O. PETER SHERWOOD, J.
Before the court are three motions to dismiss the complaint in this action arising from the Chapter 7 bankruptcy filing of NEC Holdings Corp. ("NEC" or the "Company"). As these are motions to dismiss, the allegations are taken from the complaint and are assumed to be true (see Morone v Morone, 50 N.Y.2d 481, 484 [1980]).
Plaintiff Alfred Thomas Giuliano is the Chapter 7 Trustee ("Trustee") in the bankruptcy proceeding of NEC. Plaintiff Joan Levy ("Levy") was a member of NEC's board of directors and a beneficial owner of 25% of the Company's equity.
Defendant Stephen Gawrylewski ("Gawrylewski") was NEC's chief restructuring officer ("CRO") from March 18, 2009 until July 23, 2010, and an employee of defendant Loughlin Management Partners + Company, formerly known as Loughlin Meghji + Co ("LM"). He was placed at NEC pursuant to a services contract between NEC and LM. Defendants, Denise F. Ungar Stern ("D. Stern") and Rita L. Ungar Moser ("R. Moser") were during the time relevant to this action, members of the board of directors of NEC. Each was a beneficial owner of 25% of the Company. Defendant Leslie F. Stern ("L. Stern") is D. Stern's husband and is a former director, CEO, and COO of NEC (D. Stern and L. Stern are sometimes referred to collectively as the "Sterns"). Defendant Nathan F. Moser ("N. Moser") is R. Moser's husband and is a former director, President, and CEO of NEC (R. Moser and N. Moser are sometimes referred to collectively as the "Mosers").
The NEC board consisted of five members: non-party William Ungar, and his daughters, non-party Florette Shaashua, plaintiff Levy, defendant R. Moser, and defendant D. Stern. Plaintiffs allege that at the time the events described in the complaint occurred, William Ungar was 96 years old and "generally followed the advice of the Mosers and Sterns on matters related to NEC and, as a result, voted as a director according to their wishes." The complaint does not allege facts or assert that Ungar was mentally infirm.
Plaintiffs allege that the defendants took advantage of NEC's financial distress to pursue their personal interests in obtaining control of the Company, and reaping other personal benefits to the detriment of the Company, its creditors, non-defendant shareholders, and employees. Specifically, the defendants jeopardized, and ultimately sacrificed, the interests of these parties by refusing to consider all options that might have averted bankruptcy. This action is brought by the Trustee on behalf of the Company and its creditors, and by Levy directly in her personal capacity.
The complaint asserts five causes of action: (1) breach of fiduciary duties (against Gawrylewski and his employer, LM); (2) aiding and abetting breach of fiduciary duties (against D. Stern and R. Moser); (3) breach of fiduciary duties (against D. Stern and R. Moser); (4) aiding and abetting breach of fiduciary duties (against L. Stern and N. Moser); and (5) negligence (against Gawrylewski and LM). All claims arise from an alleged refusal of defendants to pursue Levy's proposal to raise funds required to avert bankruptcy through a high-yield bond transaction (the "high-yield alternative"). The other directors and Gawrylewski sought to raise cash through sale of equity interests in NEC.
In motion sequence number 001, the Sterns and Mosers seek dismissal of the complaint as against them, specifically the Second, Third and Fourth Causes of Action. In motion sequence number 002, LM seeks dismissal of the complaint against it, specifically the First and Fifth Causes of Action. In motion sequence number 003, Gawrylewski moves to dismiss the claims against him, specifically the First and Fifth Causes of Action.
Since NEC was incorporated in Delaware, substantive Delaware law applies to this case (see Hart v General Motors Corp., 129 A.D.2d 179 [1st Dept 1987]).Claims for breach of fiduciary duty are subject to the heightened pleading standards of CPLR 3016.
To succeed on a motion to dismiss, pursuant to CPLR 3211 (a) (1), the documentary evidence submitted that forms the basis of a defense must resolve all factual issues and definitively dispose of the plaintiff's claims (see 511 W. 232nd Owners Corp. v Jennifer Realty Co., 98 N.Y.2d 144, 152 [2002]; Blonder & Co., Inc. v Citibank, N.A., 28 A.D.3d 180 [1st Dept 2006]). A motion to dismiss pursuant to CPLR 3211 (a) (1) "may be appropriately granted only where the documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law" (McCully v Jersey Partners, Inc., 60 A.D.3d 562, 562 [1st Dept 2009] [citation omitted]).
CPLR 3211 (a) (1) does not explicitly define "documentary evidence." As used in this statutory provision, "documentary evidence' is a fuzzy term', and what is documentary evidence for one purpose, might not be documentary evidence for another" (Fontanetta v John Doe 1, 73 A.D.3d 78, 84 [2d Dept 2010]). "[T]o be considered documentary,' evidence must be unambiguous and of undisputed authenticity" (id. at 86, citing Siegel, Practice Commentaries, McKinney's Cons. Laws of NY, Book 7B, CPLR 3211:10, at 21-22). Typically, that means judicial records such as judgments and orders, as well as documents reflecting out-of-court transactions such as contracts, releases, deeds, wills, mortgages and any other papers, "the contents of which are essentially undeniable'" (id. at 84-85).
On a motion to dismiss a plaintiff's claim pursuant to CPLR 3211 (a) (7) for failure to state a cause of action, the court is not called upon to determine the truth of the allegations (see Campaign for Fiscal Equity v State, 86 N.Y.2d 307, 317 [1995]; 219 Broadway Corp. v Alexander's, Inc., 46 N.Y.2d 506, 509 [1979]).Rather, the court is required to "afford the pleadings a liberal construction, take the allegations of the complaint as true and provide plaintiff the benefit of every possible inference. Whether a plaintiff can ultimately establish its allegations is not part of the calculus in determining a motion to dismiss" (EBC I v Goldman, Sachs & Co., 5 N.Y.3d 11, 19 [2005] [citation omitted]). The court's role is limited to determining whether the pleading states a cause of action, not whether there is evidentiary support to establish a meritorious cause of action (see Guggenheimer v Ginzburg, 43 N.Y.2d 268, 275 [1977]; Sokol v Leader, 74 A.D.3d 1180 [2d Dept 2010]).
While affidavits may be considered on a motion to dismiss for failure to state a cause of action, unless the motion is converted to a CPLR 3212 motion for summary judgment, the court will not consider them for the purpose of determining whether there is evidentiary support for properly pleaded claims, but, instead, will accept such submissions from a plaintiff for the limited purpose of remedying pleading defects in the complaint (see Nonnon v City of New York, 9 N.Y.3d 825, 827 [2007]; Rovello v Orofino Realty Co., 40 N.Y.2d 633, 635-636 [1976]).Affidavits submitted by a defendant will almost never warrant dismissal under CPLR 3211 "unless they establish conclusively that [plaintiff] has no ... cause of action" (Lawrence v Graubard Miller, 11 N.Y.3d 588, 595 [2008], citing Rovello, 40 NY2d at 636). In this posture, the lack of an affidavit by someone with knowledge of the facts will not necessarily serve as a basis for denial of a motion to dismiss. Accordingly, the court will construe the complaint in the generous light to which it is entitled on a motion to dismiss.
The Sterns and the Mosers (collectively, the "Sterns/Mosers") move to dismiss the Second, Third and Fourth Causes of Action.
The Sterns/Mosers first argue that Levy's claims must be dismissed, because (1) Levy has no standing to bring an individual claim against the Sterns/Mosers for harm to NEC, and (2) Levy has no claim against the Sterns/Mosers for the $400,000 she allegedly spent on the high-yield alternative. Plaintiffs do not address the second point in their opposition papers, and thus apparently concede that Levy has no claim for the $400,000 she spent.
In order to bring a claim for a direct injury under Delaware law, the claimed direct harm "must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation" (Tooley v Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1039 [Del 2004]). "The mere fact that the alleged harm is ultimately suffered by, or the recovery would ultimately inure to the benefit of, the stockholders does not make a claim direct under Tooley" (Feldman v Cutaia, 951 A.2d 727, 733 [Del 2008]). "A breach of fiduciary duty that works to preclude or undermine the likelihood of an alternative, value-maximizing transaction is treated as a derivative claim because the company suffers the harm, having been precluded from entering into a transaction that would have maximized the return on its assets'" (In re NYMEX Shareholder Litig., 2009 WL 3206051, *9 [Del Ch Sept. 30, 2009], quoting Agostino v Hicks, 845 A.2d 1110, 1123 [Del Ch 2004]).
The Sterns/Mosers argue that Levy is seeking to recover damages in her individual capacity as a former shareholder of NEC. Indeed, Levy asserts in the complaint that she brought "this action to recover her personal damages that resulted from the Defendants' breaches" (Complaint ¶ 9). The Sterns/Mosers argue that Levy cannot demonstrate, as she must, that she "suffered some individualized harm not suffered by all of the stockholders at large" (Feldman, 951 A2d at 733). For these reasons, Levy's complaint must be dismissed.
In opposition, plaintiffs contend that Levy has alleged that, in addition to harm to NEC, the defendants' actions caused Levy a personal injury, i.e., the loss of the entire value of her shares of NEC. This argument is without merit, because all of NEC's shareholders suffered the same injury (see id.). Accordingly, Levy's claims must be dismissed.
Defendants argue that plaintiffs' Third Cause of Action (breach of fiduciary duties against D. Stern and R. Moser) should be dismissed, because (1) the business judgment rule protects board decisions concerning the high-yield alternative, and (2) the complaint does not identify acts or omissions by either D. Stern or R. Moser that might constitute a breach of fiduciary duty.
In connection with the business judgment rule arguments, defendants assert that (1) D. Stern and R. Moser did not have an interest and did not lack independence, and (2) plaintiffs have not pleaded that a majority of the board was interested or lacked independence. The business judgment rule "is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company" (Aronson v Lewis, 473 A.2d 805, 812 [Del 1984], overruled on other grounds, Brehm v Eisner, 746 A.2d 244 [Del 2000]). Under that rule, "a court will not substitute its judgment for that of the board if the latter's decision can be attributed to any rational business purpose" (Unocal Corp. v Mesa Petroleum Co., 493 A.2d 946, 954 [Del 1985] [internal quotation marks omitted]). In order to overcome the presumption, plaintiffs must allege a "disabling" directorial interest, which arises "whenever divided loyalties are present, or a director either has received, or is entitled to receive, a personal financial benefit from the challenged transaction which is not equally shared by the stockholders" (Pogostin v Rice, 480 A.2d 619, 624 [Del 1984], overruled on other grounds, Brehm, 746 A2d at 244; see also Orman v Cullman, 794 A.2d 5, 25 n 50 [Del Ch 2002]). To be "disabling," an interest must be "of such subjective material significance to that particular director that it is reasonable to question whether that director objectively considered the advisability of the challenged transaction to the corporation and its shareholders" (Orman, 794 A2d at 5 n 50).
Defendants argue that D. Stern and R. Moser did not have a disabling interest and did not lack independence. Accordingly, defendants aver that plaintiffs cannot overcome the presumption. In this regard, defendants contend that due to the "conclusory and self-contradictory allegations" in the complaint, it is nearly impossible to determine what interests were so seductive to R. Moser and D. Stern that the performance of their duties as directors was compromised. Defendants argue that D. Stern, R. Moser and Levy each had precisely the same equity interest in the company, and that the purpose of the high-yield alternative was to "avert a change in control and benefit all shareholders equally." Further, defendants argue that the complaint does not allege that the Sterns/Mosers were interested in any way in the actual sale of NEC or its assets in the bankruptcy proceeding. In fact, all of the shareholders lost their equity in NEC as a result of the bankruptcy. Additionally, NEC never consummated a sale or other transaction in which the Sterns/Mosers are alleged to have an interest.
Defendants also contend that the complaint does not adequately allege the interests of L. Stern or N. Moser. Defendants note that the complaint alleges that L. Stern became "affiliated" with the Alpine Group ("Alpine") for the purpose of proposing a capital contribution to NEC, as required by G.E. Capital Corp. ("GECC"), NEC's principal lender, and further that N. Moser was similarly "affiliated" with KPS Capital Partners, LP ("KPS"), another potential investor or bidder for NEC. Defendants argue that nowhere does the complaint quantify or describe any financial interest or benefit that might accrue to L. Stern or N. Moser through those purported relationships, nor does it state the "economic circumstances" required to support a finding of a disabling interest (see In re General Motors Class H Shareholders Litig., 734 A.2d 611, 617 [Del Ch 1999] [dismissing breach of fiduciary duty claim where challenge to independence of board members was "too weak to state a claim that the business judgment rule does not apply.... To show that a ... director's independence was compromised by her ownership of greater amounts of ... stock, the plaintiffs must plead that the amount of such holdings and the predominance of such holdings over GMH holdings was of a sufficiently material importance, in the context of the director's economic circumstances, as to have made it improbable that the director could perform her fiduciary duties to the ... shareholders without being influenced by her overriding personal interest in the performance of the ... shares"]).
Defendants further argue that plaintiffs fail to plead how the "self interest" L. Stern and N. Moser had in blocking the high-yield alternative is imputed to D. Stern and R. Moser, who undoubtedly had as much of an interest in preserving their equity interests in NEC as Levy.
In opposition, plaintiffs contend that D. Stern and R. Moser were not disinterested directors, and further that they have properly pleaded that D. Stern and R. Moser breached their duties of loyalty. In this regard, plaintiffs rely heavily on paragraph 20 of the complaint. Plaintiffs argue that they pleaded that the sisters' husbands were actively pursuing opportunities to acquire NEC to the exclusion of the other shareholders. By way of example, plaintiffs contend that the complaint asserts that Gawrylewski and the Sterns/Mosers aligned their interests to facilitate a transaction that would result in them, individually or jointly, obtaining control of NEC's assets through a sale transaction (Complaint ¶ 20). Plaintiffs assert that D. Stern and R. Moser used their directors' votes to support their husbands' interests by attempting to control the selection of an investment banker that would tolerate the creation of an "inside" shareholder track for introduction of purchasers. Further, the Sterns/Mosers acted in their own self-interest to attempt to force a sale of a controlling interest in NEC that would provide significant benefits solely to themselves in their individual capacities, rather than to the Company and NEC equally. In addition, the Sterns/Mosers blocked the steps necessary for the high-yield alternative's continued viability by refusing to approve a budget that would enable completion of an offering circular.
Plaintiffs further argue that the sisters' familial interests render them "interested." Under Delaware law, "disinterested directors" have been defined "as those directors that neither appear on both sides of a transaction nor expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally.' Likewise, independent' means that a director's decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences'" (Williams v Geier, 671 A.2d 1368, 1379 n 19 [Del 1996], quoting Aronson, 473 A.2d 805, 812 [other citations omitted]). Plaintiffs contend that under this test, D. Stern and R. Moser were not disinterested. Plaintiffs argue that the complaint alleges that at the behest of their husbands, the sisters were, in effect, on both sides of NEC's efforts to obtain financing necessary to cure NEC's default (Complaint ¶ 20). Furthermore, the complaint alleges that D. Stern and R. Moser had a significant personal financial interest in the outcome of the funding, and stood to benefit personally in a manner different that the other shareholders from their efforts to block the high-yield alternative (Complaint ¶ 20-21). Additionally, D. Stern and R. Moser conspired with Gawrylewski and LM to block the high-yield alternative and limit Levy's input into the financing process, thereby dominating the financing discussions.
The complaint does not reveal what sort of "alignment" or "interests" the husbands, and consequently the sisters, had with the potential investors. The complaint uses only the most conclusory terms to describe these connections. Indeed, the complaint provides no factual detail whatsoever concerning these purported "alignments." Further, apart from the undisputed allegation that they share the same parents, the complaint does not state how D. Stern and R. Moser were rendered interested, and thus unable to act in an independent manner with respect to the transaction Levy favored, i.e., the high-yield alternative. Defendants assert, correctly, that the complaint does not illuminate how L. Stern or N. Moser's purported "alignment" with any potential investor or bidder was different in any respect from Levy's "alignment" with Global Hunter, the investment banking firm Levy sought to introduce to NEC in connection with her proposal to explore the high-yield alternative. These allegations are insufficient to satisfy the heightened pleading requirements of CPLR 3016.
Plaintiffs' failure to plead with particularity aside, plaintiffs have failed to adequately plead that a majority of the board was interested or lacked independence and therefor cannot rebut the business judgment rule presumption. As former Chancellor Chandler has explained:
(Orman, 794 A2d at 22 [citations omitted]; see also Carsanaro v Bloodhound Tech. Inc., 65 A.3d 618, 637 [Del Ch 2013] ["[t]o overcome the presumption of loyalty, a stockholder plaintiff must allege facts supporting a reasonable inference that there were not enough independent and disinterested individuals among the directors making the decision to comprise a board majority"]). Indeed, in Orman, the Chancellor noted that "[the company] had an eleven-member board. In order to rebut the presumptions of the business judgment rule, [plaintiff] must allege facts that would support a finding of interest or lack of independence for a majority, or at least six, of the Board members" (id. at 24-25). NEC had a five-member board: defendant D. Stern, defendant R. Moser, plaintiff Levy, non-party William Ungar, and non-party Florette Shaashua. In order to rebut the business judgment rule presumption, plaintiffs must allege that three members of the board members had a financial interest in blocking the high-yield alternative or were dominated or controlled by a materially interested director (id. at 22). No such claim has been asserted here. Plaintiffs have not alleged that William Ungar or Florette Shaashua (and certainly not Levy) had a financial interest, or were dominated or controlled by either D. Stern or R. Moser.
In footnote 2 of the complaint, plaintiffs assert that William Ungar "was 96 years old when the events described in the Complaint occurred. He generally followed the advice of the Mosers and Sterns on matters related to NEC and, as a result, voted as a director according to their wishes" (Complaint ¶ 20 n 2). Plaintiffs assert that these allegations are enough to establish that William Ungar was controlled by the Sterns/Mosers and therefore lacked independence. "Control over individual directors is established by facts demonstrating that through personal or other relationships the directors are beholden to the controlling person' or so under their influence that their discretion would be sterilized'" (Benihana of Tokyo, Inc. v Benihana, Inc., 891 A.2d 150, 174-175 [Del Ch 2005]). The complaint merely alleges that William Ungar was 96 years old at the time, and that he generally followed the wishes of the Sterns/Mosers. But "a consistent and unvaried pattern of deferring to anything" the controlling person wants is insufficient, by itself, to establish a lack of independence (see In re Tyson Foods, Inc., 919 A.2d 563, 588 [Del Ch 2007]). The additional allegation that William Ungar was 96 is not grounds for inferring any lack of independence. Accordingly, plaintiffs have failed to establish that a majority of the board was interested or lacked independence; at most, they have alleged that two of the five directors were interested.
Plaintiffs also argue that the business judgment rule "is irrelevant and inapplicable to the facts of this case." In this regard, plaintiffs advance three arguments: (1) a number of courts have refused to dismiss complaints when defendants invoke the business judgment rule, because it is an affirmative defense; (2) 8 Del C § 144, and not the business judgment rule, apply to the facts of this case; and (3) the court must apply enhanced Revlon scrutiny to the facts of this case, because the transactions contemplated by the board involved a sale of control. I address these arguments in turn.
Regarding the first argument, plaintiff cites In re Tower Air, Inc., 416 F.3d 229, 238 [3d Cir 2005] where the Third Circuit has stated, "[g]enerally speaking, we will not rely on an affirmative defense such as the business judgment rule to trigger dismissal of a complaint under Rule 12(b)(6)". The decision which interpreted Fed. R. Civ. P. Rule 12(b)(6), is inconsistent with the law of Delaware where the Federal Rules of Civil Procedure do not apply. In Delaware, "the business judgment rule operates as both a procedural guide for litigants and a substantive rule'.... As a procedural guide [it] places the initial burden of proof on the plaintiff" (Cinerama Inc. v Technicolor, Inc., 663 A.2d 1156, 1162 [Del 1995]). "On a motion to dismiss, the pled facts must support a reasonable inference that in making the challenged decision, the board of directors breached either its duty of loyalty or its duty of care" (Gantler v Stephens, 965 A.2d 695, 706 [Del 2009]). Accordingly, Delaware courts, and New York courts applying Delaware law, routinely dismiss complaints on motions to dismiss where plaintiffs fail to rebut the presumptions of the business judgment rule (see, e.g., In re Tyson Foods, Inc., 919 A.2d 563, 587-588 [Del Ch 2007]; HF Lexington KY LLC v Wildcat Synergy Mgr. LLC, 35 Misc.3d 1210(A) [Sup Ct, NY County 2012, Fried, J.]).
As to the argument that the business judgment rule applies only when a decision is made by a majority of independent, disinterested directors, plaintiffs cite to In re Network Access Solutions, Corp. (330 B.R. 67, 77 [Bankr D Del 2005]), where the court held that "[t]he decision of a majority of the disinterested directors to execute a transaction with an interested director is subject to the business judgment rule." Plaintiffs reason that this court's analysis must focus on three directors: William Ungar, Levy and Florette Shaashua. Since three members make a majority of NEC's board, and since these three board members split 2-1 in deciding whether to block the high-yield alternative, plaintiffs contend that there were not enough disinterested director votes to approve the transaction. In plaintiffs' view, the vote among the three directors would have to be 3-0, with three (3) constituting a majority of the board, to apply the business judgment rule. Thus, at no point in time was there majority support among the independent, disinterested directors to block the high-yield option. This reasoning is flawed. Network Access Solutions, on which plaintiffs rely, itself relies on 8 Del C § 144. That statute is inapplicable to the facts of this case. 8 Del C § 144 (Interested directors; quorum) states, in relevant part:
(8 Del C § 144). In interpreting this statute, the court in Network Access Solutionsstated that "[t]o establish protection under section 144, however, requires evidence that the transfers had the approval of a disinterested majority of the board of directors and that approval was a sound exercise of the directors' business judgment" (Network Access Solutions, 330 BR at 78). Section 144 creates a "safe harbor," the intent of which "is to remove the taint of a director's self-interest in a transaction where there is an approving vote of a majority of the informed and disinterested directors" (id.) The safe harbor applies only to completed transactions in which the director defendants stood on both sides of the transaction. Here, the high-yield alternative was not a completed transaction. Indeed, the transaction was never completed. Moreover, R. Moser and D. Stern were not on both sides of the high-yield alternative "transaction." As defendants note, if anyone could be said to be on both sides of the high-yield alternative, it was Levy. The safe harbor created by 8 Del C § 144 is inapplicable.
In their third argument, plaintiffs aver that since the transactions contemplated by the board involved a sale of control, the board's actions must be judged pursuant to the enhanced scrutiny required under Revlon, Inc. v MacAndrews & Forbes Holdings, Inc. (506 A.2d 173 [Del 1986]), and not the business judgment rule. In a sale or change of control transaction, the duty of the board changes from the preservation of the "corporate entity to the maximization of the company's value at a sale for the stockholders' benefit" (id. at 182). In such a circumstance, directors "have the obligation of acting reasonably to seek the transaction offering the best value reasonably available to the stockholders" (Paramount Communications Inc. v QVC Network Inc., 637 A.2d 34, 43 [Del 1993]). Revlon is inapplicable to the facts of this case. The transaction at issue in this case is the high-yield alternative, the purpose of which was to avoid a sale or change of control transaction. Revlon duties apply only when a sale or change of control becomes inevitable, which plaintiffs specifically contend was not the case (Complaint ¶ 37). Because plaintiffs have not rebutted the business judgment rule presumption, the third cause of action must be dismissed.
The Second Cause of Action alleges aiding and abetting breach of fiduciary duties against D. Stern and R. Moser. The Fourth Cause of Action alleges aiding and abetting breach of fiduciary duties against L. Stern and N. Moser. In Delaware, a claim for aiding and abetting breach of fiduciary duty has four elements: "(1) the existence of a fiduciary relationship; (2) the breach of a duty by the fiduciary; (3) the knowing participation in the breach by the defendant, who is not a fiduciary; and (4) damages to the plaintiff resulting from the concerted action of the fiduciary and the nonfiduciary" (In re Jevic Holding Corp., 2011 WL 4345204, *13 [Bankr D Del Sept. 15, 2011]).
The very definition of a cause of action for aiding and abetting breach of fiduciary duty mandates dismissal of the second cause of action because it is uncontested that D. Stern and R. Moser were fiduciaries. The third element of the claim requires plaintiffs to allege "the knowing participation in the breach by the defendant, who is not a fiduciary" (id. [emphasis added]) Since D. Stern and R. Moser were fiduciaries, the claim must be dismissed (In re Verestar, Inc., 343 B.R. 444, 482 [Bankr SDNY 2006] [applying Delaware law, holding that "a claim for aiding and abetting breach of fiduciary duty can only be sustained against a non-fiduciary"]).
Turning to the fourth cause of action (aiding and abetting breach of fiduciary duties against L. Stern and N. Moser), the claim must be dismissed because, as described above, plaintiffs fail to adequately allege an underlying breach of fiduciary duty, a required element of the claim.
Two claims are asserted against Gawrylewski and LM: the First (breach of fiduciary duties) and Fifth (negligence) Causes of Action.
As to the First Cause of Action, to state a claim for breach of fiduciary duty in Delaware, plaintiffs must plead: (1) the existence of a fiduciary relationship; (2) misconduct by the fiduciary; and (3) damages. In connection with this claim, Gawrylewski raises two arguments, each of which, he asserts, mandates its dismissal: (1) the complaint fails to allege any conduct by Gawrylewski constituting a breach of his fiduciary duties; and (2) plaintiffs fail to allege any connection between any purported breach of a fiduciary duty by Gawrylewski and any loss suffered by plaintiffs.
With regard to his first argument, Gawrylewski contends that plaintiffs have not provided particularized allegations of misconduct sufficient to rebut the business judgment rule presumptions. Indeed, Gawrylewski argues that the only portion of the complaint where plaintiffs allege Gawrylewski breached his duty of loyalty is a single allegation that he "aligned himself with various bidders to obtain employment and a control position with the successful bidder" (Complaint ¶ 20). Gawrylewski argues that plaintiffs fail (1) to identify the various bidders, (2) to allege any specific relationship between Gawrylewski and such bidders, (3) to allege that he had obtained or would obtain any personal benefits from any such bidder, (4) to identify any transaction or agreement between Gawrylewski and any such bidder, and (5) to allege that he actually caused NEC to enter into any transaction with any entity in which he had any interest at all.
Gawrylewski next avers that even if plaintiffs had adequately alleged that a breach fiduciary duty, the claim should be dismissed because plaintiffs have not adequately alleged any causal connection between his actions and any harm to the plaintiffs. Defendants note that the complaint does not allege that pursuing the high-yield alternative would necessarily have resulted in a different outcome for NEC. Rather, it merely alleges that defendants "refus[ed] to consider all options that might have averted the Company's Chapter 11 filing and ultimate disastrous sale and liquidation" (Complaint ¶ 9). Defendants aver that such speculation is insufficient to maintain a claim, particularly where plaintiffs do not and cannot allege that NEC would have obtained required approvals for the high-yield alternative, such as from GECC. The First Department has held that in stating a cause of action for breach of fiduciary duty, a "plaintiff must establish that the alleged ... misconduct w[as] the direct and proximate cause of the losses claimed" (Laub v Faessel, 297 A.D.2d 28, 30-31 [1st Dept 2002], citing R.M. Newell Co. v Rice, 236 A.D.2d 843[4th Dept 1997], lv denied 90 N.Y.2d 807 [other citations omitted]; see also RNK Capital LLC v Natsource LLC, 76 A.D.3d 840, 842 [1st Dept 2010] [dismissing claim for lost profits arising out of alleged breach of fiduciary duty where "plaintiffs' ability to realize profits from the allegedly usurped investment opportunity was contingent on certain conduct by third parties and authorization from a government-sanctioned oversight entity, both of which were highly uncertain and well beyond the scope of defendants' influence or control"]). Here, the alleged damages are too attenuated for the claim to stand. In order to prove damages, plaintiffs would have to demonstrate that the high-yield alternative would have been approved, and further that it would have resulted in the avoidance of a Chapter 11 bankruptcy filing. Plaintiffs cannot prove either.
As to the Fifth Cause of Action for negligence against Gawrylewski and LM, defendants argue that the claim must fail for the same reasons that the breach of fiduciary duty claim fails. Under Delaware law, "[a] claim that a corporate manager acted with gross negligence is the same as a claim that she breached her fiduciary duty of care" (In re Citigroup Inc. Shareholder Derivative Litig., 964 A.2d 106, 114 n 6 [Del Ch 2009], quoting Albert v Alex Brown Mgmt. Servs., Inc., 2004 WL 2050527, *6 [Del Super Sept. 15, 2004]). "In the duty of care context gross negligence has been defined as reckless indifference to or a deliberate disregard of the whole body of stockholders or actions which are without the bounds of reason.'" (Benihana of Tokyo, 891 A2d at 192, quoting Tomczak v Morton Thiokol, Inc., 1990 WL 42607, *12 [Del Ch Apr. 5, 1990]). "Because duty of care violations are actionable only if the directors acted with gross negligence, and because in most instances money damages are unavailable to a plaintiff who theoretically could prove a duty of care violation, such violations are rarely found" (Benihana of Tokyo, 891 A2d at 192). "The fiduciary duty of due care requires that directors of a Delaware corporation use that amount of care which ordinarily careful and prudent men would use in similar circumstances,' and consider all material information reasonably available' in making business decisions, and that deficiencies in the directors' process are actionable only if the directors' actions are grossly negligent" (In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 749 [Del Ch 2005]).
Because the First Cause of Action cannot withstand scrutiny, the Fifth Cause of Action must fall as well even if plaintiffs properly allege misconduct as they have not adequately alleged damages. Accordingly, this claim must be dismissed.
This is a classic case for application of the business judgment rule. While the defendants' business decisions might ultimately have been unwise, under Delaware law, the court may not second-guess the board's decision making where it is essentially uncontested that a majority of the board was disinterested. Accordingly, the complaint must be dismissed in its entirety. It is hereby
