Opinion ID: 781162
Heading Depth: 4
Heading Rank: 2

Heading: Did Color Tile Have at Least Substantially Equal Responsibility With Coopers?

Text: 43 Turning to the District Court's conclusion that the in pari delicto affirmative defense was established as a matter of Texas law by the facts pled in the Second Amended Complaint, we agree with the District Court that Color Tile, through its Board and controlling shareholders, bore at least substantially equal responsibility with Coopers for permitting [the Transaction] to go forward on the basis of inflated projections. Color Tile I, 80 F.Supp.2d at 138. In particular, the Color Tile Board unanimously approved the Transaction, notwithstanding the Management Directors' express warning that the purchase price was grossly excessive, the projections supporting the Transaction were unrealistic and exaggerated, and the Transaction would impose an imprudent and unmanageable debt structure on Color Tile. Moreover, the Second Amended Complaint alleges that Coopers either deliberately or negligently failed to advise the Board about what the Board already knew. Thus, since the Board allegedly had the same knowledge that Coopers allegedly should have disclosed, the pleadings established at least equal fault on the part of the Board. With respect to Color Tile's controlling shareholders — the Investcorp Group — the Second Amended Complaint is strewn with allegations establishing that the Investcorp Group was responsible for every detail of the Transaction from the decision to purchase the ABF assets, to dictating the terms and the price that Color Tile paid for the ABF assets, to dictat[ing] the terms of the high-interest bond offering, to finally dominat[ing] Color Tile's board of directors and forc[ing] Color Tile to consummate the Transaction. Consequently, Color Tile Committee's pleadings also established that Color Tile's controlling shareholders were at least equally at fault with Coopers. 44 On appeal, Color Tile Committee raises several challenges to the District Court's conclusion that in pari delicto was established as a matter of law in the Second Amended Complaint, none of which we find persuasive.
45 Color Tile Committee first argues that, under Texas law, in pari delicto can never be established on the pleadings because issues of relative fault are quintessential fact questions for the jury. Color Tile Committee cites no Texas cases on point in support of this position. 12 Indeed, this Court has affirmed the dismissal of breach of fiduciary duty claims on the pleadings upon findings that in pari delicto had been established in the complaints. See In re Mediators, 105 F.3d 822; Hirsch, 72 F.3d 1085. Consequently, there was nothing inherently wrong with the District Court's dismissal of the pleadings on in pari delicto grounds.
46 Color Tile Committee next argues that the District Court improperly attributed the misconduct of Color Tile's controlling shareholders, the Investcorp Group, to Color Tile because the Investcorp Group's interests were adverse to Color Tile's. See Askanase v. Fatjo, 130 F.3d 657, 666 (5th Cir.1997) (knowledge and actions of a corporation's agent will not be imputed to the corporation if the agent was acting adversely to the corporation and entirely for his own or another's purpose so that the agent's endeavors are so incompatible that they destroy the agency). 13 This argument also lacks merit. As the District Court correctly noted, where, as here, the persons dominating and controlling the corporation orchestrated the fraudulent conduct, their knowledge is imputed to the corporation as principal under the sole actor rule, which negates the adverse interest exception when the principal and agent are one and the same. Color Tile I, 80 F.Supp.2d at 138 (citing In re Mediators, 105 F.3d at 827; Ernst & Young, 967 F.2d at 171). 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. Mediators, 105 F.3d at 827. 47 Relying on precedents applying the sole actor rule from this Circuit, Color Tile Committee argues that the sole actor rule does not apply here principally because there were relevant decision makers who were not engaged in the fraud and who would have stopped the Transaction if they had known of Coopers' Negative Conclusions. In particular, the Second Amended Complaint alleges that, if the Management Directors had known of the Negative Conclusions, they could and would have [prevented the Transaction from closing] by going outside the company and informing the company's underwriter and lenders, neither of which would have sold the notes or otherwise financed the Transaction in the face of Coopers' Negative Conclusions. 48 We initially note that the Second Circuit precedents cited by Color Tile Committee did not apply Texas law, so they are not dispositive here. Moreover, in Ernst & Young, the Fifth Circuit rejected a similar argument made by the assignee of a bankrupt corporation's trustee, which was suing the company's outside accountants for negligently auditing the company. The court found that, as a matter of law, the corporation could not have been misled by the auditor's failure to disclose certain negative financial information about the company because the company's sole shareholder committed the fraud that was the cause of the company's dire financial situation and his knowledge of the fraud was imputed to the corporation under the sole actor rule. 967 F.2d at 171. The assignee then argued that the accounting firm's negligence still could have caused losses to the company because, had the audits been accurate, someone, such as [the company's] creditors or government regulators, would have `rescued' the company. Id. The Fifth Circuit responded that this argument was flawed because the company could not claim that it should recover from [the accounting firm] for not being rescued by a third party for something [the company] was already aware of and chose to ignore. Id. Likewise, Color Tile Committee alleged that the Management Directors approved the Transaction knowing that the purchase price and the debt were excessive, and thus the possibility that Color Tile's creditors or underwriter would have rescued Color Tile if informed of the Negative Conclusions is legally irrelevant. Accordingly, the District Court properly concluded that the sole actor rule negated the applicability of the adverse interest exception.
49 Color Tile Committee next argues (for the first time on appeal) that the claims against the Investcorp Group Defendants are irrelevant to the claims against Coopers and thus the former's knowledge and conduct should not be considered when analyzing the legal sufficiency of the claims against Coopers under some form of alternative pleading analysis. In particular, Color Tile Committee relies on our decisions in Adler v. Pataki, 185 F.3d 35 (2d Cir.1999), Henry v. Daytop Village, Inc., 42 F.3d 89 (2d Cir.1994), and MacFarlane v. Grasso, 696 F.2d 217 (2d Cir.1982), for the proposition that allegations that are not explicitly pled as alternative claims should be construed as alternative claims. 50 Because this argument (like the arguments above concerning the applicability of in pari delicto to breach of contract claims) is being raised for the first time on appeal, we decline to consider it. See Baker v. Dorfman, 239 F.3d 415, 420-21 (2d Cir. 2000). Color Tile Committee had the opportunity to raise this argument before the July 31, 1998 dismissal of the First Amended Complaint and before the November 18, 1999 dismissal of the Second Amended Complaint, but chose not to do so. Indeed, in response to the dismissal of the First Amended Complaint, Color Tile Committee chose to pursue an opposite course of action: it pled additional facts to portray the Management Directors as quasi-independent actors who insulated Color Tile from the Investcorp Group Defendants' misfeasance; it persisted in building its case against Coopers with the case against the Investcorp Group Defendants as a foundation. Having elected not to undermine its case against the Investcorp Group Defendants by pleading in the alternative and then having failed to prove the latter's liability on the relevant claims, Color Tile Committee should not be permitted at this late date to proclaim that its unsuccessful allegations against the Investcorp Group Defendants were in the alternative to those against Coopers. Accordingly, we decline to reach this argument under the waiver doctrine articulated above. 14
51 Finally, Color Tile Committee argues that the District Court erred in declining to grant its Rule 54(b) Motion to reconsider its dismissal of Color Tile Committee's breach of fiduciary duty claims and permit it to amend its complaint for the third time in light of conclusions reached in the Color Tile II summary judgment decision. We find that this argument too lacks merit. 52 Rule 54(b) provides, in relevant part, that, prior to entry of a final judgment, an interlocutory order or other form of decision is subject to revision at any time before the entry of judgment adjudicating all the claims and the rights and liabilities of all the parties. Fed. R.Civ.P. 54(b). We have limited district courts' reconsideration of earlier decisions under Rule 54(b) by treating those decisions as law of the case, which gives a district court discretion to revisit earlier rulings in the same case, subject to the caveat that where litigants have once battled for the court's decision, they should neither be required, nor without good reason permitted, to battle for it again. Zdanok v. Glidden Co., 327 F.2d 944, 953 (2d Cir.1964). Thus, those decisions may not usually be changed unless there is an intervening change of controlling law, the availability of new evidence, or the need to correct a clear error or prevent a manifest injustice. Virgin Atl. Airways, Ltd. v. Nat'l Mediation Bd., 956 F.2d 1245, 1255 (2d Cir.1992) (internal quotation marks omitted). We review for abuse of discretion a district court's denial of the Rule 54(b) motion and its denial of leave to amend a complaint. Local 802, Associated Musicians v. Parker Meridien Hotel, 145 F.3d 85, 89 (2d Cir.1998) (leave to amend); Virgin Atl. Airways, 956 F.2d at 1254-55 (Rule 54(b) motion). 53 The new evidence or intervening change of controlling law that Color Tile Committee referenced in support of its Rule 54(b) argument were findings in the Color Tile II decision that the Investcorp Group Defendants' interests were fully aligned with Color Tile's, they did not act adversely to Color Tile, and hence they did not breach any fiduciary duties to Color Tile, and that the Management Directors were not `forced' to approve the [Transaction] by [the Investcorp Group Defendants] and did not `defer' to their wishes, but ultimately voted for the [Transaction] because they were persuaded that it was in the best interests of Color Tile. Thus, Color Tile Committee argues, neither the Investcorp Group Defendants nor the Color Tile Board engaged in any intentional wrongdoing in connection with the Transaction, and the in pari delicto defense could not be imputed to Color Tile. For the reasons outlined below, the District Court did not abuse its discretion. 54 First, the allegations in the Second Amended Complaint are judicial admission[s] by which Color Tile Committee was bound throughout the course of the proceeding. Bellefonte Re Ins. Co. v. Argonaut Ins. Co., 757 F.2d 523, 528 (2d Cir.1985) (party cannot contradict its own pleading with affidavits); see also Soo Line R.R. Co. v. St. Louis Southwestern Ry. Co., 125 F.3d 481, 483 (7th Cir.1997) (plaintiff can plead himself out of court by alleging facts which show that he has no claim, even though he was not required to allege those facts and judicial efficiency demands that a party not be allowed to controvert what it has already unequivocally told a court by the most formal and considered means possible) (internal quotation marks omitted). 55 Second, there was no new evidence. Color Tile I was decided in November 1999. All of the deposition testimony cited in Color Tile II to support a lack of wrongdoing on the part of the Investcorp Group Defendants was taken months before Color Tile I was decided. Thus, Color Tile Committee had access to the evidence before the order they sought to revise was entered and even used some of it in drafting the Second Amended Complaint. Accordingly, the evidence was not new and it was available before the Second Amended Complaint was dismissed. 56 Third, there was no intervening law. The District Court never found as a matter of law in Color Tile II that the Investcorp Group Defendants were not in pari delicto with Coopers or that they were blameless. Rather, it applied the same substantive law that it had applied in previous rulings on the merits of the Second Amended Complaint and found that the Investcorp Group Defendants were entitled to the benefit of the business judgment rule because Color Tile Committee had failed to satisfy its summary judgment burden of presenting evidence to support its allegations that the Investcorp Group Defendants had breached their fiduciary duties to Color Tile. To be sure, there were facts proffered by the Investcorp Group Defendants tending to show that they were not so culpable, but those facts were not found by the District Court. 57 Fourth, there is no manifest injustice here. As noted above, the deposition testimony cited in Color Tile II to support a lack of wrongdoing on the part of the Investcorp Group Defendants was taken months before Color Tile I was decided. Thus, Color Tile Committee had the opportunity to bring its Rule 54(b) motion long before Color Tile II was decided. Doing so, however, would have undercut its arguments in opposition to the Investcorp Group Defendants' summary judgment motion. Color Tile Committee's decision not to file the Rule 54(b) motion until after summary judgment was entered against it in Color Tile II was a strategic one. Denying Color Tile Committee yet another bite at the apple because this strategy ultimately failed certainly cannot be characterized as manifestly unjust, especially given the subsequent $30 million settlement with the Investcorp Defendants. 58 Finally, the District Court did not abuse its discretion in denying Color Tile Committee leave to amend the complaint because there was a repeated failure to cure deficiencies by amendments previously allowed. Dluhos v. Floating & Abandoned Vessel, Known as New York, 162 F.3d 63, 69 (2d Cir.1998); see also Hirsch, 72 F.3d at 1096; Salinger v. Projectavision, Inc., 972 F.Supp. 222, 236 (S.D.N.Y. 1997) (Three bites at the apple is enough.).