Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_05-cv-00427/USCOURTS-cand-5_05-cv-00427-4/pdf.json

Nature of Suit Code: 423
Nature of Suit: Bankruptcy Withdrawal 28 USC 157
Cause of Action: 28:1334 Bankruptcy cases and proceedings under title 11

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United States District Court

For the Northern District of California

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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

CARLYLE FORTRAN TRUST,

Plaintiff,

 v.

NVIDIA CORPORATION, et al.,

Defendants.

 /

NO. C 05-00427 JW 

ORDER DISMISSING THIRD

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 Third Amended Complaint

("TAC") filed by Carlyle Fortran Trust ("Carlyle"). On October 18, 2005, this Court held a hearing on

Defendants' motions. For the reasons set forth below, this Court dismisses the claims in the TAC for lack

of standing and grants Carlyle leave to amend in accordance with this Order.

II. BACKGROUND

Based upon 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 August 7, 1996, Carlyle leased approximately 77,000 square feet of commercial

space in San Jose, California to 3dfx. nVidia was a competitor of 3dfx also in the business of developing

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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 of 3dfx including its portfolio of patents, trademarks, and applications. 

The APA also provided that 3dfx would dissolve after consummating its transaction with nVidia. The

parties dispute the exact effects and motivations behind the structuring of the APA's terms. 

On January 1, 2002, 3dfx ceased paying rent. Carlyle filed a complaint in the Santa Clara County

Superior Court against 3dfx, nVidia and their respective directors and officers for, inter alia, intentional

interference with contract, fraudulent transfer, and unfair business practices. 3dfx then filed for relief in

bankruptcy under Chapter 11. On January 3, 2003, the nVidia Defendants removed Carlyle's State Court

action to the Bankruptcy Court. The bankruptcy court appointed a trustee ("Trustee"), who filed a

complaint against nVidia and a subsidiary. The Trustee subsequently filed an action against the 3dfx

Defendants in the San Mateo County Superior Court. On September 21, 2004, the Trustee and the 3dfx

Defendants entered into a Settlement Agreement and Mutual Release ("Settlement Agreement") pursuant to

which the 3dfx Defendants were to pay $5.5 million. The Settlement Agreement was approved by the

bankruptcy court on November 19, 2004.

By Order on May 6, 2005, this Court withdrew the reference of Carlyle's action from the

Bankruptcy Court. In July of 2005, the nVidia and 3dfx Defendants filed the present motion to dismiss

claims in Carlyle's TAC. 

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)

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

every claim in the TAC. 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 TAC.

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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.

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, Carlyle must have standing to pursue the claims it asserts in the TAC. 

Defendants contend that Carlyle has no standing to bring certain claims in the TAC, because such claims

belong exclusively to the Trustee.1 Carlyle argues that the Trustee has no standing to pursue the claims in

the TAC because these claims do not belong to the debtor. Contrary to Carlyle's position, the law of the

Ninth Circuit requires that this Court dismiss the general claims in the TAC 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. 

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2At the hearing on October 18, 2005, and in Plaintiff's Motion for Leave to File (Docket No. 129),

Carlyle 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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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

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. 2 

A. Claims in the TAC Based on Dissipation of Assets Caused by the APA

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

APA dissipated the amount of assets available to pay all creditors. For example, claims 1 and 2 allege that

the dissolution of 3dfx, and 3dfx's subsequent inability to pay rent interfered with the contractual and

economic relations between 3dfx and Carlyle. As alleged, however, these claims are not particular to

Carlyle. 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.

In its papers, Carlyle points to its allegations in ¶¶ 86-88 as particularized claims. In these

paragraphs, Carlyle alleges that at the time of the APA, Defendants agreed that nVidia or its subsidiary

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would be assuming the Lease, but shortly before Defendants closed the asset purchase transaction at issue,

nVidia and its subsidiary refused to assume the Lease. However, the core of these allegations is a general

creditor claim of simply increased general liability based on Defendants' refusal to assume the lease. 

Carlyle states that nVidia "refused to assume the Lease, thereby leaving 3dfx with an additional liability in

excess of $7 million without any additional Cash Consideration or Stock Consideration to deal with such

liability." (TAC ¶ 87.) The dissipation of corporate assets resulting from an additional $7 million in

liabilities is a harm to the bankruptcy estate common to all creditors. See In re Smith, 421 F.3d at 1004. 

Accordingly, the Trustee has exclusive jurisdiction over the claims in ¶ 86-88 that are based on additional

liabilities of the estate.

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

To the extent that the claims in the TAC are based on an allegation that the APA provided

insufficient consideration for 3dfx's assets, the claims are general and are also to be exclusively asserted by

the Trustee. For example, claims 3-5 for fraudulent transfer are primarily based on Carlyle's allegations

that the APA provided "inadequate value" for 3dfx's assets. Such claims based on the amount of

consideration provided under the APA for the assets of 3dfx are general claims which could be brought by

any creditor of the debtor. Under the rule of the Ninth Circuit in In re Folks, the Trustee has exclusive

jurisdiction over claims based on insufficient consideration as a result of the APA. 

Similarly, Claim 6 of the TAC alleges successor liability based on the nVidia Defendants' actions in

having "acquired substantially all of the assets of 3dfx and paid inadequate consideration therefor" through

the APA, and that the nVidia Defendants acted "for the fraudulent purposes of allowing 3dfx to evade its

liability to Carlyle." (TAC, ¶ 138.) While a claim that an asset purchase agreement designed to escape

liability from a particular creditor would ordinarily be an allegation of particularized injury, there does not

seem to be anything in the TAC that alleges that Defendants acted with Carlyle in mind. At the hearing,

Carlyle argued that their injury was particularized because Defendants' due diligence prior to the APA

made Defendants aware of the terms of the Lease. However, Defendants were likely aware of all

creditors' contracts with 3dfx, and Carlyle does not allege that Defendants were particularly aware of the

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Lease, or structured the APA to evade the Lease in particular. Based on the facts alleged in the TAC, 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. Accordingly, because Carlyle has alleged insufficient facts to support a claim that

Defendants entered into the APA to evade liability to Carlyle in particular, claim 6 is also a general claim

that the Trustee has exclusive standing to assert.

C. Claims Based on Breach of Fiduciary Duty and Aiding and Abetting Breach of Fiduciary

Duty in Entering into the APA

As to Carlyle's claims regarding breach of fiduciary duty, Carlyle argues that it has standing because

California law recognizes a fiduciary duty of the directors and officers of an insolvent corporation to its

creditors. 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. However, Carlyle 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 trustee. 211 B.R. at 384-85. Furthermore, in the case cited by Carlyle,

Saracco Tank & Welding Co. v. Platz, 65 Cal. App. 2d 305, 315 (1944), the court stated that "all of the

assets of a corporation immediately on its becoming insolvent, become a trust fund for the benefit of all of

its creditors." (emphasis added). 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 Carlyle from asserting a claim for breach of fiduciary duty against

the 3dfx Defendants. Similarly, Carlyle's claim against nVidia Defendants that the nVidia Defendants aided

and abetted the 3dfx Defendants' breach of fiduciary duty is also dismissed to the extent that such a claim is

general to all creditors.

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3

 This Court notes that basing the claims on an argument that the APA was structured to minimize

the assets available to repay creditors while allowing the shareholders to receive valuable stock

consideration may have been secondary to the insufficient consideration allegations in the TAC. For

example, the central allegation in the TAC is that the APA "stripp[ed] 3dfx of substantially all of its assets

for inadequate consideration," resulting in injury to Carlyle (Claims 1 and 2, TAC ¶¶ 88, 96, 100), or that

"3dfx transferred such assets to [nVidia Defendants] without receiving reasonably equivalent value in

consideration therefor," (Claims 3-5, TAC ¶¶ 107, 118, 129), or that the nVidia Defendants "acquired

substantially all of the assets of 3dfx and paid inadequate consideration therefor," (Claim 6, TAC ¶ 138), or

"under the nVidia Agreement, inadequate consideration was given for 3dfx's assets" (Claim 9, ¶ 152).

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D. Claims Based on the Structure of the APA

At oral argument, Carlyle argued that the Trustee does not have an interest in the claims in the TAC

because the claims are based on the structure of the APA as unfair to creditors, and not an allegation that

the APA provided insufficient consideration for 3dfx's assets.3 In other words, Carlyle reasons that each of

the general claims asserted are general creditor claims belonging to creditors and not to the Trustee. The

injury to Carlyle 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. By the terms of their allegations, these claims are general. 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. 

Carlyle claims to find support for its standing argument in In re Smith, where the Ninth Circuit cited

to Steinberg v. Buczynski, 40 F.3d 890 (7th Cir. 1994) for the proposition that "when a third party has

injured not the bankrupt corporation itself but a creditor of that corporation, the trustee in bankruptcy

cannot bring a suit against the third party." In re Smith, 421 F.3d at 1002-03. Carlyle's reliance on the

Ninth Circuit's citation of Steinberg is misplaced. In Steinberg, a plumber's union pension fund obtained a

judgment against a plumbing corporation for ERISA-required contributions. The corporation then declared

bankruptcy. The bankruptcy trustee brought an adversary proceeding against the corporation's two

shareholders seeking to pierce the corporate veil and hold the shareholders personally liable for the

corporation's debt to the pension fund. In holding that the bankruptcy trustee did not have standing to

assert this claim, the Seventh Circuit relied on the fact that the trustee had failed to allege any wrongs by the

shareholders. Id. at 891. In this case, Carlyle is not simply attempting to collect on rent due prior to the

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3dfx bankruptcy. The claims asserted in the TAC, instead, stem from the actions of Defendants entering

into the APA and that the APA (or structure thereof) left the estate with insufficient funds to make rental

payments. The Steinberg opinion itself finds that it would have granted the bankruptcy trustee standing had

the trustee sufficiently alleged that the shareholders diverted assets to their personal use thus minimizing the

amount available to pay the pension fund. Id. at 892. 

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 TAC. Carlyle is ordered to file a Fourth

Amended Complaint limiting its claims and allegations in accordance with this Order by February 4, 2006. 

Failure to file a Fourth 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

05cv427dismTAC

 /s/ James Ware 

JAMES WARE

United States District Judge

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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

Henry H. Oh henry.oh@dlapiper.com

James N. Kramer jkramer@orrick.com

Jonathan B. Gaskin jgaskin@orrick.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

Michael Todd Scott tscott@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

USBC Manager-San Jose

US Bankruptcy Court

280 South First Street

Room 3035

San Jose, CA 95113

Arthur S. Weissbrodt

U.S. Bankruptcy Court

280 South First Street

Room 3035

San Jose, CA 95113

Stephen Pettigrew

David M. Shannon

Nvidia Corporation

2701 San Tomas Expressway

Santa Clara, CA 95050

Henry H. Ho

Dewey Ballantine LLP

333 South Grand Avenue

Los Angeles, Ca 90071-1530

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

By:___/s/ JW Chambers________

Ronald L. Davis

Courtroom Deputy

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