Wednesday, February 4, 2009

Judge Perris Grants Motion to Dismiss Claim for Breach of Fiduciary Duty on Grounds of Standing and the Business Judgment Rule, With Leave to Amend

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

Batlan v. WT Consulting, Inc.
Adversary Proceeding No. 08-03196-elp
Unpublished letter by Judge Elizabeth Perris
January 26, 2009

The Rulings
In this letter to the parties on whether to grant defendants' motion to dismiss a claim for breach of fiduciary duty alleged by a Chapter 11 liquidating agent, Judge Perris made three rulings: 1) to dismiss the claim for lack of standing by the plaintiff liquidating agent, with leave to amend; 2) to dismiss the claim because of the business judgment rule, also with leave to amend; and 3) anticipating a successful amendment to address the business judgment rule, she made clear that under federal notice pleading standards a complaint for breach of fiduciary duty need not anticipate the business judgment rule defense as long as that rule was not raised in the complaint.

James Thompson and Scott Walters owned Thompson & Walters Nursery Sales, Inc., an Oregon corporation (T&W #1). They sold its assets to a similarly named Delaware LLC (T&W #2). It subsequently failed, and filed a liquidating Chapter 11.

The Adversary Proceeding
The Chapter 11 liquidating agent filed an adversary proceeding against Mr. Thompson and Mr. Walters to avoid the sale to T&W #2 as a fraudulent conveyance and to recover against them for their alleged breach of fiduciary duty. They responded with a motion to dismiss the adversary complaint. At a prior hearing Judge Perris denied this motion as to the fraudulent conveyance claims. So now the purpose of her letter was to rule on the motion to dismiss as to the claim for breach of fiduciary duty.

1) Standing
Defendants argued that the liquidating agent did not have standing to bring a claim for breach of fiduciary duty as to T&W #1, the Oregon corporation. Plaintiff refuted this by relying on a federal court opinion in Delaware holding that "the court should collapse the transactions involved in the asset sale and consider them as integrated transactions that form a 'single integrated plan'." Thus plaintiff would have standing as to all entities involved in that "plan." But Judge Perris noted that the Delaware case involved a much more complex set of transactions unlike the single sale here, that the Delaware case did not involve an Oregon corporation, and that plaintiff had not pled a basis under Oregon law for such "collapsing of transactions" to provide for standing. So she granted the motion to dismiss as to T&W #1, while also granting plaintiff leave to amend if able to cure this shortcoming.

2) Business Judgment Rule
Defendants also argued for dismissal of the claim for breach of fiduciary duty as to T&W #2 "because it does not overcome the business judgment rule." That rule creates a presumption that "directors' decisions are made in good faith and are based upon sound and informed business judgment." Therefore, from the defendants' perspective, the plaintiff needed to plead affirmatively to overcome the business judgment rule or else have the claim dismissed. The rule relates only to directors' decisions, not those of officers. The complaint was unclear whether defendants were directors of T&W #2. So the judge granted the motion to dismiss the claim for breach of fiduciary duty as to T&W #2, while again granting plaintiff leave to amend if he is able "to clarify the basis of the claimed fiduciary duty of defendants Thompson and Walters, in particular whether they were directors of T&W #2."

3) Judge Perris then directly addressed the Business Judgment Rule, anticipating plaintiff's successful repleading that defendants were directors. She noted that the federal pleading standard is notice pleading in contrast to fact pleading in Delaware, the source of most of defendant's supportive case law, thus inferring that she accepted plaintiff's argument that the Delaware case law was inapplicable or at least of limited applicability. She made clear her opinion:
I recognize that the cases regarding whether a plaintiff must plead around the business judgement rule are divided. I am more persuaded by the reasoning in the line of cases that holds that 'a ruling on the applicability of the business judgment rule is peculiarly a question of fact, wholly inappropriate for consideration on a motion to dismiss.' . . . . Under the federal notice pleading standard, a plaintiff is not required to preemptively plead around defenses not alleged in his complaint. In this case, plaintiff did not make any allegations about the business judgment rule in his complaint. [Citations omitted.]

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
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