“[I]n the absence of facts showing self-dealing or improper motive, a corporate officer or director is not legally responsible to the corporation for losses that may be suffered as a result of a decision that an officer made or that directors authorized in good faith.”
How later courts described this case
- “[I]n the absence of facts showing self-dealing or improper motive, a corporate officer or director is not legally responsible to the corporation for losses that may be suffered as a result of a decision that an officer made or that directors authorized in good faith.”
- “Every employment contract encompasses implied duties of honesty and loyalty, which if breached by the employee, results in the employer owing the employee nothing.”
Written by the judges who cited it.
The opinion
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: Chapter 11
ESSAR STEEL MINNESOTA LLC and Case No. 16-11626 (BLS)
ESML HOLDINGS INC. Jointly Administered
Debtors.
KEVIN NYSTROM, solely in his capacity as
Litigation Trustee for the UC Litigation Adv. Proc. No. 17-50001 (BLS)
Trust,
Re: Adv. Pro. Docket Nos. 132, 134
Plaintiff,
v.
MADHU VUPPULURI; SANJAY
BHARTIA; PRASHANT RUIA;
ANSHUMAN RUIA; and DOES 1-500
Defendants.
Garvan F. McDaniel, Esq. Mark E. Felger, Esq.
Daniel K. Hogan, Esq. Simon E. Fraser, Esq.
HOGAN McDANIEL COZEN O’CONNOR
1311 Delaware Avenue 1201 North Market Street, Suite 1001
Wilmington, DE 19806 Wilmington, DE 19801
Andrew K. Glenn, Esq. Michael L. Bernstein, Esq.
Stephen W. Tountas, Esq. David B. Bergman, Esq.
Robert M. Novick, Esq. ARNOLD & PORTER KAYE
KASOWITZ BENSON TORRES LLP SCHOLER LLP
1633 Broadway 601 Massachusetts Avenue NW
New York, New York 10019 Washington, D.C. 20001
Attorneys for Kevin Nystrom, UC Attorneys for Madhu Vuppuluri
Litigation Trustee
Karen M. Grivner, Esq.
824 N. Market Street, Suite 710
Wilmington DE 19801
Scott N. Schreiber, Esq.
Michael P. Croghan, Esq.
CLARK HILL PLC
130 E. Randolph Street, Suite 3900
Chicago, IL 60601
Attorneys for Sanjay Bhartia
MEMORANDUM OPINION1
0F
Background and Factual Allegations
Essar Steel Minnesota LLC (“ESML” or the “Company”), a wholly-owned
subsidiary of Essar Global Fund Limited (“Essar Global”), planned to build a large-
capacity state-of-the-art iron ore mine and pellet plant in Nashwauk, Minnesota (the
“Project”), financed through a mix of debt financing and a substantial equity infusion
from Essar Global.2 The Third Amended Complaint in this adversary proceeding
1F
alleges that ESML paid Essar Global and its affiliates over $1.1 billion between 2008
and 2016 - - that is, the amount it was obligated to spend under the governing Project
Contracts to complete the Project - - but, in the end, ESML was left with only a half-
completed iron ore pellet plant that will cost hundreds of millions of dollars more to
finish.3 The complaint also alleges that Defendants Madhu Vuppuluri and Sanjay
2F
Bhartia (the “Moving Defendants”), as governors and officers of ESML, breached
their fiduciary duties to ESML by engaging in self-dealing, acting in bad faith, and
failing to exercise judgment (let alone business judgment) and due care with respect
to the Project.4
3F
In an Opinion dated May 23, 2019, this Court granted the Moving Defendants’
motions to dismiss the Second Amended Complaint, but also permitted the Plaintiff
1 This Court has jurisdiction to decide this Motion pursuant to 28 U.S.C. § 157 and §1334(b).
Pursuant to Fed. R. Civ. P. 52 (made applicable here through Fed. R. Bankr. P. 7052) the Court does
not make findings of fact for purposes of a decision on a Fed. R. Civ. P. 12 motion.
2 Third Amended Complaint (Adv. D.I. 121) ¶¶ 1-2.
3 Id. ¶ 3.
4 Id. ¶ 6.
to replead his claims. 5 Plaintiff Kevin Nystrom, acting as the Trustee for the UC
4F
Litigation Trust (the “Trustee”), filed a Third Amended Complaint (the “TAC”).6 The
5F
TAC asserts the following claims against Vuppuluri and Bhartia:
1. First Claim for Relief – Breach of Fiduciary Duty – Loyalty - Against Madhu
Vuppuluri and Does 1-500 as Governors.
2. Second Claim for Relief – Breach of Fiduciary Duty – Care – Against Madhu
Vuppuluri; Sanjay Bhartia; Does 1-500 as Governors.
3. Third Claim for Relief – Breach of Fiduciary Duty – Loyalty – Against
Madhu Vupuluri and Sanjay Bhartia as Officers.
4. Fourth Claim for Relief – Breach of Fiduciary Duty – Care – Against Madhu
Vuppuluri and Sanjay Bhartia as Officers.
5. [Fifth Claim for Relief – Aiding and Abetting Breach of Fiduciary Duty -
against other defendants]
6. Sixth Claim for Relief – Disallowance of No. 132 – Against Madhu
Vuppuluri.
7. Seventh Claim for Relief – Disallowance of Claim No. 217 – Against Sanjay
Bhartia
Before the Court are Vuppuluri’s and Bhartia’s motions to dismiss the TAC
(the “Motions to Dismiss”).7 The Moving Defendants argue that the TAC does not
6F
provide any new factual allegations to support the claims, and also ask the Court to
reconsider its decision that the claims are timely under Minnesota’s six-year statute
5 Adv. D.I.s 112, 117. Nystrom v. Vuppuluri (In re Essar Steel Minnesota LLC), 2019 WL
2246712 (Bankr. D. Del. May 23, 2019) (the “Prior SAC Opinion”). A detailed background of this
matter is set forth in the Prior SAC Opinion and will not be repeated here.
6 Adv. D.I. 121.
7 See Adv. D.I. 132 (Vuppuluri’s Motion to Dismiss the Third Amended Complaint), Adv. D.I.
133 (Vuppuluri’s Opening Brief in Support of his Motion to Dismiss the Third Amended Complaint),
and Adv. D.I. 141 (Vuppuluri’s Reply Brief in Support of his Motion to Dismiss the Third Amended
Complaint). See Adv. D.I. 134 (Bhartia’s Motion to Dismiss the Third Amended Complaint), Adv. D.I.
135 (Bhartia’s Opening Brief in Support of his Motion to Dismiss the Third Amended Complaint) and
Adv. D.I. 142 (Bhartia Reply Brief in Support of his Motion to Dismiss the Third Amended Complaint).
of limitations. The Trustee opposes the Motions, contending that the amended
complaint provides numerous additional, detailed factual allegations to support the
claims.8 The Trustee also argues that the Court should not reconsider the statute of
7F
limitations issue. After oral argument, the matter was taken under advisement and
is now ripe for disposition.
For the reasons set forth herein, each of the Motions to Dismiss will be denied.
Standard
When reviewing a motion to dismiss, the court will “accept all factual
allegations as true, construe the complaint in the light most favorable to the plaintiff,
and determine whether, under any reasonable reading of the complaint, the plaintiff
may be entitled to relief.”9 To survive a Rule 12(b)(6) motion to dismiss, a plaintiff
8F
must show that the grounds of his entitlement to relief amount to more than labels
and conclusions, and a formulaic recitation of a cause of action’s elements will not
do.10
9F
“A claim has facial plausibility when the pleaded factual content allows the
court to draw the reasonable inference that the defendant is liable for the misconduct
alleged.”11 The plausibility standard is not akin to the probability standard but
10F
requires more than the sheer possibility that a defendant acted unlawfully.12 Two
11F
principles underlie the Twombly standard. First, a court’s acceptance of a complaint’s
8 Adv. D.I. 139 (Plaintiff’s Omnibus Brief in Opposition to Vuppuluri’s and Bhartia’s Motions
to Dismiss the Third Amended Complaint).
9 Crystallex Int’l Corp. v. Petróleos De Venezuela, S.A., 879 F.3d 79, 83 n.6 (3d Cir. 2018).
10 Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 545 (2007).
11 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556).
12 Id. at 678.
allegations as true is inapplicable to legal conclusions, and threadbare recitals of a
cause of action elements, supported by conclusory statements, will not suffice.13
12F
Second, determining whether a complaint states a plausible cause of action requires
the court to rely on its experience and common sense.14 Twombly requires that a
13F
pleading nudge claims “across the line from conceivable to plausible.”15
14F
The Third Circuit follows a three-step process to determine the sufficiency of a
complaint under Twombly and Iqbal:
First, the court must “take note of the elements a plaintiff must plead
to state a claim.” Second, the court should identify allegations that,
“because they are no more than conclusions, are not entitled to the
assumption of truth.” Finally, “where there are well-pleaded factual
allegations, a court should assume their veracity and then determine
whether they plausibly give rise to an entitlement for relief.”16
15F
The movant carries the burden of showing that the dismissal is appropriate.17
16F
The Statute of Limitations Issue will not be Reconsidered.
The Moving Defendants ask this Court to reconsider the statute of limitations
analysis in the Prior SAC Opinion, which determined that the Minnesota’s six-year
statute of limitations applied to the claims, rather than Delaware’s three-year statute
of limitations.18 The Moving Defendants contend that, under a conflicts of law
17F
analysis, a statute of limitations issue is procedural and, therefore, the forum state’s
13 Id.
14 Id.
15 Iqbal, 556 U.S. at 680 (citing Twombly, 550 U.S. at 570).
16 Burtch v. Milberg Factors, Inc., 662 F.3d 212, 221 (3d Cir. 2011) (quoting Santiago v.
Warminster Twp., 629 F.3d 121, 130 (3d Cir. 2010)).
17 Paul v. Intel Corp. (In re Intel Corp. Microprocessor Antitrust Litig.), 496 F. Supp. 2d 404,
408 (D. Del. 2007).
18 Essar Steel, 2019 WL 2246712 at *4.
statute of limitations applies.19 The Moving Defendants argue that this Court erred
18F
in relying on the “internal affairs” doctrine to determine that Minnesota’s statute of
limitations applies to the claims in this case. Instead, the Moving Defendants argue
that this Court should have applied Delaware’s borrowing statute,20 which generally
19F
applies the shorter of two competing statutes of limitations.
The Trustee argues that the Moving Defendants have not raised any new
arguments and, therefore, have not provided any reason for the Court to revisit its
prior decision. The Trustee asserts that this Court correctly followed the analysis of
In re Mervyn’s Holding LLC,21 which applied Delaware’s choice of law rules to the
20F
statute of limitations analysis. Relying on the Supreme Court of Delaware’s decision
in Saudi Basic Ind. Corp. v. Mobil Yanbu Petrochemical Co., Inc.,22 the Mervyn’s
21F
Court declined to apply Delaware’s borrowing statute because there was no threat of
forum shopping in the matter before the Court. 23 Instead, the Mervyn’s Court
22F
determined that “Delaware’s choice of law rules require application of the ‘law of the
state of incorporation to issues involving corporate internal affairs.’”24 Because a
23F
19 See, e.g., Norman v. Elkin, No. Civ. 06-005-JJF, 2007 WL 2822798, *3 (D. Del. Sept. 26,
2007), aff’d 860 F.3d 111 (3d Cir. 2017).
20 10 Del. C. § 1821 provides in pertinent part: “[w]here a cause of action arises outside of this
State, an action cannot be brought in a court of this State to enforce such cause of action after the
expiration of whichever is shorter, the time limited by the law of this State, or the time limited by the
law of the state or country where the cause of action arose, for bringing an action upon such cause of
action.”
21 Mervyn’s LLC v. Lubert-Adler Group IV, LLC (In re Mervyn’s Holdings, LLC), 426 B.R. 488,
502 (Bankr. D. Del. 2010).
22 Saudi Basic Ind. Corp. v. Mobil Yanbu Petrochemical Co., Inc., 866 A.2d 1 (Del. 2005).
23 Mervyn’s, 426 B.R. at 503.
24 Id. at 502.
breach of fiduciary duty claim involves the internal affairs of the corporation,25 the
24F
Mervyn’s Court applied California’s longer statute of limitation.26
25F
Similarly, in the Prior SAC Opinion, this Court determined that there was no
threat of forum shopping since the Plaintiff filed in the jurisdiction with a shorter
statute of limitations period. Other courts have relied on the Saudi case and reached
a similar conclusion. 27 Therefore, the Court will not reconsider the statute of
26F
limitations analysis and will apply Minnesota’s six-year statute of limitations to the
breach of fiduciary duty claims in this case.28
27F
The Claims for Breach of the Duty of Care will not be Dismissed.
The Moving Defendants argue for dismissal of the Trustee’s breach of the duty
of care claims because (i) ESML’s Articles of Organization contain an exculpation
clause that precludes their liability for a breach of the duty of care, and (ii) even
assuming that the exculpation clause does not preclude such liability, the TAC fails
to plead facts establishing a breach of the duty of care.
In response the Trustee argues that the exculpation clause does not preclude
the Defendants’ liability for actions taken as officers of ESML and, further, that the
Trustee’s amended complaint adds detailed allegations that the Moving Defendants
acted in bad faith or with intentional misconduct and thus are not protected by the
25 Id. at 502 (citing Coleman v. Taub, 638 F.2d 628, 629 n. 1 (3d Cir. 1981)).
26 Id. at 503.
27 Funari v. Wallpang, Inc., C.A. No. 13C-04-287 JRJ CCLD, 2014 WL 1678419, *4-*5 (Del.
Super. Ct. Apr. 16, 2014); Bear Stearns Mortg. Funding Trust 2006-SL1 v. EMC Mortg. LLC, C.A. No.
7701-VCL, 2015 WL 139731, *8-*9 (Del. Ch. Jan. 12, 2015); In re Circle Y of Yoakum, Texas, 354 B.R.
349, 359 (Bankr. D. Del. 2006).
28 As also discussed previously in the Prior SAC Opinion, the Trustee argues that the doctrine
of equitable tolling preserves his breach of fiduciary duty claims. As before, based on the decision
herein, the Court does not reach this issue.
exculpation clause. The Trustee also claims that the TAC sufficiently alleges that
the Moving Defendants breached their duty of care by adding more details and
additional facts that the Moving Defendants failed to act on an informed basis and
acted in bad faith.
(i) The exculpation clause
ESML’s exculpation clause refers only to governors, not officers.29 But the
28F
Moving Defendants argue that the exculpation clause includes a “savings clause” that
expands its coverage “to the fullest extent permitted by Chapter 322B of the
Minnesota Statutes, as amended.”30 That statute (Minn. Stat. § 322B) has been
29F
repealed and is replaced by Chapter 322C, which broadly permits a limited liability
company’s operating agreement to “eliminate or limit a member’s, manager’s or
governor’s liability to the limited liability company and members for money damages
…”31 The Trustee asserts, however, that the savings clause in ESML’s operating
30F
agreement, when read in full, limits application of the savings clause to governors,
stating:
If Chapter 322B of the Minnesota Statutes is hereafter amended to
authorize the further elimination or limitation of liability of governors,
then the liability of a governor of this limited liability company, in
addition to the limitation on personal liability provided herein, shall
be limited to the fullest extent permitted by Chapter 322B of the
Minnesota Statutes, as amended.32
31F
29 Articles of Organization, Art. 7 (Adv. D.I. 133-1).
30 Id.
31 Minn. Stat. § 322C.0110 subd.7.
32 Articles of Organization, Art. 7 (Adv. D.I. 133-1).
Ultimately, this issue need not be addressed here on the Motions to Dismiss
because the TAC includes detailed allegations of actions that would fall within the
exception in ESML’s exculpation clause - - that is, the clause does not bar claims “for
acts or omissions not in good faith or that involved intentional misconduct or a
knowing violation of law.”33 As discussed in more detail below, the TAC includes
32F
allegations that the Moving Defendants did not act in good faith or involved
intentional misconduct.34
33F
(ii) Claims for a breach of the duty of care
Under Minnesota law, a plaintiff must prove four elements to prevail on a
claim for breach of fiduciary duty: duty, breach, causation, and damages.35 “In a
34F
business setting, ‘one entrusted with the active management of a corporation, such
as an officer or director, occupies a fiduciary relationship to the corporation.”36
35F
Subject to the business judgment rule,37 a manager or governor must “act with the
36F
care that a person in a like position would reasonably exercise under similar
circumstances and in a manner the [manager or governor] reasonably believes to be
33 Articles of Organization, Art. 7 (Adv. D.I. 133-1).
34 See, e.g., TAC ¶¶ 54-56 (alleging misrepresentations to lenders); ¶¶ 88-97 (alleging
participation in a fraudulent invoicing scheme).
35 TCI Business Capital, Inc. v. Five Star American Die Casting, LLC, 890 N.W. 2d 423, 434
(Minn. App. 2017) (citing Padco, Inc. v. Kinney & Lange, 444 N.W.2d 889, 891 (Minn. App. 1989) review
denied (Minn. Nov. 15, 1989).
36 TCI, 890 N.W.2d at 434 (citing Miller v. Miller, 301 Minn. 207, 219, 222 N.W.2d 71, 78
(1974)).
37 “The business judgment rule is a ‘powerful presumption in favor of actions taken by directors
in that a decision made by a loyal and informed board will not be overturned by the courts ‘unless
there is no rational business purpose.” Miller v. Bradley (In re W.J. Bradley Mortg. Capital, LLC), 598
B.R. 150, 163 (Bankr. D. Del. 2019) (quoting Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del.
1993)). “A plaintiff can rebut the rule by showing that the fiduciaries ‘in reaching [their] challenged
decision, violated any one of [the] triad of fiduciary duties: due care, loyalty, or good faith.’” Id. (quoting
Joseph v. Frank (In re Troll Commc’ns, LLC), 385 B.R. 110, 118 (Bankr. D. Del. 2008)).
in the best interests of the company.”38 Moreover, as recognized in the Prior SAC
37F
Opinion, the duty of care requires officers to “act on an informed basis.”39 “The focus
38F
of the Court’s inquiry is not the merits of the officers’ ultimate decision . . . [r]ather,
the Court must analyze the process leading up to the decision and whether the officer
‘inform[ed] themselves of all material information reasonably available to them.’”40
39F
The Trustee has demonstrated that the TAC provides additional details and
more allegations that the Moving Defendants’ breached their duty of care. For
example, the TAC includes allegations that the Moving Defendants made the
disputed transfers without seeking or considering relevant information. See, e.g.,
TAC ¶¶ 50-51, 86-87 (alleging that the Moving Defendants ignored warnings received
from other officers or employees regarding the Company’s finances); or ¶¶ 71-74, 75-
80 (alleging that the Moving Defendants transferred funds without documentation or
Board approval). The TAC also includes allegations that the Moving Defendants
intentionally or with gross negligence approved and facilitated transactions that
could not be reasonably believed to be in the best interest of ESML. See, e.g., TAC ¶¶
64-66 (alleging a transfer in exchange for equipment the Defendants never expected
to receive); ¶¶ 68-74 (alleging “loans” to Essar Global despite knowing of Essar
Global’s liquidity issues and inability to repay the loans); ¶¶ 75-80 (alleging a transfer
to Aegis for no consideration); ¶¶ 82-87 (alleging transfers to fund letters of credit for
38 Minn. Stat. 322C.0409 subd. 3, subd. 7(1), and subd. 8(1).
39 Essar, 2019 WL 2246712, *7 (citing In re USDigital, Inc., 443 B.R. 22, 41 (Bankr. D. Del.
2011)). The Prior SAC Opinion also noted that, because shareholder derivative actions are relatively
rare in Minnesota, Minnesota courts often look to the decisions of Delaware courts for guidance in this
area. In re Xcel Energy, Inc., 222 F.R.D. 603, 606 (D. Minn. 2004) (citing cases).
40 Id. (quoting Benihanna of Tokyo, Inc. v. Benihana, Inc., 891 A.2d 150, 192 (Del. Ch. 2005)).
projects not associated with ESML); or ¶¶ 88-97 (alleging that the Moving Defendants
participated in a scheme to pay invoices for work that was never performed and for
which ESML receive no reciprocal value).
The Claims for Breach of the Duty of Loyalty will not be Dismissed.
Minnesota law requires managers and governors of an LLC to act in
accordance with the duty of loyalty.41 The duty of loyalty stands for the principle
40F
that “the best interest of the corporation and its shareholders takes precedence over
any interest possessed by a director, officer or controlling shareholder.”42 A plaintiff
41F
asserting a breach of the duty of loyalty can plead around the protection of the
business judgment rule by alleging self-dealing, improper motive,43 or a lack of
42F
independence to consider the challenged transaction objectively.44
43F
41 Minn. Stat. 322C.0409 subd. 2, subd.7(1) and subd. 8(1). In the Prior SAC Opinion, the
Court recognized that when a corporation is owned by a single entity, the directors’ fiduciary duties
serve only that parent entity. Essar, 2019 WL 2246712 at *5. But, “[o]nce the subsidiary enters the
zone of insolvency, the directors ‘become fiduciaries of the corporate assets for the benefit of creditors.’”
Id. (quoting Snyder Elec. Co. v. Fleming, 305 N.W.2d 863, 869 (Minn. 1981)). In the Prior SAC Opinion,
the Court determined that the complaint adequately pled that ESML was insolvent. Id. at *6.
42 Essar, 2019 WL 2246712, *6 (citing In re Fedders N. Am., Inc., 405 B.R. 527, 540 (Bankr. D.
Del. 2009)).
43 Troll Commc’n, 385 B.R. at 118 (citing Continuing Creditors’ Comm. of Star Telecomm., Inc.
v. Edgecomb, 385 F.Supp.2d 449, 458 (D. Del. 2004) (“[I]n the absence of facts showing self-dealing or
improper motive, a corporate officer or director is not legally responsible to the corporation for losses
that may be suffered as a result of a decision that an officer made or that directors authorized in good
faith.”).
44 Telxon Corp. v. Meyerson, 802 A.2d 257, 264 (Del. 2002) (“Theoretically a director can be
‘controlled’ by another, for purposes of determining whether the director lacked the independence
necessary to consider the challenged transaction objectively. A controlled director is one who is
dominated by another party, whether through close personal or familial relationship or through force
of will. A director may also be deemed ‘controlled’ if he or she is beholden to the allegedly controlling
entity, as when the entity has the direct or indirect unilateral power to decide whether the director
continues to receive a benefit upon which the director is so dependent or is of such subjective material
importance that its threatened loss might create a reason to question whether the director is able to
consider the corporate merits of the challenged transaction objectively.”) (citations omitted).
The duty of loyalty also is breached when “the fiduciary fails to act in good
faith.”45 A lack of good faith can be shown by alleging conduct motivated by a
44F
subjective bad intent or conduct that is an “intentional dereliction of duty or the
conscious disregard for one's responsibilities.”46
45F
The Trustee has demonstrated that the TAC provides additional details and
more allegations that the Moving Defendants breached their duty of loyalty. For
example, the TAC alleges that Mr. Vuppuluri lacked the independence necessary to
objectively consider the challenged transactions’ effects on ESML because he has
held various director and executive officer roles within Essar Global’s enterprise over
the past twenty-seven years and, as a result, depended on Essar Global, the Essar
affiliates, and the Ruia family for his livelihood. See, e.g., TAC ¶¶ 20 – 23, ¶¶ 72 – 74
(alleging that, upon instruction of Mr. Ruia and Essar Global’s officers, Vuppuluri
continued to “lend” money from ESML to Essar Global despite the negative impact
on ESML’s finances and inability to complete the Project). Although Mr. Bhartia’s
employment did not begin until 2013,47 his livelihood also relied on Essar Global, its
46F
affiliates and the Ruia family so that the TAC sufficiently alleged that both the
Moving Defendants lacked independence to objectively consider the impact of the
45 Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006). “The duty to act in good faith is a ‘subsidiary
element of the duty of loyalty.’” Liquidation Trust of Solutions Liquidation LLC v. Stienes (In re
Solutions Liquidation LLC), 608 B.R. 384, 401 (Bankr. D. Del. 2019) (quoting Fedders, 405 B.R. at
540).
46 McPadden v. Sidhu, 964 A.2d 1262, 1274 (Del. Ch. 2008) (citing Walt Disney Co. Derivative
Litig., 906 A.2d at 66-68).
47 Mr. Bhartia’s motion to dismiss also argues that he had no connections to transfers made
before his employment in 2013. While the Court agrees that Mr. Bhartia cannot violate a fiduciary
duty to ESML before his employment began, it is more appropriate to sort out disputed facts regarding
which transfers Mr. Bhartia may have authorized in the context of a summary judgment motion or at
trial.
transfers on ESML. See, e.g., TAC ¶¶24 – 25, ¶¶ 75 – 81 (alleging that, upon demand
of Mr. Ruia, the Moving Defendants authorized transfers for services that they knew
ESML was not responsible to pay), and ¶¶ 82 – 87 (alleging that, upon demand of
Essar Global and the Ruia family, the Moving Defendants authorized transfers for
letters of credit on projects not associated with ESML, despite warnings from ESML
employees on the impact such transfers had on ESML’s liquidity). The TAC also
alleges that the Moving Defendants’ actions lacked good faith when they participated
in a fraudulent invoicing scheme in which ESML paid Essar Projects-US for work
that was never performed for ESML’s benefit. See, e.g., TAC, ¶¶ 88 – 97.
The Claims for Disallowance of the Moving Defendants’ Claims will not be dismissed
The TAC seeks to disallow the Moving Defendants’ claims against ESML for
bonus pay under Bankruptcy Code § 502(b)(1), which provides that a claim may be
disallowed if it is unenforceable against the debtor under any agreement or applicable
law. The Trustee asserts that Minnesota law provides that an employee forfeits his
compensation for conduct that is disobedient or in breach of his duty of loyalty.48 The
47F
TAC contains sufficient allegations to permit the § 502(b)(1) claims to survive.
48 Stiff v. Assoc. Sewing Supply Co., 436 N.W.2d 777, 780 (Minn. 1989) (“Every employment
contract encompasses implied duties of honesty and loyalty, which if breached by the employee, results
in the employer owing the employee nothing.”).
Conclusion
For the foregoing reasons, the Court concludes that the revised and additional
allegations in the TAC “nudged [the Trustee’s claims] across the line from conceivable
to plausible.” 49 The Moving Defendants’ motions to dismiss will be denied.
The parties shall confer and submit an appropriate Order consistent with this
Opinion within 14 days of the date hereof.
FOR THE COURT:
Brendan ‘Linehan Shavinon
United States Bankruptcy Judge
Dated: May 5, 2021
49 Twombly, 550 U.S. at 570.
15