the SAC. 

Defendants contend that CarrAmerica has no standing to bring certain claims in the SAC, because such

claims belong exclusively to the Trustee.2 CarrAmerica argues that the Trustee has no standing to pursue

the claims in the SAC because these claims do not belong to the debtor. Contrary to CarrAmerica's

position, the law of the Ninth Circuit requires that this Court dismiss the general claims in the SAC for lack

of standing. 

Under California law as interpreted by the Ninth Circuit, the authority to pursue a debtor's general

causes of action is delegated exclusively to the bankruptcy trustee, unless the creditor can show

particularized injury. In re Folks, 211 B.R. 378 (9th Cir. BAP 1997). In In re Folks, the Ninth Circuit

held that the bankruptcy trustee has exclusive jurisdiction for general claims: "If a claim is a general one,

with no particularized injury arising from it, and if that claim could be brought by any creditor of the debtor,

the trustee is the proper person to assert the claim, and the creditors are bound by the outcome of the

trustee's action." Id. at 386. In so doing, the Ninth Circuit defined personal claims as those held by the

creditor, and distinguished these personal claims from general claims over which the bankruptcy trustee has

exclusive standing:

A cause of action is personal if the claimant himself is harmed and no other claimant or

creditor has an interest in the case. A general claim exists if the liability is to all creditors

of the corporation without regard to the personal dealings between such officers and

creditors. 

Id. at 386 (citations and quotations to Koch v. Farmers Union Cent. Exchange, Inc., 831 F.2d 1339 (7th

Cir. 1987) omitted). More recently, the Ninth Circuit has expanded the holding of In re Folks to grant

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3At the hearing on October 18, 2005, and in Plaintiff's Motion for Leave to File (Docket No. 129),

counsel for Carlyle in the related case 05cv427JW argued that In re Smith supports its position because the

Ninth Circuit did not expressly grant the bankruptcy trustee exclusive standing. First, even if Carlyle is

correct that In re Smith only held that the trustee has standing along with the creditors, the holding in In re

Folks granting the bankruptcy trustee exclusive standing for general creditor claims has not been

superceded by other Ninth Circuit or Supreme Court decisions. Second, on this Court's reading of In re

Smith, the trustee action was the only case before the Ninth Circuit, and thus it had no jurisdiction to deny

standing to a separate action involving plaintiffs before a Colorado court.

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standing to a bankruptcy trustee where the trustee alleged that defendants' "dissipation of assets limited the

firm's ability to pay creditors." In re Smith, 421 F.3d 989, 1004 (9th Cir. 2005). Recognizing that "the

economic reality that any injury to an insolvent firm is necessarily felt by its creditors," the Ninth Circuit in In

re Smith nevertheless held that the defendants' acts in dissipating corporate assets gave rise to a general

claim. Id. 3

A. Claims Based on Violation of the Lease Terms

Claim 1 of the SAC alleges that Defendants "were aware of the contractual relationship" between

CarrAmerica and 3dfx and "intended to induce a breach of the Lease by [3dfx] and intentionally interfered

with the existing contractual relationship." (SAC ¶¶ 23-24.) While a claim that an asset purchase

agreement was designed to escape liability from a particular creditor would ordinarily be an allegation of

particularized injury, there does not appear to be anything in the SAC that alleges that Defendants acted

with CarrAmerica in mind. CarrAmerica's allegation that Defendants knew of the Lease as a result of due

diligence prior to the APA is insufficient to support an allegation that the injury was particularized. 

Defendants were likely aware of all creditors' contracts with 3dfx, and CarrAmerica does not allege that

Defendants were particularly aware of the Lease, or structured the APA to evade the Lease in particular. 

Based on the facts alleged in the SAC, any creditor could allege that the APA was "for the fraudulent

purposes of allowing 3dfx to evade its liability" to any or all of the creditors. Even under the liberal federal

pleading rules, CarrAmerica has failed to state a claim for particularized injury in this claim, and thus claim 1

is a general claim that the Trustee has exclusive standing to assert.

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B. Claims Based on Insufficient Consideration Provided by the APA for 3dfx's Assets.

A number of the claims in the SAC are based on the general allegation that the structure of the

APA dissipated the amount of assets available to pay all creditors. For example, the core of the allegations

in claims 2 and 3 as currently presented in the SAC are based on a general allegation of insufficient

consideration to all creditors. In ¶ 33 of the SAC, CarrAmerica alleges: 

Defendants' conduct was independently wrongful, in that it was part of a conspiracy to

acquire [3dfx's] significant intellectual property assets and other rights while concurrently

avoiding significant liabilities,suchasliabilityto [CarrAmerica] underthe Lease, associated

withthe acquisitionofsuch rights, allforinadequate considerationinviolationofestablished

principles.

(emphasis added). Similarly, claims 7-9 are based on the allegation that "as a result of the [APA], [3dfx]

was rendered insolvent." (TAC ¶ 71). As alleged, these claims are not particular to CarrAmerica. The

dissolution of a corporation where liabilities exceed assets rendering the corporation unable to fulfill its

obligations, is at the heart of bankruptcy. The exact injury to each creditor as a result of the dissolution of

an insolvent corporation may vary, but this variation does not make the injury "particularized" within the

meaning of the term as used by the Ninth Circuit. Since the injury caused by the dissolution of 3dfx with

insufficient assets to pay its obligations is "to all creditors of the corporation without regard to the personal

dealings between such officers and creditors," In re Folks, 211 B.R. at 386, the Trustee has exclusive

jurisdiction to assert the claims arising out of the allegedly APA-caused dissolution of 3dfx.

C. Claims Based on Breach of Fiduciary Duty in Entering into the APA

Under California law, a claim could be stated that the 3dfx Defendants breached their fiduciary

duties to the creditors of 3dfx when 3dfx was in the zone of insolvency. See Saracco Tank & Welding Co.

v. Platz, 65 Cal. App. 2d 305, 315 (1944). However, CarrAmerica is not the proper party to assert this

claim. The Ninth Circuit in In re Smith declined to rule on whether the creditors could have asserted these

claims outside the bankruptcy context "because state law often permits creditors to pursue derivative claims

on an insolvent corporation's behalf when the corporation itself has been injured by breaches of fiduciary

duty." 421 F.3d at 1006. The Ninth Circuit in In re Folks, however, already found that under California

state law, derivative claims on an insolvent corporation's behalf are asserted exclusively by the bankruptcy

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trustee. 211 B.R. at 384-85. Because the claim that Defendants breached their fiduciary duty by entering

into an APA which did not provide enough in cash for the bankruptcy estate is general to all creditors, the

rule of In re Folks that the trustee has exclusive jurisdiction to assert claims where "liability is to all creditors

of the corporation" bars CarrAmerica from asserting a claim for breach of fiduciary duty against

Defendants.

D. Claims Based on the Structure of the APA

To the extent that the injury to CarrAmerica allegedly arose as a result of Defendants agreeing to a

deal under the APA which only provided $70 million in cash plus nVidia stock as opposed to the initial

offer of $100 million in cash with no stock, the claims remain general and properly asserted by the Trustee. 

Because the Ninth Circuit has not expressly excluded general creditor claims from the broad grant of

exclusive trustee jurisdiction over general claims in In re Folks, this Court is reluctant to carve out such an

exception. 

This Court recognizes the potential for a conflict of interest between the shareholders and the

creditors when Defendants entered into the APA. However, a bankruptcy trustee, appointed after the

corporation's liabilities exceed its assets, is the representative of the bankrupt estate. Among the trustee's

duties is the obligation to "collect and reduce to money the property of the estate." 11 U.S.C. §704(1). 

The "property of the estate" includes "all legal or equitable interests of the debtor in property as of the

commencement of the case," 11 U.S.C. §541(a)(1), including the debtor's "causes of action." In re Smith,

421 F.3d at 1002. At the time of commencement of the Chapter 11 proceedings, Defendants had already

entered into the APA. Thus, the "interests of the debtor in property as of the commencement of the case"

includes the interest to have the bankrupt estate consist of $100 million in cash instead of $70 million in

cash. Accordingly, the diminution in assets of the bankrupt estate as a result of the structure of the APA is

the debtor's cause of action properly asserted exclusively by the Trustee. 

V. CONCLUSION

For the reasons set forth above, this Court dismisses the SAC. CarrAmerica is ordered to file a

Third Amended Complaint limiting its claims and allegations in accordance with this Order by February 4,

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2006. Failure to file a Third Amended Complaint by this deadline may result in dismissal. The parties are

ordered to appear before the Court on April 18, 2006 at 10:00 a.m. for a case management conference.

Dated: November 10, 2005

05cv428dismSAC

 /s/ James Ware 

JAMES WARE

United States District Judge

Case 5:05-cv-00428-JW Document 82 Filed 11/10/05 Page 7 of 8
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THIS IS TO CERTIFY THAT COPIES OF THIS ORDER HAVE BEEN DELIVERED TO:

Douglas A. Applegate daa@sezalaw.com

Dwight Craig Donovan Dwight@mbvlaw.com

George M. Lee gml@sezalaw.com

Henry H. Oh henry.oh@dlapiper.com

James N. Kramer jkramer@orrick.com

John L. Fitzgerald jfitzgerald@pinnaclelawgroup.com

Jonathan B. Gaskin jgaskin@orrick.com

Jonathan S. O'Donnell jon@mbvlaw.com

Justin Myer Lichterman jlichterman@orrick.com

Karen Johnson-McKewan kjohnson-mckewan@orrick.com

Kim Y. Arnone karnone@buchalter.com

Leah Anne Nutting lnutting@orrick.com

Morgan William Tovey mtovey@reedsmith.com

Richard C. Darwin rdarwin@buchalter.com

Robert P. Varian rvarian@orrick.com

Ruth Young Kwon rkwon@orrick.com

William R. Overend woverend@reedsmith.com

Office of the U.S. Trustee/SJ

U.S. Federal Bld.

280 S 1st St.

San Jose, CA 95113-3004

USBC Manager-San Jose

US Bankruptcy Court

280 South First Street

Room 3035

San Jose, CA 95113

James R. Grube

U.S. Bankruptcy Court

280 South First Street

Room 3035

San Jose, CA 95113

David M. Shannon

Stephen Pettigrew

Nvidia Corporation

2701 San Tomas Expressway

Santa Clara, CA 95050

Dated: November 10, 2005 Richard W. Wieking, Clerk

By:__/s/ JW Chambers_____________

Ronald L. Davis

Courtroom Deputy

Case 5:05-cv-00428-JW Document 82 Filed 11/10/05 Page 8 of 8