OPINION AND ORDER
LEVAL, District Judge.
This is an action brought by a holder of corporate bonds against the corporation, its officer, and various advisors and lenders to the corporation, seeking damages because a corporation's distribution to its common stockholders of a special dividend caused a decline in the market value of the bonds. Defendants move to dismiss the complaint.
Plaintiff Preston M. Geren, Jr., the owner of $100,000 face amount of the 8.875% subordinated debt securities issued by defendant Quantum Chemical Corporation, sues individually and on behalf of all owners of a variety of subordinated debt securities of Quantum (the "Bonds"), similarly situated on December 27, 1988 (generally, the "Bondholders").
According to the complaint, Quantum incurred indebtedness of approximately $1.221 billion (including $80 million in various fees) to pay the special dividend.
With one exception, noted below, each of the nine counts of the complaint seeks damages of $600 million, representing the decline in value of the Bonds caused by payment of the special dividend. The various defendants move to dismiss all counts of the complaint. Fed.R.Civ.P. 12(b)(6).
On a motion to dismiss, the court must accept the factual allegations in the complaint as true, drawing all reasonable inferences in favor of the plaintiffs, in order to determine whether the complaint is legally sufficient on its face. Goldman v. Belden, 754 F.2d 1059, 1065-67 (2d Cir.1985); Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir.1989). The court "should not dismiss the complaint pursuant to Rule 12(b)(6) 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.'" Goldman v. Belden, 754 F.2d at 1065 (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957)).
A. Counts I, V, and VII: Claim for Breach of Duty of Good Faith and Fair Dealing
Counts I, V, and VII all set out essentially the same cause of action. Count I, captioned "misappropriation of assets," alleges that Quantum and its directors owed to the bondholders a duty of good faith and fair dealing and that they violated this duty by diminishing and misappropriating the assets of Quantum by incurring substantial debt to fund the special dividend. Count V alleges that the bondholders had a contractual relationship with Quantum requiring the company to act with the utmost good faith and to engage in fair dealing and that defendants knowingly interfered with the bondholders contractual rights. Count VII again alleges that the director defendants breached their duty of good faith and fair dealing to the bondholders.
Each of these counts is based on a contractual duty of good faith and fair dealing running from the corporation to its bondholders: they allege that the actions of Quantum in incurring debt to pay the special dividend violated this contractual duty.
The relationship between Quantum and the Bondholders is governed by contract — the indenture for the Bonds. The indenture contains extensive provisions governing the rights of the parties and the obligations of the corporation. The principle promise by Quantum is
§ 5.01. To protect the Bondholders against future creditors acquiring prior claims against the assets of the corporation, the indenture also contains an agreement by Quantum not to incur certain secured indebtedness while any of the debentures remain outstanding. § 5.05. With the exception of this prohibition on secured indebtedness, the indenture places no restrictions on the amount or purpose of debt to be incurred by the corporation.
Plaintiff does not claim that defendants violated an explicit covenant in the indenture. The claim set out in Counts I, V, and VII is that defendants violated an implied covenant of good faith and fair dealing not to take an action such as the financing and payment of the special dividend that would reduce the market value of the debentures by diminishing the likelihood that all interest and principal payments would be met.
Every contract governed by New York law, including the indenture at issue here, contains an implied covenant of good faith and fair dealing. Hartford Fire Ins. Co. v. Federated Department Stores, Inc., 723 F.Supp. 976, 991 (S.D.N.Y.1989) (citing
For example, in Van Gemert v. Boeing Co., 520 F.2d 1373 (2d Cir.), cert. denied, 423 U.S. 947, 96 S.Ct. 364, 46 L.Ed.2d 282 (1975), holders of convertible debentures had an express contractual right to receive notice of the issuer's intent to redeem the debentures; this notice would allow them to determine whether they wanted to exercise the conversion privilege attached to their bonds. The indenture did not specifically provide for the form of this notice. The issuer gave notice through a press release that did not provide the information necessary for the bondholders to decide whether to exercise their conversion rights prior to redemption of the debentures. The Second Circuit relied on the implied covenant of good faith and fair dealing to construe the notice requirement as mandating the furnishing of sufficient information to permit bondholders to assess meaningfully their options. 520 F.2d at 1383-85. However, courts have declined to find that the implied covenant of good faith and fair dealing adds to the contract a substantive provision not included by the parties. See, e.g., Harris Trust and Savings Bank v. E-II Holdings, Inc., 926 F.2d 636, 643-44 (7th Cir.) (New York law), cert. denied, ___ U.S. ___, 112 S.Ct. 192, 116 L.Ed.2d 152 (1991); Metropolitan Life Insurance Co. v. RJR Nabisco, Inc., 716 F.Supp. 1504 (S.D.N.Y.1989); Hartford Fire Insurance Co. v. Federated Department Stores, Inc., 723 F.Supp. at 990-93.
In Metropolitan Life Insurance Co. v. RJR Nabisco, Inc., 716 F.Supp. 1504 (S.D.N.Y.1989), then District Judge Walker faced the almost identical legal issue to that presented here. In RJR Nabisco, the issuer engaged in a leveraged buy-out, in which a group of investors "buy the company under financial arrangements that include little equity and significant new debt.... [A] portion of this debt is generally secured by the company's assets." Id., 716 F.Supp. at 1505 n. 1. As a result of RJR Nabisco's assumption of billions of dollars of new debt, the value of bonds previously issued by the company declined significantly. Two institutional bondholders brought suit, claiming that RJR Nabisco's incurrence of debt violated an implied covenant of good faith and fair dealing. Judge Walker rejected this claim, reasoning that the indentures at issue gave the bondholders only the explicit right to receive periodic interest payments and the repayment of principal. Judge Walker explained that,
716 F.Supp. at 1508, 1519. Similarly, in Hartford Fire Insurance Co. v. Federated Department Stores, Inc., 723 F.Supp. 976
723 F.Supp. at 992. See also Caplan v. Unimax Holdings Corp., 188 A.D.2d 325, 591 N.Y.S.2d 28, 29 (1st Dept.1992); Harris Trust and Savings Bank v. E-II Holdings, Inc., 926 F.2d at 642-44 (New York law), cert. denied, ___ U.S. ___, 112 S.Ct. 192, 116 L.Ed.2d 152 (1991); Gardner & Florence Call Cowles Foundation v. Empire, Inc., 589 F.Supp. 669, 673-74 (S.D.N.Y.1984).
These conclusions are equally applicable here. As noted, the indenture addresses the possibility of Quantum incurring additional debt and places certain limitations on Quantum's ability to take on additional secured indebtedness. However, the indentures contain no restriction on the amount of debt Quantum may incur nor does it contain any prohibition against transactions in the nature of the special dividend. See RJR Nabisco, 716 F.Supp. at 1515; Hartford Fire Ins. Co., 723 F.Supp. at 992. As Judge Knapp noted in Gardner & Florence Call Cowles Foundation v. Empire Inc., 589 F.Supp. at 674, "Defendants ... were under a duty to carry out the terms of the contract, but not to make sure that plaintiffs had made a good investment. The former they have done; the latter we have no jurisdiction over." If the challenged transaction does not violate any express term of the indenture, or prevent the bondholder from obtaining the benefit of an express indenture term, a bondholder may not challenge an action by the corporation on the basis of breach of the indenture contract. As Judge Walker noted in RJR Nabisco,
716 F.Supp. at 1519 n. 24.
Plaintiff makes several, unconvincing arguments as to why the conclusion of Metropolitan Life Ins. Co. v. RJR Nabisco, Inc. should not apply to the complaint here. Plaintiff first notes that RJR Nabisco involved a leveraged buy-out and a more justifiable business transaction. See 716 F.Supp. at 1507. I do not believe these distinctions import any significant difference. In both cases, the corporation took on extensive additional debt, reducing the market value of the plaintiffs' debentures and the likelihood of their being paid when due; the issue in both cases is the same: whether such act violates implied covenants of the indenture.
Plaintiff next attempts to distinguish RJR Nabisco on the ground that the Bondholders constituting the plaintiff class are not sophisticated investors. It is true that Judge Walker noted the sophistication of the plaintiff bondholders in that suit, two life insurance company with billions of dollars invested in securities. See 716 F.Supp. at 1505,
Accordingly, I conclude that the allegations of Counts I, V, and VII, based on the contention that defendant's actions violated an implied duty of good faith and fair dealing, fail to state a claim. These counts must therefore be dismissed.
B. Count II: Claim under Virginia Corporate Law
Count II alleges that the special dividend violated Virginia corporate law because it left the corporation with less assets than liabilities. Section 13.1-653(C)(2) of the Virginia Code provides, in pertinent part, "[n]o distribution may be made if, after giving it effect ... [t]he corporation's total assets would be less than the sum of its liabilities...." 3 Va.Code Ann. § 13.1-653(C)(2). Count II appears to be asserted both against the directors of Quantum and against the other participants in the payments of the dividend.
Both the director and non-director defendants move to dismiss. Section 13.1-692 of the Virginia Code provides that
3 Va.Code Ann. § 13.1-692(A). The statute, it appears, thus makes only the directors of the corporation liable for payment of such a dividend. See In re C-T of Virginia, Inc., 958 F.2d 606, 609-10 (4th Cir.1992) (under § 13.1-692(A), "a creditor's only remedy is against the directors" of the corporation); see also Curley v. Dahlgren Chrysler-Plymouth, Dodge, Inc., 429 S.E.2d 221, 223 (Va. 1993) ("If corporate assets are distributed in violation of Code § 13.1-653, a director may be liable to the corporation and to its creditors under certain circumstances. Code § 13.1-692(A).").
In any event, the claim is time-barred. The same section that provides for the liability of directors states that
3 Va.Code Ann. § 13.1-692(C). Here, plaintiff's cause of action accrued on or before January 10, 1989, the date the special dividend was paid. This action was not filed until May 29, 1992, more than two years later.
Plaintiff contends that this court, sitting in diversity, should apply the longer statute of limitations of New York, the state in which the court sits. See Martin v. Julius Dierck Equipment Co., 43 N.Y.2d 583, 588, 403 N.Y.S.2d 185, 187, 374 N.E.2d 97, 98-99 (1978); see also Restatement (Second) of the Conflict of Laws § 142 (1971). However, where the very right sued upon, and not merely the remedy, is time-barred under the laws of the state that create the right, New
C. Count III: Ultra Vires
Count III, captioned "ultra vires," alleges that the actions of defendants in paying the special dividend was beyond the power and authority of Quantum. In response to defendants' motion to dismiss this count, plaintiff has stated that this claim "will be withdrawn without prejudice." Pl.Mem. at 33. Count III is therefore dismissed without prejudice.
D. Count IV: Breach of Fiduciary Duty
Count IV alleges that defendants' actions incurring additional debt on behalf of Quantum breached their common law fiduciary duties of due care and loyalty to Quantum's bondholders. Defendants contend, inter alia, that this claim is time-barred. I agree.
The parties agree that New York's statute of limitations is applicable, but disagree as to which of two possible limitations periods applies to this action. Under New York law, "the choice of the applicable Statute of Limitations depends on the substantive remedy which the plaintiff seeks." Loengard v. Santa Fe Industries, Inc., 70 N.Y.2d 262, 519 N.Y.S.2d 801, 803, 514 N.E.2d 113, 115 (1987) (citing cases). Actions for damages from breach of fiduciary duty are governed by the three-year period in N.Y. CPLR § 214(4); actions seeking equitable relief are governed by the six-year period in § 213(1). If the former statute is applicable, plaintiff's claim, filed nearly three and a half years after payment of the special dividend, is time-barred.
In Loengard v. Santa Fe Industries, Inc., the New York Court of Appeals noted that,
519 N.Y.S.2d at 803, 514 N.E.2d at 115 (citing cases). Plaintiff contends that, as in Loengard, Count IV essentially seeks equitable relief. I do not agree. The Loengard court explained that, in an ordinary freeze-out merger,
Id. at 803, 514 N.E.2d at 115 (citing cases). In Loengard, the minority shareholders had received their legal remedy, but they alleged that, because they had been forced to sell their shares at a price that, due to fraud, was "substantially undervalued," this legal remedy was inadequate. Hence, the plaintiffs in Loengard sought equitable relief where the relief provided by statute was inadequate. The court
Id. at 803, 514 N.E.2d at 115.
Plaintiff here, in contrast, seeks a simple award of damages — $600 million in money damages to compensate for the decline in the value of the bonds. See Resnick v. Resnick, 763 F.Supp. 760, 768 (S.D.N.Y.1991) ("claims for damages to compensate for the appropriation of corporate opportunities and the diversion of its corporate assets are more in the nature of a legal action"); Posner v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 469 F.Supp. 972, 980 n. 20 (S.D.N.Y.1979). Count IV does not seek, for example, to compel the shareholders to return the special dividend to the corporation. I conclude that Count IV falls under the three year limitation of CPLR § 214(4) for an action at law for breach of fiduciary duty and not under the six year statute of § 213(1) for actions seeking equitable relief. Count IV must therefore be dismissed as time-barred.
E. Count VI: Fraudulent Conveyance Claim
Count VI, brought against the defendants who are directors of Quantum, alleges that the payment of the special dividend was a fraudulent conveyance; this count seeks $600 million in damages and an order voiding the transaction and requiring that the fraudulently conveyed assets be returned to Quantum.
"The gravamen of the action [for fraudulent conveyance] is the right of the creditor to be paid out of assets to which he is actually entitled and to set aside the indicia of ownership which apparently contradict that right." Id., 283 N.Y. at 142, 27 N.E.2d at 817. Under the Uniform Fraudulent Conveyance Act, which is embodied in Article 10 of the New York Debtor and Creditor Law, N.Y. DCL §§ 270-81, see Hearn 45 St. Corp. v. Jano, 283 N.Y. 139, 142, 27 N.E.2d 814, 816 (1940), (a) if a debtor makes a transfer which is not for fair consideration, and (b) the debtor was either insolvent at the time of the transaction or rendered insolvent by the transaction, the creditor may cause the transfer to be rescinded. N.Y. DCL § 273; see Hearn 45 St. Corp. v. Jano, 283 N.Y. 139, 27 N.E.2d 814 (1940); see generally Moody v. Security Pacific Business Credit, Inc., 971 F.2d 1056, 1063-66 (3d Cir.1992); Kevin J. Liss, Note, "Fraudulent Conveyance Law and Leveraged Buyouts," 87 Colum.L.Rev. 1491, 1496-97 (1987). The purpose of such an action is to force the debtor to recover property transferred for inadequate consideration so that the property can be used to satisfy the debt owed to the creditor.
Count VI fails to state a claim for fraudulent conveyance and must be dismissed. The remedy plaintiff seeks against the director defendants is an award of damages representing the diminution in the market value of the debt securities caused by the payment of the special dividend. Such relief is not within the scope of the cause of action for fraudulent conveyance.
First, the cause of action of fraudulent conveyance does not allow for recovery of the decline in the market value of a creditor's debt securities allegedly caused by the fraudulent conveyance. "The creditor's remedy in a fraudulent conveyance action is limited to reaching the property which would have been available to satisfy the judgment had there been no conveyance," and requiring that it be restored to the debtor's possession. Marine Midland Bank v. Murkoff, 120 A.D.2d 122, 508 N.Y.S.2d 17, 25 (2d Dept.1986), appeal dismissed, 69 N.Y.2d 875, 514 N.Y.S.2d 1029, 507 N.E.2d 322 (1987); accord Federal Deposit Insurance Corp. v. Porco, 75 N.Y.2d 840, 552 N.Y.S.2d 910, 911, 552 N.E.2d 158, 159 (1990) (prior to judgment on a debt, New York's fraudulent conveyance law allows only for "nullification of the conveyance"); see Marine Midland Bank v. Murkoff, 508 N.Y.S.2d at 23 ("remedy provisions [of New York fraudulent conveyance law] ... allow the creditor only to reach the property as if there had been no conveyance (Debtor and Creditor Law § 278), or, if its claim has not yet been established, to protect the property for its benefit (Debtor and Creditor Law
Indeed, the action for fraudulent conveyance does not create an independent remedy of money damages against third parties who aided the debtor's transfer at all. Federal Deposit Insurance Corp. v. Porco, 75 N.Y.2d 840, 552 N.Y.S.2d 910, 911, 552 N.E.2d 158, 159 (1990) ("the traditional rule in this State rejects any cause of action for mere participation in the transfer of a debtor's property prior to the creditor's obtaining a judgment or lien on that property") (citation omitted); accord Blakeslee v. Rabinor, 182 A.D.2d 390, 582 N.Y.S.2d 132, 134 (1st Dept.1992). The New York Court of Appeals recently explicitly rejected the contention that New York law "created a creditor's cause of action in conspiracy, assertable against nontransferees or nonbeneficiaries solely for assisting in the conveyance of a debtor's assets." Federal Deposit Insurance Corp. v. Porco, 75 N.Y.2d 840, 552 N.Y.S.2d at 911, 552 N.E.2d at 159.
The essence of the action is that it seeks to rescind the transfer, requiring transferee to return the transferred property to the transferor. Although Count VI asserts that it seeks nullification of the dividend and return of the distributed cash, plaintiff has named neither the transferees (the shareholders) nor the transferor (Quantum) as defendants in that count. To the degree Count VI seeks an order voiding the special dividend transaction, it fails to name any of the parties to that transaction. See generally W.J. Dunn, Annotation, Necessary Parties Defendant to Action to Set Aside Conveyance in Fraud of Creditors, 24 A.L.R.2d 395, 422-24 (1952); but cf. International Association of Machinists and Aerospace Workers v. Allegis Corp., 144 Misc.2d 983, 545 N.Y.S.2d 638, 643 (N.Y.Cty.1989).
Thus, for numerous reasons explained above, Count VI fails to state a cause of action and must be dismissed.
F. Count VIII: Negligent Breach of Contract Claim
Count VIII, captioned "Negligent Breach of Contract" and brought against the investment advisors and the valuation advisor, alleges that they violated their duty of care owed to the bondholders by rendering faulty and deficient advice that payment of the special dividend was in the best interests of Quantum. These defendants move to dismiss on the grounds that negligent breach of contract is not a cognizable cause of action in New York and that plaintiff's allegations fail to state a claim sounding in either contract or tort. In response, plaintiff has withdrawn this claim; accordingly, Count VIII is dismissed without prejudice.
G. Aiding and Abetting
Count IX alleges that the investment advisors and Travelers Insurance Co., which was to underwrite the special dividend by purchasing debt securities, aided and abetted Quantum and its officers and directors in their breaches of fiduciary duty owed to the bondholders. However, the complaint fails to state a claim for aiding and abetting a breach of fiduciary duty. "A plaintiff seeking to establish a cause of action for aiding and abetting a breach of a fiduciary duty must show: `(1) the existence of a ... violation by the primary (as opposed to the aiding and abetting) party; (2) "knowledge" of this violation on the part of the aider and abettor; and (3) "substantial assistance" by the aider and abettor in the achievement of the primary violation.'" Samuel M. Feinberg Testamentary Trust v. Carter, 652 F.Supp. 1066, 1082 (S.D.N.Y. 1987) (quoting ITT v. Cornfeld, 619 F.2d 909, 922 (2d Cir.1980)); see also Terrydale Liquidating Trust v. Barness, 611 F.Supp. 1006, 1027 (S.D.N.Y.1984). Here, the first of these requirements is not met, for, as explained above, plaintiff's claim for a primary violation by Quantum and its directors, a breach of fiduciary duty, is time-barred. Where the primary violation is barred by the applicable
The motion to dismiss is granted as to all counts.
Plaintiff may file an amended complaint not inconsistent with this opinion or with the requirements of Rule 11, Fed.R.Civ.P., within forty-five (45) days of the date of this order.
Plaintiff's brief does not treat Count IX as presenting a claim that the investment and lending advisors themselves breached a fiduciary duty owed to the bondholders, but that count might be read that way. To the degree plaintiff makes such a claim, I believe that it also fails to state a claim, for the investment and lending advisors owed no such duty to the bondholders. These defendants were retained by Quantum to render advice. They had no connection with the bondholders, and the bondholders would hardly have relied on the actions or advice of these defendants.