GRASSMUECK v. BARNETT

MARSHA PECHMAN, District Judge.

This matter comes before the court on a Motion To Dismiss brought by Defendant Livingston Chaffee pursuant to Federal Rule of Civil Procedure 12(b)(6). In support of this Motion, Defendant incorporates by reference Outside Director Defendants' Motion to Dismiss and their two Requests for Judicial Notice. Having reviewed Defendants' Motion, all answers and responses thereto, the Request for Judicial Notice and the remaining record, the Court hereby DENIES the Motion.

Defendant was an Officer of Znetix Inc. ("Znetix") while Zenetix's founder and principal stockholder, Kevin Lawrence, served as director and controlling shareholder of Znetix and Health Maintenance Centers, Inc. ("HMC"). Mr. Lawrence is accused of exerting "unchecked power and control" over Znetix, including various improper actions and false and misleading representations regarding Znetix's business, which diverted millions of dollars from the day-to-day operation of Znetix. Complaint, ¶ 15(f). Allegedly, Mr. Lawrence used these funds for the personal benefit of himself, his family, friends, and accomplices. Id., ¶ 14. As a result of these wrongful acts, the Securities and Exchange Commission forced Znetix into receivership and forced liquidation of all of its assets. The Complaint alleges that the damages to Znetix and its shareholders are known to exceed $10 million. Id., ¶ 22. Plaintiff and Receiver, Michael Grassmuek, claims on behalf of creditors and investors of HMC, Znetix and/or Cascade that the Directors and Officers should be held personally liable for damages to the creditors and investors because they were negligent and exercised bad faith by failing to act to prevent or control Lawrence's wrongful acts. Id., ¶ 20-22.

It is undisputed that the Officers and Directors had fiduciary duties of care to Znetix and its shareholders to (a) discharge their duties with the care an ordinary prudent person in a like position would exercise under similar circumstances; (b) discharge their duties with a critical eye to assessing information, performing actions carefully, thoroughly, thoughtfully, and in an informed manner; (c) seek all relevant material information before making decisions on behalf of the corporation; and (d) avoid and prevent corporate waste and unnecessary expense. See, e.g., Wash. Rev. Code. § 23B.08.300-400; 8 Del. C. § 141-142; Harriman v. E.I. Dupont De Nemourse Co., 372 F. Supp. 101 (D.Del. 1974); Cede Co. v. Technicolor, Inc., 634 A.2d 345 (Del.Supr. 1993). They also had affirmative duties to protect Znetix and its shareholders' interests and to be aware of the corporation's affairs. Id. In addition, they owed fiduciary duties of loyalty to Znetix and its shareholders, which required that each discharge his or her duties in good faith. Wash. Rev. Code. § 23B.08.300-400; Cede Co., 634 A.2d at 361; See Interlake Porsche Audi, Inc. v. Bucholz, 45 Wash.App. 502, 509, 728 P.2d 597 (1986). Finally, they owed undivided loyalty to Znetix and its shareholders to ensure that neither they, nor any other officer or director, obtained any profit or advantage at the expense of Znetix. Id.

The Complaint asserts that the Directors and Officers did not uphold these obligations and alleges "negligent and bad faith performance of their duties," and "breach of fiduciary duty." Complaint, ¶ 16-25. In particular, the complaint states that the Directors had knowledge of, or recklessly failed to learn of Lawrence's wrongful acts when they recklessly and negligently continued to work for Znetix and/or allowed their names, services, and work product to be used in furtherance of the Lawrence's wrongful acts, without disclosing those acts or taking steps to prevent them. Id. ¶ 20. Furthermore, the Directors and Officers acted in bad faith when they accepted compensation from Znetix for a job they did not intend to properly perform, acting in their own self-interest at the expense of the corporation. Id., ¶ 21. In addition, these same actions constituted a breach of fiduciary duty. Id., ¶ 23-25.

"Breach of fiduciary duty" is a state law claim. See Bomarko v. International Telecharge, Inc., 794 A.2d 1161, 1184 (Del. 1999); cf. CTS Corp. v. Dynamics Corp., 481 U.S. 69, 90 (1987) (corporations, in general, are governed by state corporations law). Therefore, because the Complaint alleges a period of duty that precedes and extends beyond September 25, 2001 (the date when Znetix, the Washington Corporation, merged into Znetix, the Delaware Corporation), this Court must decide whether the Plaintiff states a claim under Washington law, Delaware law, or both.

In his Motion, Defendant alleges that Plaintiff does not state a claim sufficient to hold him personally liable for damages under Washington or Delaware law. In particular, he claims the Plaintiff has failed to put forth sufficient factual evidence in order to sustain a claim for fiduciary breach of the duty of care that is otherwise given judicial deference under the "business judgment" rule.

1. The Standard

In general, the pleading standard under the Federal Rules of Civil Procedure is liberal. See Conley v. Gibson, 355 U.S. 41, 48, 78 S.Ct. 99 (1957). Accordingly, Rule 8(a) requires a "short and plain statement of the claim showing that the plaintiff is entitled to relief," Fed.R.Civ.P. 8(a)(2); Swierkiewwicz v. Sorema, 534 U.S. 506, 513, 122 S.Ct. 992, 998 (2002). Such a statement is only required to "give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests." Conley, 355 U.S. at 47. Thus, except when specific pleading is required (e.g. in complaints alleging fraud or mistake), detailed evidentiary facts need not be laid out in the complaint. In fact, "federal courts and litigants must rely on summary judgment and control of discovery to weed out unmeritorious claims." Leatherman v. Tarrant County Narcotics Intelligence Coordination Unit, 507 U.S. 163, 168-69 (1993).

Similarly, on a Rule 12(b)(6) motion to dismiss, this Court does not decide whether a plaintiff's success on the merits is likely, but whether the claimant "is entitled to proceed beyond the threshold in attempting to establish his claims." De la Cruz v. Tormey, 582 F.2d 45, 48 (9th Cir. 1978); See Swierkiewwicz v. Sorema, 534 U.S. at 515. Consequently, this Court construes Rule 12(b)(6) motions in a light most favorable to the pleader to "determine whether . . . under existing law that no relief can be granted under any set of facts that might be proved in support of plaintiffs' claims." De la Cruz, 582 F.2d at 48; see also Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683 (1974).

2. Bad Faith Performance and Breach of Fiduciary Duty

In general, fiduciary duty comprises three sub-duties: the duty of loyalty, the duty of care, and the duty to act in good faith. Cede Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del.Supr. 1993); cf. Kane v. Klos, 50 Wn.2d 778, 784-786, 789 (1957). Therefore, to successfully plead breach of fiduciary duty against the Directors in this case, Plaintiff must sufficiently plead breach of the duty of loyalty, bad faith performance of duties, or intentional or knowing breach of the duty of care. See Id.

Although Defendant incorporates by reference the arguments and authorities set out in the Outside Director Defendants' Motion to Dismiss, it is undisputed that he is not a Director. Therefore, this Court will not analyze the claims against him in light of the Znetix Articles of Incorporation, as it did for Director Defendants. (See Dkt. No. 118). Instead, this court only analyzes whether Plaintiff has stated a claim against Defendant for breach of fiduciary duty and negligent and bad faith performance of duties in Defendant's capacity as an Officer.

Officers are not covered by either Washington or Delaware's director liability limitation statutes; however, they are both afforded some protection from liability under the rebuttable presumption of the "business judgment rule." The business judgment rule protects corporate officials from liability for breaches of the duty of care so long as they act in good faith and without a corrupt motive. Federal Deposit Insurance Corporation v. Castletter, 184 F.3d 1040, 1044 (9th Cir. 1999); Seafirst Corp. v. Jenkins, 644 F. Supp. 1152, 1158-1159 (W.D.Wash. 1986); Interlake Porsche Audi, Inc. v. Bucholz, 45 Wash. App. 502, 508 (1986); Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del 1971). Under this rule, a court will not substitute its own notions of sound business judgment for that of directors and officers unless the presumption is rebutted. Sinclair, 280 A.2d at 720.

However, if directors or officers breach the duty of care intentionally, knowingly, or in bad faith, the business judgment rule will not shield them from personal liability. See O'Reilly v. Transworld Healthcare, Inc, 745 A.2d 902 (Del. 1999); Cede Co., 634 A.2d at 361; Interlake, 45 Wash.App. at 509. Notably, neither a breach of the duty of loyalty nor actions done in bad faith are protected by the business judgment rule. See Seafirst Corp. v. Jenkins, 644 F. Supp. at 1158-1159; Cede Co., 634 A.2d at 361; Bomarko v. International Telecharge, Inc., 494 A.2d 1161, 1178 (Del. 1999); Interlake, 45 Wash.App. at 509.

In his Motion, Defendant states that in light of the "business judgment" rule, the Plaintiff has failed to put forth sufficient factual evidence to state a claim for fiduciary breach of the duty of care. However, here the Plaintiff has rebutted the presumption of good faith by asserting facts to show that the Defendants acted in bad faith and in self-interest at the expense of the corporation and its shareholders. Furthermore, if the Defendant wants to invoke the protection of the business judgment rule, it is now his burden show that he acted in good faith, yet he has not done so. See Aaronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). Moreover, in Washington, even a showing of good faith may not be enough to remain shielded by the business judgment rule. See Seafirst Corp. v. Jenkins, 644 F. Supp. 1152, 1158 (W.D.Wash. 1986). Therefore, under Washington or Delaware law, the business judgment rule does not shield the Defendant from Plaintiff's claims for breach of fiduciary duty or bad faith performance of his duties.

Plaintiff has sufficiently stated claims under Washington law and under Delaware law that Defendant performed his duties negligently or in bad faith and that he breached his fiduciary duty. Thus, this Court DENIES Defendants' Motions to Dismiss.