EBS LITIGATION LLC v. BARCLAYS GLOBAL INVESTORS, N.A. v. David B. Cooper

PRECEDENTIAL
Filed September 18, 2002
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 01-1864
EBS LITIGATION LLC
v.
BARCLAYS GLOBAL INVESTORS, N.A.;
GREENWAY PARTNERS, L.P.;
GREENTREE PARTNERS, L.P.;
WILSHIRE ASSOCIATES INCORPORATED;
N.A. MELLON BANK;
IBM RETIREMENT FUND TRUST;
DREW BAEBLER; LAURA BAEBLER
BARCLAYS GLOBAL INVESTORS, N.A.;
GREENWAY PARTNERS, L.P.;
GREENTREE PARTNERS, L.P.;
Third-Party Plaintiffs
v.
DAVID B. COOPER; JULIAN I. EDISON;
PETER A. EDISON; JANE EVANS;
MICHAEL H. FREUND; KARL W. MICHNER;
ALAN D. MILLER; ANDREW E. NEWMAN;
ALAN A. SACHS; CRAIG D. SCHUNCK;
MARTIN SNEIDER; DAVID O. CORRIVEAU;
JAMES W. CORLEY; WALTER S. HENRION;
MARK H. LEVY; MARK B. VITTERT;
DAVE & BUSTERS, INC.
Third-Party Defendants
Barclays Global Investors, N.A.
Greenway Partners, L.P., and Greentree Partners, L.P.,
individually and in their capacity as class representatives
of all members of the defendant class certified in this
action, and third-party plaintiffs,
Appellants.
On Appeal from the United States District Court
for the District of Delaware
D.C. Civil Action No. 98--cv-00547
(Honorable Sue L. Robinson)
Argued: July 11, 2002
Before: SCIRICA and GREENBERG, Circuit Judges ,
and FULLAM,* District Judge
(Filed: September 18, 2002)

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Edward M. McNally (argued)
Michael J. Maimone
James E. Drnec
Morris, James, Hitchens &
Williams LLP
222 Delaware Avenue - 10th Floor
P.O. Box 2306
Wilmington, DE 19899
Attorneys for the Appellants
A. Gilchrist Sparks, III (argued)
R. Judson Scaggs, Jr.
Megan E. Ward
Morris, Nichol, Arsht & Tunnell
1202 N. Market Street
P.O. Box 1347
Wilmington, DE 19899-1347
Attorneys for Edison Director Third-
Party Defendants Below, Appellees
_________________________________________________________________
* Honorable John P. Fullam, Senior Judge of the United States District
Court for the Eastern District of Pennsylvania, sitting by designation.
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Philip Trainer, Jr.
Ashby & Geddes
222 Delaware Avenue - 17th Floor
P.O. Box 1150
Wilmington, DE 19899
James P. Reid (argued)
Stacy R. Obenhaus
Gardere Wynne Sewell LLP
1601 Elm Street, Suite 3000
Dallas, TX 75201
Attorneys for D&B Defendants
Appellees
Daniel J. DeFranceschi
Richards, Layton & Finger
One Rodney Square
P.O. Box 551
Wilmington, DE 19899
Richard A. Chesley
Houlihan Lokey Howard & Zukin
123 North Wacker Drive, 4th Floor
Chicago, IL 60606
Attorneys for EBS Litigation LLC
Appellee
OPINION OF THE COURT
FULLAM, District Judge:

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This is an appeal from the dismissal of a third-party
complaint, in an adversary action pending in the District
Court for the District of Delaware (the reference to the
Bankruptcy Judge having previously been withdrawn). The
dismissal of the third-party complaint did not dispose of the
entire adversary action, but has been certified as final for
purposes of appeal, pursuant to Fed.R.Civ.P. 54(b).
BACKGROUND
As part of a corporate re-shuffling, Edison Brothers
Stores, Inc., a publicly-held corporation (hereinafter
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"Edison") acquired the stock of Dave & Busters, Inc.
("D&B"). On June 29, 1995, pursuant to a unanimous
resolution of the Edison Board, Edison distributed the D&B
stock to all Edison shareholders, as a dividend. Each
Edison shareholder received one share of D&B stock for
every five shares of Edison stock held. In public filings at
that time, the Edison Directors represented that Edison
was in sound financial condition. A few months later,
however, on November 3, 1995, Edison filed a voluntary
petition in bankruptcy under Chapter 11.
In the course of the bankruptcy proceedings it became
apparent that the 1995 stock dividend qualified as a
voidable transfer under 11 U.S.C. SS 544(b) and 548(a).
Edison’s Plan of Reorganization was confirmed on
September 9, 1997, effective as of September 19, 1997. The
Plan contemplated the formation of a new entity, EBS
Litigation, LLC ("EBS"), which would pursue litigation in
order to retrieve, for the bankruptcy estate, debts owed to
the estate, including recoveries of the previously-distributed
D&B stock or its monetary equivalent. On September 30,
1997, EBS filed the present case, naming a class of
defendants consisting of all of the shareholders who had
received the D&B stock and had neither returned nor paid
for it. The defendant class is represented by appellant
Barclays Global Investors, N.A.
On March 29, 2000, Barclays filed a third-party
complaint against the former Directors of Edison ("Edison
defendants") and Directors of D&B ("the D&B defendants").
In the third-party complaint Barclays alleges that the
Edison defendants breached their fiduciary duties in
declaring the illegal stock dividend, misleading the Edison
shareholders as to the financial condition of the company
and the legitimacy of the dividend; and also asserts claims
against the Edison defendants for contribution and
subrogation. The D&B defendants are charged with aiding
and abetting the breaches of fiduciary duty and other
securities violations.
The District Court dismissed the third-party complaint in
its entirety, ruling that the claims for breaches of fiduciary

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duty and securities violations in connection with the stock
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dividend were time-barred, and that the third-party
complaint did not state valid claims for contribution or
subrogation. This appeal followed.
STATUTE OF LIMITATIONS
All parties agree that the statute of limitations for the
alleged breaches of fiduciary duty and related offenses is
three years. It is also agreed that, under Delaware law, the
limitations period begins when the wrongful acts are
committed, even though the injured party may be ignorant
of the existence of a cause of action. See e.g. In re Dean
Witter P’ship Litig., 1998 WL 442456 at * 4 (Del.Ch. July
17, 1998). Thus, in this case, the limitations period began
to run on June 29, 1995, when the D&B stock was
distributed as a dividend, and expired on June 29, 1998,
unless the statute was tolled during part or all of that
period.
Delaware law recognizes three potential sources of tolling:
(1) the doctrine of inherently unknowable injuries; (2) the
doctrine of fraudulent concealment; and (3) the doctrine of
equitable tolling. See, In re Dean Witter P’ship Litig. supra;
In re MAXXAM, Inc./Federated Dev.S’holders Litig., 1995 WL
376942 at *6-7 (Del.Ch. June 21, 1995). Barclays asserts
that the statute of limitations was indeed tolled, under all
three of these doctrines.
Under Delaware law, however, "if the limitations period is
tolled under any of these theories, it is tolled only until the
plaintiff discovers (or exercising reasonable diligence should
have discovered) his injury. Thus, the limitations period
begins to run when the plaintiff is objectively aware of the
facts giving rise to the wrong, i.e, on inquiry notice." In re
Dean Witter P’ship Litig., supra at *6 (emphasis in original).
The District Court ruled that Barclays was on "inquiry
notice" as of the commencement of Edison’s bankruptcy
proceeding, since it knew that it had received the stock
dividend less than one year earlier, and should have
realized that there was a potential for an avoidance claim
under 11 U.S.C. S 548(a). "Inquiry notice" requires only
notice of "facts sufficient to put a person of ordinary
intelligence and prudence on inquiry which, if pursued,
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would lead to the discovery." Becker v. Hamada, Inc. 455
A.2d 353, 356 (Del. 1982).
The proper resolution of this issue requires careful
analysis of (1) the precise nature of the claims now being
asserted by Barclays, (2) whether an objectively reasonable
person would have realized the need to investigate further,

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and (3) what information such an inquiry would have
disclosed.
For purposes of analysis, at this stage of the proceedings
we must assume that the Edison Directors did violate a
fiduciary duty to the Edison stockholders and that they
were aided and abetted by the D&B defendants. If the stock
dividend occurred when Edison was insolvent, or rendered
Edison insolvent, it was illegal under Delaware law, and
voidable in bankruptcy. The General Corporation Law of
Delaware provides, in S174(a):
"In case of any wilful or negligent violation . .. the
directors under whose administration the same may
happen shall be jointly and severally liable, at any time
within six years after paying such unlawful dividend or
after such unlawful stock purchase or redemption, to
the corporation and to its creditors in the event of its
dissolution or insolvency, to the full amount of the
dividend unlawfully paid . . ."
S174(b) of the same statute provides:
"Any director against whom a claim is successfully
asserted under this section shall be entitled to
contribution from the other directors who voted for or
concurred in the unlawful dividend . . .
"(c) Any director against whom a claim is successfully
asserted under this section shall be entitled, to the
extent of the amount paid by such director as a result
of such claim, to be subrogated to the rights of the
corporation against stockholders who received the
dividends on, or assets for the sale or redemption of,
their stock with knowledge of facts indicating that such
dividend, stock purchase or redemption was unlawful
under this chapter in proportion to the amounts
received by such stockholders respectively."
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Should the Edison shareholders represented by Barclays
have realized, when the bankruptcy petition was filed, that
the distribution of D&B stock five months earlier rendered
Edison insolvent, or triggered its insolvency? They had been
assured, by the Edison defendants, in public filings, that
such was not the case. The filing of the bankruptcy petition
undoubtedly should have alerted the Edison stockholders
to the realization that the previously-expressed belief of the
Edison defendants that Edison had adequate cash flows to
support continued operations, and that its financial future
was not in doubt, had ultimately proven incorrect, but we
are not persuaded that an objectively-reasonable
shareholder should have realized that the Edison Directors
had breached their fiduciary obligations.
There is no suggestion in the record before us that
anyone believed, or contended, that the stock distribution
had occurred when Edison was insolvent, or that the stock

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distribution caused its insolvency, until, in connection with
the adoption of Edison’s Reorganization Plan, Edison filed a
disclosure statement, on June 30, 1997. We conclude,
therefore, that the statute of limitations was tolled until
June 30, 1997, because the Edison defendants actively
concealed the true financial condition of the company until
the bankruptcy petition was filed, and thereafter concealed
until June 30, 1997, the fact (if it was a fact) that the stock
distribution may have contributed to the insolvency.
Barclays’ third-party complaint, filed on March 29, 2000,
was therefore timely.
Moreover, we must not lose sight of the practical realities
of the situation. We suspect it would not occur to an
objectively-reasonable stockholder with full knowledge of
the applicable law, even if he or she suspected that the
distribution of D&B stock might be vulnerable to challenge,
to do anything about it unless such a challenge became a
reality. Until Edison’s creditors took action to recover the
stock, the recipients of the stock dividend could scarcely be
expected to challenge it themselves, and thus trigger an
avalanche. It may well be, therefore, that the statute of
limitations should be deemed to have been tolled until
confirmation of the Reorganization Plan which provided for
such litigation by EBS; the Plan was confirmed on
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September 9, 1997, and became effective on September 19,
1997.
THE MERITS OF BARCLAYS’ FIDUCIARY-DUTY CLAIMS
Interspersed throughout appellees’ briefs are suggestions
that dismissal of the third-party complaint should be
upheld on the alternative ground that Barclays has no valid
claims against the Edison defendants for breach of
fiduciary duties because the Edison shareholders
represented by Barclays are only being asked to return
something they did not pay for. But the merits of the
underlying lawsuit are not before us. The third-party
complaint which is before us at this time does undoubtedly
contain adequate allegations to impose liability upon the
Edison defendants, in the event that Barclays is held liable
to EBS. Barclays may prevail in the underlying litigation,
and may be able to charge the Edison defendants with
reimbursement of defense costs. Or, Barclays may be held
liable for a greater amount than the share prices
contemplated in the settlement proposal embodied in the
Reorganization Plan.
Needless to say, we express no view as to the actual
merits of any of the claims or defenses asserted in the
underlying action. We hold merely that, at this stage, the
possibility of successful third-party claims cannot be ruled
out.
CONTRIBUTION AND SUBROGATION

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All parties agree that, to support a claim for contribution,
there must be a joint tortfeasor relationship (or a joint
contractual obligation, plainly not present here); and that
subrogation is available only if third-party plaintiffs are
required to bear the burden of an obligation which is really
that of the Edison defendants. The District Court ruled that
neither doctrine was available in this case, but we are
constrained to disagree.
Under Delaware General Corporation Law, as quoted
above, the Edison Directors would be liable in full for the
entire stock dividend, and could recover from the recipients
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of the dividend only if the recipients had been aware of the
impropriety in issuing the dividend. If EBS succeeds in the
underlying litigation, the shareholders represented by
Barclays might be held liable even though they were not
aware of the impropriety of the dividend. In our view, this
would, at least potentially, give rise to a subrogation claim,
since innocent shareholders will have been paying sums
which were the obligation of the Edison defendants.
Alternatively, should it be established that the Edison
shareholders represented by Barclays were not innocent
recipients of the stock dividend, a joint tortfeasor
relationship would thus have been established. And, if the
Barclays shareholders are held liable for more than the
share price paid by the Edison defendants and other
culpable shareholders, there might be a basis for a
contribution claim. In our view, all of these issues should
be resolved in the course of the underlying litigation; they
cannot appropriately be resolved at this point, on the basis
of the pleadings.
CONCLUSION
For the reasons stated above, we hold that all of the
claims asserted in the third-party complaint were timely
filed, and that the third-party complaint is adequate in all
respects to withstand dismissal under Fed.R.Civ.P. 12(b)(6).
The judgment appealed from will therefore be reversed, and
the case remanded for further proceedings.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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