Gwynne v. Credit Suisse First Boston (USA), Inc. (In Re Quintus Corp.)

Citations: 397 B.R. 710; 2008 Bankr. LEXIS 3001; 2008 WL 4853443Docket: 17-12788

Court: United States Bankruptcy Court, D. Delaware; November 7, 2008; Us Bankruptcy; United States Bankruptcy Court

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Kurt F. Gwynne, as the Chapter 11 Trustee for Quintus Corporation, filed a complaint against Credit Suisse First Boston (formerly Donaldson, Lufkin, Jenrette Securities Corporation) alleging breach of fiduciary duty related to the underpricing of shares during Quintus' initial public offering (IPO) in 1999. Quintus had retained DLJ as the lead underwriter, and due to DLJ's significant shareholding, regulatory rules necessitated the appointment of a qualified independent underwriter (QIU), which was Dain Rauscher Wessels. Dain recommended a maximum offering price of $18 per share, but the stock closed at $55 on its first trading day. Following Quintus' bankruptcy filing on February 22, 2001, the company later sold its assets and distributed over $13 million to shareholders after settling creditor claims. The Trustee's motion for summary judgment on the breach of fiduciary duty claim was denied, while DLJ's motion for summary judgment was granted by the court. Jurisdiction for the case was established under relevant provisions of the U.S. Code.

The Court evaluates motions for summary judgment under Federal Rule of Civil Procedure 56(c), requiring that no genuine issue of material fact exists and that the movant is entitled to judgment as a matter of law. The burden lies with the movant to prove the absence of genuine issues, while the non-moving party must present specific facts demonstrating a genuine issue for trial, beyond mere speculation or conclusory allegations. Summary judgment is appropriate when the evidence, viewed in its entirety, does not allow a rational trier of fact to rule in favor of the non-moving party.

In the case of the Trustee's claim for breach of fiduciary duty against DLJ, both parties submitted cross motions for summary judgment. The Trustee alleges that DLJ owed a fiduciary duty to Quintus to establish the maximum price for IPO shares, asserting that DLJ breached this duty by underpricing the shares to benefit favored clients through side agreements, resulting in significant financial loss for Quintus. Conversely, DLJ argues that it had no fiduciary duty to set the share price, asserting that Quintus had hired Dain as the Qualified Independent Underwriter (QIU) to determine the price and that DLJ was bound by the Underwriting Agreement and NASD rules, which restricted it from setting prices above Dain’s recommendations. DLJ further claims the Trustee has not provided evidence of improper compensation or side agreements related to the IPO shares.

DLJ asserts that under New York law, there is no fiduciary duty owed by underwriters to issuers of stock, referencing the case HF Management Services LLC v. Pistone, which emphasizes the nonfiduciary nature of the underwriter-issuer relationship. The court agrees, noting that underwriters primarily owe a duty to investors, and any fiduciary duty to the issuer is limited to advisory roles. However, the Trustee argues that a fiduciary relationship can arise if the issuer places special reliance on the underwriter, as established in EBC I, Inc. v. Goldman, Sachs & Co. Under certain circumstances, if the relationship extends beyond the contract terms and involves a higher level of trust, a breach of fiduciary duty claim may be sustained. The Trustee cites cases where underwriters acted as expert advisors, suggesting a potential fiduciary duty to avoid actions detrimental to the issuer. DLJ contests this, asserting that the general rule applies and that the cases cited by the Trustee are distinguishable, particularly emphasizing that the EBC I case established that fiduciary duties are exceptions rather than the norm. The Trustee maintains that Quintus relied heavily on DLJ's expertise in determining the IPO pricing, indicating a relationship that transcended mere contractual obligations.

Quintus engaged Dain as a qualified independent underwriter (QIU) to set the maximum price for its IPO shares. DLJ asserts that the Underwriting Agreement did not obligate it to price the IPO shares above Dain's recommendation, and NASD Rule 2720(c)(3)(A) explicitly prohibited such action. The Court agrees with DLJ, determining that Quintus did not depend on DLJ to establish the IPO's maximum selling price, finding no evidence of a fiduciary duty beyond the typical underwriter-issuer relationship.

The Underwriting Agreement confirms Dain's role as QIU, stating that the public sale price shall not exceed Dain's maximum price recommendation. The Prospectus reiterates that Dain will set this price in accordance with NASD rules, specifically due to DLJ's ownership stake in Quintus. The Trustee's argument, citing a Master Agreement that grants DLJ discretion over pricing, is deemed irrelevant as it predates Quintus' IPO and does not pertain to the specific regulations governing QIUs. Furthermore, contract law principles dictate that specific terms in the Underwriting Agreement and Prospectus, which designate Dain as responsible for pricing, take precedence over the more general terms in the Master Agreement.

The Court determined that NASD rules prohibited DLJ from setting the maximum price for Quintus' IPO shares, as outlined in Rule 2720(c)(3)(A). This rule mandated that Quintus hire Dain to conduct independent due diligence and recommend the IPO share price, which DLJ was not allowed to exceed. Dain confirmed its status as a Qualified Independent Underwriter (QIU) and acknowledged its responsibilities under the Securities Act of 1933, having conducted due diligence on the offering.

The Trustee argued that DLJ, rather than Dain, determined the IPO price, claiming DLJ could have set a price above the recommended $18 per share and had knowledge of market demand through its order book. However, DLJ countered that no testimony supported the claim that DLJ set the maximum price or could price above Dain’s recommendation. The Court found no evidence to substantiate the Trustee’s assertions, noting that many references to depositions presented by the Trustee were misleading or incorrect. Specifically, the Trustee's claims that the QIU had no role in pricing and that DLJ was solely responsible for setting the IPO price were unsupported by the record. Additionally, the Trustee misrepresented statements made by Quintus' president regarding reliance on DLJ for pricing, as the record indicated he had no such responsibility in the IPO process.

Mr. Burke asserted that the underwriters were engaged to market the company's shares and provide analytical research to support a fair market value. The Trustee's claim that Quintus relied entirely on DLJ for pricing the IPO is unsubstantiated. The Court expressed concern over the Trustee's misrepresentation of the deposition record and found no evidence supporting the Trustee's claims that Dain failed in its role as Qualified Independent Underwriter (QIU) or that DLJ interfered with Dain's responsibilities.

Even if Quintus' management relied on DLJ for pricing, such reliance was deemed unreasonable due to the Underwriting Agreement, which explicitly designated Dain as responsible for setting the maximum selling price. The Court highlighted that a fiduciary relationship, which requires one party to rely on another's expertise, does not exist in arm's length business transactions. It further clarified that fiduciaries must adhere to securities laws and cannot justify violations as part of fulfilling their duties.

Additionally, the Court stated that the Trustee failed to provide evidence of excessive compensation for DLJ's underwriting services or any side agreements with customers for improperly allocating IPO shares. Although the Trustee requested a delay in the ruling on DLJ's motion for summary judgment pending expert discovery, the Court emphasized that expert opinions must be supported by factual evidence and cannot rely on mere allegations or unsupported assumptions.

The Court finds insufficient evidence to support the Trustee's allegation that DLJ engaged in "side agreements" with clients to receive improper extra-contractual compensation for allocating Quintus' IPO shares. As a result, the Court concludes that the Trustee has not proven that DLJ breached any fiduciary duty. Therefore, the Trustee's motion for summary judgment is denied, and DLJ's motion for summary judgment regarding the breach of fiduciary duty is granted.

DLJ also seeks summary judgment on the Trustee's remaining claims, which include breach of contract, breach of an implied covenant of good faith and fair dealing, fraud, negligence, and unjust enrichment. For the breach of contract claim, DLJ contends there is no factual or legal foundation for the Trustee's assertion that it breached the Underwriting Agreement by favoring certain clients in exchange for additional compensation. DLJ argues that the Underwriting Agreement did not prohibit the allocation of IPO shares to clients and that the Trustee has not provided evidence of any side agreements.

The Trustee claims that DLJ breached the Underwriting Agreement by underpricing Quintus' shares, which he argues was contrary to Quintus' expectations of maximizing proceeds. However, the Court dismisses the breach of contract claim, stating that the Trustee has failed to identify any specific provision of the Underwriting Agreement that was violated. The Court cites precedents indicating that a breach of contract claim cannot stand without a clear allegation of a breach of contract terms and that the Trustee has not presented factual support for his claims. Moreover, the Court emphasizes that mere speculation or conclusory allegations do not suffice in the face of a properly supported motion for summary judgment, and a genuine issue for trial must be established with specific facts.

The Trustee's claims against DLJ have been dismissed by the Court due to a lack of evidence. The Trustee failed to identify any specific DLJ clients involved in alleged side agreements or demonstrate any profit-sharing arrangements. Additionally, no proof was provided to suggest that favoritism towards certain clients resulted from any improper arrangements. Consequently, DLJ's motion for summary judgment regarding the breach of contract claim was granted.

Regarding the claim for breach of the implied covenant of good faith and fair dealing, DLJ argued that such a covenant cannot impose duties that contradict the express terms of a contract. The Underwriting Agreement stipulated that Dain would recommend the maximum price for Quintus' IPO shares, which DLJ contended precluded any obligation to set a price above that recommendation. The Trustee countered that the Underwriting Agreement did not prevent DLJ from exceeding Dain's maximum price and asserted that DLJ's obligations were to maximize the IPO proceeds.

The Court ruled in favor of DLJ, stating that it fulfilled its contractual obligations under the Underwriting Agreement. The contractual objectives of enhancing working capital and establishing a public market for Quintus' stock were achieved, negating the Trustee's claims. Furthermore, DLJ had no authority to raise the maximum price set by Dain without violating NASD rules. Therefore, the Court found that DLJ did not implicitly agree to set a higher price for the IPO shares.

The Trustee's reliance on the Master Agreement is deemed inappropriate, as it does not mention Quintus' IPO or the necessity of a Qualified Independent Underwriter (QIU) under Rule 2720(c)(3)(A). Consequently, the Court grants DLJ's motion for summary judgment regarding the Trustee's claim for breach of an implied covenant of good faith and fair dealing. Regarding the claims of fraud and fraudulent concealment, DLJ asserts that the Trustee has not demonstrated any false representations concerning the IPO share price or shown that Quintus relied on DLJ for pricing, nor proven DLJ's intent to underprice shares. DLJ argues its ownership interest would likely motivate it to increase share prices instead. 

On the fraudulent concealment claim, DLJ contends that the Trustee has not established that DLJ had a fiduciary duty to set the IPO price or that it withheld any material information. The Trustee counterclaims that DLJ misrepresented the market price and concealed demand for the shares justifying a higher price. The Trustee argues that even absent a fiduciary relationship, a duty to disclose arises when one party's superior knowledge makes a transaction unfair. 

The legal standards for fraud require a representation of a material fact, falsity, intent, deception, and injury, while fraudulent concealment additionally requires a duty to disclose. The Court concludes that the Trustee has failed to provide evidence of any material misrepresentation by DLJ, noting that the Pricing Committee approved the IPO price based on Dain's recommendation, thus undermining the claim of exclusive reliance on DLJ for pricing.

The Court has determined that the Trustee's claims against DLJ for fraudulent concealment, negligence, and unjust enrichment are legally deficient. The claim for fraudulent concealment fails because DLJ had no fiduciary duty to Quintus regarding the IPO share pricing, and Quintus' management was aware of the significant oversubscription before the IPO. Furthermore, even if DLJ had disclosed the public demand, Quintus could not have priced shares above Dain's recommendation due to NASD rules. The Trustee also failed to present evidence that demand would have sustained at a price above $18 or that DLJ allocated shares improperly for compensation.

In addressing the negligence claim, the Court found no independent legal duty owed by DLJ to set the IPO price, reiterating that a breach of contract does not equate to a tort without a distinct legal duty. The Trustee's assertion of DLJ's unilateral pricing decision lacked sufficient evidence and legal grounding to support a negligence claim.

Regarding unjust enrichment, DLJ argues this claim is merely a duplication of the breach of contract claim and emphasizes the absence of evidence for any improper side agreements or compensation. The Trustee contends that the unjust enrichment claim is distinct from the Underwriting Agreement but has not sufficiently demonstrated this difference. Consequently, the Court grants DLJ's motions for summary judgment on all claims.

The Underwriting Agreement specifies a 7% underwriting fee for DLJ and does not mention any additional compensation. The Trustee is seeking the return of extra-contractual payments allegedly received by DLJ from select customers in exchange for underpricing Quintus' IPO shares. The Court agrees with DLJ that the Trustee's claim for unjust enrichment is legally invalid due to the existence of a valid contract governing the relationship, which precludes quasi-contract recovery for related matters. The Court also finds that the Trustee has not provided evidence of any extra-contractual compensation received by DLJ in connection with the IPO. Consequently, the Court grants DLJ's motion for summary judgment regarding the Trustee's unjust enrichment claim and denies the Trustee's Motion for Summary Judgment on all counts of the Complaint. The findings reflect that expert discovery is unnecessary given the lack of supporting facts for the Trustee's claims, and the Court notes the Trustee's failure to address key provisions of the Underwriting Agreement and related regulations in his arguments. New York law applies to the parties' contract.

The Association and the Commission assert that a "qualified independent underwriter" (QIU) bears full responsibilities and liabilities under the Securities Act of 1933, as specified in Rule 2720(c)(8). The Court critiques the Trustee's claim that Quintus relied solely on DLJ for managing and pricing its IPO, highlighting that four underwriters were involved. Testimonies indicate that Dain's role as a syndicate member was not definitively established, with key individuals unable to recall Dain's specific responsibilities as a QIU during the IPO. Additionally, statements from Mr. Martin suggest that the book-running manager, DLJ, would consult with the QIU regarding pricing, indicating a collaborative process. The Trustee's breach of contract claim is undermined by reliance on precedents that predate the dismissal of a similar claim in EBC I, which the Court notes but the Trustee fails to acknowledge. The Trustee also cites Robinson v. Crawford but the Court cannot find the referenced language in that case.