Nobilis Health Corp. - Adversary Proceeding

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

Chapter 7

In re:

Case No. 19-12264 (CTG)

NOBILIS HEALTH CORP., et al.,

Jointly Administered

Debtors.

Adv. Proc. No. 21-51183 (CTG)

ALFRED T. GIULIANO, in his capacity

as Chapter 7 Trustee for the jointly Related Docket Nos. 181, 201, 203, 207

administered bankruptcy estates of

Nobilis Health Corp., et al.,

Plaintiff,

v.

HARRY J. FLEMING, et al.,

Defendants.

Adv. Proc. No. 23-50486 (CTG)

ALFRED T. GIULIANO, in his capacity

as Chapter 7 Trustee for the jointly Related Docket No. 13

administered bankruptcy estates of

Nobilis Health Corp., et al.,

Plaintiff,

v.

HARRY J. FLEMING, et al.,

Defendants.

MEMORANDUM OPINION AND PROPOSED

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Debtor Nobilis Health Corp. was once a publicly traded healthcare company

that (through its affiliates) owned and operated more than 30 surgical facilities and

clinics. In 2017, the company found that insurers were declining to pay for certain

procedures. Taking the view that these delayed payments would ultimately be made,

the company altered its accounting practice, keeping certain of these receivables on

the company’s books rather than writing them off when they had been outstanding

for more than a year. In the end, however, the insurers never paid for these

procedures. The company filed to liquidate under chapter 7 of the Bankruptcy Code

in 2019.

The chapter 7 trustee brings this lawsuit against various of the company’s

former officers and directors, claiming that they breached their fiduciary duties. The

chief allegation in the complaint is that the defendants caused the debtors to change

their practice of writing off receivables that had been outstanding for more than a

year in order to deceive lenders into extending credit. Because the company was

unable to collect on those receivables, the unpaid receivables that remained on the

company’s balance sheet began to mount. The debtors subsequently missed a

securities filing deadline, were delisted from the stock exchange, and filed for

bankruptcy under chapter 7.

Separately, the debtors’ largest creditor sued some of the defendants for

negligent misrepresentation, pointing to the same conduct that forms the basis for

the trustee’s lawsuit. That case settled and, as a part of its resolution, the defendants

received an assignment of the creditor’s claim against the estate. The trustee brought

a separate adversary proceeding seeking to subordinate the defendants’ claims on the

ground that those claims arose out of defendants’ inequitable conduct, namely the

same breach of fiduciary duty that is the subject of the initial adversary proceeding.

The defendants moved for summary judgment in the breach of fiduciary duty

case. First, they argue that their actions were consistent with their fiduciary duties

in view of the deference to which their business judgments are entitled under

Delaware law. Second, they contend that there is no basis to conclude that any

alleged breaches of fiduciary duty were causally related to the debtors’ ultimate

business failure. The defendants separately moved to dismiss the equitable

subordination claim.

The summary judgment record supports the defendants’ position with respect

to the breach of fiduciary duty claims. Discovery failed to produce evidence that

would permit a reasonable finder of fact to conclude that the defendants breached

their fiduciary duties. To be sure, the evidence would be sufficient to permit a finding

that the defendants participated in the company’s decision to take an aggressive

accounting position. But in light of the deferential standard imposed by the business

judgment rule, that is insufficient to give rise to a claim of breach of fiduciary duty.

And alternatively, even if there were a breach of duty, the evidence is insufficient to

permit a reasonable finder of fact to conclude that such a breach was causally related

to the debtors’ failure.

The underlying problem was the fact that insurers were refusing to pay for

procedures the debtors performed. No evidence in the summary judgment record,

however, would permit a reasonable juror to conclude that it was the accounting

errors, rather than the underlying economic reality the debtors faced in view of the

change in insurer behavior, that caused the business failure.

Indeed, at the end of the day, the trustee’s case fails for the same reason this

Court dismissed the trustee’s claim for common law fraud. To the extent any fraud

occurred here, the debtors (in whose shoes the trustee stands) were the perpetrator

rather than the victim. While the trustee has standing to assert claims held by the

debtors for the benefit of creditors, the trustee cannot assert claims for fraud that are

held directly by either shareholders or creditors—and that run against the debtors.

To be sure, there is a point at which a corporation’s directors and officers, were they

to choose to steer a company down a path of criminality, would breach their duties to

act in the company’s best interests. The conduct shown in the summary judgment

record, however, falls far short of that line. That record, read in the light most

favorable to the trustee, demonstrates that the debtors made improper accounting

decisions with respect to its receivables. The trustee argues vigorously that these

errors violated the company’s or the individuals’ obligations under the federal

securities laws. Even if the trustee were correct about that (and it bears note that

nothing in the record suggests that either the SEC or the company’s shareholders

ever asserted such a claim), that would still fall short of what one needs to

demonstrate in order to establish a claim of breach of fiduciary duty.

The Court will thus enter summary judgment (or, where appropriate,

recommend the entry of summary judgment) for the defendants in the adversary

proceeding claiming breach of fiduciary duty. Finally, in light of the Court’s

disposition of claims for breach of fiduciary duty, the Court will dismiss the adversary

proceeding asserting a claim for equitable subordination.

Factual and Procedural Background

Debtor Nobilis Health Corporation was a publicly traded healthcare company

that (along with its affiliated debtor entities) owned 33 facilities in Texas and

Arizona.1 The defendants are former officers and directors of the debtors. Defendant

Harry Fleming was the Chief Executive Officer from January 2016 to December 2018

and Chairman of the Board of Directors from November 16, 2017 until the debtors’

bankruptcy filing.2 Defendant Kenneth Efird was the President for the relevant

period;3 defendant David Young was the Chief Financial Officer;4 Brandon Moreno

was the Associate Vice President of Finance, and eventually, the Vice President of

Finance;5 Marcos Rodriguez was the Chief Accounting Officer;6 and Steve Ozonian

was a member of the Board of Directors and served on Nobilis Health Corp.’s Audit

Committee.7

1 D.I. 225-2 at 9 of 199 (Nobilis Health Corp. Dec. 31, 2017 10-K Form). Nobilis Health Corp.

and its affiliates are referred to as “debtors.”. Unless otherwise indicated, citations to items

on the Court’s docket are to the docket in No. 21-51183, and are cited as “D.I. __.”. Materials

on the docket of the main bankruptcy case, In re Nobilis Health Corp., et al., No. 19-12264

(CTG) (Bankr. D. Del.) are cited as “Main Case D.I. __.”.

2 D.I. 184-49 at 8 of 24 (Plaintiff’s Answer and Objection to Fleming’s Interrogatories).

3 D.I. 215 at 104 of 263 (Efird Dep.).

4 Id. at 48-49 of 263. (Young Dep.).

5 Id. at 174-175 of 263 (Moreno Dep.).

6 Id. at 200 of 263 (Rodriguez Dep.).

7 D.I. 80 ¶ 19 (Ozonian Answer to Compl.). Ozonian suffered health issues, leading him to

step down as Chair of the Audit Committee, but remained on the Board of Directors until

2019. See D.I. 225-54 at 5 of 9 (Ozonian Dep.).

The debtors were primarily out-of-network healthcare providers. As such, they

did not have contracts with major health insurers but relied upon third-party

reimbursement from private insurers to pay for the services rendered.8 Consistent

with ordinary principles of accrual accounting, the debtors recognized revenue at the

time the services were rendered. The subject of this litigation is, first, how the

debtors recognized revenue in the first instance, then how the debtors determined

when those receivables needed to be written off as uncollectible.

Revenue was recognized initially through an estimation process. A revenue

management team projected the amount Nobilis expected to receive on a procedure-

by-procedure basis according to numerous factors.9 The company adjusted these

estimates on an on-going basis.10 These revenue recognition decisions were subject

to several layers of authority including the finance department, an auditor, and

ultimately, management.11

Nobilis historically wrote off most accounts receivables that had been

outstanding for more than a year.12 But notwithstanding the write off, the company

continued to seek collection on those accounts.13 As discussed extensively below, in

late 2017, management increased the proportion of the receivables that were more

8 D.I. 225-2 at 58 of 199 (Nobilis Dec. 31, 2017 Form 10-K).

9 Id. at 89-90 of 199 (Nobilis Dec. 31, 2017 Form 10-K).

10 Id.

11 D.I. 182 at 17 (chart summarizing testimony cited); D.I. 214 at 5-7 (explaining collectability

analysis with record citations).

12 D.I. 215 at 180-181 of 263 (Moreno Dep.).

13 Id. at 22-23 of 263 (Moreno Dep.).

than a year old that it estimated it would collect in the future. Unless and until these

receivables were actually collected, the effect of this practice was to increase the

receivables that remained on the company’s books.14 This decision was preceded by

a significant decline in cash collections on the company’s receivables in the second

quarter of 2017 with a larger projected shortfall in the third quarter.15 The

defendants had several theories as to why aging receivables were accumulating, but

repeatedly stated that they believed that these receivables were still collectable.16 In

this same period, Hurricane Harvey made landfall in Houston, further disrupting the

debtors’ operations.17

The debtors applied the new revenue recognition formula through 2018.

Actual collections, however, were less robust. As a result, the company reported

mounting uncollected accounts receivable.18 The debtors then missed the filing

deadline for their third quarter 10-Q in 2018 and requested additional time for the

auditor to complete its review of the financial statements.19 At the auditor’s request,

14 See infra Part I-A-1.

15 D.I. 225-25 at 3 of 30 (Aug. 16, 2017 Management Report); D.I. 184-42 at 4 of 4 (email from

lender BBVA to Nobilis).

16 Reasons included technological and vendor issues delaying collections; D.I. 215 at 28, 37 of

263 (Moreno Dep.); D.I. 215-1 at 8 of 18 (Feb. 23, 2018 memorandum); and issues with

insurance reimbursing pre-authorized claims, id. at 8-11 of 18 (Feb. 23, 2018 memorandum);

D.I. 215-5 at 39-41 of 70. Nobilis’ lender, BBVA, stated that the later increase in receivables

more than one year old were due to changes in third party payor behavior. See D.I. 215-6 at

32 of 107.

17 D.I 215-5 at 41 of 70 (Feb. 1, 2019 memorandum).

18 D.I. 215 at 118 of 263 (Wiggins Dep.); D.I. 225-90 at 25 of 71 (Dec. 31, 2017, $20.4 million;

March 31, 2018, $26.2 million); D.I. 225-81 at 23 of 74 (June 30, 2018, $38.8 million).

19 D.I. 225-68; D.I. 225-69.

the debtors retained additional professionals to assess the debtors’ books.20

Ultimately, Nobilis failed make another SEC filing and was delisted.21

On October 21, 2019, the debtors filed a voluntary chapter 7 petition and Alfred

Giuliano was appointed the chapter 7 trustee.22 Two years later, the trustee initiated

this adversary proceeding alleging that twelve defendants breached their fiduciary

duties and committed corporate waste and common law fraud.23 The Court granted

a motion to dismiss the claims for corporate waste and common law fraud as well as

the claims against one of the 12 defendants.24 The parties thereafter stipulated to

the dismissal of the breach of fiduciary duty claims against five more defendants.25

Discovery has now been completed and the six remaining defendants bring the

current motions for summary judgment.26

Concurrent with the summary judgment briefing, the trustee filed a second

adversary proceeding against Fleming, Young, and Moreno for equitable

subordination. Those defendants had been sued directly by BBVA, the debtors’

largest creditor, over the same events that are at issue in this lawsuit. In September

20 D.I. 225-104 (CFO Kenneth Klein email summarizing call with auditor).

21 D.I. 225-70 (Nobilis Sept. 3, 2019 Form 8-K).

22 Main Case D.I. 1.

23 D.I. 1.

24 D.I. 77.

25 D.I. 129.

26 D.I. 181 & 201 (Fleming), D.I. 203 (Ozonian), D.I. 207 (Young, Moreno, Efird, and

Rodriguez).

2022, these defendants settled with BBVA.27 As part of that settlement, BBVA

assigned its claims against the estate to the three defendants. The trustee now seeks

to subordinate those claims, alleging that because none of this would have arisen but

for the defendants’ actions that are alleged to breach their fiduciary duties. The

trustee therefore argues that the claim acquired from BBVA is subject to equitable

subordination.28 The defendants moved to dismiss that adversary proceeding.29

Jurisdiction

The district court has jurisdiction over this matter pursuant to

28 U.S.C. § 1334(b). The case has been referred to this Court pursuant to

28 U.S.C. § 157(a) and the district court’s standing order of reference.30 Without

consent, bankruptcy courts lack authority to enter final judgment on matters of

private rights that are non-core matters.31 Claims for breaches of fiduciary duty are

private rights, such that this Court would typically lack the authority to enter a final

judgment on such a claim.32

27 Giuliano v. Fleming, et al., Adv. Proc. No. 23-50486 (CTG) (Bankr. D. Del. Aug. 21, 2023),

D.I. 1 ¶ 4. Citations to materials on the docket of this adversary proceeding are cited as “Adv.

Proc. No. 23-50486, D.I. __.”.

28 Id. ¶¶ 124-134.

29 Adv. Proc. No. 23-50486, D.I. 13.

30 Amended Standing Order of Reference from the United States District Court for the

District of Delaware, dated Feb. 29, 2012.

31 Stern v. Marshall, 564 U.S. 462, 488 (2011).

32 See, e.g., In re Allied Systems Holdings, Inc., 524 B.R. 598, 606 (Bankr. D. Del. 2015);

Granfinanciera v. Nordberg, 492 U.S. 33, 55 (1989).

The trustee’s equitable subordination claim, however, changes this analysis,

at least as it applies to Fleming, Young, and Moreno. That adversary proceeding

relates to claims allowance and is thus a core proceeding on which this Court may

enter final judgment. Moreover, by seeking to subordinate these defendants’ claims

against the estate on account of their alleged breaches of fiduciary duty, the trustee

effectively put the question whether the defendants breached their fiduciary duties

at issue in the claims allowance process. That operates to convert the breach of

fiduciary duty claims into core matters on which the Court may enter final judgment.

The Supreme Court explained this principle in Katchen v. Landy. There, the

Supreme Court held that § 502’s predecessor, § 57g of the Bankruptcy Act, operated

to transform an avoidance action into part of the claims allowance process for a

preference defendant who had filed a proof of claim. Under § 57g, the claim of a

creditor that had received an avoidable transfer would be disallowed unless and until

the creditor had repaid the avoidable transfer back to the estate. In light of that

principle, a creditor’s proper share of the estate “can neither be determined nor

allowed until the creditor disgorges the alleged voidance preference he has already

received.”33 As a result of that principle, the question whether a creditor had received

a preference necessarily became part of the claims allowance process. And because

the claims allowance process was a “summary” proceeding (the kind of matter that

could be heard and decided by the bankruptcy referee), the creditor’s filing of a proof

of claim operated to transform the avoidance action into a summary proceeding. The

33 Katchen v. Landy, 382 U.S. 323, 336 (1966).

Supreme Court reaffirmed this understanding of the principle it had announced in

Katchen in both Granfinanciera and Stern.34

The principle applies here. The subordination of the claims held by those

defendants against whom the equitable subordination claim is asserted depends (at

least on the trustee’s theory) on whether they breached their fiduciary duties. As

such, the breach of fiduciary duty claims against those defendants is thus part of the

claims allowance process. For those defendants, the claim for breach of a fiduciary

duty is therefore a core matter on which this Court may enter final judgment.35 The

claims for breach of fiduciary duty against the remaining defendants, however,

remain non-core matters. For those defendants, the Court may make (and this

Memorandum Opinion shall constitute) proposed findings and conclusions of law that

are subject to de novo review by the district court.36

34 Granfinanciera, 492 U.S. at 57-59; Stern v. Marshall, 564 U.S. 462, 496 (2011). See also,

In re Cyber Litigation, No. 20-12702 (CTG), 2023 WL 6938144, at *12 (Bankr. D. Del. Oct.

19, 2023).

35 Katchen, 382 U.S. at 336. As to those defendants — Fleming, Young, and Moreno — this

Memorandum Opinion sets forth the Court’s findings of fact and conclusions of law as

required by Rule 7052 of the Federal Rules of Bankruptcy Procedure (which incorporates

Rule 52 of the Federal Rules of Civil Procedure).

36 See 28 U.S.C. § 157(c)(1); Fed. R. Bankr. P. 9033.

As this Court noted in In re Cyber Litigation, “in the context of a motion for summary

judgment the issue of whether a bankruptcy court may enter a final judgment is a matter of

relatively little consequence. Regardless of whether a bankruptcy court issues a ‘judgment’

or makes proposed findings and conclusions, a decision granting a motion for summary

judgment is subject to the district court’s de novo review in any event.” In re Cyber Litigation,

2023 WL 6938144, at *5 n.41; see Executive Benefits v. Arkison, 573 U.S. 25, 39 (2014).

Analysis

Summary judgment is appropriate when “there is no genuine dispute as to any

material fact and the movant is entitled to judgment as a matter of law.”37 In

reviewing the evidence, the Court makes all reasonable inferences in the light most

favorable to the non-moving party. A court considering a motion for summary

judgment shall not make credibility determinations or weigh the evidence.38 Rather,

the role of the court is to assess the record evidence and determine whether it would

permit a reasonable finder of fact to rule in favor of the non-moving party.39 If so, the

motion must be denied. On the defendants’ motions for summary judgment, then,

the question is whether defendants have established that, based on the record before

the Court, a reasonable finder of fact would be compelled to find in their favor.

In the trustee’s lawsuit asserting claims of breach of fiduciary duty, the

defendants are entitled to summary judgment because the summary judgment record

would not permit a reasonable jury to conclude that defendants breached their duties

(as set forth in Part I). Alternatively, even if there were a basis for finding a breach

of the duty, the evidence would not permit a finding that such breach was the cause

of the debtors’ failure (as set forth in Part II).

Finally, as discussed in Part III, the adversary proceeding seeking equitable

subordination of claims asserted by Fleming, Young, and Moreno is dismissed (under

37 Fed. R. Civ. P. 56 made applicable by Fed. R. Bankr. P. 7056.

38 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986); Big Apple BMW, Inc. v. BMW of

N. Am., Inc., 974 F.2d 1358, 1363 (3d Cir. 1992).

39 Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-587 (1986).

the standards applicable to a motion to dismiss under Rule 12(b)(6) of the Federal

Rules of Civil Procedure) because it is premised on the unsuccessful breach of

fiduciary duty action.

I. The motion for summary judgment will be granted/recommended for

all defendants, as no reasonable jury could find the defendants liable

for a breach of fiduciary duty.

The trustee claims that certain directors and officers breached their fiduciary

duties to the debtors. The parties do not contest that the defendants owed the debtors

fiduciary duties. The only dispute is over whether the defendants breached those

duties.

Officers and directors owe fiduciary duties to the corporation they serve under

Delaware law.40 But the business judgment rule grants those directors and officers a

great degree of flexibility by presuming that the directors and officers of a corporation

act on an informed basis in good faith, and in the honest belief that the actions taken

were in the best interests of the company.41 To rebut this presumption, a plaintiff

must show the defendants breached their duties of care or loyalty, or acted in bad

faith.42

The duty of care requires fiduciaries to act on an informed basis before making

a business decision and to act prudently in carrying out their responsibilities.43

40 Gantler v. Stephens, 965 A.2d 695, 708-709 (Del. 2009).

41 Delman v. GigAcquisitions3, LLC, 288 A.3d 692, 713 (Del. Ch. 2023).

42 Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370-371 (Del. 2006); Gantler,

965 A.2d at 708-09.

43 Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985); In re Walt Disney Co. Derivative Litig.,

907 A.2d 693, 739 (Del. Ch. 2005).

Instead of analyzing the substance of the decision at issue, courts consider whether

the process leading to the relevant decision reflected good faith consideration.44 To

succeed, a plaintiff must show that the fiduciary was grossly negligent, requiring

“reckless indifference to or a deliberate disregard of the whole body of stockholders or

actions which are without the bounds of reason.”45 When the directors and officers

act upon the material facts that were reasonably available to them at the time of

alleged breach, courts do not inquire further into whether the defendants made the

correct or best decision.46

The duty of loyalty requires fiduciaries to place the interests of the corporation

above their own interests, to the extent their interests are not already aligned.47 To

claim the duty of loyalty has been breached, the plaintiff must show that the

defendants were conflicted and pursued their own interests above those of the

company or that the defendant failed to pursue the best interests of the company in

good faith.48

While the plaintiff claims the duty of loyalty was breached, there is no

allegation that any defendant was conflicted. Rather, the trustee claims the

defendants breached their duty of loyalty by failing properly to oversee the company

44 Caremark Int’l. Inc. Derivative Litig., 698 A.2d 959, 967 (Del. Ch. 1996).

45 In re DSI Renal Holdings, LLC, 574 B.R. 446, 470 (Bankr. D. Del. 2017).

46 Moran v. Household Intern., Inc., 490 A.2d 1059, 1075 (Del. Ch. 1985).

47 Walt Disney, 907 A.2d at 751; In re Orchard Enterprises, Inc. S’holder Litig., 88 A.3d 1, 33

(Del. Ch. 2014).

48 Orchard Enterprises, 88 A.3d at 32-33; Brehm v. Eisner, 746 A.2d 244, 259 (Del. 2000).

in good faith. An officer or director may breach its duty of loyalty by either (1) “utterly

fail[ing] to implement any reporting or information system or controls” or (2) “having

implemented such a system or controls, consciously fail[ing] to monitor or oversee its

operations, thus disabling [himself] from being informed of risks or problems

requiring managerial attention.”49 Corporate officers have oversight obligations

under Caremark as they are “optimally positioned to identify red flags and either

address them or report upward to more senior officers or to the board.”50

To prevail on a Caremark theory, the plaintiff must show that the defendants

observed and consciously disregarded “red flags” that would have put them on notice

of a problem located within the scope of the defendant’s corporate authority.51 This

standard is exacting, the Chancery Court having described it as “possibly the most

difficult theory in corporation law upon which a plaintiff might hope to win a

judgment.”52

The trustee contends that four sets of events give rise to claims for breach of

fiduciary duty, either on account of the defendants’ direct conduct or for their

inactions under Caremark: (A) the changes to the company’s revenue estimates in

2017, (B) the failure to disclose the change, (C) the failure of the revenue recognition

49 Stone, 911 A.2d at 369-370 (citing Caremark Int’l. Inc. Derivative Litig., 698 A.2d 959 (Del.

Ch. 1996)) (“The failure to act in good faith may result in liability because the requirement

to act in good faith is a subsidiary element[,] i.e., a condition, of the fundamental duty of

loyalty.”) (internal quotations omitted).

50 In re McDonald’s Corp. S’holder Derivative Litig., 289 A.3d 343, 362 (Del. Ch. 2023).

51 Caremark, 698 A.2d at 967-968, 971.

52 Id. at 967.

committee to prevent the accounting errors, and (D) the Audit Committee’s decision

to sign off on the company’s financials. As further described below, the claims

relating to each of these events are asserted against different groups of defendants.

A. No jury could find that the defendants breached their fiduciary

duties by adjusting the revenue estimates in the third quarter

of 2017, either by direct conduct or under Caremark.

The trustee claims that all six of the remaining defendants breached their

fiduciary duties both by virtue of their direct affirmative conduct in connection with

the company’s change in accounting practices and by failing to take appropriate

actions as required under Caremark.

The trustee alleges that the defendants breached their fiduciary duties

through their actions or inactions related to the company’s decision in late 2017 to

change it practices regarding writing off receivables that were more than a year old.

The trustee characterizes this as an attempt to “cook the books.”53 The trustee points

to the corporate officers’ statements in internal emails expressing concerns about

diminished third quarter estimated revenue in 2017, followed by an effort to boost

those revenues to meet certain loan covenants. The trustee alleges that the

defendants ignored “red flags” that should have signaled to the defendants that they

had obligations to act.

In 2015 and 2016, the debtors were growing, and the company was taking steps

to digest the acquisitions of new facilities, which were driving its growth. Nobilis

53 D.I. 224 at 19, 21, 61.

identified “a long list of Material Weaknesses” in its financial reporting54 and restated

its 2014 annual financials.55 Nobilis engaged PricewaterhouseCoopers (“PwC”) to

assess its internal controls and to develop compliance procedures, as required by the

Sarbanes-Oxley Act (“SOX”).56 As an emerging growth company, the debtors were

exempt from certain SOX requirements.57 But since this regulatory slack was

temporary, Nobilis hired PwC to ensure it would be ready when it was required to

comply fully.58 At the end of the PwC engagement, Nobilis incorporated PwC’s

findings in the company’s SOX internal control documentation, which included a

policy to write down to zero any receivable that was more than one year old.59

Defendant Moreno sent the SOX internal controls document to all employees on

December 5, 2016, indicating that it was “effective immediately.”60

The parties dispute the effect of this policy. The plaintiff argues that deviating

from this policy after December 5, 2016 amounted to a misstatement of the debtors’

financials that the debtors would be required to disclose as an accounting change in

54 D.I. 225-8 (email from Rodriguez regarding SOX internal controls assessment and

documentation).

55 Id.; D.I. 184-42 at 2-4 of 4; D.I. 225-7 at 4 of 79.

56 D.I. 184-46 at 2-3 of 106 (Rodriguez email “Management News Blast”); D.I. 225-8.

57 See 15 U.S.C. § 7262(b) (exempting emerging growth companies from requirement that

accounting firm attest to management assessment of internal controls).

58 D.I. 184-15 at 13 of 34 (Fleming Dep.); D.I. 184-16 at 10-11 of 19 (Fleming Dep.) (“The

status of the company at this time was an emerging growth company, which means we were

not fully obligated to comply with every one of the Sarbanes-Oxley rules. And so, what we’re

seeing here with Marcos Rodriguez’s email is the beginning stages of preparing the company

for the full-on Sarbanes obligations in the future…”).

59 D.I. 225-12 (Rodriguez “Management News Blast” with new internal controls).

60 Id. at 2 of 106.

its public filings.61 The plaintiff further contends that because of Moreno’s email, all

defendants were aware of the policy.62

The defendants argue that Nobilis’ status as an emerging growth company

exempted it from following these internal guidelines as it ramped up to full SOX

compliance. Rather than expressing current binding policies, the narratives

expressed “goals.”63 CEO Fleming’s deposition testimony reflected this:

I understand that as the chief accounting officer, [Rodriguez] was intent

on building a program so that when we became SOX reporting, we’d be

compliant… We didn’t have full-on SOX obligation [because we were] an

emerging growth company. That would be sometime in the future that

we’d obtain that status and obligations.64

The defendants also refer to their explanation of the revenue recognition

process in the debtors’ public filings. Rather than a full write-off of all receivables

that were more than a year old, Nobilis explained that the company’s revenue cycle

management team assessed accounts on a line-by-line basis:

[I]n estimating net patient service revenues, management evaluates

payor mix, (among private health insurance plans, workers’

compensation insurers, government payor plans and patients),

historical settlement and payment data for a given payor and type of

medical procedure, and current economic conditions and revises its

revenue estimates as necessary in subsequent periods.65

61 D.I. 224 at 66 (“With respect to the 365+ AR Policy specifically, the Company followed it as

standard practice right up until poor financial results in 2017 Q3 threatened to derail” a loan

with BBVA for the purchase of a new facility).

62 D.I. 224 at 65-66.

63 D.I. 212 at 7.

64 D.I. 184-15 at 13 of 34 (Fleming Dep.).

65 D.I. 215-8 at 5-6 of 74 (Nobilis 2016 Form 10-K at 54-55). See also D.I. 215-6 at 77 of 107

(Nobilis 2015 Form 10-K at 43); D.I. 215-11 at 38-39 of 79 (Nobilis 2017 Form 10-K at 52-53).

The record shows that this analysis usually—but not always—resulted in

receivables that were more thana year old being written down to zero.66 The financial

statements from periods immediately before and after the SOX narrative

implementation included some receivables over a year old that remained on the

books.67 The defendants testified at their depositions that this was their

understanding of the internal SOX controls policies and their reporting obligations.68

In the second quarter of 2017, the debtors’ reported revenue was millions short

of their projections and the company continued to face headwinds into the third

quarter.69 In August 2017, executives expressed concern about even larger projected

revenue shortfalls for the third quarter.70 Days later, on August 25, Hurricane

Harvey made landfall in Houston, disrupting the debtors’ operations.71

66 D.I. 215 at 22-23 of 263 (Moreno Dep.).

67 D.I. 215 at 58-60 of 263 (Young Dep.); D.I. 215-11 at 53 of 79 (Nobilis 2017 Form 10-K)

(noting that the receivables that were more than a year old were $0.6 million for the year

ending December 31, 2016); D.I. 215-6 at 28 of 107 (Nobilis aging report sent to BBVA in

April 2017 reflecting over $2 million of receivables more than one year old at certain

facilities).

68 D.I. 184-7 at 22 of 31 (Rodriguez Dep.) (“Because as a collective group, management in

consultation with their auditor, it was determined that we should add a statement related to

accounts that were greater than 365 days since this number has grown. As you can see, it

was also included in the 12-31-2016. So there was no change related to 365 from a policy

standpoint. This is just an additional disclosure that was added. The policy still stands as is

and was unchanged from ’16 to ’17.”).

69 D.I. 225-25 (Management Report as of August 16, 2017); D.I. 225-30 (Management Report

as of September 21, 2017).

70 D.I. 225-25 (Young email, Aug. 20, 2017); D.I. 225-28 at 3 of 4 (“I am out of ideas here. I

can really use your help about what to do to figure out if we have an issue and how to turn

this around. These numbers have been terrible for the past two weeks and we don’t have good

answers, much less a solution.”) (Young email, Sept. 5, 2017).

71 D.I. 215-5 at 41 of 70.

The record shows that in this time period, the debtors were both seeking to

close on a new BBVA loan, the proceeds of which they would use to acquire another

facility, and also at risk of tripping the covenants on their existing BBVA loan.72

During the week of September 21, 2017, the debtors’ budget estimates showed that

the third quarter’s shortfall would dwarf the second quarter’s deficiency.73 Young

expressed dismay at the estimates.74 In a September 28 email to Fleming, Young,

and Efird, Moreno wrote:

I want to dig in deep to [Days Sales Outstanding] at each facility and

the individual agings to see what % of total AR is over 150-180-210

[days] etc.

End of the day, lowest volumes all year and we were heading that way

before any hurricane hit. Only difference this Q is collections weren’t

strong so we couldn’t bank on as large of adjustments as last time.75

Young sent the group revenue estimates at 10:00 p.m. that evening and said he would

continue to work with Moreno on them. In an email to Patrick Yoder, the chief

revenue officer, Young noted concerns regarding aging receivables:

You will note that ½ of the receivables (~$5MM) are over 150 days old.

Of this amount, $3.8MM is over 240 days or 8 months. As these amounts

go over 360 days we will need to evaluate their collectability and make

a decision on whether to drop them from our calculations. The first

window of that is $893K. …We simply cannot afford for them to ignore

$4MM that is 8 months old.76

72 D.I. 225-53 at 5 of 6 (McCurdy Dep.). See also D.I. 224 at 30.

73 D.I. 225-30.

74 Id. (“Do we believe these numbers? Looks bad.”).

75 D.I. 225-27 at 2 of 5.

76 D.I. 225-44 at 3 of 4.

Five days later, Young held a meeting with Yoder to review third quarter

revenues and project fourth quarter revenues. He later sent to Fleming, Efird, and

Moreno an estimate that projected $65 million in revenue for the third quarter of

2017.77

The next day, following a meeting to discuss the revenue projection, a Nobilis

employee expressed skepticism. His preliminary analysis suggested that they would

“be lucky to get to just above $60 [million].” He but acknowledged, however, that the

numbers required further “scrubbing” and that there remained “work to do.”78 Two

days later, Moreno returned to the group with a revenue estimate of $64.8 million,

just short of Young’s projection.79 The increase in revenue came in part from enlarged

estimates of aging receivables that would remain on the books. It is uncontroverted

that in third quarter of 2017, Nobilis changed its practice regarding the accounting

treatment of aged receivables.80

In the subsequent weeks, the defendants were in contact with the debtors’

auditor and discussed the change, including in an email on October 31 and a phone

77 D.I. 225-39.

78 D.I. 225-43.

79 D.I. 225-45.

80 D.I. 225-1 at 5-6 of 14 (“We had a general practice that we followed and we did not follow

that practice in the third quarter. We changed that practice…. Prior practice was for a

receivable that had gone over 365 days would be excluded from receivables… Now they were

going to be included.”).

call on November 2.81 Discussions continued into 2018 regarding the issue. The

record includes a draft memorandum from Moreno to the Accounting Files stating

that the debtors historically “demonstrated ability to liquidate claims over the 365-

day threshold.”82 The auditor continued to question assumptions made in the revenue

estimates, but eventually signed off on the company’s public filings.83

The defendants sought to understand why their aging accounts receivable were

going uncollected. They developed theories, including that the delays were caused by

slowdowns from their collections agent, the effects of Hurricane Harvey, and a change

in reimbursement behavior from insurers. The last theory, initially treated with

skepticism by some internally, would later be validated by others.84 In addition to

modifying their accounting policies to reflect these changes, the debtors made other

adjustments such as building a patient-intake tool, consolidating billing and

collection personnel to one location, and increasing the debtors’ collection workforce.85

81 D.I. 184-28 (email from auditors to Rodriguez dated October 31 regarding AR Aging); D.I.

184-29 (conference call information with Rodriguez, Young, Moreno, and auditors on

November 2).

82 D.I. 215-1 at 10 0f 18 (Feb. 23, 2018 memorandum).

83 D.I. 225-47 at 32 of 33 (email from BBVA to Young and Moreno regarding discussion with

auditors over accounting treatment of aged receivables); D.I. 215 at 144 of 263 (Edwards

Dep.); D.I. 215-5 at 57 of 70 (review of revenue reasonableness dated 9/30/2017).

84 D.I. 225-28; D.I. 225-76 (Young expressing view that insurance reimbursement theory did

not “hold water”). BBVA stated that they believed the change in reimbursement behavior

was widespread, as others were raising the same issue. D.I. 184-42 at 4 of 4. BBVA indicated

that it could not have foreseen the increase in difficulty of collecting out-of-network charges.

D.I. 184-31 at 9-11 of 18.

85 D.I. 184-48 at 7 of 11 (auditor AFDA and lookback analysis).

This record would not permit a finding that the defendants were grossly

negligent in how they evaluated the company’s position in October 2017 and reacted

to the circumstances they faced. The plaintiff alleged that executives artificially

inflated their revenues to avoid tripping a covenant under the BBVA loan. Plaintiff

contends that in doing so, defendants broke with the company’s accounting practices

and SOX internal controls and never made any disclosure of those changes. Plaintiff

argues that the revenue projection that Young sent prior to the October 4 meeting

was simply reverse engineered by the finance department led by Moreno.86 Without

this, plaintiff suggests, BBVA may not have agreed to the second loan that the

company sought.87

The plaintiff claimed the record shows that Moreno and Young instigated the

scheme and manipulated the debtors’ accounts receivable to inflate their revenues.

The trustee alleged that Efird was instrumental in this process while Fleming knew

of it and condoned it.88 Rather than engaging in a rigorous analysis, according to the

trustee, the defendants circumvented their ordinary revenue recognition process and

implemented the accounting change without meaningful contemporaneous analysis.89

In doing so, the group intended to misrepresent the company’s financial position and

breached their fiduciary duties to the debtor company.

86 D.I. 224 at 24-50, 29-30.

87 D.I. 225-51 at 3-5 of 5.

88 D.I. 224 at 52.

89 Id. at 54-55.

The defendants argue that the record shows a different story. Language in

emails suggest that they engaged in a rigorous analysis: Moreno wrote he was going

to “dig in deep to [Days Sales Outstanding]” then, over a week later, he still had “work

to do.” Rather than indicating the defendants were effectively reverse engineering

their revenues to achieve a desired result, they sought to use data and re-evaluate

the company’s performance after a disruption to the business environment. The

defendants also argued that the company’s auditors were informed of the changes in

fall 2017 and signed off on the changes in 2018.

The plaintiff finally claimed that the defendants applied a blanket 25 percent

discount rate for all receivables more than a year old, meaning they assumed that the

debtors would collect 75 percent of such accounts receivable. The plaintiff pointed to

emails between the auditor and the defendants expressing concern and a need to re-

evaluate this assumption on the ground that it lacked historical support.90 The e-

mail in question, however, did not recommend that the company write down those

receivables to zero. Rather, it stated that the company’s historical data was of limited

utility in light of the substantial changes the company had undergone.91 The

defendants showed that the debtors conducted a detailed analysis that considered the

claim, procedure type, and which facility from which it originated in determining

what fraction of the receivable should be treated as collectible.92 The auditor

90 D.I. 225-48 at 2 of 5 (March 3, 2018 email from auditor to Moreno, Rodriguez, and Young).

91 Id.

92 D.I. 215-11 at 38-39 of 79 (Nobilis 2017 Form 10-K at 52-53).

referenced changes in specific facilities to understand the aging trends across the

company’s business.93

1. The defendants’ conduct regarding the change in revenue

estimation policy in the third quarter of 2017 did not

breach their fiduciary duties.

The plaintiff argued that Fleming, Young, Moreno, and Efird decided to

misstate the company’s financials by violating its policy of writing off receivables that

were more than a year old. Such policies were reflected in the company’s internal

controls, which Rodriguez helped implement and develop. The trustee argues that

compliance with the policies set forth in those internal controls violated federal

securities laws.

The defendants, on the other hand, argue that because Nobilis was an

emerging growth company, it was not required to adhere to policies set forth in

internal controls documentation, as would otherwise be required under SOX. As

such, they contend that there was no hard and fast policy of writing down accounts

receivable that were more than a year old. Rather, they argue that their practice was

to make appropriate adjustments on an on-going basis based on their assessment of

what they would be able to collect.

This case, of course, is one for breach of fiduciary duty. There is no suggestion

that a bankruptcy trustee (standing in the shoes of the debtor) can sue a company’s

officers for the company’s alleged violations of the securities laws. The Court made a

similar point, at the motion to dismiss stage, where it dismissed the claim for common

93 D.I. 225-48 at 2-3 of 5.

law fraud on the ground that, on the trustee’s theory, the debtors were the perpetrator

rather than the victim of the alleged fraud.94 The Court accordingly need not decide

whether SOX required the company was required to write down its receivables that

were more than one year old. Because the relevant claim is for breach of fiduciary

duty, the question is whether the actions by the defendants deviated so far from

ordinary business judgment to amount to bad faith and thus violate their fiduciary

duties.

On that issue, the Court concludes that the most that the summary judgment

record would support would be a finding that the defendants participated in a

decision by the company to take an accounting position that was later called into

question by outside professionals.95 Delaware law is clear, however, that it takes

more than an erroneous exercise of business judgment to give rise to a claim of breach

of fiduciary duty. In light of the high bar set by applicable law, the record before the

Court would not permit a finding that defendants’ conduct was so grossly negligent

that it could amount to a breach of their fiduciary duties.

This record would not permit a reasonable factfinder to conclude that that the

defendants were grossly negligent in their assessment of the company’s position in

October 2017. While the Court of Chancery found in Lipman that a complaint

involving the misstatement of a partnership’s financials stated a claim for breach of

fiduciary duty, in that case the allegation was that the fiduciaries misstated the

94 In re Nobilis Health Corp., Adv. Proc. No. 21-51183 (CTG), 2022 Bankr. LEXIS 2057 at *24

& *24 n.65 (Bankr. D. Del. July 27, 2022).

95 D.I. 225-107 at 8 of 19.

partnership’s financials to cover up their own self-dealing.96 In other cases, plaintiffs’

claims regarding financial misstatements survived, but the plaintiffs were

shareholders asserting fiduciary duties owed to them rather than to the corporation,

and the allegations were that the fiduciaries did not communicate truthfully with

them.97 The reasoning of those cases is inapplicable here, where there is no

suggestion of self-dealing and the plaintiff stands in the shoes of the entity that made

the allegedly incorrect statements, rather than the party to whom the statements

were made.

On the trustee’s telling, the defendants made an overt decision, in the face of

declining revenues, to doctor their financials by showing as revenue amounts that

they had previously recognized would be uncollectible. The Court concluded that such

allegations survived the defendants’ motion to dismiss, as a decision by a fiduciary to

set the corporation off on a course of committing fraud would certainly be inconsistent

with the duty to act in the corporation’s best interests.98 The summary judgment

record, however, does not bear out the trustee’s theory. What it shows instead is a

lively discussion among the defendants, the lenders, and the auditors about the fact

that revenues were falling short of projections at a time when there were many

96 Lipman v. GPB Capital Holdings LLC, No. 2020-0054, 2020 WL 6778781 at **3-4, *11 (Del.

Ch. 2020).

97 See, e.g., Anglo Am. Sec. Fund., L.P. v. S.R. Global Intern. Fund, L.P., 829 A. 2d 143, 157

(Del. Ch. 2003) (citing Malone v. Brincat, 722 A.2d 5, 10-11 (Del. 1998)).

98 Nobilis, 2022 Bankr. LEXIS 2057 at *14, *18. See, e.g., In re American Intern. Grp., Inc.,

965 A.2d 763, 795 (Del. Ch. 2009) (detailing officers involved with schemes to engage in

sophisticated financial fraud, involving reporting increases in loss reserves and income).

different parts moving at the same time. The company was integrating new facilities,

dealing with the results of a severe storm, and insurer payments had slowed. Was

that the result (as the defendants asserted, and their revised accounting practices

reflected) a matter of timing, such that the debtors would be paid for most of the

procedures in question, only more slowly? Or would the insurers refuse to pay at all?

Beyond the trustee’s conjecture, there is literally nothing in the summary judgment

record that would support the conclusion that the defendants knew that their revised

projections were wrong and their financial statements therefore inaccurate.

Rather, based on the summary judgment record now before the Court, the

following points are not subject to genuine dispute:

First, the defendants continued to account for some receivables that were more

than a year old even after the implementation of the new SOX narratives. The SOX

business narratives were made “effective” on December 5, 2016, but in financial

statements and aging reports, the debtors consistently reported some receivables of

more than a year old, including over $2 million in April 2017.99 The aging receivables

were never written down fully to zero, even after the SOX narratives’ implementation

date. Accordingly, the trustee’s suggestion that defendants were violating a “known

duty” in the fall of 2017 when they increased the portion of aged receivables that

remained on their books necessarily fails.100

99 D.I. 215-11 at 53 of 79 (Nobilis 2017 Form 10-K) (noting that receivables more than one

year old was $0.6 million for the year ending December 31, 2016); D.I. 215-6 at 28 of 107

(Nobilis aging report sent to BBVA in April 2017 reflecting over $2 million of receivables

more than a year old at certain facilities).

100 D.I. 184-15 at 13 of 34 (Fleming Dep.).

Second, the defendants engaged a process to assess the changed circumstances

in the third quarter of 2017 to estimate their revenues. From early September 2017,

the defendants sought answers for why their numbers were “terrible.”101 The

defendants deliberated internally regarding the cause of the financial difficulties.102

Regardless of which cause was correct, the unmistakable fact is that the answer was

unknown at the time. Defendants spent weeks seeking to understand what occurred

and assessing their accounts receivable. They then took action that reflected their

apparent understanding of how these changes would affect the company’s finances.

Third, the company’s auditor knew of the changes and later did not object to

them. The plaintiff claimed that the defendants could not rely upon any expertise of

the auditors in displaying their good faith for the changes in the estimates for the

third quarter of 2017 because they did not inform the auditors until February 2018.103

But the summary judgment record shows phone calls and emails with the auditors—

contemporaneous to the fall of 2017 and later emails referring to those

conversations.104 A reasonable finder of fact could not conclude, from this record, that

the defendants had engaged in a deliberate scheme to deceive their auditors.

101 D.I. 225-28 (Young email, Sept. 5, 2017).

102 D.I. 225-44 (collections agency); D.I. 184-13 at 28-20 of 39 (Hurricane Harvey); D.I. 184-

31 at 9-10 of 18 (industry-wide trends). The industry wide trends were particularly

unforeseeable. Id. at 10-11 of 18.

103 D.I. 224 at 58.

104 See, e.g., D.I. 225-19 at 2 of 4 (email from Young to Rodriguez and Moreno); D.I. 184-28

(email from auditors to Rodriguez dated October 31 regarding AR Aging); D.I. 184-29

(conference call information with Rodriguez, Young, Moreno, and auditors on November 2);

D.I. 214 at 11.

With the benefit of hindsight, of course, one can now say that the defendants’

judgment proved to be incorrect. But it is well established that this falls far short of

what is needed to establish a breach of fiduciary duty.105 Success on a breach of

fiduciary duty claim under Delaware law requires a substantial showing. There must

be evidence of bad faith or that the defendants acted without having exercised any

semblance of business judgment. The record here does not support that conclusion

for the change in the revenue estimates in the third quarter of 2017.

Separately, the plaintiff claims that Rodriguez, whose title was Chief

Accounting Officer, is liable on account of his actions.106 Unlike defendants Fleming,

Young, Moreno, and Efird, there is no evidence that links Rodriguez to the decision

to change the revenue estimates in 2017. Rather, the plaintiff’s evidence showed that

Rodriguez sought approval of the SOX business narratives from the Audit

Committee.107 He then sent an email about the goals of hiring PwC and the SOX

compliance procedures to other defendants in a “Management News Blast.”108

Rodriguez later acknowledged that there had been a change in the third quarter of

2017,109 and signed a statement to the auditor that he and other defendants were

“responsible for the fair presentation of the [] financial statements in conformity with

105 See, Walt Disney, 906 A.2d at 37.

106 D.I. 224 at 64.

107 D.I. 225-10 (Rodriguez email to Ozonian).

108 D.I. 225-12 (Rodriguez “Management News Blast” with new internal controls).

109 Rodriguez disputed that it was a “policy” change but rather an estimation change. D.I.

225-65 at 4-5 of 5 (Rodriguez Dep.).

[GAAP]” following the fall 2017 financial statements.110 Rodriguez was later involved

in estimating the effects of Hurricane Harvey on the debtors’ operations and meeting

with the Audit Committee.111 Importantly, no evidence in the record suggests (and

the plaintiff does not even allege) that Rodriguez had personal involvement in the

decision to change the way revenue would be estimated in the third quarter of 2017,

or even that Rodriguez knew those conversations were occurring.

As described above, to make a claim of breach of fiduciary duty based on a

defendant’s own conduct, the trustee must show that Rodriguez acted with gross

negligence. The only direct action at issue was Rodriguez’s decision to sign a

statement affirming that the financial statements were in compliance with GAAP

after acknowledging the change in revenue recognition policy. For the reasons set

forth above, this cannot be enough.

As with the other defendants, the question is not whether the judgments

Rodriguez reached with respect to how to meet the company’s disclosure obligations

ultimately proved to be correct. Because nothing in the record would support the

conclusion that his actions were unreasonable or made in bad faith, he is entitled to

summary judgment on this count.

110 While Rodriguez voiced displeasure with the auditor in internal emails, such dialogue does

not bear on the issues before the Court today. They do not relate to the auditor’s work

regarding the policy to write off receivables after one year or the financial statements at issue

in this proceeding.

111 D.I. 225-116 (internal report); D.I. 225-97 (Audit Committee minutes showing Rodriguez’s

attendance).

2. The defendants are entitled to summary judgment

regarding supervisory liability under Caremark as it

relates to the change in revenue estimation policies.

For a Caremark claim to succeed, there must be sufficient “red flags” as to

signal to directors and officers that they have an obligation to act. Caselaw sets a

high bar for a plaintiff seeking to establish such a claim. In Stewart, the plaintiff’s

allegations survived a motion to dismiss after the plaintiff alleged the director

“approved the audited financial statements with little or no substantive discussion,

despite warnings that significant irregularities occurred and the companies’

procedures needed to be changed.”112 The director received a letter in which the

auditor expressed significant difficulties in preparing financial statements, including

extraordinary balance discrepancies. Further, multiple employees of the company

allegedly informed the director of concerns—which included violations of internal

policies and common-sense business practices.113 In spite of all of that, there was not

a claim under Caremark.

The trustee here claims there were red flags: the material weaknesses that led

to the 2014 financial restatements,114 and the increase in days sales outstanding and

aging receivables.115 The difficulty with the trustee’s theory is that beyond his claim

that the debtors’ accounting was improper, he does not explain the underlying

112 Stewart v. Wilmington Trust SP Servs., Inc., 112 A.3d 271, 300 (Del. Ch. 2015).

113 Id. at 300-301.

114 D.I. 224 at 65-66.

115 Id. at 66-68.

systemic deficiencies to which the defendants should have been alerted by virtue of

these “red flags.”

As to the claim that the red flags should have alerted the defendants to the

failures of the debtors’ accounting systems, the Caremark claim has the same

problems as the “good faith” claim addressed above. The summary judgment record

makes clear that the defendants acted within the range of discretion afforded to them

under the business judgment rule with respect to how the company addressed the

fact that, in the fall of 2017, cash collections were declining, and old accounts

receivable remained on the books. To the extent the actual decisions were consistent

with the defendants’ fiduciary duties, it adds nothing to say that other defendants

were on notice of the issue and should have taken some different action.

Insofar as the trustee is arguing that the “red flags” should have alerted the

defendants to other concerns in the debtors’ financial controls, the record makes clear

that the company responded to that concern by engaging a reputable accounting

firm.116 Insofar as the allegation is that more should have been done to seek to collect

the aging accounts receivable, the record is undisputed that the company re-

evaluated its business and policies to get to the bottom of the problem.117

Where the trustee is arguing that the red flags were within Rodriguez’s

supervisory purview and he disregarded those signs, the record does not support that

he had such supervisory authority or failed to implement a system of control or

116 D.I. 184-46 at 2 of 106 (Rodriguez email “Management News Blast”); D.I. 225-8.

117 D.I. 184-42 at 4 of 4; D.I. 184-31 at 9-11 of 18; supra Part I-A.

consciously disregarded such flags.118 Rodriguez announced the new business

narratives and was in communication with the Audit Committee regarding PwC’s

SOX compliance work. Nothing, however, outside of his title of Chief Accounting

Officer, indicates that he had any further role. Like the argument with respect to the

other defendants, this claim depends on the assertion that Rodriguez’s fiduciary

duties required him to ensure compliance with the accounting policies set forth in the

SOX narratives.

At the end of the day, the Court is persuaded that the defendants are correct

that the trustee’s theory of wrongdoing—the defendants “cooked the books” to

disguise the mounting financial problems—simply fails to line up with the Caremark

legal theory the trustee advances. The Caremark claim is designed to impose liability

when a fiduciary fails to employ a rational process to advance the interests of the

company.119 The record before the Court on summary judgment would not permit a

reasonable factfinder to impose liability on that basis.

B. The record would not support a finding that the defendants

breached their fiduciary duties by failing to disclose the change

in the revenue estimation formula.

Securities and Exchange Commission regulations require publicly traded

companies to disclose any material accounting change, the date of the change, and

the reason for such change.120 The trustee argues that defendants Fleming, Young,

118 D.I. 224 at 64.

119 In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 122 (Del. Ch. 2009) (citing

Caremark, 698 A.2d at 967-968).

120 Item 303 of Regulation S-K; D.I. 225-85 at 46-47 of 88 (Devor expert report).

Moreno, and Efird breached their fiduciary duties by participating in issuing

statements saying that the company had not made material changes to its accounting

policies despite changing its revenue estimation model to include some accounts

receivable that were more than a year old.121 The trustee similarly argues that

Rodriguez, as the Chief Accounting Officer, should be liable for failing to ensure the

disclosure.

The argument runs into the same trouble as the trustee’s principal argument

about the company’s alleged improper accounting decisions. The trustee stands in

the shoes of the debtors, not its shareholders or the SEC. So while there surely is a

point at which a the company’s officers or directors breach their fiduciary duties to

the company by flouting applicable law, that is different from authorizing the trustee

to act as private attorney general with the authority to enforce every alleged

violation, by the company, of any and every regulation or standard. Under the

business judgment rule, so long as there was a reasoned basis for the officers’

decision, they will not have violated their fiduciary duties.

The record in this case makes plain that the defendants had a reasoned basis

for their decisions in this regard. The record is clear that the issue was discussed

with the company’s outside auditors.122 In its prior public filings, the company had

121 D.I. 225-57 at 8 of 8 (Nobilis Sept. 30, 2017 Form 10-Q).

122 See, e.g., D.I. 215 at 87 of 263 (Rodriguez Dep.) (“We discussed this with our auditors, and

we collectively, as a group, both management and the auditors, decided what disclosures to

include in our Qs and Ks.”); D.I. 225-19 at 2 of 4 (email from Young to Rodriguez and Moreno)

(“I distinctly [remember] having a conversation with [auditor] about [not disclosing the policy

change]. Which also drove the call we had with them to review overall AR at the end of the

quarter. I have the agenda from that meeting in my files.”).

never disclosed a policy of writing down all receivables that were more than a year

old to zero. Rather, the company merely stated that its revenues were subject to

continued evaluation based on several factors. Since this was still true, there was

certainly a basis for the judgment that there was no obligation to disclose a “change”

in accounting practices.123 Indeed, the auditor reached precisely the same

judgment.124 The company did, however, disclose the growth of its aging receivables

in Note 6 of the 2017 Form 10-K.125 Based on this record, a reasonable finder of fact

could not conclude that the defendants so departed from established standards in

making this decision that they could be found to have breached their fiduciary duties.

The same is true of the trustee’s allegation that, as a result of the accounting

policy change, certifications filed by Young and Fleming were false.126 The Court of

Chancery explained in China Automotive Systems that a claim of breach of fiduciary

duty based on the filing of an incorrect certification would need to include a showing

that the defendant knew that the certification was false. Nothing in the summary

judgment record would permit such a finding.127 Similarly, in Citigroup, the Court of

Chancery emphasized that “to establish a threat of director liability based on a

123 D.I. 215-5 at 33-34 of 70 (email from Young to Rodriguez and Moreno); D.I. 215 at 54-55

of 263 (Young Dep.); D.I. 215 at 87-91 of 263 (Rodriguez Dep.).

124 D.I. 215-5 at 66-68 of 70 (auditor’s notes of Q3 Audit Committee Meeting); D.I. 215 at 231-

233 of 263 (Edwards Dep.).

125 D.I. 225-2 at 111 of 159; D.I. 184-7 at 22 of 31 (Rodriguez Dep.).

126 D.I. 224 at 52-54.

127 In re China Automotive Sys. Inc. Derivative Litig., No. 7145, 2013 WL 4672059, at *8 (Del.

Ch. Aug. 30, 2013).

disclosure violation, plaintiffs must plead facts that show that the violation was made

knowingly or in bad faith, a showing that requires allegations regarding what the

directors knew and when.”128

While Young and Fleming signed the financial statements and Rodriguez had

a role implementing the business narratives, there is nothing in the record that could

support a finding that any defendant acted in bad faith or believed at the time that

the certifications were false. Defendants are thus entitled to summary judgment on

this point.

The trustee claimed the failure to disclose the changed revenue recognition

policy amounted to a red flag, creating liability under Caremark.129 As discussed

previously, the bar here is higher. There is no evidence that the defendants failed to

create reporting systems or consciously disregarded their obligations as supervisors.

They are similarly not liable under a Caremark theory.

C. No jury could find the defendants breached their fiduciary

duties as they relate to the debtors’ internal revenue recognition

committee.

The debtors’ CEO, Fleming, formed an internal committee to address revenue

recognition issues. The trustee alleges that defendants Efird, Moreno, and Young

breached their fiduciary duties in connection with the work of the revenue recognition

committee because the committee failed to implement any policies. The trustee

further contends that Fleming should be subject to liability under Caremark for the

128 Citigroup, 964 A.2d at 133-134.

129 D.I. 224 at 64.

Committee’s inaction.130 The Court finds that neither theory subjects a defendant to

liability.

CEO Fleming formed the revenue recognition committee on February 28, 2017,

with an email to Efird, Young, Moreno, and three others.

Team, I am forming a Revenue Recognition Committee effective

immediately. Each of you will participate and you will collectively decide

how you will operate and interface with management and Crowe (or any

other auditor). For some time now I’ve been considering how we manage

this extremely important function for the company. I have been

seriously concerned that we have been putting this function on one

person’s shoulders. This new committee will report to the CFO [David

Young]. You will adopt your own rules and procedures as well as pick a

chair person to run the meetings. This new committee will set the

company’s future policies on revenue recognition and will make all

decisions as a group. The CEO will not participate in this process. The

CFO’s participation will be up to the CFO. [Non-defendant member] will

set the first meeting for tomorrow morning. I will expect the newly

elected chairman to report to me on the committee’s progress. Each of

you has been chosen as initial members because of your background and

skill set. I’d like to see the process take shape asap.131

Efird was elected chair of the committee at the first meeting on March 1, 2017. The

committee kept minutes for seven additional meetings through July 2017.132 No

member of the committee identified a clear deliverable or policy change that emerged

from the work of the committee. While the committee was a part of the company’s

2017 strategic plan, Efird testified at deposition that he did not consider it vital to

the company.133

130 D.I. 224 at 68.

131 D.I. 225-20 (email from Fleming to Efird, Moreno, Young and others).

132 D.I. 225-21 (email with meeting minutes attached).

133 D.I. 224 at 15-18, 69; D.I. 225-22 at 7 of 8 (Efird Dep.).

The trustee alleges that the defendants who were members of the revenue

recognition committee breached their duties of care to the company on account of the

committee’s inaction and failure to maintain the internal SOX controls. In forming

the committee, Fleming tasked the group to “set the company’s future policies”

indicating that there should be deliverables. The committee only took minutes for a

few meetings and never produced any policy changes.134 In depositions, members of

the committee could not identify who chaired the committee or what was discussed

at the meetings.135 The trustee argues that this shows that defendants abdicated

their duties and violated their duties of care.136

The defendants assert that the committee’s purpose was primarily to

encourage collaboration and discussion across Nobilis’ divisions.137 Fleming wrote

that he was “seriously concerned that we have been putting this function on one

person’s shoulders.”138

The defendants point to Citigroup, arguing that the committee members’

liability should not be measured against internal documents, like Fleming’s email

that formed the revenue recognition committee.139 In Citigroup, a committee’s

charter charged members with reviewing and ensuring the accuracy of Citigroup’s

134 D.I. 225-21 (email with meeting minutes attached); D.I. 225-22 at 3-4 of 8 (Efird Dep.).

135 D.I. 225-1 at 9-10, 11 of 14(Young Dep.); D.I. 225-14 at 7 of 14 (Moreno Dep.).

136 D.I. 224 at 70-72.

137 D.I. 214 at 36-37.

138 D.I. 225-20 (email from Fleming to Efird, Moreno, Young and others).

139 Citigroup, 964 A.2d at 135.

financial statements. The Court of Chancery ruled that “director liability is not

measured by the aspirational standard established by the internal documents

detailing a company’s oversight system.”140 Delaware law requires that actions were

taken knowingly or in bad faith to create liability for a breach of fiduciary duty.

The plaintiff attempts to distinguish this case from Citigroup by arguing that

the members “were specifically tasked by the CEO with setting the company’s future

policies on revenue recognition as part of the [revenue recognition committee] but

failed to do so.”141 Despite his insistence that this is not creating liability based on

the text of an internal document, failing fully to comply with a direction set forth in

an email cannot be a basis for a bad faith finding under the principles set forth in

Citigroup, even if the email was sent by the CEO. Failing to fulfill the request of a

superior does not indicate that the inferior breached their duties of care and loyalty,

particularly in a context in which the CEO’s directive sets forth the type of

“aspirational standard” that the Chancery Court found in Citigroup cannot establish

a floor for the imposition of liability.

The plaintiff claimed that Fleming failed adequately to supervise the revenue

recognition committee after its creation and should thus be liable for that failure

under Caremark. Fleming never discussed the committee’s tasks with its chair

(Efird), nor was he updated regarding the committee’s progress. The trustee says

that when Fleming created the committee, Fleming found the issue of revenue

140 Id.

141 D.I. 224 at 71.

recognition “seriously concern[ing]” which the trustee alleges was a “red flag.” In

return, Fleming argues that a Caremark claim does not turn on whether a

subordinate follows directions, but whether the officer failed to monitor or oversee

systems of control to a degree that disabled him from being informed of risks and

problems.142

To establish liability under Caremark, the trustee would be required to show

that Fleming had such conscious disregard for an obligation that is so glaring as to

constitute bad faith.143 The plaintiff cited to the email forming the committee and

Fleming’s deposition where he maintained that he did not know whether the revenue

recognition committee set policies and never discussed the work of the committee

with its chair or followed up with respect to the committee’s progress.144

If there were a red flag that Fleming observed regarding revenue recognition,

he acted upon it by creating the revenue recognition committee. And that committee

was not the only entity with responsibility for addressing the issue. The company

also had an Audit Committee and an outside auditor that were concerned with

revenue recognition. Caremark requires that fiduciaries take appropriate steps to

establish appropriate procedures. It does not require them to micromanage. As the

Delaware Supreme Court explained the point in Lyondell, there is a difference

“between an inadequate or flawed effort to carry out fiduciary duties and a conscious

142 D.I. 227 at 9.

143 See Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243 (Del. 2009); In re McDonald’s Corp.,

289 A.3d at 370; Morris, 246 A.3d at 133 n.57.

144 D.I. 224 at 69.

disregard for those duties.”145 Nothing in this record would permit a reasonable

factfinder to conclude that Fleming consciously disregarded his obligations.

D. Summary judgment will be granted in favor of Ozonian, as no

jury could find that he breached his fiduciary duty to the

company in connection with the work of the Audit Committee.

Defendant Ozonian was the chair of the debtors’ Audit Committee and sat on

the board of the directors. The plaintiff alleged that the Audit Committee sanctioned

and helped implement the PwC-created SOX procedures. The trustee alleged that,

afterwards, the committee failed to ensure that receivables that were more than a

year old were written down to zero or make a good faith effort to monitor the

company’s financials and controls.146 As the chair of the Audit Committee, the

plaintiff claimed Ozonian had the authority to oversee the company’s financials but

that he failed to act after being put on notice of clear irregularities.147 No evidence

was presented that Ozonian had any involvement in the decision to change the

revenue recognition policy.148 Rather, the plaintiff alleged that the growth in

receivables was a red flag that required Ozonian to act.149

The Audit Committee’s role within Nobilis was to assist the Board of Directors

with oversight of the integrity of financial reporting, compliance with regulatory

requirements, and monitoring the performance of the independent auditor. The

145 Lyondell, 970 A.2d at 243.

146 D.I. 224 at 73.

147 Id. at 72.

148 D.I. 224 at 39-40.

149 Id.

committee was not, however, tasked with ensuring the accuracy of the financial

statements.150 After the 2014 financial statements were restated, the Audit

Committee helped “put in place” PwC to create the internal controls, which included

the policy to write down to zero receivables that were more than a year old. The Audit

Committee approved that policy.151

While Chair, Ozonian actively participated in Audit Committee meetings.152

The Audit Committee was at least aware that the policy described in the internal

controls documentation was not being followed because meeting minutes indicate

that there was a change. The minutes mention that the company continued to collect

those accounts.153 As Audit Committee chair Ozonian signed the debtors’ 2017 Form

10-K, which included the revenue projections based on the collectability of the older

accounts receivable.154

150 D.I. 213 at 65 of 118 (Audit Committee Charter) (the Audit Committee “is not responsible

for … certifying or determining the completeness or accuracy of the Corporation’s financial

statements or that those financial statements are in accordance with generally accepted

accounting principles”).

151 D.I. 225-54 at 6 of 9 (Ozonian Dep.); D.I. 225-10 at 2 of 10; D.I. 225-11 at 2 of 3 (Ozonian

approving SOX documentation).

152 See, e.g., D.I. 213-1 at 95-96 of 120 (March 8, 2017 Audit Committee Meeting Minutes); id.

at 99-100 of 120 (March 7, 2018 Audit Committee Meeting Minutes).

153 Id. at 99 of 120; D.I. 225-97 (March 7, 2018 Audit Committee Meeting Minutes) (“Balances

over 365 days – change to keep those on the books as management continues to collect

those.”).

154 D.I. 213-1 at 100 of 120 (approving the 10k 2017 financials after the auditor indicated that

its review would be completed the next day and “it is a good draft.”).

It is true that Ozonian signed off on the financial reports in question.155 But

that alone is insufficient to establish a breach of fiduciary duty.156 As described above,

the defendants who formulated the revenue estimates did not breach their fiduciary

duties to the company even though those estimates proved to be incorrect. As the

Court reads Citigroup, it does not follow that a director whose role was to review

those statements, with the assistance of auditors, would be held to a higher

standard.157

The trustee also claims that Ozonian is liable under Caremark for failing to

identify the accounting deficiencies. The trustee cites two cases to support imposing

liability.158 In Marchand, it was alleged that the board of directors had no system to

oversee the food safety of an ice cream manufacturer. The Delaware Supreme Court

ruled to act in good faith the board is only required to “try” to implement a reasonable

system of monitoring.159 The allegations of the complaint in Marchand were sufficient

because it was alleged that the directors there lacked any system to oversee a major

source of concern for a food manufacturer.160 Similarly in Hughes, the audit

155 D.I. 225-89 at 34-35 of 84 (report of Audit Committee in Schedule 14A); D.I. 225-85 at 44-

45 of 88 (Devor report).

156 See Wood v. Baum, 953 A.2d 136, 142 (Del. 2008) (“The Board’s execution of [the

company’s] financial reports, without more, is insufficient to create an inference that the

directors had actual or constructive notice of any illegality.”); Citigroup, 964 A.2d at 134.

157 Citigroup, 964 A.2d at 134.

158 Hughes v. Xiaoming Hu, No. 2019-0112, 2020 WL 1987029, at *14 (Del. Ch. Apr. 27, 2020);

Marchand v. Barnhill, 212 A.3d 805 (Del. 2019) (defendant directors knew of listeria

contamination risks and disregarded those risks, breaching their fiduciary duties).

159 Marchand, 212 A.3d at 821.

160 Id.

committee was on clear notice of irregularities within the company but only held short

meetings when federal law required it and overlooked the pressing issues.161 For

example, in one 50-minute meeting, the board approved an entire year’s worth of

related-party transactions, a time period in which the board could not have fulfilled

its fiduciary obligations.162

The General Motors case provides another relevant datapoint.163 There, the

board exercised some oversight: reviewing the company’s risk management structure,

risks to the company, and it received presentations on product safety and quality.

When GM recalled 28 million vehicles for faulty ignition switches, plaintiffs claimed

that board members were liable under Caremark because the reporting system did

not adequately assess the personal injury risks.164 That was not enough for liability.

The board had “tried” to implement a system of oversight and its inadequacy alone

was not ground for Caremark liability.

The import of this caselaw is that a director must attempt to implement a

reporting system for known risks to a company, then must attempt to provide

oversight—success is not required. The record shows that Ozonian performed an

active role on the Audit Committee until he experienced health complications just

before the bankruptcy filing. While there were concerns about growing receivables,

161 Hughes, at *14.

162 Id. at *15.

163 In re General Motors Co. Derivative Litig., No. 9627, 2015 WL 3958724 (Del. Ch. June 26,

2015).

164 Id. at *15.

there is no indication that he ignored them nor that he held perfunctory meetings.

While Ozonian and the Audit Committee could have fully excavated the source of the

debtors’ financial problems, they were only required to “try” to implement a system

of oversight to avoid breaching their fiduciary duties. The record before the Court

indicates that the committee sought to monitor the company, receiving presentations

from management and auditors. Under applicable caselaw, that is sufficient to

satisfy their fiduciary duties.

II. Alternatively, the record would not support a finding that any of the

alleged breaches caused the company harm.

A plaintiff must prove not only that a breach of fiduciary duty occurred, but

that there is a connection between the breach and harm that befalls the company. 165

The damages for a breach of fiduciary duty must be “logically and reasonably related

to the harm or injury [for] which compensation is being awarded.”166 Where the

plaintiff does not point to sufficient evidence to draw a causal link between harm to

the debtors and the alleged breach, or where the court lacks a reasonable basis to

estimate damages based on the record, summary judgment must be granted.

The plaintiff argues that these alleged breaches of fiduciary duty caused the

eventual chapter 7 bankruptcy of the debtors.167 His expert, Harris Devor, cited other

165 Metro Storage Int’l LLC v. Harron, 275 A.3d 810, 859 (Del. Ch. 2022) (“Responsible

estimates that lack m[a]thematical certainty are permissible so long as the court has a basis

to make a responsible estimate of damages.”) (internal quotation and citation omitted).

166 Id. (“A plaintiff also must prove by a preponderance of the evidence that a sufficient causal

linkage exists between the breach of duty and the remedy sought to make the remedy an apt

means of addressing the breach.”).

167 D.I. 224 at 46-47.

examples of material misstatements leading to the downfall of well-known companies

to justify his conclusions:

Inventors, creditors, and other users of the financial statements

(“stakeholders”) need to have confidence in the propriety of financial

statements. These stakeholders are intent on dealing with companies

that uphold values of integrity, transparency and honesty… The

necessity of restating financial statements either as a result of

unintentional error or due to the nefarious activities of management…

has led to the collapse of many companies including some noteworthy

ones…, e.g., Enron, WorldCom, Sunbeam, Lehman Brothers, to just

mention a few. The inevitable litigation that follows cases of fraud or

the uncovering of unreliable internal control systems, among others, can

cause irreparable damage to a company’s image and brand.168

The expert then connected Nobilis’ failure to submit necessary filings in late 2018

with its significant stock price drop and delisting from the New York Stock

Exchange.169

The trustee fails to provide evidence that would permit a reasonable factfinder

to connect the accounting errors to the company’s failure. For example, the trustee’s

brief argues that Nobilis was already experiencing financial difficulties before

Hurricane Harvey and before the changes in practice dealing with writing off old

receivables in the third quarter of 2017.170 Indeed, the trustee acknowledges that the

debtors were facing financial challenges that led it to adopt the change in policy.

Devor’s calculated damages was the entire difference in the enterprise value from

168 D.I. 225-85 at 59-60 of 88.

169 Id. at 60 of 88.

170 D.I. 224 at 48 (“The August 2017 Report was issued before Hurricane Harvey hit and

painted a bleak picture of Nobilis’s financial performance—with estimate revenues” far below

budget.); D.I. 225-25 (August 2017 Report).

June 30, 2017 to its bankruptcy less liquidation proceeds.171 The report, however,

offers little more than the conclusory assertion that “the accounting improprieties. . .

caused the Company’s demise.”172

As the plaintiff’s only evidence for causation, the expert report falls short. The

report relies upon conclusory allegations regarding financial misstatements and does

not provide a reason why the alleged breaches of fiduciary duty, rather than the

underlying economic challenges the company faced, were responsible for the

company’s total loss in market value. As the Third Circuit instructed, “the

nonmoving party cannot rely upon conclusory allegations in its pleadings or in

memoranda and briefs to establish a genuine issue of material fact.”173 The plaintiff

has failed to come forward with sufficient evidence to permit a reasonable finder of

fact to conclude that it has met its burden on this issue.

The record in this case makes clear that as insurers began to refuse to pay for

certain out-of-network procedures, the debtors found itself collecting less than it had

anticipated while the unpaid receivables that were on its books began to age. When

it was first presented with this problem, it was not clear to the debtors whether the

issue was that the insurers would never pay for these procedures, or whether the

issue was that they needed to enhance their collection efforts, in which case the

problem would simply be one of timing.

171 D.I. 225-85 at 61-62 of 88.

172 D.I. 225-88 at 14 of 17.

173 Pastore v. Bell Telephone Co. of Pa., 24 F.3d 508, 511 (3d Cir. 1994).

In the fall of 2017, the debtors altered their accounting practices on the premise

that the collections issue would prove to be a temporary one. That judgment,

however, turned out to be incorrect. The issue was not one of timing, and the

suggestion that these old receivables would ultimately be paid proved to be unduly

optimistic. Rather, the insurers were not going to pay at all for certain of the services.

Against that backdrop, blaming the failure of the business on the erroneous

accounting judgments badly loses the forest for trees. The accounting issue arose

only because the company’s cash collections were falling short. And when a company

is not getting paid for the services it performs, even the most immaculate accounting

will not yield a successful business enterprise. Devor’s overly general and conclusory

assertions about causation—which is the only evidence on which the trustee relies to

establish this element—ultimately amounts to little more than camouflage. To the

extent the defendants’ accounting judgments turned out to be incorrect, their efforts

proved to be a band aid that failed to stop the bleeding. No reasonable factfinder,

however, could find that an inadequate band aid was the cause of the patient’s injury.

Accordingly, even if one or more of the defendants had breached his fiduciary duties,

defendants would still be entitled to summary judgment on account of the plaintiff’s

failure to demonstrate causation.

III. The equitable subordination claim is dismissed for failure to state a

claim under Federal Rule of Civil Procedure 12(b)(6).

The equitable subordination claim is at the motion to dismiss stage. The

trustee alleges that the inequitable conduct at issue in the adversary proceeding filed

in 2021 requires the equitable subordination of the claims BBVA transferred to

certain defendants as part of their settlement agreement.

The trustee agreed that there is a basis for equitable subordination only if he

succeeds on the breach of fiduciary duty claims.174 Since this Court found that the

fiduciary duty claims fail, the complaint accordingly fails to state a claim for which

relief may be granted and must therefore be dismissed.

In addition, the Court notes that in the alternative, even if the claims for

breach of fiduciary duty had survived a motion for summary judgment, it would still

be far from clear that the claims that defendants acquired from BBVA would be

subject to equitable subordination. There is a robust secondary market in claims

against debtors in bankruptcy. At times, defendants in lawsuits that are being

pursued on behalf of the bankruptcy estate will acquire claims against the debtor as

a means of hedging their own liability. It is far from obvious that there is anything

inequitable about that strategy. The holders of those claims, after all, are willing

sellers who would rather accept the cash being offered by the buyer than continue to

hold the claim and take their chances on what their ultimate distribution will be. The

equitable subordination complaint makes no allegation, other than its claim about

the defendants’ underlying liability, that defendants did anything inequitable in

connection with their acquisition of the claims. The Court accordingly concludes that

the claim for equitable subordination would be subject to dismissal even if the

underlying claims were to have survived the motions for summary judgment.

174 Dec. 13, 2023 Hr’g Tr. at 145-146.

Conclusion

For the reasons stated above, the Court will recommend the entry of summary

judgment in favor of defendants Efird, Rodriguez, and Ozonian. The Court will also

enter summary judgment in favor of defendants Fleming, Young, and Moreno.

Finally, the Court will dismiss the equitable subordination complaint brought against

defendants Fleming, Young, and Moreno. The Court will accordingly issue separate

orders and judgments so providing.

Dated: June 12, 2024

CRAIG T. GOLDBLATT

UNITED STATES BANKRUPTCY JUDGE

51