U.S. Bank National Assoc. v. Verizon Comm. Inc.

U.S. Court of Appeals, Fifth Circuit Case No. 11-10744- Not yet published
The Fifth Circuit Panel affirmed numerous rulings of the District Court which resulted in a Litigation Trust Trustee losing on all fronts in a substantial federal court lawsuit he had brought against Verizon, two of its subsidiaries and one former director of the Debtor. The most significant is the affirmation of the District Court's order striking the Litigation Trustee's jury demand on the basis that the fraudulent transfer claims were integral to the restructuring of the debtor-creditor relationship and thus interconnectd iwth the bankruptcy proceedings. The debtor had not right to a jury trial basedon the nature of claims so the Litigation Trustee, likewise, had not such right. The court did an extensive de novo review of the law relative to jury trial demands, starting with Granfinanciera and notiing that Stern v Marshall had reaffirmed Langenkamp. Then the Fifth Circuit Panel held that Langenkamp applied even though it was the Litigation Trust, not the Debtor, bringing the action,and, despite Verizon having filed proofs of claim and the Plan Trustee had no authority to object to the Verizon claims. The Trustee sought to rely on Crescent Resources case; however, the Fifth Circuit found Cresent Resources' reliance on the Seventh Circuit decision in Grede v Bank of New York Mellon misplaced. The Fifth Circuit focused on the nature of the claim and the fact that the claim was derived from bankrputcy law and and was the proper basis for denying the Trustee's jury trial on the fraudulent transfer claims. The ruling also limited the Trustee's claims for damages arising from breaches of fiduciary duty of a former prinicipal of Idearc, Inc. to available insurance, asserting such a limitiation exists unless the Trustee could show the former director had engaged in willful misconduct or gross neglect. Next, the Fifth Circuit upheld the District Court's factual conclusion that Idearc, Inc. was solvent at the time of its spin-off; and its legal conclusiont that, due to the solvency, the remaining legal claims were not viable. The remainder of the 53-page opinion contains numerous rulings as to waiver of arguments, sufficiency of the District Court's evidentiary findings and rulings on partial summary judgment, and deficiencies in evidence presented by the Trustee on his claims brought under Texas and Delaware laws.
Procedural context:
Idearc, Inc. had filed for Chapter 11 in 2009 and confirmed a plan which provided for a Liquidating Trust, which was granted authority to valuate and pursue claims of Idearc, Inc. against Verizon, two of its subsidiaries, and the former director of Idearc. The Trustee of the Liquidating Trust filed a federal court action against Verizon and others for fraudulent transfer cliam, and against the former director for breach of fiduciary duty claims. The District Court had stricken the Trustee's jury trial demand initiallly and on a motion for reconsideration and then the Fifth Circuit had denied the petition for writ of mandamus on that issue so the case was set for bench trial. The judge dismissed a few of the claims on summary judgment motions and then bifurcated the trial, first proceeding with Phase 1 of the bench trial on the sole factual issue of the value of Idearc, Inc. at the time of the spin-off transaction. The judge found Idearc had been solvent at the time and, after permitting the Trustee to brief whether his remaining claims were viable in light of that ruling, the District judge entered judgment for the Defendants. The Trustee then appealed the rulings on the Motion to Strike the jury demand, the evidentiary rulings before and during the bench trial, most of the District Court's legal conclusions, and rulings on the partial summary judgments.
Idearc, Inc. had been a subsidiary of Verizon which spun off in November of 2006. In the spin-off Idearc received the print and online domestic directory business of Verizon. Verizon received stock, $2.5 billion in cash from Idearc and $7.115 billion of Idearc debt. The debt consisted of two secured loans and one unsecured loan from Verizon. After Idearc suffered financial setbacks in 2008, it filed for Chapter 11 in the March of 2009. The Trustee sought to recover the transfers to Verizon as fraudulent transfers, asserting that the directories Idearc received were "obsolete" and that Verizon had just spun off Idearc to load it up with debt. The District Court reviewed the stock prices of Idearc and concluded that is was solvent at the time of the spin-off. This factual finding in Phase 1 of the trial, ultimately led the District Court to conclude that the remaining legal claims of the Trustee were not viable.
King, Haynes and Graves

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