IN RE TOUSA, INC. (Bankr.S.D.Fla. 10-4-2010)

Derivative, Not Direct, Claims for Breaches of Fiduciary Duties Owed to the Conveying Subsidiary Debtors.

The Defendants insist that the Committee's causes of action are direct creditor claims masquerading as derivative claims. This was not the case on June 1, 2009, when I granted the Committee derivative standing to pursue the Claims on behalf of and for the benefit of the Conveying Subsidiaries' estates. Any recovery on behalf of a conveying subsidiary in this adversary proceeding will go to the estate of that conveying subsidiary, not to the Committee.

Order Granting Leave, Standing and Authority to the Official Committee of Unsecured Creditors of TOUSA Inc., et al., to Prosecute and If Appropriate Settle Certain Causes of Action on Behalf of the Debtors' Estates, Main Case No. 08-10928, June 1, 2009, ECF No. 2828.

While Delaware law prohibits creditors of an insolvent corporation from bringing direct breach of fiduciary duty claims against the corporation's directors:

[w]hen a corporation is insolvent . . . its creditors take the place of the shareholders as the residual beneficiaries of any increase in value. Consequently, the creditors of any insolvent corporation have standing to maintain derivative claims against directors on behalf of the corporation for breaches of fiduciary duties.

See N. Am. Catholic Programming Found. v. Gheewalla, 930 A.2d. 92 (Del. 2007).

The proper analysis to distinguish between direct and derivative actions "must be based solely on the following questions: Who suffered the alleged harm — the corporation or the suing stockholder individually- and who would receive the benefit of the recovery or other remedy?" With respect to the Committee's claims, the answers to the questions concerning harm and remedy are in both instances "the Conveying Subsidiaries." The Amended Complaint alleges at paragraph 5 that "as a result of the Transaction, the Conveying Subsidiaries were saddled with a massive amount of secured debt for which they received little or no value in return, became financially hamstrung as the company and the market collapsed, and were unable to access necessary credit and liquidity or pursue other options." At paragraphs 168 and 177, the Amended Complaint alleges that the July 2007 transaction "improperly harm[ed] and diminish[ed] the value of the Conveying Subsidiaries through the incurrence of the secured New Debt, for the sole purpose of satisfying the existing obligations of TOUSA and Homes LP." With respect to the question of who will receive the benefit of the recovery in the action, one need only consult paragraph 4 of the June 1, 2009 order granting the Committee standing to pursue the claims: any recovery in this adversary proceeding becomes

Tooley v. Donaldson, Lufkin, Jenrette, Inc., 845 A.2d 1031, 1035 (Del. 2004).

property of the debtor estates that were harmed by the breaches. That the Debtors retain the authority to settle the Claims the Committee brings on behalf of the Conveying Subsidiaries is further support that the Claims are derivative.

The Defendants nevertheless argue that the Committee's allegations render its claims direct. But the allegations concerning the subsidiaries' creditors are consistent with the claims' derivative nature. The Committee alleges in paragraph 133 of the Amended Complaint that "[t]he insolvency of the Conveying Subsidiaries before and after the Transaction resulted in the Director Defendants owing fiduciary duties . . . to the creditors" because, upon insolvency, "creditors take the place of the shareholders as the residual beneficiaries of any increase in value." Likewise, the Committee alleges in paragraph 168 of the Amended Complaint that the July 2007 transaction damaged the conveying subsidiaries' creditors by subordinating the interests of their existing creditors to the new secured lenders. This is because "[t]he corporation's insolvency `makes the creditors the principal constituency injured by any fiduciary breaches that diminish the firm's value.'" Courts routinely hold that claims like those asserted in the Amended Complaint constitute derivative causes of action. The contentions by the defendants that the claims the Committee asserts are not derivative in nature (or that the conveying subsidiaries and their creditors are not owed fiduciary duties upon insolvency) fly in the face of well-settled case law.

Gheewalla, 930 A.2d at 101.

Id. at 102 (quoting Prod. Res. Grp., LLC v. NCT Grp., Inc., 863 A.2d 772, 794 n. 67 (Del. Ch. 2004)).

See Seidel v. Byron, 405 B.R. 277, 288 (N.D. Ill. 2009) ("Based on [Delaware] case law, the Court finds that [the Chapter 7 Trustee] has properly stated a derivative claim for breach of fiduciary duty on behalf of [the Debtor's] creditors, and declines to dismiss on this ground."); In re VarTec Telecom, Inc., No. 04-81694-HDH-7, 2007 WL 2872283, at *3-4 (Bankr. N.D. Tex. Sept. 24, 2007) (holding that trustee pleaded claims for breach of fiduciary duties within insolvency exception to Delaware rule that wholly-owned subsidiaries operated for benefit of their parent corporations, and that trustee could bring derivative claim for breach of fiduciary duty on behalf of debtor's creditors); Medlin v. Wells Fargo Bank, N.A. (In re I.G. Servs., Ltd.), Nos. 99-53170-C, 99-53171-C, 2007 WL 2229650 at *3 (Bankr. W.D. Tex. July 31, 2007) ("the creditors of an insolvent corporation have standing to maintain derivative claims against directors on behalf of the corporation for breaches of fiduciary duties"); Official Comm. Of Unsecured Creditors v. Clark (In re Nat'l Forge Co.), 326 B.R. 532, 547 (W.D. Pa. 2005) ("We conclude that the Bankruptcy Court did not err in granting the Committee derivative standing . . ." for fraudulent transfer and breach of fiduciary duty claims).

Delaware law is clear that directors and officers of an insolvent, wholly-owned subsidiary owe fiduciary duties to the subsidiary and its creditors. The Delaware Chancery Court explained that holding directors of a wholly-owned, insolvent subsidiary liable for breaches of fiduciary duties to the subsidiary and the subsidiary's creditors can be rationalized in traditional terms. "If the firm is insolvent, its residual claimants are the creditors and it is for their benefit that the directors must now manage the firm. A purposeful fraudulent transfer to stockholders who are `out of the money' is obviously inconsistent with the best interest of the creditors, the firm's new residual claimants." Even outside of the context of insolvency, "[i]ndividuals who act in a dual capacity as directors of two corporations, one of who[m] is parent and the other subsidiary, owe the same duty of good management to both corporations . . ." The Supreme Court has held it is a "well established principle [of corporate law] that directors and officers holding positions with a parent and its subsidiary can and do `change hats' to represent the two corporations separately, despite their common ownership." The presumption is that "directors are wearing their `subsidiary hats' and

Claybrook v. Morris (In re Scott Acquisition Corp.), 344 B.R. 283, 290 (Bankr. D. Del. 2006) ("Thus, the Court rejects the suggestion that upon insolvency a director of a wholly-owned subsidiary owes a duty to that corporation's creditors but not to the corporation itself. A more natural reading of Delaware law is that upon insolvency directors of a wholly-owned subsidiary owe fiduciary duties to the subsidiary and its creditors."); Collins v. Kohlberg Co. (In re Southwest Supermarkets, LLC), 376 B.R. 281, 285 (Bankr. D. Ariz. 2007) ("Once the subsidiary becomes insolvent, Delaware law recognizes that the fiduciary duties shift to the creditors. Once they do, the effect is that there is more than one equitable beneficiary of those duties.").

Trenwick Am. Litig. Trust v. Ernst Young, LLP, 906 A.2d 168, 204, n. 96 (Del. Ch. 2006), aff'd, 931 A.2d 438 (Del. 2007).

Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983).

United States v. Bestfoods, 524 U.S. 51, 69 (1998).

not their `parent hats' when acting for the subsidiary." Indeed, "[t]here is no basis for the principle . . . that the directors of an insolvent subsidiary can, with impunity, permit it to be plundered for the benefit of its parent corporation."

Id.

In re Scott Acquisition, 344 B.R. at 288; see also ASARCO LLC v. Americas Mining Corp., 396 B.R. 278, 395 (S.D. Tex. 2008) ("As a general rule, a director owes a fiduciary duty only to its corporation and its shareholders (not its creditors). When a corporation is a wholly owned subsidiary, the directors' duties to the corporation benefit the parent as the sole shareholder. New Jersey and Delaware have both adopted an `insolvency exception' to this general rule. If the wholly owned subsidiary is insolvent, the director's fiduciary duties to the corporation run to the benefit of the creditors. `The fact of insolvency places the creditors in the shoes normally occupied by the shareholders-that of residual risk-bearers.' The directors' focus is no longer solely on its shareholders' interests, but also on the creditors' interests.") (internal citations omitted); see also RSL Commc'n PLC ex rel. Jervis v. Bildirici, No. 04-CV-5217 (KMK), 2006 WL 2689869, at *9 (S.D.N.Y. Sept. 14, 2006) ("Therefore, in a situation such as is alleged here, the directors of the subsidiary must consider the subsidiary's creditors' interests in addition to the parent's interests. This means the directors may have to pursue a course which does not benefit any particular group, including shareholders and creditors, over another.") (internal citations omitted).

The Third Circuit has explained why a subsidiary's insolvency is a fiduciary duty game-changer:

In a parent and wholly-owned subsidiary context, the directors of the subsidiary are obligated only to manage the affairs of the subsidiary in the best interest of the parent and its shareholders . . . [T]he only interest of a wholly owned subsidiary is in serving its parent. That doing so may not always maximize the subsidiary's economic value is of little concern. If the subsidiary is not wholly owned, however, in the interest of protecting minority shareholders we revert to requiring that whoever controls the subsidiary seek to maximize its economic value with requisite care and loyalty. Similarly, if the subsidiary is insolvent, we require the same in the interest of protecting the subsidiary's creditors.

The rule that in the case of an insolvent subsidiary, fiduciary duties are owed to the subsidiary and its creditors (and not simply to the subsidiary's parent) is consistent with Delaware law that "directors of an insolvent corporation [must] consider . . . the interests of the corporation's creditors who, by definition, are owed more than the corporation has the wallet to repay." That creditors are owed fiduciary duties upon insolvency is "uncontroversial," since "directors continue to have the task of attempting to maximize the economic value of the firm." Both in and out of the parent-subsidiary context, fiduciaries are required to exercise their duty for the "benefit of all those having an interest in [the insolvent company]."

Miller v. McCown De Leeuw Co. (In re The Brown Schools), 386 B.R. 37, 46 (Bankr. D. Del. 2008) (quoting Trenwick, 906 A.2d at 205).

Production Res., 863 A.2d at 790.

Gheewalla, 930 A.2d at 103.

The Amended Complaint alleges at paragraphs 129-30 that the Conveying Subsidiaries were insolvent before the July 2007 transaction, and alleges at paragraphs 113-16, 118-19, and 128 a number of facts regarding inability to pay debts as they became due. Although several of the defendants claim that the Committee's insolvency allegation is merely conclusory with insufficient factual detail, a thirteen day trial in this very forum established insolvency, and I must accept the Committee's allegation of insolvency as true at this early pleading stage. I decline to hold the allegation of insolvency insufficient under Twombley and Iqbal because the factual record regarding the Committee's allegation of insolvency is well developed and easily accessible within this very bankruptcy case.

See Official Comm. of Unsecured Creditors of TOUSA, Inc., et al. v. Citicorp N. Am., Inc., et al. (In re TOUSA, Inc., et al.), 422 B.R. 783 (Bankr. S.D. Fla. 2009).

Because the conveying subsidiaries are alleged to have been insolvent, they and their stakeholders, including creditors, were owed fiduciary duties for purposes of these motions to dismiss. Where a defendant owed fiduciary duties to an insolvent conveying subsidiary, that defendant was required to consider the interests of that subsidiary's creditors in attempting to maximize value for all stakeholders. Each of the subsidiary directors owed fiduciary duties to their respective subsidiaries by virtue of their status as director, officer, manager, or managing trustee of a subsidiary, and this is set forth in the Amended Complaint at paragraphs 49-68. None of the subsidiary directors dispute his/her fiduciary relationship with the subsidiaries he or she served, and some of the defendants' arguments attempting to limit fiduciary duties owed are frivolous and do not appear to be made in good faith because they ignore plainly alleged facts that actions were taken which can only come with fiduciary obligations. That many of these motions devote so much time to the application of Delaware law while ignoring clear Delaware precedent is troublesome.

The Brown Schools, 386 B.R. at 46.

Delaware law expressly rejects the notion that directors of a corporation owe no fiduciary duties to a limited partnership or LLC controlled by that corporation. "One who controls property of another may not, without implied or express agreement, intentionally use that property in a way that benefits the holder of the control to the detriment of the property or its beneficial owner." As the court in USA Cafes rhetorically asked, where an individual uses a corporate entity to cause a partnership/LLC to enter into a transaction which injures the partnership/LLC but rewards the corporate entity: "[c]an it be imagined that such persons have not breached a duty to the partnership[/LLC] itself? And does it not make perfect sense to say that the gist of the offense is a breach of the equitable duty of loyalty that is placed upon a fiduciary?" It is settled Delaware law that, "[i]f the firm is insolvent, its residual claimants are the creditors and it is for their benefit that the directors must now manage the firm." Under Delaware law, once a subsidiary becomes insolvent, the fiduciary duties shift from the parent to the insolvent subsidiary's creditors, and "[o]nce they do, the effect is that there is more than one equitable beneficiary of those duties."

In re USA Cafes, L.P. Litig., 600 A.2d 43, 48-49 (Del. Ch. 1991); see also Wallace v. Wood, 752 A.2d 1175, 1180-81 (Del. Ch. 1999); Bigelow/Diversified Secondary P'ship Fund 1990 v. Damson/Birtcher Partners, Civ. A. 16630-NC, 2001 WL 1641239, *8 (Del. Ch. Dec. 4, 2001); In re Primedia Inc. Derivative Litig., 910 A.2d 248, 257 (Del. Ch. 2006); Cargill, Inc. v. JWH Special Circumstance LLC, 959 A.2d 1096, 1110 (Del. Ch. 2008).

USA Cafes, 600 A.2d at 48.

Id. at 49.

Trenwick, 906 A.2d at 203 n. 96.

Collins v. Kohlberg Co. (In re Southwest Supermarkets, LLC), 376 B.R. 281, 285 (Bankr. D. Ariz. 2007) (applying Delaware law).

III. The Amended Complaint Adequately States Claims for Breaches of Fiduciary Duties.

A. The Duties of Loyalty Good Faith

The duties of loyalty and good faith require directors and officers to put the interests of the company above their own interests and those of others. The "universe of fiduciary misconduct is not limited to . . . disloyalty in the classic sense[,]" i.e. self-dealing, personal gain, or a cognizable conflict of interest. A corporate fiduciary fails to act in good faith and therefore breaches the duty of loyalty by "intentionally act[ing] with a purpose other than that of advancing the best interests of the corporation . . . act[ing] with the intent to violate applicable positive law . . . [or] intentionally fail[ing] to act in the face of a known duty to act, demonstrating a conscious disregard for their responsibilities." Corporate fiduciaries fail to act in good faith where they display a lack of diligence that "is more culpable than simple inattention or failure to be informed of all facts material to the decision," such that it is "qualitatively more culpable than gross negligence."

See Brehm v. Eisner (In re Walt Disney Co. Derivative Litig.), 906 A.2d 27, 66 (Del. 2006); see also Bridgeport Holdings Inc. Liquidating Trust v. Boyer (In re Bridgeport Holdings, Inc.), 388 B.R. 548, 564 (Bankr. D. Del. 2008) (citing Desimone v. Barrows, 924 A.2 908, 933 (Del. Ch. 2007).

Brehm v. Eisner, 906 A.2d at 67.

Id. at 66.

Acts and omissions like those alleged in the Amended Complaint are sufficient to state a claim for breach of the duty of loyalty. In RSL Primecall, the plaintiffs alleged that a parent company forced its insolvent subsidiary to become the guarantor of the parent's pre-existing bond debt thirteen months before the subsidiary filed for bankruptcy. Like here, the subsidiary was not party to and did not originally guarantee the debt, which was issued years before. The plaintiff debtors and committee of unsecured creditors filed suit, claiming that the subsidiary's directors breached their fiduciary duties by executing a "Unanimous Written Consent" authorizing the subsidiary to enter into the guaranty, without conducting any independent analysis or evaluation. In their motions to dismiss the complaint, the Primecall subsidiary directors argued that they did not breach their fiduciary duties because they did not act out of self-interest or receive a pecuniary gain, their decisions were protected by the business judgment rule, and they were relieved from potential liability by virtue of an exculpation clause in the subsidiary's certificate of incorporation. The court disagreed on all counts, holding that:

[the law does] not require that the plaintiffs allege that each defendant director was the recipient of a direct pecuniary benefit from a challenged transaction, but [instead it is sufficient that] in each the transaction allegedly benefited only the affiliate/[parent company] and was patently inequitable to the subsidiary . . .

Moreover, the business judgment rule does not protect conduct of directors where material decisions are made in the absence of any information and any deliberation. Allegations that the [subsidiary] directors abdicated all responsibility to consider action that was arguably of material importance to the corporation puts directly in question whether the board's decision-making processes were employed in a good faith effort to advance corporate interests . . .

With respect to the guarantees, Plaintiffs have challenged the Defendants' good faith and this is enough, at this stage, to overcome the exculpation clause.

See, e.g., The Official Comm. of Unsecured Creditors of RSL Com Primecall, Inc., et al. v. Beckoff (In re RSL Com Primecall, Inc., et al.), Nos. 01-11457 (ALG) through 01-11469 (ALG), Adv. 03-2176 (ALG), 2003 WL 22989669, at *12 (Bankr. S.D.N.Y. 2003 Dec. 11, 2003) ("With respect to the guarantees, Plaintiffs have challenged the Defendants' good faith and this is enough, at this stage, to overcome the exculpation clause.").

Id. at *2.

Id. at *11.

Moreover, the Primecall court noted:

It would be absurd to hold that the doctrine that directors owe special duties after insolvency is inapplicable when the insolvent company is a subsidiary of another corporation. That is precisely when a director must be most acutely sensitive to the needs of a corporation's separate community of interests, including both the parent shareholder and the corporation's creditors. The Delaware courts have recognized that directors who hold dual directorships in the parent-subsidiary context may owe fiduciary duties to each corporation.

There is no basis in law for the proposition that the directors of an insolvent subsidiary can permit it to be plundered for its parent's benefit.

Id.

The Committee has alleged sufficient facts to support the claim that the defendants breached their duty of loyalty and acted in bad faith. The Committee has alleged, in what I find to be ample detail for pleading purposes, that the defendants were required to evaluate the July 2007 transaction on behalf of the entities they served, and that each of them failed to do so. The defendants' arguments regarding lack of factual specificity are frivolous.

See Am. Compl., ECF No. 93, at ¶¶ 6, 95-98, 107, 110-12, 117, 120-127, 134-36, 139-54, 162

B. The Duty of Due Care

The duty of due care requires that corporate directors "use that amount of care which ordinarily careful and prudent men would use in similar circumstances" and "consider all material information reasonably available." The Delaware Supreme Court has described two contexts in which liability for a breach of the duty of care may arise:

In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 749 (Del. Ch. 2005).

First, such liability may be said to follow from a board decision that results in a loss because that decision was ill advised or `negligent.' Second, liability to the corporation for a loss may be said to arise from an unconsidered failure of the board to act in circumstances in which due attention would, arguably, have prevented the loss.

Where "directors have made an unintelligent or unadvised judgment, the protections of the business judgment rule do not apply." Gross negligence is the applicable legal standard for a corporate director's breach of the duty of care under Delaware law, and this appears to be synonymous with "engaging in an irrational decision making process." It "signifies more than ordinary inadvertence or inattention," and a corporate strategy will fail to meet the standard of due care if it reflects "a knowing and deliberate indifference to the potential risk of harm to the Company." As Judge Teel stated in Greater Southeast Cmty. Hosp. Corp. (when declining to apply the business judgment rule at the motion to dismiss stage):

Walt Disney, 907 A.2d at 748 (Del. Ch. 2005); see also Cede Co. v. Technicolor, Inc., 634 A.2d 345, 367 (Del. 1993); Bridgeport Holdings Inc. Liquidating Trust v. Boyer (In re Bridgeport Holdings, Inc.), 388 B.R. 548, 572 (Bankr. D. Del. 2008).

Brehm v. Eisner, 746 A.2d 244, 259 (Del. 2000).

In re Greater Southeast Cmty. Hosp. Corp., 353 B.R. 324, 339 (Bankr. D. Col. 2006) (citing Stanziale v. Nachtomi (In re Tower Air, Inc.), 416 F.3d 229, 241 (3d Cir. 2005)).

Jardel Co. v. Hughes, 523 A.2d 518, 530 (Del. 1987).

See Boles v. Filipowski (In re Enivid, Inc.), 345 B.R. 426, 451 (Bankr. D. Mass. 2006) (applying Delaware law).

Any reasonable businessperson worth her salt would have carefully considered the obvious negative consequences of incurring additional debt of the magnitude acquired by each and every one of the debtors, yet this is precisely what [the officer defendants] allegedly failed to do when they signed the agreements and notes — some of which required the issuance of patently false `solvency certificates' — that plunged the debtors deeper and deeper into insolvency . . . Such conduct, if it actually occurred, cannot be excused as `ordinary inadvertence or inattention,' but rather constitutes gross negligence of the highest order. [Plaintiff] alleges facts sufficient to state a claim for breach of the fiduciary duty of care by [the officer defendants].

And under Delaware law, "[t]he more significant the subject matter of the decision, the greater is the requirement to probe and consider alternatives." In Healthco, the court considered allegations of uninformed decision-making by directors in connection with a leveraged buyout that left the corporation with unreasonably small capital. In approving the LBO, the directors failed to review cash projections indicating that the debtor would be left with insufficient capital after the transaction. The court held that the directors' failure to consider material information was grossly negligent and violated their duty of due care. It is difficult to imagine a business decision more significant for the conveying subsidiary debtors than becoming obligors of the July 2007 transaction's $500 million of new debt, which provided them with no benefits and ultimately led to their bankruptcy.

Brandt v. Hicks, Muse Co. (In re Healthco Int'l, Inc.), 208 B.R. 288, 305 (Bankr. D. Mass. 1997) (applying Delaware law); see also UIS, Inc. v. Walbro Corp., No. Civ. A. 9323, 1987 WL 18108, *2 (Del. Ch. Oct. 6, 1987) ("A board's duty is to act with due care and that duty includes the responsibility to reasonably inform oneself of alternatives.").

The Committee has alleged sufficient facts to support the claim that the defendants breached their duty of due care. The Committee has alleged that the defendants were required to evaluate the July 2007 transaction on behalf of the entities they served, and that each of them failed to do so. The defendants' arguments regarding lack of factual specificity are, again, frivolous.

See Am. Compl., ECF No. 93, at ¶¶ 6, 95-98, 107, 110-12, 117, 120-127, 134-36, 139-54, 162

IV. The Amended Complaint Adequately States Claims for Aiding and Abetting Breaches of Fiduciary Duties.

The Committee is required to show: (1) the existence of a fiduciary relationship; (2) that the fiduciary breached its duty; (3) that a non-fiduciary defendant knowingly participated in the breach; and (4) that damages to the plaintiff resulted from the concerted action of the fiduciary and the non-fiduciary. As stated in the preceding sections, the Amended Complaint alleges the existence of fiduciary relationships and breaches of duties concomitant with those relationships.

To allege a non-fiduciary's knowing participation in a fiduciary's breach, a plaintiff must allege facts from which the non-fiduciary's knowing participation can be reasonably inferred. "[I]n some circumstances, the nonfiduciary's actions may be so suspect as to permit, if proven, an inference of knowledge of an intended breach of trust." Nevertheless, a plaintiff is not required to establish that the non-fiduciary intended to aid in the fiduciary's breach because "knowing participation" only requires "that the third party act with the knowledge that the conduct advocated or assisted constitutes such a breach." A reasonable inference of the non-fiduciary's "knowing participation" may be drawn where the complaint alleges that the third party was aware of the fiduciary's wrongful actions and advocated, approved of, or participated in some manner in them.

See Miller v. Greenwich Capital Fin. Prods., Inc. (In re American Bus. Fin. Servs., Inc.), 362 B.R. 135, 145 (Bankr. D. Del. 2007); In re Shoe-Town, Inc. Stockholders Litig., C.A. No. 9483, 1990 WL 13475 at *8 (Del. Ch. Feb. 12, 1990).

Triton Constr. Co. v. Eastern Shore Elec. Servs., Inc., C.A. No. 3290-VCP, 2009 WL 1387115, *16 (Del. Ch. May 18, 2009), aff'd 988 A.2d 938 (Del. Jan. 14, 2009).

See Malpiede v. Thompson, 780 A.2d 1075, 1097 (Del. 2000).

See Triton Constr. Co., 2009 WL 1387115, at *16; see also IT Litig. Trust v. D'Aniello (In re IT Group, Inc.), No. 02-10118, Civ. A. 04-1268-KAJ, 2005 WL 3050611, *13 (D. Del. Nov. 15, 2005) ("allegations of [the defendants'] actual control of the [company's] board are sufficient to survive the 12(b)(6) motion, and knowing participation could be inferred from that alleged control.").

The defendants' arguments that the Amended Complaint fails to allege aiding and abetting breaches of duty are questionable, at best. The Amended Complaint makes a number of fairly specific allegations which, taken together, can only be interpreted as a comprehensive allegation of aiding and abetting breaches of fiduciary duty. The Committee alleges that the defendants used insolvent subsidiary debtors' assets to expand the parents' pie at the expense of the subsidiaries' non-parent stakeholders. This is not a matter where the subsidiary debtors received the proceeds of the loan, thereby increasing liabilities and assets in the same (or equivalent) amounts. The allegation is that the conveying subsidiary debtors received little or nothing in return for the liens on their assets, and that the cash proceeds of the July 2007 transaction went to satisfy the obligations of others.

See Am. Compl., ECF No. 93, at ¶¶ 92, 94-97, 108-11, 113-16, 129-31, 134, 145, 153-54, 157-58.

V. Conclusion

Under Delaware law, business judgment will not be second-guessed by courts absent an abuse of discretion because there is a presumption of propriety, and the burden is on the party challenging the business decision to establish facts rebutting the presumption. But the business judgment rule does not protect the defendants at this early pleading stage because the Committee has properly alleged breaches of the duties of loyalty, good faith, and due care. A director who breached any one of those duties loses the protection of the business judgment rule under Delaware law.

In re Troll Commc'ns, 385 B.R. 110, 118 (Bankr. D. Del. 2008).

McMullin v. Beran, 765 A.2d 910, 917 (Del. 2000) (citing Emerald Partners v. Berlin, 726 A.2d 1215, 1221 (Del. 1999)).

Further, the defendants' arguments that this breach of fiduciary duty action is merely a disguised deepening insolvency claim are unpersuasive. This is not a matter in which the defendants "cho[se] to continue the firm's operations in the hope that they [could] expand the inadequate pie." The Committee alleges that the defendants used insolvent subsidiary debtors' assets to expand the parents' pie at the expense of the subsidiaries' non-parent stakeholders. This is not a matter where the subsidiary debtors received the proceeds of the loan, thereby increasing liabilities and assets in the same (or equivalent) amounts. The allegation is that the conveying subsidiary debtors received little or nothing in return for the liens on their assets, and that the cash proceeds of the July 2007 transaction went to satisfy the obligations of others. The allegations here therefore differ from those in Mukamal v. Bakes, where it was "not even alleged that the Debtors suffered any loss on the loan transactions in question," nor alleged "that the interests of the [controlling shareholder] were favored

Trenwick, 906 A.2d at 174.

over those of other shareholders, or that [the defendant's] decision-making failed to increase the value of [the company] for all shareholders."

Mukamal v. Bakes, 383 B.R. 798, 825 (citing Trenwick, 906 A.2d at 204).

Finally, I need not reach the defendants' argument that this action seeks relief which is mooted by the October 30, 2009 order in 08-1435-JKO. "It is premature to reach issues of damages on [a 12(b)(6)] motion," even if the defendants "contend that the facts alleged in the complaint, together with facts of record in the . . . Chapter 11 case, demonstrate that there could be no damages because the [debtor subsidiary] attempted to set aside the [fraudulent transfers]." The finding that a fraudulent transfer was conveyed does not negate a cause of action that directors breached their fiduciary duties in connection with approving that same fraudulent transfer. And it is worth noting that the Amended Complaint requests punitive damages in the first paragraph of its prayer for relief. A fact-intensive inquiry would in any event be necessary to determine whether the unwinding of the July 2007 transaction renders damages nominal.

The Official Comm. of Unsecured Creditors v. Beckoff (In re RSL Com Primecall), Nos. 01-11457 (ALG) through 01-11469 (ALG), Adv. 03-2176 (ALG), 2003 WL 22989669, at *12 (Bankr. S.D.N.Y. 2003 Dec. 11, 2003) (breach of fiduciary duty case, relating to underlying fraudulent transfer, survived motion to dismiss).

See, e.g., ASARCO LLC v. Americas Mining Corp., 404 B.R. 150, 168 (S.D. Tex. 2009) (simultaneously holding that fraudulent transfer occurred and finding defendants liable for aiding and abetting breaches of fiduciary duty in connection with the transfer because "[t]his [fraudulent] conduct is precisely what the law governing fiduciary duties is meant to deter").

It is accordingly ORDERED that the motions to dismiss filed at ECF Nos. 107, 109, 110, 111, 113, 114, and 129 seeking to dismiss the Amended Complaint at ECF No. 93 are DENIED.