Free Opening Brief in Support - District Court of Delaware - Delaware

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

COLLINS & AIKMAN CORPORATION and COLLINS & AIKMAN PRODUCTS CO., as Debtors in Possession, Plaintiffs,
Vs.

C.A. No. 07-265-***

DAVID A. STOCKMAN, J. MICHAEL STEPP, BRYCE M. KOTH, DAVID R. COSGROVE, PAUL C. BARNABA, ROBERT

A. KRAUSE, JOHN A. GALANTE, CHARLES E. BECKER, ELKIN B. MCCALLUM, THOMAS E. EVANS, CYNTHIA HESS, DANIEL P. TREDWELL, W. GERALD MCCONNELL, SAMUEL VALENTI, III, HEARTLAND INDUSTRIAL PARTNERS, L.P., HEARTLAND INDUSTRIAL ASSOCIATES, L.L.C., HEARTLAND INDUSTRIAL GROUP, L.L.C., PRICEWATERHOUSECOOPERS LLP and KPMG LLP,
Defendants.

OPENING BRIEF IN SUPPORT OF DEFENDANT THOMAS E. EVANS' MOTION TO DISMISS YOUNG CONAWAY STARGATT & TAYLOR, LLP OF COUNSEL:
MAYER BROWN LLP Richard A. Spelu Joseph De Simone Christian Douglas Wright {43554) Andrew A. Lundgren (#4429) The Brandywine Building

1675 Broadway New York, New York 10019 (212) 506-2500
Dated : September 14, 2007

1000 West Street, 17th Floor P.O. Box 391 Wilmington, DE 19899-0391 (302) 571-6600
ewright cr ycst.com Attot·neys fw- Defendant Thomas E. Evans

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TABLE OF CONTENTS
Page PRELIMINARY STATEMENT ....................................................................................................1

NATURE AND STAGE OF THE PROCEEDING .......................................................................2

SUMMARY OF ARGUMENT ........................................... ........................................................... 3 STATEMENT OF FACTS ............................................................................................................. 5 Generalized Allegations About the "Director and Officer Defendants" Occurring Prior to Evans' Resignation In August 2002 ...............................................................

5

Allegations Occurring After August 2002 ..........................................................................7 ARGUMENT .................................................................................................................................. 8 I. C&A's IOb-5 CLAIM AGAINST EVANS MUST BE DISMISSED .................10 A. The Complaint's Blanket Securities Fraud Accusations Violate The Particularity Requirement of Rule 9(b) .............................................11 C&A's IOb-5 Claim Also Must Be Dismissed Because It Does Not Plead Loss, Misrepresentation Scienter Or Reliance ................................15 1. The Complaint Does Not Allege That Evans Made Any Misleading Statement In Connection With The 2004 Securities Transaction ...................................................................16 The Complaint Fails To Allege That C&A Was Ignorant Of The Falsity Of Its Accounting Statements , Or That C&A Acted In Reliance Thereon ........................................................... 18

B.

2.

3. II.

The Complaint Pleads An Invalid Theory of Loss .......................19

C&A's SECTION 14(a) CLAIM IS UNTIMELY AND FAILS TO ALLEGE BOTH INJURY AND CAUSATION ..................................................22
A. B. As To Evans, This Claim Is Plainly Untimely .........................................22 C&A Did Not Suffer A Cognizable Injury ...............................................24

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C.
D.

If C&A Suffered An Injury, It Was Not Caused By The Proxy
Statements .................................................................................................26 C&A Lacks Standing To Assert This Claim ............................................27

III.

C&A'S STATE LAW CLAIMS FAIL UNDER RULES 9(b) AND 12(b)(6) .................................................................................................................29
A. B. C&A's State-Law Claims Are Not Pleaded With Particularity ...............30 C&A's Unjust Enrichment Claire Must Be Dismissed Because C&A Failed to Plead Its Requisite Elements ............................................33 I. The Complaint fails to describe how Evans benefited from the alleged misconduct or what he gained thereby ....................... 34 C&A's unjust enrichment claim must be dismissed because adequate remedies exist at law for the Company ' s alleged injuries ..........................................................................................35

2.

D.

The Complaint Does Not State A Claim For Common-Law Fraud .........37 1. 2. The Complaint fails to plead reliance ...........................................37 Any injury suffered by C&A was not proximately caused by the alleged misrepresentations ................................................. 38

CONCLUSION ............................................................................................................................40

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TABLE OF AUTHORITIES
Page Cases 7547 Corporation v. Parker & Parsley,

38 F.3d 211 (5th Cir. 1994) .........................................................................................................28
Am. Mobile Comms., Inc. v. Nationwide Cellular Serv., Inc.,

No. 91 Civ. 3587 (LBS), 1992 WL 232058 (S.D.N.Y. Sept. 3, 1992) ........................................31 Ash v. GAF Corp., 723 F.2d 1090 (3d Cir . 1983) ......................................................................................................28
Bakerman v. Sidney Frank Importing Co., Ina,

No. Civ. A. 1844-N, 2006 WL 3927242 (Del. Ch. Oct. 16, 2006) ...................................... 33,35 Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007 ) ...................................................................................................................9
Blue Chip Stamps v. Manor' Drug Stores,

421 U.S. 723 (1975) .................................................................................................................... 10 9,31 477 F.3d 502 (7th Cir. 2007) ...................................................................................................9,

Borsellino v. Goldman Sachs Grozrp, Inc.,

Buckley v. O'Hanlon,

No. 04-955GMS, 2007 WL 956947 (D. Del. Mar. 28, 2007) .....................................................31
Caplin v. Marine Midland Grace Trust Co.,

406 U.S. 416 (1972) ....................................................................................................................11
Central Bank of Denver v. First Interstate Bank of Denver,

511 U.S. 164 (1994) ....................................................................................................................17
Ceres Partners v. GEL Assocs.,

918 F.2d 349 (2d Cir. 1990) ........................................................................................................23 Cort v. Ash, 422 U.S. 66 (1975 ) ......................................................................................................................28
Crigger v. Fahnestock and Co., Inc.,

No. 01 Civ. 07819 (1FK), 2003 WL 22170607 (S.D.N.Y. Sept. 18, 2003) ............................... 36

iii

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Degulis v. LXR Biotechnology, Inc., 928 F. Supp. 1301 (S.D.N.Y. 1996) ............................................................................................14
Diceon Elecs. Me . v. Calvary Partners, L.P.,

28,29 772 F. Supp . 859 (D . Del. 1991 ) ........................................................................................... 28,
DiVitt orio v. Equidy ne Extractive In dus., Inc.,

822 F.2d 1242 (2d Cir. 1987) ......................................................................................................14
Drphily v. Del. Elec. Co-op., Inc.,

662 A .2d 821 (Del. 1995 ) ............................................................................................................ 39
Dura Pharm., Inc. v. Broudo,

544 U.S. 336 (2005) ....................................................................................................................15
General Electric Company by Levit v. Cathart,

980 F.2d 927 (3d Cir. 1992) ........................................................................................................25
Gould v. Americas?-Hawaiian S. S. Co.,

535 F.2d 761(3d Cir. 1976) .........................................................................................................23
Highland Legacy Ltd. v. Singer,

No. Civ. A. 1566-N, 2006 WL 741939 (Del. Ch. March 17, 2006) ........................................... 34
In re Aetna Sec. Litig.,

34 F. Supp. 2d 935 (E.D. Pa. 1999) .............................................................................................12
In re AOL Time Warner Sec. and "ERISA" Litig.,

381 F. Supp . 2d 192 (S.D.N.Y. 2004 ) .........................................................................................28
In r'e Baan Sec. Litig.,

103 F. Supp. 2d 1 (D.D.C. 2000) .................................................................................................14
In re Bennett Funding Group, Inc.,

336 F.3d 94 (2d Cir. 2003) ..........................................................................................................11
In re Burlington Coat Factory Sec. Litig.,

114 F.3d 1410 (3d Cir. 1997) ............................................................................................ 8, 10, 15
In re Charter Cormns., Inc. Sec. Litig.,

443 F.3d 987 (8th Cir. 2006 ) .......................................................................................................17
In re CITX Corp., Inc.,

2 0,21 448 F .3d 672 (3d Cir. 2006 ) ..................................................................................................2 0,

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In re Digital Island Sec. Litig.,

223 F. Supp. 2d 546 (D. Del. 2002) ............................................................................................14
In re Exxon Mobil Sec. Litig., 387 F. Supp. 2d 407 (D.N.J. 2005) ..............................................................................................24 In re Global Crossing, Ltd. Sec. Litig.,

313 F. Supp. 2d 189 (S.D.N.Y. 2003) .........................................................................................24
In re HealthSouth Corp. S'holders Litig.,

845 A.2d 1096 (Del. Ch. 2003) ...................................................................................................35
In re

LZrpron Marketing

and Sales Practices

L i t ig.,

295 F. Supp. 2d 148 (D. Mass. 2003) ..........................................................................................36
In re Radnor Holdings Corp.,

353 B.R. 820 (Bankr. D. Del. 2006) ......................................................................................20, 20,21
In re Rockefeller Or. Properties Inc. Sec. Litig.,

311 F.3d 198 (3d Cir. 2002) ..........................................................................................................9
In re Suprerna Specialties, Inc. Sec. Litig.,

438 F.3d 256 (3d Cir. 2006) .................................................................................................passim
In re Tyson Foods, Inc.,

919 A.2d 563 (Del. Ch. 2007) .....................................................................................................35
In re Zoran Corp. Derivative Litig.,

No. C 06-05503 WHA, 2007 WL 1650948 (N.D. Cal. June 5, 2007) ............... ......................... 24
In Reliance Sec. Litig.,

135 F. Supp. 2d 480 (D. Del. 2001) ........................................................................................... 23
Ini'l Jensen Inc. v. Emerson Radio Corp.,

Nos. 96 C 2816, 96 C 6902, 1997 WL 43229 (N.D. Ill. Jan. 24, 1997) ......................................28
J L Case Co. v. Borak,

22,28 377 U.S. 426 (1964) ..............................................................................................................22,
Johnson v. Knorr,

477 F3d 75 (3d Cir. 2007) ..........................................................................................................40
Kirtley v. Wadekar,

No. 05-5383 (JAG), 2006 WL 2482939 (D.N.J. Aug. 25, 2006) ...... .......................................... 31

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Kolbeck v. LIT America, Inc.,

923 F. Supp. 557 (S.D.N.Y. 1996) ..............................................................................................11
Luni v. Bank of Ainer·ica,

361 F.3d 217 (3d Cir. 2004) ...............................................................................................9, 11, 31
Matter of Century Glove, Inc.,

151 B.R. 327 (Bkrtcy. D. Del. 1993) ...........................................................................................35
MBIA Ins. Coip. v. Royal Indem. Co.,

11,32 221 F.R.D. 419 (D. Del. 2004) ..............................................................................................11,
North Penn Tmnsfej·, Inc. v. Victaulic Co. ofAm.,

859 F. Supp. 154 (E.D. Pa. 1994).. .............................................................................................. 23
Official Committee of Unsecured Creditors v. R.F. Laffet·ty & Co.,

267 F.3d 340 (3d Cir. 2001) ........................................................................................................20
Pinnacle Choice Inc. v. Silverstein,

No. 07-ev-1379 (DMC), 2007 WL 2212861 (D.N.J. July 31, 2007) ..........................................31
Prrohias v. Pfiz er, Inc., 490 F. Supp. 2d 1228 , 1237 (S.D. Fla. 2007) ...........................................36 P1yo1· v. Nat'l Collegiate Athletic Ass'n,

288 F.3d 548 (3d Cir. 2002) ........................................................................................................23
Rep. of Panama v. Am. Tobacco Co.,

Nos. 05C-07-181-RRC, 05C-07-180-RRC, 2006 WL 1933740 (Del. Super. Jun. 23, 2006) ..................... .................. .................. ................................................. 39
Santa Fe v. Green,

430 U.S. 462 (1977) ....................................................................................................................29
Scattergood v. Perelman,

945 F.2d 618 (3d Cir. 1991) ........................................................................................................26
Scheuef· v. Rhodes,

416 U.S. 232 (1974 ) ......................................................................................................................9 SEC v. Todd, No. 03 CV 2230 BEN, 2007 WL 1574756 (S.D. Cal. May 30, 2007) ........................................16
SEC v. Yuen, 221

F.R.D. 631 (C.D. Cal. 2004) ........................................................................................................13

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Shapiro v. Cantor,

123 F.3d 717 (2d Cir. 1997) ........................................................................................................17
Shapiro v. UJB Fin. Corp,

12,32 964 F.2d 272 (3d Cir. 1992) ..................................................................................................12,

Sills v. Smith & Wesson Corp.,

No. 99C-09-283-FSS, 2000 WL 33113806 (Del. Super. Dec. 1, 2000) ..................................... 34
Stephenson v. Capano Dev. Inc.,

462 A.2d 1069 (Del. 1983 ) ..........................................................................................................37 360 F.2d 692 (2d Cir. 1966) ........................................................................................................28

Studebaker Corp. v. Gittlin,

Total Care Physicians, P.A. v. O'Hara,

No. Civ. A. 99C-11-201JJRS, 2002 WL 31667901 (Del. Super. Oct. 29, 2002) ........................36
TrenwickAm. Lrtig. Trust v. Ernst & Young, LLP,

906 A.2d 168 (Del. Ch. 2006) ...................................................................................13, 18, 37, 38
Virginia Bankshares, Inc. v. Sandberg,

501 U.S. 1083 (1991) ......................................................................................................26, 27, 29
Virginia M. Damon Trust v. North Country Fin. Corp.,

325 F. Supp . 2d 817 (W.D. Mich. 2004) ........................................ ........................ .......... 22-23, 24
Weiner v. Quaker Oats Co.,

129 F.3d 310 (3d Cir. 1997)
Westinghouse Elec. Corp. v. Franklin,

1 12,1 3 , 32

993 F.2d 349 (3d Cir. 1993) ........................................................................................................23
Wilmington Country Club v. Cowee,

747 A. 2d 1087 (Del. 2000) ..........................................................................................................39
Statutes 8 Del. Code Ann tit. Quorum and required vote for stock corporations, § 216(2) (2007) ............................................................................................................................27 8 Del. Code Ann tit. Quorum and required vote for stock corporations,

§ 216(3) (2007) ........................................................................................................................... 27
15 U.S.C. § 77 ( m) .........................................................................................................................23

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17 C.F.R. § 240, 1Ob-5 ..........................................................................................................passim 17 C.F.R. § 240, 14a-9 ............................................................................................................passim 28 U.S.C. § 1367(c) .......................................................................................................................40 Del. Ch. Ct. Rule 9(b) .......................... ...................................................................................13

Fed. R. Civ. P. 9(b) ..............................................................................................................passim Fed. R. Civ. P. I I (b)(3) ................................................................................................................14 Fed. R. Civ. P. 12(b)(6) ......................................................................................................... passim The Sarbanes-Oxley Act of 2002 Pub. L. No. 107-204, 116 Stat. 745 (2002) ..............................24 Other Authorities
37 AM. JUR. 2D, FRAUD AND DECEIT § 280 ...............................................................................39 L. HAzEN, THE LAW OF SECURITIES REGULATION, § 10.3 (5TH ED. 2007) ..............................28 S. WILLET, THE SHALLOWS OF DEEPENING INSOLVENCY,

20,21 60 BUS. LAW 549 (2005) .......................................................................................................20,

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PRELIMINARY STATEMENT
Thomas Evans resigned as Chairman of the Board and CEO of Collins & Aikman in the summer of 2002 and since that time has had no association with the Company. Now, more than five years after his departure, Collins & Aikman has named Evans as a defendant in this highly unusual suit - one which is marked by at least three distinct and ultimately fatal defects.
The first is the sharp disconnect between the allegations in the body of the Complaint and the claims for relief ultimately asserted against Evans and the other Director and Officer Defendants: the purported factual allegations in the Complaint assert that the Defendants engaged in a scheme to defraud the creditors of the now-bankrupt Collins & Aikman by presenting falsified accounting statements to the outside world; but the latter claims for relief allege that Collins & Aikman itself was somehow misled and damaged by its own false statements.

A second, closely related defect lies in the asserted injury: Collins & Aikman alleges that it was injured when the Defendants' misleading statements supposedly caused the Company to borrow money during a liquidity crunch that the Company was later unable to repay. This is absurd. The injured parties, if any, in this story were the creditors, who may or may not have lost funds they advanced. It certainly was not Collins & Aikman, which was obviously benefited by those funds in its ultimately unsuccessful turnaround effort. Collins & Aikman attempts to plead around the first two of these fatal defects by asserting that the alleged misrepresentations and omissions of its former managers caused the Company to obtain financing and capital it would not otherwise have obtained. This theory of "deepening insolvency," however, has been flatly rejected by the Third Circuit.

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The third defect in the Complaint is that Evans has been forced to defend this suit at all. His name barely appears in the Complaint, gracing only the caption and a single sentence identifying his past corporate positions and naming him as a defendant in this action. Virtually all of the events alleged in the Complaint occurred long after Evans left the Company. And every one of these allegedly injurious acts occurred after the Heartland Defendants obtained what the Complaint describes as "dominion and control" over Collins & Aikman's affairs. Given these asserted facts, there is no basis for any claim against Evans. Together, these defects doom all five of the claims asserted against Evans, each of which either fails to comply with the heightened pleading requirement imposed by Rule 9(b), is timebarred, fails to state a claim upon which relief may be granted, or fails for lack of standing. In fact, most of the claims against Evans suffer from more than one of these shortcomings. If this deeply flawed action is to go forward at all, it must proceed without Evans, against whom Collins & Aikman has not presented a single viable claim.

NATURE AND STAGE OF THE PROCEEDING
Plaintiffs Collins & Aikman Corporation and Collins & Aikman Products Co., (collectively, "C&A" or "the Company"), acting as debtors in possession, filed this Complaint on May 16, 2007. The Complaint accuses many of C&A's former Directors and Officers, the Company's largest shareholder, and the Company's outside accountants of having caused and deepened C&A's insolvency through their combined fraud and negligence. The Complaint

alleges that Evans violated the federal securities laws by committing securities fraud and causing the release of materially misleading proxy statements to shareholders. It additionally alleges that Evans is liable to C&A under state law for breach of fiduciary duty, unjust enrichment and common-law fraud. Evans now moves to dismiss all of the claims against him.

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SUMMARY OF ARGUMENT
1. C&A's securities fraud claim against Evans, alleged under Section 10(b) of the Exchange

Act, trust be dismissed because: (a) In violation of Fed. R. Civ. P. 9(b), which requires all "averments of fraud" to be

pleaded with particularity, the Complaint does not contain any detail whatsoever about Evans' role in the publication of the alleged misstatement -- an event that occurred two years after Evans left C&A. Additionally, the necessary predicates for application of the "group pleading

doctrine" are not met here because C&A has not alleged that it is unable to plead with particularity prior to discovery, and because, in any event, C&A has ready access to its own corporate records. (b) The Complaint does not allege that Evans made or approved any misleading

statement made in connection with the sole securities transaction identified in the Complaint, a 2004 sale of corporate bonds. This omission is hardly surprising, as Evans left the Company two years before this sale occurred; (c) The Complaint fails to allege transaction causation for two reasons. First, it fails to allege any facts that support its conclusory assertion that misstatements were trade to C&A; the only purported misstatements identified in the Complaint were made by C&A to outside investors. Second, the Complaint fails to plead facts from which C&A's justifiable reliance on the alleged misstatements can be inferred because it alleges that these alleged misstatements fooled the very people - C&A's managers - who created them. (d) C&A's loss theory, which alleges that the Company's insolvency deepened when C&A tools on additional loans, fails as a matter of law and of logic. As recent precedent

confirms, the mere receipt of a loan by a borrower does not deepen the borrower's insolvency;

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the borrower's insolvency is deepened, if at all, only when the borrower fails to make productive use of the borrowed funds. There is no such allegation in this case. 2. C&A's claim against Evans under Section 14(a) of the Exchange Act must be dismissed because: (a) This claim, which accrued as to Evans on April 25, 2002, is time-barred; (b) The Third Circuit has squarely rejected C&A's loss theory; (c) injury. (d) C&A lacks standing to assert that it was injured by its own false publications. 3. Each of C&A's state-law claims against Evans must be dismissed because: (a) All three of these claims (alleging breach of fiduciary duty, unjust enrichment- and The allegedly misleading proxy statement was not a legal cause of C&A's alleged

common-law fraud, respectively) sound in fraud and therefore must comply with Rule 9(b)'s heightened pleading requirements. Because the Complaint does not allege any facts about

Evans' purported participation in the underlying accounting schemes, Rule 9(b) requires the dismissal of these claims against him. (b) C&A's unjust enrichment claim against Evans also must be dismissed because: (i) the Complaint fails to explain how Evans obtained any unjust benefit or what that unjust benefit was; and (ii) C&A has failed to allege that it does not have an adequate remedy at law. (c) C&A's common-law fraud claim against Evans additionally must be dismissed

because C&A has failed to plead facts from which its reliance on alleged misstatements can be inferred.

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STATEMENT OF FACTS
In its Complaint, C&A alleges that Evans "served as CEO and President of Collins & Aikman Corporation from April 1999 until he resigned those positions in August 2002." Compl. ¶ 18, This is the only factual allegation in the Complaint that pertains to Evans specifically. For the sake of accuracy, Evans respectfully advises the Court that he actually served as C&A's CEO and Chairman of the Board until he resigned those positions in June 2002; at no time was Evans the Company's President. See Collins & Aikman 2002 Proxy Statement, Apr.

25, 2002, at 19. (Wright Decl., Ex. 1). While Evans, in fact, left C&A in June 2002, Evans will accept C&A's allegation that he resigned in August 2002 solely for purposes of this motion. For the remainder of this Statement Of Facts, Evans also relies on the well-pleaded allegations of the Complaint, assuming their truth solely for purposes of this motion to dismiss. Generalized Allegations About the "Director and Officer Defendants " Occurring Prior to Evans' Resignation In August 2002 The Complaint identifies Evans as one of fourteen Director and Officer Defendants. Id. TT 9-23. With the exception of defendant J. Michael Stepp, all of the other Director and Officer Defendants adopted their positions at C&A in or after February 2001, id.. IT 9-17, 19-22, i.e., after the Heartland entities acquired a controlling interest in C&A. Id. 42. Each of the other

Director and Officer Defendants continued on in one or more corporate roles at C&A long after Evans left the Company in August 2002. Id, ¶ 9-17, 19-22. C&A alleges that the corporate positions held by each of the Director and Officer Defendants made them "privy to confidential and proprietary information concerning [C&A] and its operations, finances and financial condition." Id. 27. The Complaint further alleges that

each of the Director and Officer Defendants therefore knew that certain "true facts" concerning C&A's financial condition and accounting practices "had not been disclosed to and were being

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concealed from its shareholders, its creditors, vendors, customers, employees and the public." Id, In particular, C&A complains that, in order to disguise the negative effects that

developments in the automotive industry were having on the company's bottom line and future prospects, "Defendants employed a variety of fraudulent schemes designed to artificially inflate the Company's reported financial results." Id. 140. C&A alleges that an additional purpose of these schemes was to "avoid triggering debt covenants and enable Collins & Aikman to borrow additional funds, thereby deepening its insolvency." Id. These alleged accounting schemes took a variety of forms. For example, C&A alleges that from the fourth quarter of 2001 to the first quarter of 2003, the Company "engaged in a series of fraudulent `round-trip' transactions" with Joan Fabrics. Id. IT 50. These

transactions allegedly were fraudulent because they were recorded by C&A as supplier rebates for past purchases when they really were short-term loans. Id. IT 49, 51-52. C&A alleges that "Defendants [David A.] Stockman, [J. Michael] Stepp and others acting at their direction," including Defendant Elkin B. McCallum, were responsible for this scheme, which allegedly inflated C&A's financial results by $14.9 million between 2001 and 2003. Id. 148-51. C&A also alleges that in early 2002, the Company began to engage in a practice that the Complaint calls the "Rebate Scheme." Id. 53. This alleged scheme consisted of "improperly

recognizing rebates from the Company's suppliers before the rebates had actually been earned by the Company." Id. The Complaint does not allege that any particular persons were responsible for the Rebate Scheme; rather, it simply asserts that "Defendants" are culpable. See id. 1153, 55-57. Finally, the Complaint alleges that beginning with the fourth quarter of 2001, "Defendants caused [C&A] to file false and misleading quarterly and annual reports with the

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SEC and to issue materially false and misleading statements to investors concerning the Company's financial performance, operations and prospects." Id. ^j 75. According to the

Complaint, these reports were false and misleading because "they contained financial results which were artificially inflated by the improper accounting practices" described above. Id. The

Complaint alleges that each of the Director and Officer Defendants - in ways unspecified "participated in the issuance and/or review of false and/or misleading statements, including the preparation of false and/or misleading press releases, SEC filings and reports to [C&A] shareholders and/or creditors." Id ^j 27. Allegations Occurring After August 2002 Many allegations of wrongdoing described in the Complaint occurred long after Evans left C&A in August 2002. For example, the Complaint alleges that in August 2004 - two years after Evans' resignation - the Director and Officer Defendants caused C&A to prepare and disseminate an Offering Memorandum containing false and misleading statements in connection with C&A's sale of approximately $415 million in senior subordinated bonds. Id 60.

The Complaint additionally alleges that in or around January 2005, "Stockman and others acting at his direction" engaged in a scheme to defraud General Electric Capital Corporation ("GECC") by including tens of millions of dollars of ineligible receivables in the borrowing base, thereby fraudulently reducing the amount of money the Company then owed to GECC. Id 63-64. The Complaint also alleges that on March 17, 2005, the Company issued a press release announcing that it was delaying the issuance of its financial results for fiscal year 2004 while it conducted an internal review of its rebate accounting. Id. T 65. According to the Complaint, this press release was false because it materially misstated the amount of liquidity that the Company

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then possessed. Id. T 66. The Complaint likewise alleges that a second press release, issued on April 4, 2005, similarly contained false liquidity figures, and therefore was also materially misleading. Id. ^ 71. C&A further alleges that in early April 2005, "Stockman and others" made further false and misleading statements to a lender about the Company's liquidity, capital expenditures, and prior and projected financial results. Id. ^ 70. On May 12, 2005, Stockman resigned his positions at C&A. Id ¶ 73. Five days later, on May 17, 2005, C&A and its subsidiaries filed for bankruptcy. Id. T 74. C&A now asserts five claims against Evans. The First Claim for Relief charges that Evans committed securities fraud in violation of Section 10(b) of the Exchange Act and Rule lOb-5 thereunder in connection with a sale of securities by C&A in August 2004 - two years after Evans resigned from C&A. Id. T 153-57. The Second Claim for Relief alleges that Evans violated Section 14(a) of the Exchange Act and Rule 14a-9 thereunder by making misleading statements in proxy materials sent to C&A's shareholders in 2002 (during Evans' tenure), 2003 and 2004 (after Evans left). Id 11 158-63. The Third Claim for Relief alleges that Evans

breached his fiduciary duties to C&A. Id. ¶ 164-67. The Fourth Claim for Relief asserts that Evans was unjustly enriched by his allegedly unlawful conduct. Id ¶' 168-70. Finally, the Fifth Claim for Relief alleges that Evans committed common-law fraud against C&A. Id. TT 171-76. ARGUMENT The Court should dismiss each of the five claims that asserted against Evans pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b). A motion to dismiss pursuant to Rule

12(b)(6) must be granted if, accepting all well-pleaded allegations in the complaint as true, and viewing them in the light most favorable to the plaintiff, it appears that the plaintiff is not entitled to relief. See In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1420 (3d Cir. 1997).

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"The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Scheirer v. Rhodes, 416 U.S. 232, 236 (1974). This

standard obligates a plaintiff to "provide the grounds of his entitlement to relief," and supply factual allegations strong enough to "raise a right to relief above the speculative level." Bell Atl. Corp. v. Tivombly, 127 S. Ct. 1955, 1965 (2007). Accordingly, "courts are not required to credit bald assertions or legal complaints improperly alleged in the complaint." In re Rockefeller Or. Properties Inc. Sec. Litig., 311 F.3d 198, 216 (3d Cir. 2002). Where applicable, Rule 9(b) imposes additional pleading obligations on plaintiffs, mandating that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be pleaded with particularity." Fed. R. Civ. P. 9(b). This particularity requirement applies to causes of action directly alleging fraud, and also applies to non-fraud causes of action that, as pleaded, sound in fraud. See, e.g., Lum v. Bank of America, 361 F.3d 217, 220 (3d Cir. 2004) (measuring antitrust claim under Rule 9(b)'s requirements even though "antitrust claims generally are not subject to the heightened pleading requirements of Rule 9(b)" because "[f]raud is the basis for the antitrust violation alleged here"); Borsellino v. Goldman Sachs Group, Inc., 477 F'.3d 502, 507 (7th Cir. 2007) ("Although claims of interference with economic advantage, interference with fiduciary relationship, and civil conspiracy are not by definition fraudulent torts, Rule 9(b) applies to `averments of fraud,' not claims of fraud, so whether the rule applies will depend on the plaintiffs' factual allegations. A claim that `sounds in fraud' - in other words, one that is premised upon a course of fraudulent conduct - can implicate Rule 9(b)'s heightened pleading requirements."). The Third Circuit has declared that Rule 9(b) is to be "rigorously applied" in securities fraud cases. In re Rockefeller Or., 311 F.3d at 216. The courts of this Circuit therefore demand,

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"at a minimum, that plaintiffs support their allegations . .. with all of the essential factual background that would accompany `the first paragraph of any newspaper story' - that is, the `who, what, when, where and how' of the events at issue." In re Suprema Specialties, I17c. Sec. Litig., 438 F.3d 256, 276-77 (3d Cir. 2006) ( citations omitted ). And with good reason: "Rule 9(b)'s heightened pleading standard gives defendants notice of the claims against them., provides an increased measure of protection for their reputations, and reduces the number of frivolous suits brought solely to extract settlements." omitted). In re Burlington, 114 F.3d at 1418 (citations

Measured against these appropriately demanding standards , each of C&A 's claims

against Evans falls far short of the mark and, accordingly, must be dismissed.

1.

C&A's 10-5 CLAIM AGAINST EVANS MUST BE DISMISSED
C&A's claim under Rule lOb-5 is exceedingly limited, and, at least as to Evans,

hopelessly misguided. C&A's winding 80-page Complaint attributes various allegedly false and misleading statements to various defendants - though none specifically to Evans. However, the Complaint recounts only one securities transaction in which C&A participated - its August 2004 bond issue. (Compl. ^T 60, 76, 156 ). Because it is firmly established that the implied private

right of action created by Rule lOb-5 reaches only misstatements or omissions made "in connection" with an actual purchase or sale of securities , only those misstatements alleged to have been made in connection with this 2004 transaction conceivably could support C&A's securities fraud claim . See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975). So focused , it is immediately evident that C&A's lOb -5 claim against Evans is fatally flawed for at least three reasons. First, displaying no regard for the particularity that Rule 9( b) and the law of this Circuit demand of plaintiffs pleading fraud, the Complaint advances the wholesale accusation that

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"Defendants" committed a fraud, nowhere specifying which of the fourteen individual defendants are alleged to have committed any of the relevant bad acts. Second, the Complaint fails to satisfy Rules 9(b) and 12(b)(6) because it does not identify any misstatement or omission that was made to C&A - rather, the complaint describes alleged falsehoods that were conveyed to prospective securities purchasers. But of course, C&A lacks standing to assert the alleged

injuries of its creditors in this proceeding. See Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 434 (1972); In re Bennett Funding Group, Inc., 336 F.3d 94 (2d Cir. 2003). Third, if any misstatement was made to C&A in connection with its 2004 bond sale, it was not made by Evans, who left C&A's management two full years before this allegedly injurious transaction occurred. For each of these reasons, the securities fraud claim against Evans must be dismissed. A. The Complaint ' s Blanket Securities Particularity Requirement of Rule 9(b) Fraud Accusations Violate The

Plaintiffs are not permitted to plead fraud by association.

Rather, "[wjhen alleging

fraudulent behavior against a group of defendants, a plaintiff is required to separately plead the fraudulent acts of each defendant to satisfy Rule 9(b). Collective allegations of fraud against a group of defendants generally do not satisfy Rule 9(b) because the Rule is intended to ensure that each defendant has adequate notice of the charges against it, thereby permitting each defendant to mount a defense and not just deny that they did anything wrong." MBM Ins. Corp. v. Royal Indent. Co., 221 F.R.D. 419, 421 (D. Del. 2004). See also Lzini v. Bank of America, 361 F.3d 217, 229 (3d Cir. 2004) (dismissing fraud allegations that, among other things, failed to "set out who sent what infonnation to whom or when it was sent."); Kolbeck v. LIT America, 117c., 923 F. Supp. 557, 569 (S.D.N.Y. 1996) ("In a case involving multiple defendants, Rule 9(b) mandates that the complaint inform each defendant of his alleged role in the deception.").

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The Complaint violates this simple but vital pleading rule. With respect to the allegedly injurious securities transaction that occurred in August 2004, the Complaint does not specify what any Defendant is alleged to have done wrong. Rather, the Complaint sweepingly asserts that "Defendants caused Collins & Aikman to file false and misleading quarterly and annual reports with the SEC ..." (¶ 75), that "Defendants' positive statements falsely portrayed the Company as well positioned to succeed. . ." (id.), that "Defendants caused Collins & Aikman to circulate an offering memorandum in connection with the August Senior Note Offering," (¶ 76), that "Defendants caused Collins & Aikman to sell and issue [securities]," (T 76), and that "Collins & Aikman sold securities in reliance on Director and Officer Defendants' materially false and misleading statements..." (T 156) (emphases added). Rule 9(b) plainly requires more. See, e.g., Suprema Specialties, 438 F.3d at 276-77. Moreover, the so-called "group pleading doctrine" cannot excuse C&A's failure to plead its securities fraud claim against Evans with even the slightest hint of specificity. In limited

circumstances, that doctrine has been held to relax Rule 9(b)'s strictures and allow plaintiffs to allege that all of a corporation's officers and directors are responsible for the publication of a purportedly misleading statement. See, e.g., In re Aetna Sec. Litig., 34 F. Supp. 2d 935, 949 (E.D. Fa. 1999). This exception cannot aid C&A here. First, the group pleading doctrine applies to lessen a plaintiff's burden only where the information needed to allow particularized pleading "lies in defendants' exclusive control," Weiner v. Ouaker Oats Co., 129 F.3d 310, 319 (3d Cir. 1997), and where plaintiffs allege as much in their pleadings. See Shapiro v. UJB Fin. Corp, 964 F.2d 272, 285 (3d Cir. 1992). That is patently not the case here. C&A has not even attempted to plead that the defendants have "exclusive control" over the necessary evidence. This is likely because C&A has access to -- and

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indeed, exclusive control over - its own corporate books, records , emails, telephone records and notes of meetings, and other documents relevant to the question of who was involved in the drafting, review and approval of the financial statements at issue in the Complaint . Moreover, according to C&A, its Special Counsel has already conducted an investigation of the circumstances underlying its Complaint . See Compl. Opening, at 1. On these facts, the practical considerations that support application of the group pleading doctrine in other contexts are not present, and no unfairness resides in requiring C&A to state its fraud allegations with particularity . Cf. SEC v. Yuen, 221 F.R .D. 631, 637 (C.D. Cal. 2004) ("given the SEC's

substantial pre-filing investigatory powers and the significant discovery already conducted in this case, the SEC ' s reliance upon the 'group published information' doctrine is misplaced and inappropriate"); Tremilick Agra, Litig. Trust v. Ernst & Young, LLP, 906 A.2d 168, 211 (Del. Ch. 2006) (" The Litigation Trust has had far more access to information than the typical plaintiff, having access to voluminous documents during the bankruptcy proceedings, for more than a year before it filed its complaint. Thus , it was better positioned than most fraud plaintiffs to meet the standards of [Delaware Court of Chancery] Rule 9 (b)."). Accordingly, the group pleading

doctrine offers C&A no respite from Rule 9 (b)'s particularity command. Second, even where it appears that the defendants may be in exclusive control of the facts necessary to identify the culpable parties, Rule 9( b)'s strictures may be relaxed only where the Complaint additionally "delineate[s] at least the nature and scope of plaintiffs ' effort to obtain, before filing the complaint , the information needed to plead with particularity." Weiner, 129

F.3d at 319 (internal citation and quotation marks omitted ). C&A has made no effort whatsoever to satisfy this requirement. Nothing in the Complaint describes C&A's efforts to plead its claims with particularity . Nor, given C&A's access to its own records, is it clear how C&A could have

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mounted such an effort, found itself unable to plead with particularity , and yet still able to aver in good faith that its claims against Evans "are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery ." Fed. R. Civ. P . 11(b)(3). Third, even if the group pleading doctrine could be invoked in this case, C&A's blanket pleading would still be insufficient as to Evans , who left C &A two years before the allegedly misleading Offering Memorandum was distributed to potential investors, and therefore had no responsibility - and further, no opportunity - to ensure the accuracy of the statements then being made by C & A's management . Evans therefore stands well outside the group of persons whose responsibility for the contents of this 2004 corporate publication could be logically or legally presumed in any circumstance. See In re Digital Island Sec . Litig., 223 F. Supp. 2d 546, 553 (D. Del. 2002) ("under the group pleading doctrine , a company's statements or omissions may be presumed to be the collective work of those individuals with direct involvement in the everyday business of the company") (citation and quotation marks omitted, emphasis added). See also Di Vittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987 ) ("no specific connection between fraudulent representations in [an] Offering Memorandum and particular defendants is necessary where, as here, defendants are insiders or affiliates participating in the offer of the securities in question") (citation omitted , emphasis added); Degulis v. LXR Biotechnology, Inc., 928 F. Supp. 1301, 1311-12 (S.D.N.Y . 1996) (applying group pleading doctrine to "narrowly defined " group of officers and directors who "participated in the preparation and dissemination " of the group published document); In re Baal Sec. Litig., 103 F. Supp . 2d 1, 17-18 (D.D.C. 2000 ) ( noting that "where plaintiffs are relying exclusively on the [group pleading] doctrine to establish 10(b) liability , courts tend to be more selective about which individual defendants qualify" and concluding that the doctrine typically extends only to

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individuals with "direct involvement in the everyday business of the company" or who were "were involved in drafting, reviewing, or disseminating the misleading statements"). An essential purpose of Rule 9(b) is to provide defendants with sufficient notice of a plaintiff's basis for raising assertions that threaten to sully the defendant's reputation for honesty and fair dealing. See In re Burlington, 114 F.3d at 1418. By any measure, this Complaint fails that test. The Complaint alleges that Evans was employed by C&A from April 1999 until

August 2002, see Compl. T 18, and then, without any alleging a single additional fact about Evans, asserts that he participated in a corporate securities fraud that allegedly tools place in August 2004. Because Rule 9(b) does not permit a plaintiff alleging fraud to leave such a broad logical chasm unbridged by any assertion of fact, this claim against Evans must be dismissed. B. C&A's 10-5 Claim Also Must Be Dismissed Because It Does Not Plead Loss, Misrepresentation, Scienter or Reliance

In order state a claim under Rule 10b-5, a plaintiff must allege "(1) a material misrepresentation (or omission); (2) scienter, i.e., a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance, often referred to in cases involving public securities markets (fraud-on-the-market cases) as "transaction causation"; (5) economic loss; and (6) "loss causation," i.e., a causal connection between the material misrepresentation and the loss." Irz re Suprerrra Specialties, Inc. Sec. Litig., 438 F.3d 256, 275 (3d Cir. 2006) (quoting Dura Pharrn., Inc. V. Broudo, 544 U.S. 336, 342 (2005)) (citations omitted). C&A's claim fails to plead economic loss, fails to plead that Evans made any misrepresentation, and fails to allege facts from which C&A's reliance on the alleged misrepresentations can be inferred. Because of these flaws, Rules 9(b) and 12(b)(6) require the dismissal of this claim. [

See In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 276-77 (3d Cir. 2006). "As applied to Section 10(b) claims, Rule 9(b) requires a plaintiff to plead (1) a specific false representation [or omission] of material fact; (2) knowledge by the person who made it of its

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1.

The Complaint Does Not Allege That Evans Made Any Misleading Statement In Connection With The 2004 Securities Transaction

It bears repeating that Evans resigned his corporate positions at C&A in August of 2002 over two years before the only securities transaction alleged in the complaint occurred. Additionally, the Complaint does not allege that Evans had any involvement in any aspect of C&A's management at any time thereafter. Accordingly, even if the court finds that group

pleading is permissible here, Rules 9(b) and 12(b)(6) would still require the dismissal of this claim against Evans because - as demonstrated by the two year gap between Evans' departure and the publication of the allegedly misleading Offering Memorandum distributed in connection with the 2004 securities sale - the Complaint utterly fails to assert that Evans made or approved any relevant statement. We assume that C&A intends to argue that Evans may be held liable for the alleged falsity of the Offering Memorandum distributed in connection with that 2004 transaction because the Offering Memorandum incorporated prior financial statements of the Company, some of which may have been prepared during Evans' tenure at C&A. Compl. ¶ 76. But, as the District Court for the Southern District of California recently explained, the securities laws simply do not create perpetual vicarious liability of this kind: "If the Court were to allow the verdict to stand on this claim, it would in essence allow potential liability in perpetuity for documents signed by an officer of a company, regardless of whether that officer has any knowledge or control over their future use." SEC v, Todd, No. 03 CV 2230 BEN, 2007 WL 1574756, at *2 (S.D. Cal. May 30, 2007) (granting defendant's motion for judgment as a matter of law as to claim under Section 17(a) of the Securities Act upon finding that the SEC's case, premised on the theory that the defendant could be held liable because a corporate statement he had signed was later falsity; (3) ignorance of its falsity by the person to whom it was made; (4) the intention that it should be acted upon; and (5) that the plaintiff acted upon it to his damage." (Emphasis added). 16

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incorporated by reference into an unsigned statement, was insufficient to support the jury's verdict). The 'odd court's decision follows naturally from the line of cases explaining that the implied right of action under Rule lOb-5 does not incorporate aiding and abetting liability. On the contrary, as the Supreme Court has explained, "[Section 10(b)] prohibits only the making of a material misstatement (or omission) or the commission of a manipulative act. . . . The proscription does not include giving aid to a person who commits a manipulative or deceptive act." Central Bank of Deaver v. First Interstate Bank of Denver, 511 U.S. 164, 177 (1994). Accordingly, "any defendant who does not make or affirmatively cause to be made a fraudulent misstatement or omission, or who does not directly engage in manipulative securities trading practices, is at most guilty of aiding and abetting and cannot be held liable under § 10(b) or any subpart of Rule lOb-5." In re Charter Conwis., Inc. See. Ling., 443 F.3d 987, 992 (8th Cir. 2005). See also Shapiro v. Cantor, 123 F.3d 717, 720-21 (2d Cir. 1997) ("A claim under § 10(b) must allege a defendant has made a material misstatement or omission indicating an intent to deceive or defraud in connection with the purchase or sale of a security."). Even on a generous reading, nothing in the Complaint alleges that in connection with the 2004 bond sale, Evans made a fraudulent statement, caused a fraudulent statement to be made, or directly engaged in any manipulative sales practice. C&A's apparent effort to state a claim for relief under lOb-5 on the ground that its 2004 Offering Memorandum incorporated earlier financial statements compiled while Evans was at C&A represents nothing more than an attempt to evade the brightline rule that only a primary violator may be held liable under Rule IOb-5 in a private securities

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action. This attempt must be rejected, and C&A's securities fraud claim against Evans must be d ismiss ed.' 2. The Complaint Fails To Allege That C&A Was Ignorant Of The Falsity Of Its Accounting Statements. Or That C&A Acted In Reliance Thereon

The Complaint's attempt to plead reliance and, accordingly, "transaction causation" is fatally nonsensical. The Complaint alleges that C&A "sold securities in reliance on Director and Officer Defendants' materially false and misleading statements...." Compl. ¶ 156. But the Complaint also alleges that C&A was controlled by these same Director and Officer Defendants (^T 28, 31), who, according to the Complaint, knew that C&A's financial statements were false and misleading (^ 27, 154). The Complaint thus alleges that the false statements of the Director and Officer Defendants misled the Director and Officer Defendants, and thereby caused the same Director and Officer Defendants to authorize a sale of C&A's securities in August 2004. This allegation makes no sense: How could the alleged schemers have been misled by their own scheme? The Complaint does not even hint at an answer to this basic question, one which calls C&A's conclusory assertion that it relied on the Director and Officer Defendants' statements in arriving at its decision to sell securities into serious doubt. Cf. Tremt,ick Am. Litig. Trust, 906 A.2d at 211-12 (holding on similar facts that a plaintiff litigation trust had failed to allege the reliance element of its common-law fraud claim: `By the Litigation Trust's own admission, [debtor's] board of directors knew the true facts about all the issues said to have been misrepresented. As a result, [the debtor] - as an entity - did not rely to its detriment on any of the

Because C&A concedes that Evans had resigned his position at C&A in August 2002 (Compl. ¶ 18), more than two years before the publication of the allegedly misleading Offering Memorandum that was distributed in connection with the 2004 securities sale, it is self-evident that Evans did not act with the requisite scienter, or mental state necessary for C&A to state a l Ob-5 claim.

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misstatements, despite the cursory statement in the complaint that the `plaintiff relied on the false statements to its detriment."). This illogic highlights two further flaws in C&A's attempt to plead securities fraud: the Complaint fails to allege that the alleged misstatements were made to C&A, and fails to allege that C&A was ignorant of the falsity of these statements. See In re Suprema Specialties, 438 F.3d at 276-77 (holding that Section 10(b) plaintiffs must allege with specificity, inter alia, "ignorance of [the statement's] falsity by the person to whom it was made"). As to the first, the Complaint actually asserts that the misstatements were made by C&A: "Defendants caused Collins & Aikman to circulate [the allegedly misleading] offering memorandum" to investors. Compl. ' j 75-76. Complaint is mute. And as to C&A's knowledge of the offering memorandum's falsity, the The Complaint thus offers only silence and contradiction where Rules These patent deficiencies are

12(b)(6) and 9(b) require allegations of fact and particularity.

independently sufficient to require the dismissal of this l Ob-5 claim. 3. The Complaint Pleads An Invalid Theory of Loss

According to the Complaint, C&A suffered a loss in the form of "deepened . . . insolvency" when, facing a "liquidity crisis," Compl. 62, its management decided to seek a On this rationale,

capital infusion from the securities markets by issuing bonds. Id.. ¶ 156.

individuals and business entities suffer a "loss" when they obtain a mortgage, finance a car purchase, take out a student loan, or borrow funds to make capital improvements in a small business. But as logic and ordinary experience teach, a loan is not, in and of itself, a loss - the borrower is not automatically poorer for having accepted the lender's money. Rather, at the

moment the loan closes, the borrower is exactly as rich or poor as he was before: the transaction "increases liabilities (the amount of the loan) and assets (the cash provided by the loan) in the

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same amount." In re Radnor Holdings Coip., 353 B.R. 820, 842 (Bankr. D. Del. 2006). As one commentator has explained, this is no less true of an insolvent borrower than of any other: "the fresh cash equals and cancels out the fresh debt, and the insolvency stands as it did before." S. Willett, The Shallows of Deepening Insolvency, 60 Bus. LAW 549, 553 (2005). If a loss comes at all, it comes only later, when the borrower fails to make productive use of the cash supplied by the loan. See id. at 575 (explaining that "[l]oans do not deepen insolvency. Although

improvident uses of firm assets which credit is put.").

may cause harm, the borrower is responsible for the uses to

This common-sense principle - although ignored in the Complaint - has been strongly endorsed by the Third Circuit. In In re CITX Corp., Inc., the Third Circuit considered a Chapter 7 Trustee's claim that the debtor's accountant was liable for professional malpractice because its incautious audit reports had permitted the debtor to continue to raise equity from new investors. 448 F.3d 672, 677 (3d Cir. 2006). The Court sharply rejected this loss theory. It first clarified that the Court's earlier opinion in Official Committee of Unsecured Creditors v. R.F. Lafferty Co., 267 F.3d 340 (3d Cir. 2001), had "never held that [deepening insolvency] was a valid theory of injury for an independent cause of action," and disavowed any implication in Lafferty that "deepening insolvency would be a valid theory of damages for any other cause of action, such as fraud." CITX Corp., 448 F.3d at 677 and n.8.3 The Court then went on to explain why the new equity obtained by the debtor had not deepened the debtor's insolvency: Assuming for the sake of argument that [defendant's] financial statements allowed [the debtor] to raise over $1,000,000, that did nothing to "deepen" [the debtor's] insolvency. It did the opposite. Before the equity infusion, [debtor) was $2,000,000 in the red.... With the added $1,000,000 investment, it was thereby insolvent only $1,000,000. Insolvency decreased rather than deepened.... The

Judge Fuentes, who authored Lafferty, was also member of the CITX panel and j oined the 3 CITX opinion without reservation. 20

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crux, then, is the claim that the $1,000,000 equity investment allowed [debtor] to exist long enough for its management to incur millions more in debt. But that looks at the issue through hindsight bias. As noted, the equity investment was hardly harmful to [debtor]. Its management surely misused the opportunity created by that investment; that was unfortunate. But they could have instead used that opportunity to turn the company around and transform it into a profitable business. They did not, and therein lies the harm to [debtor]. Id. at 677-78 (citing with approval S. Willet, The Shalloii,s of Deepening Insolvency, 60 Bus. LAW at 552-57). The same principles require the rejection of C&A's theory that the corporation suffered a loss when it borrowed money from outside investors. While C&A's 2004 bond sale did not

lessen C&A's alleged insolvency, neither did it deepen it; C&A was exactly as rich or poor as it was before. See Radnor Holdings, 353 B.R. at 842. The crux of C&A's claim, then, must be that by raising money through the bond sale, C&A gained the ability to pursue other business decisions that turned out to be unwise. The Complaint concedes as much, asserting that the debt sale "deepened the insolvency of the Company by providing it with funds it 11,ould rapidly lose and be enable to repay due to the huge hidden operating losses it already had incurred and was continuing to incur." Compl. T 60 (emphasis added). But for precisely the reasons explained by the CITX Court, this allegation fails to state a claim that C&A sustained an injury when it borrowed funds: "[Tjhat looks at the issue through hindsight bias ... [defendant's] management surely misused the opportunity created by that [loan]; that was unfortunate. But they could have instead used that opportunity turn the company around and transform it into a profitable business. They did not, and therein lies the harm to [defendant]." 448 F.3d at 677-78. Because

4

These words are particularly pertinent to Evans' motion to dismiss this claim. As set forth in the Complaint, Evans was not an officer or director of C&A in or after August 2004, and therefore played no role in C&A's decision to issue bonds or in deciding how to use the cash that C&A raised. Compl. 118. Even assuming arguendo that C&A has alleged a cognizable injury in the form of a "deepened insolvency," CITX makes clear that this alleged injury occurred long 21

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the Complaint therefore does not adequately link the purported misstatements in the 2004 Offering Memorandum to a cognizable farm, C&A's I Ob-5 claim must be dismissed.

II.

C&A'S SECTION 14(A) CLAIM IS UNTIMELY AND FAILS TO ALLEGE BOTH INJURY AND CAUSATION
C&A next claims that Evans is liable to the Company under Section 14(a) of the

Exchange Act and Rule 14a -9 thereunder because the Company's 2002, 2003 and 2004 proxy statements omitted material facts, and thus were misleading to its shareholders .' This claim fails against Evans for four reasons . First , Section 14(a) claims arising out of the 2002 Proxy

Statement are time-barred . Second, the attenuated and contingent loss theory that the Complaint asserts has been squarely rejected by the Third Circuit. Third, because investors who

collectively owned almost 85% of C&A's shares committed to vote in favor of the Company's proposals before the 2002 Proxy Statement was released , C&A cannot show in any event that its purported injury was caused by the allegedly misleading statements contained in that document. Finally, C &A lacks standing to bring a claim under Section 14(a) complaining that its own proxy statements were misleading . In short, this claim is meritless. A. As To Evans, This Claim Is Plainly Untimely

Thomas Evans resigned his positions as President and CEO of C&A in August 2002, see Compl . ^ 18, and therefore had no obligation to ensure the accuracy of the 2003 and 2004 Proxy Statements about which C&A now complains . See Virginia M Damon Trust v. North Counity after Evans left C&A, when others failed to make productive use of the borrowed funds. Evans is not responsible for these decisions or their result. Rule 14a-9 provides, in relevant part, that "[n]o solicitation ... shall be made by means 5 of any proxy statement ... containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to s