Black v. Brice

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF NORTH CAROLINA

CHARLOTTE DIVISION

CIVIL CASE NO. 3:23-cv-00457-MR

IN RE: )

)

SCHLETTER, INC., )

)

Debtor. )

_______________________________ )

)

CAROL BLACK, Plan Administrator )

of Liquidating Debtor, Schletter, Inc., ) MEMORANDUM OF

) DECISION AND ORDER

Appellant, )

)

vs. )

)

DENNIS BRICE, )

)

Appellee. )

_______________________________ )

THIS MATTER is before the Court on the Plaintiff’s appeal from the

Bankruptcy Court’s order granting summary judgment in favor of the

Defendant. [BK 20-03061, Doc. 88; CV 3:23-cv-00457-MR, Doc. 5].1

The rushed launch of a new product left Schletter, Inc. (the “Debtor”)

unable to fulfill orders to its customers. Faced with paying liquidated

1 Citations to the record herein contain the relevant document number referenced

preceded by “CV 3:23-cv-00457-MR,” denoting that the document is listed on the docket

in Civil Case No. 3:23-cv-00457-MR; “BK 18-40169,” denoting that the document is listed

on the docket in Lead Bankruptcy Case No. 18-40169; or “BK 20-03061,” denoting that

the document is listed on the docket in Bankruptcy Adversary Proceeding No. 20-03061.

damages to its customers, the Debtor filed a petition pursuant to Chapter 11

of the Bankruptcy Code in the United States Bankruptcy Court for the

Western District of North Carolina. Carol Black (the “Plaintiff”), in her role as

plan administrator of the Debtor, sued the Debtor’s former CEO, Dennis

Brice (the “Defendant”), in an adversary proceeding before the Bankruptcy

Court.2 The Plaintiff asserted that the Defendant is personally liable to the

Debtor for its losses because under Delaware law (1) the Defendant

breached a duty of loyalty owed to the Debtor, and (2) the Defendant’s poor

decisions caused the failed product launch. The Bankruptcy Court

disagreed, determining that the Defendant did not breach any duty of loyalty

owed to the Defendant, and that the Defendant’s actions were protected by

Delaware’s business judgment rule. Accordingly, the Bankruptcy Court

granted summary judgment in favor of the Defendant. For the following

reasons, this Court affirms.

I.

Section 158(a)(1) of Title 28 gives federal district courts jurisdiction to

hear appeals “from final judgments, orders, and decrees” entered by

bankruptcy courts. 28 U.S.C. § 158(a)(1). “The Bankruptcy Court’s

2 Before the Bankruptcy Court, the Plaintiff also named two other defendants who are not

parties in the present appeal. [See BK 20-03061].

conclusions of law are reviewed de novo and its findings of fact are reviewed

for clear error.” Campbell v. Hanover Ins. Co., 457 B.R. 452, 456 (W.D.N.C.

2011); In re Jenkins, 784 F.3d 230, 234 (4th Cir. 2015).

Summary judgment shall be granted “if the movant shows that there is

no genuine dispute as to any material fact and the movant is entitled to

judgment as a matter of law.” Fed. R. Civ. P. 56(a). A factual dispute is

genuine “if the evidence is such that a reasonable” factfinder could render a

verdict in favor of the nonmoving party. Anderson v. Liberty Lobby, Inc., 477

U.S. 242, 248 (1986). A fact is material only if it might affect the outcome of

the suit under governing law. Id.

The movant has the “initial responsibility of informing the . . . court of

the basis for its motion, and identifying those portions of the pleadings,

depositions, answers to interrogatories, and admissions on file, together with

the affidavits, if any, which it believes demonstrate the absence of a genuine

issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)

(internal citations omitted).

Once this initial burden is met, the burden shifts to the nonmoving

party. The nonmoving party “must set forth specific facts showing that there

is a genuine issue for trial.” Id. at 322 n. 3. The nonmoving party may not

rely upon mere allegations or denials of allegations in her pleadings to defeat

a motion for summary judgment. Id. at 324. Rather, the nonmoving party

must oppose a proper summary judgment motion with citation to

“depositions, documents, electronically stored information, affidavits or

declarations, stipulations . . . , admissions, interrogatory answers, or other

materials” in the record. See id.; Fed. R. Civ. P. 56(c)(1)(a). Courts “need

not accept as true unwarranted inferences, unreasonable conclusions, or

arguments.” E. Shore Mkt. Inc. v. J.D. Assoc.’s, LLP, 213 F.3d 174, 180 (4th

Cir. 2000). The nonmoving party must present sufficient evidence from

which a reasonable factfinder “could return a verdict for the nonmoving

party.” Anderson, 477 U.S. at 248; accord Sylvia Dev. Corp. v. Calvert

County, Md., 48 F.3d 810, 818 (4th Cir. 1995).

When ruling on a summary judgment motion, a court must view the

evidence and any inferences from the evidence in the light most favorable to

the nonmoving party. Anderson, 477 U.S. at 255. Facts, however, “must be

viewed in the light most favorable to the nonmoving party only if there is a

‘genuine’ dispute as to those facts.” Scott v. Harris, 550 U.S. 372, 380

(2007). On appeal, this Court may only consider “evidence which was

presented before the bankruptcy court and made a part of the record.” In re

Bartlett, 92 B.R. 142, 143 (W.D.N.C. 1988) (citations omitted).

II.

A.

Because the Plaintiff appeals the Bankruptcy Court’s order granting

summary judgment for the Defendant, this Court recites the following

undisputed forecast of evidence in the light most favorable to the Plaintiff.3

The Debtor, a supplier of solar racking systems, was an American

corporation incorporated in Delaware with its principal place of business in

Shelby, North Carolina. [BK 20-03061, Doc. 74-1 at 8; BK 20-03061, Doc.

74-2 at 2; BK 18-40169, Doc. 416 at 26]. The Defendant became the

Debtor’s President and Chief Executive Officer (“CEO”) in May 2014. [BK

20-03061, Doc. 74-1 at 4].

The Debtor is part of the “Schletter Group,” which consists of solar

mounting systems production facilities and sales offices all over the world

that all operate under a parent company called Schletter Germany. [BK 18-

40169, Doc. 416 at 27]. Before the Debtor filed in Bankruptcy Court,

Schletter Germany owned 95% of the Debtor’s common stock, with the other

3 In her appellant brief before this Court [CV 3:23-cv-00457-MR, Doc. 5], and her

memorandum in response to the Defendant’s Motion for Summary Judgment before the

Bankruptcy Court [BK 20-03061, Doc. 81], the Plaintiff heavily cites to her Amended

Complaint [BK 20-03061, Doc. 38; CV 3:23-cv-00457-MR, Doc. 5-1 at 11-42]. Any cites

to the Complaint are allegations, not evidence. The Court will not consider any such

allegations at the summary judgment stage of this case. See Celotex Corp., 477 U.S. at

324.

5% “put into the treasury of the company” and not owned by anyone, which

is a normal practice under German law. [BK 18-40169, Doc. 416 at 27; BK

20-03061, Doc. 74-1 at 6-7].

In 2016, the Debtor began to lose customers in the American market

because the company lost its competitive advantage with one of its products,

the FS Uno. [BK 20-03061, Doc. 74-1 at 12-15]. The Defendant consulted

a large customer to explore ways to improve the FS Uno, and ultimately

decided to develop a new product: the G-Max. [Id. at 11-14]. With the

G-Max, the Defendant aimed to make the Debtor’s racking system “cheaper,

lighter[,] and easier to install, and thus more competitive in U.S. market

conditions.” [BK 20-03061, Doc. 74-2 at 6].

As the Debtor’s CEO, the Defendant was “subject to the control of

[Schletter Germany’s] Board of Directors.” [BK 20-03061, Doc. 74-3 at 11].

Thus, the Defendant could not proceed with the production of the G-Max

under the Debtor’s bylaws without Schletter Germany’s permission. [BK 20-

03061, Doc. 74-2 at 7-8]. Following “nearly six months of analysis and

investigation,” in October 2016, the Defendant and other employees of the

Debtor presented a proof of concept to Schletter Germany’s board. [Id. at

6]. After the presentation, Schletter Germany’s board approved continued

development and production of the G-Max. [Id.]. Moving forward, the

Defendant kept Schletter Germany informed of the progress made on the G-

Max, and of the anticipated launch. [BK 20-03061, Doc. 74-2 at 10].

Before the development of the G-Max, the Debtor paid a licensing fee

to Schletter Germany based on revenue derived from sales of the FS Uno.

[BK 20-03061, Doc. 81-1 at 16]. Seeing the G-Max as a simple modification

of the FS Uno rather than a new standalone product, the Defendant

permitted the Debtor’s continued payment of a licensing fee to Schletter

Germany based on revenue derived from sales of the G-Max. [Id. at 16-18].

The Defendant did so even though the G-Max had a new purlin (horizontal

beam), configuration, and design, and was built with new material. [Id.].

Under the Defendant’s leadership, the G-Max’s development,

production, and launch all failed. The Debtor’s customer contracts promised

ambitious delivery dates, which the Debtor had difficulty meeting. Those

contracts also had substantial liquidated damages provisions. Hence, the

Debtor rushed production. [BK 20-03061, Doc. 81-2 at 12; CV 3:23-cv-

00457-MR, Doc. 5-1 at 563].4 Additionally, the Defendant did not initiate any

testing on the G-Max, which further complicated the production process and

4 Before this Court, for the assertion that the G-Max contract contained large liquidated

damages clauses, the Plaintiff cites to a deposition that was not presented to the

Bankruptcy Court. [CV 3:23-cv-00457-MR, Doc. 5 at 11; see BK 20-03061, Doc. 81].

The Defendant does not object to the use of this evidence. The Court’s consideration of

this evidence will not affect the disposition of this case.

caused the Debtor to underestimate (1) the cost of the G-Max, (2) the

Debtor’s capacity to produce the G-Max, and (3) how difficult it would be for

customers to install the G-Max. [BK 20-03061, Doc. 81-2 at 3-4, 7, 9-10, 13-

14; BK 20-03061, Doc. 81-3 at 3-4]. Delays in production made the Debtor

unable to fulfill its orders to its customers, leading to customers filing financial

claims. [BK 20-03061, Doc. 81-2 at 14].

The Defendant was fired for cause on June 27, 2017. [BK 20-03061,

Doc. 74-2 at 13; BK 18-40169, Doc. 1].

B.

On April 24, 2018, the Debtor filed a bankruptcy petition pursuant to

Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court

for the Western District of North Carolina. [BK 18-40169, Doc. 1]. On

September 11, 2019, the Plaintiff was appointed as the plan administrator of

the Debtor pursuant to an Amended Combined Disclosure Statement and

Joint Chapter 11 Plan of Liquidation, which the Bankruptcy Court confirmed

on November 24, 2020. [BK 18-40169, Docs. 416, 470].

On October 22, 2020, the Debtor filed an adversary proceeding

against, inter alia, the Defendant. [BK 20-03061, Doc. 1]. On February 11,

2021, the Plaintiff was substituted for the Debtor in the adversary proceeding.

[BK 20-03061, Doc. 18]. On March 2, 2023, the Defendant filed a Motion for

Summary Judgment [BK 20-03061, Doc. 73], which the Bankruptcy Court

granted on July 5, 2023 [BK 20-03061, Doc. 88]. This appeal followed on

July 19, 2023. [BK 20-03061, Doc. 90; CV 3:23-cv-00457-MR, Doc. 1].

Having been fully briefed [CV 3:23-cv-00457-MR, Docs. 5, 6, 8], this matter

is ripe for disposition.

III.

It is undisputed that Delaware law governs the disposition of this case.

Corporate officers owe fiduciary duties of care and loyalty. Firefighters’

Pension Sys. v. Found. Bldg. Materials, Inc., 318 A.3d 1105, 1138 (Del. Ch.

2024).5 When evaluating claims for breach of fiduciary duty, Delaware courts

distinguish between the “standard of conduct” and the “standard of review.”

Chen v. Howard-Anderson, 87 A.3d 648, 666 (Del. Ch. 2014) (footnote

omitted). “The standard of conduct describes what [officers] are expected to

do and is defined by the content of the duties of loyalty and care. The

standard of review is the test that a court applies when evaluating whether

[officers] have met the standard of conduct.” Id. (citation omitted).

5 While duties for corporate directors and corporate officers may vary in some instances,

relevant to the fiduciary duties at issue in this appeal, the duties of care and loyalty are

the same for corporate directors and corporate officers. Gantler v. Stephens, 965 A.2d

695, 708-09 (Del. 2009); Firefighters’ Pension Sys., 318 A.3d at 1138. Therefore,

citations to rules for corporate directors and corporate officers are used herein

interchangeably.

There are three standards of review that Delaware courts apply to

determine whether a fiduciary has complied with a standard of conduct: the

business judgment rule, enhanced scrutiny, and entire fairness. Id. (citation

omitted). The business judgment rule, the most forgiving standard of review,

applies when fiduciaries are “disinterested and independent.” Chen, 87 A.3d

at 667 (citation omitted). Under the business judgment rule, courts presume

that fiduciaries “acted on an informed basis, in good faith[,] and in the honest

belief that the action taken was in the best interests of the company.”

Firefighters’ Pension Sys., 318 A.3d at 1139 (citation omitted). “Unless one

of the elements is rebutted, the court merely looks to see whether the

business decision made was rational in the sense of being one logical

approach to advancing the corporation’s objectives.” Id. (citation and internal

quotation marks omitted). “Only when a decision lacks any rationally

conceivable basis will a court infer bad faith and a breach of duty.” Id.

(citation omitted).

The intermediate standard of review, enhanced scrutiny, applies in two

distinct circumstances: first, when the circumstances surrounding an officer’s

decision-making process “subtly undermine the decisions of even an

independent and disinterested fiduciary,” Firefighters’ Pension Sys., 318

A.3d at 1140 (citation omitted); and second, when fiduciaries wander into an

area “where stockholders possess rights of their own,” calling into question

the “allocation of authority” within a company. Id. (citation omitted). Under

enhanced scrutiny review, courts look at “the reasonableness of the end that

the directors chose to pursue, the path that they took to get there, and the fit

between the means and the end.” Id. (citation omitted). Officers have the

burden to show that they (1) “acted for a proper purpose” and (2) “selected

an appropriate means of achieving that purpose.” Id. (citation omitted).

The third and most stringent standard of review, entire fairness, applies

when an officer operates under an “actual conflict of interest.” Id. (citation

omitted). Under entire fairness review, courts assess the fairness of the

situation as a whole by looking at (1) substance, i.e., the transactional

outcome, and (2) procedure, i.e., the means by which an officer reaches a

transactional outcome. Id. at 1140-42.

Due to the stark differences between these standards of review,

determining which standard of review to apply can oftentimes be outcome

determinative. Mills Acquisition Co. v. MacMillan, Inc., 559 A.2d 1261, 1279

(Del. 1989).

IV.

Two issues on appeal concern whether the bankruptcy judge applied

the correct standard of review. The first issue is whether the Debtor was a

wholly-owned subsidiary of Schletter Germany. The second issue is whether

the forecast of evidence gives rise to a so-called “Caremark claim” for breach

of the duty of oversight such that the business judgment rule no longer

applies.6 The Bankruptcy Court concluded, based on the undisputed

evidence, that the Debtor is a wholly owned subsidiary. It also concluded,

based on the forecast of evidence, that there is no genuine issue presented

regarding a Caremark claim. If either of these conclusions is erroneous, then

this Court must reverse the Bankruptcy Court’s judgment and remand the

case for the Bankruptcy Court to apply a more stringent standard of review.

The third issue on appeal is whether the forecast of evidence regarding

the Defendant’s conduct raised a genuine issue of material fact as to whether

the Defendant violated the business judgment rule.7 The Court will only

reach this issue if the Court determines that the Debtor was a wholly-owned

subsidiary, and if the evidence does not give rise to a Caremark claim.

6 Such claims are referred to as “Caremark claims” because the Delaware Chancery

Court first held that directors can be held liable for a breach of the duty of oversight in In

re Caremark Int’l, 698 A.2d 959 (Del. Ch. 1996).

7 In his Response, the Defendant asserts that the Plaintiff waived any argument regarding

a breach of the duty of care. [CV 3:23-cv-00457-MR, Doc. 6 at 15]. Yet, the Defendant

goes on to extensively argue that the Bankruptcy Court correctly determined that the

Defendant did not breach a duty of care. [Id. at 15-22]. The Plaintiff then, in her Reply,

argues that the Defendant’s actions violated the business judgment rule. [CV 3:23-cv-

00457-MR, Doc. 8 at 4-7]. While it appears that the Plaintiff presents no argument

regarding a breach of the duty of care in her opening brief, given that the Defendant

addresses the argument in his Response, and the Plaintiff addresses the argument in her

Reply, the Court will review the issue.

The fourth issue on appeal is whether certain indemnification clauses

in the Defendant’s employment contract shield the Defendant from liability.

[CV 3:23-cv-00457, Doc. 6 at 33-35].

A.

The Plaintiff first argues that the Defendant acted in the best interest

of Schletter Germany, rather than in the best interest of the Debtor, by

determining that the G-Max constituted a simple modification of the FS Uno

and thus agreeing to continue to pay the same licensing fees to Schletter

Germany for the G-Max. [CV 3:23-cv-00457-MR, Doc. 5 at 21-23]. The

Plaintiff asserts two reasons as to how the Defendant’s actions constitute a

breach of the Defendant’s duty of loyalty owed to the Debtor: (1) the Plaintiff

alleges that the Debtor is not a wholly-owned subsidiary of Schletter

Germany and, thus, the Defendant owed the Debtor fiduciary duties separate

and apart from those owed to Schletter Germany; and (2) the Plaintiff argues

that even if the Debtor was a wholly-owned subsidiary, fiduciary duties run

from the parent company to the subsidiary, and the Defendant breached his

fiduciary duties owed to the Debtor by acting in the best interest of Schletter

Germany. [Id. at 23]. The Court will address each of these arguments in

turn.

The undisputed forecast of evidence before the Bankruptcy Court

shows that the Debtor was a wholly-owned subsidiary of Schletter Germany.

Specifically, the forecast of evidence shows:

The Debtor’s common stock is 95 percent held by

[Schletter Germany]. It is noted that under German

law it is usual to have shares authorized but not

issued. Accordingly, the remaining 5 percent of

shares are authorized but not owned by any party.

[BK 18-40169, Doc. 416 at 27; see also BK 20-03061, Doc. 74-1: Deposition

of the Defendant at 6-7 (“[The Debtor] was not wholly owned by [Schletter

Germany] until after [the former CEO] left the company and his shares were

acquired and put into the treasury of the company. I think [the former CEO],

if I remember properly, he owned 5 percent of [the Debtor].”)].

Even though the Plaintiff’s first argument hinges on whether the Debtor

was, in fact, a wholly-owned subsidiary of Schletter Germany, the Plaintiff

does not define “wholly-owned subsidiary,” nor does the Plaintiff attempt to

explain how the ownership structure of the Debtor’s common stock makes

the Debtor anything other than a wholly-owned subsidiary of Schletter

Germany. Rather, the Plaintiff argues that simply because Schletter

Germany held only 95% of the Debtor’s common stock, the Debtor was not

a wholly-owned subsidiary of Schletter Germany. [Doc. 5 at 19]. Based on

the undisputed forecast of evidence before the Bankruptcy Court that the

parent held all of the outstanding stock of the Debtor, in addition to the

undisputed customs of stock ownership under German law (presented to the

Bankruptcy Court by the Plaintiff), the Court concludes that the Bankruptcy

Court correctly held that the Debtor was a wholly-owned subsidiary of

Schletter Germany.

As for the Plaintiff’s second argument, the Plaintiff asserts that the

Defendant breached his duty of loyalty owed to the Debtor as a wholly-owned

subsidiary by acting in the best interest of its parent company, Schletter

Germany. The Plaintiff cites no authority for this proposition. If this were the

law, it would place corporate officers in an impossible situation. They would

be required to act for the benefit of the subsidiary, even if such action was to

the clear detriment of its sole shareholder.

Instead of placing corporate officers in such an impossible position,

Delaware courts recognize that “in a parent and wholly-owned subsidiary

context, the [fiduciaries] of the subsidiary are obligated only to manage the

affairs of the subsidiary in the best interests of the parent and its

shareholders.” Anadarko Petroleum Corp. v. Panhandle E. Corp., 525 A.2d

1171, 1174 (Del. 1988) (citations omitted). This is because “a wholly-owned

subsidiary is to be managed solely so as to benefit its corporate parent.”

Cochran v. Stifel Fin. Corp., 2000 WL 286722, at *11 (Del. Ch. 2011) (citing

Anadarko, 525 A.2d at 1174), rev’d on other grounds, Stifel Fin. Corp. v.

Cochran, 809 A.2d 555 (Del. 2002).

Here, even if the payment of the licensing fees was in error and

Schletter Germany were not actually entitled to receive them, the

Defendant’s fiduciary duties were owed solely to Schletter Germany. See

Anadarko, 525 A.2d at 1174. As such, the Defendant did not breach his duty

of loyalty. Therefore, this conclusion of the Bankruptcy Court is affirmed.

B.

The Plaintiff next argues that the forecast of evidence gives rise to a

Caremark claim. A Caremark claim for breach of the duty of oversight exists

in two situations: (1) where “the [officers] utterly failed to implement any

reporting or information system or controls”; or (2) where the officers have

“implemented such a system or controls, [and] consciously failed to monitor

or oversee its operations thus disabling themselves from being informed of

risks or problems requiring their attention.” Stone v. Ritter, 911 A.2d 362,

370 (Del. 2006).8 Under either scenario, a plaintiff must show that a fiduciary

knew that he or she was “not discharging their fiduciary obligations,” or

8 The duty of oversight applies to both corporate officers and corporate directors. In re

McDonald’s Corp. S’holder Derivative Litig., 289 A.3d 343, 358 (Del. Ch. 2023).

Therefore, again, the Court will cite to rules for corporate directors and corporate officers

interchangeably.

consciously disregarded their responsibilities “such as by failing to act in the

face of a known duty to act.” In re Citigroup Inc. S’holder Derivative Litig.,

964 A.2d 106, 123 (Del. Ch. 2009) (citation omitted).

Typical Caremark claims “arise from a failure to properly monitor or

oversee employee misconduct or violations of law.” Id. at 123; see In re

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

(workplace culture condoning sexual harassment); In re Am. Int’l Grp., Inc.,

965 A.2d 763 (Del. Ch. 2009) (fraudulent financial statements and criminal

activity). The business judgment rule, on the other hand, applies when a

fiduciary’s business decisions are challenged. Firefighters’ Pension Sys.,

318 A.3d at 1139. Where the facts give rise to a Caremark claim, the

business judgment rule does not apply.

Here, the Plaintiff argues that the forecast of evidence gives rise to a

Caremark claim because the Defendant breached his duty of oversight by

ignoring certain “red flags” leading to the failed launch of the G-Max. [CV

3:23-cv-00457-MR, Doc. 5 at 13-22].

The Delaware Chancery Court has addressed a similar argument in In

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

Citigroup, shareholders brought a Caremark claim against a board of

directors for an “alleged failure to properly monitor . . . business risk,

specifically [the company’s] exposure to the subprime mortgage market,”

leading up to the 2008 financial crisis. 964 A.2d at 123 (emphasis omitted).

The shareholders pointed to several “red flags” that should have alerted the

board of directors to the subprime mortgage crisis, including (1) “the steady

decline of the housing market and the impact the collapsing bubble would

have on mortgages and subprime backed securities”; (2) warnings from the

Financial Accounting Standards Board (FASB) that certain loans increased

the company’s exposure; (3) the rise in foreclosure rates; (4) “several large

subprime lenders reporting substantial losses and filing for bankruptcy”; and

(5) other firms reporting billions of dollars in losses. Id. at 124. The

shareholders argued that because the board’s decisions resulted in losses,

board members “must have consciously ignored these warning signs or

knowingly failed to monitor the [c]ompany’s risk in accordance with their

fiduciary duties,” and therefore breached their duty of oversight. Id. at 127.

Even though the shareholders framed their claim as one arising under

Caremark, the Chancery Court recognized that the shareholders’ theory

“essentially amount[ed] to a claim that the director defendants should be

personally liable to the [c]ompany because they failed to fully recognize the

risk.” Id. When one unpeeled the “lofty allegations of duties of oversight and

red flags used to dress up these claims,” it was clear that the shareholders

were merely “attempting to hold the director defendants personally liable for

making (or allowing to be made) business decisions that, in hindsight, turned

out poorly for the [c]ompany.” Id. The “red flags” alleged by the shareholders

were not sufficient to show that members of the board of the directors knew

or should have known of corporate wrongdoing, or that the members had

consciously disregarded some duty. Id. at 128. The Chancery Court held

that “[t]he warning signs alleged by [the shareholders] are not evidence that

the directors consciously disregarded their duties or otherwise acted in bad

faith; at most they evidence that the directors made bad business decisions.”

Id. at 128. Ultimately, the Chancery Court concluded that this type of claim

was covered by the business judgment rule. Id. at 131.

Here, as stated previously, the Plaintiff argues that the forecast of

evidence gives rise to a Caremark claim because the Defendant breached

his duty of oversight by ignoring “red flags” surrounding the launch of the G-

Max. [CV 3:23-cv-00457-MR, Doc. 5 at 13-22]. Specifically, the Plaintiff

argues that the Defendant knew or should have known that (1) products are

typically tested at a small scale before being launched; (2) entering into

contracts with large liquidated damages clauses before a product is finished

is “reckless”; and (3) trying to launch the G-Max “without having sufficient

production capabilities . . . is highly imprudent.” [Id. at 16].

Like the shareholders in Citigroup, the Plaintiff fails to show that the

Defendant knew or should have known of corporate wrongdoing or unlawful

behavior, or that the Defendant consciously disregarded some duty. See

Citigroup, 964 A.2d at 128. Instead, the Plaintiff, with the benefit of hindsight,

asks this Court to review the adequacy of the Defendant’s past business

decision: namely, rushing the launch of the G-Max in an attempt to quickly

fulfill customers’ orders. This is precisely the type of case that the business

judgment rule was created to encompass. See id. at 131. Accordingly, the

Court concludes that the Bankruptcy Court correctly determined that the

evidence does not give rise to a Caremark claim.

C.

Having determined that the Defendant did not breach any duty of

loyalty by purportedly acting in the best interest of the Debtor’s parent

company, and having also determined that the undisputed forecast of

evidence does not give rise to a Caremark claim, the Court will now analyze

the forecast of evidence under the business judgment rule.

The business judgment rule stems from the idea that courts are

inadequate to retroactively assess whether corporate officers made the

“right” decision. Citigroup, 964 A.2d at 124. As previously stated, under the

business judgment rule, courts presume that a fiduciary acted in good faith,

and simply look to see whether a fiduciary’s business decision “was rational

in the sense of being one logical approach to advancing the corporation’s

objectives.” Firefighters’ Pension Sys., 318 A.3d at 1139 (citation omitted).

The business judgment rule is so forgiving that it is considered “as close to

non-review as [Delaware] law contemplates.” Kallick v. Sandridge Energy,

Inc., 68 A.3d 242, 257 (Del. Ch. 2013) (citation omitted).

Here, as the Debtor’s business struggled, the Defendant attempted to

improve a product to make the Debtor more competitive in the market. The

Defendant’s efforts ultimately failed. The Plaintiff does not point to any

evidence to rebut the business judgment rule’s presumption of good faith,

and the Defendant’s decision to launch a new and improved product to

become more competitive in the market was a rational one. As the

Bankruptcy Court aptly summarized at the summary judgment hearing:

[W]hat we’re doing now is effectively Monday-morning

quarterbacking and suggesting that [the Defendant]

shouldn’t have done any of the things that [he] did, to

which someone in my chair would say, well, what

would have happened then? It sounds like [the

Debtor] had business problems separate and apart,

[with] the cost, competition, and the difficulty of using

the product, the UNO system, [the Debtor] might have

had just the same problems that we have here and

we’d still end up in the same place. I’m not making

that finding. I’m just saying it’s easy to suggest when

a decision goes wrong that it was the improper thing

to do.

[BK 20-03061, Doc. 99 at 47]. It is not for the Court to retrospectively critique

the good faith, rational business decisions made by the CEO of a failing

business. See Citigroup, 964 at 124. Accordingly, the Court will affirm the

Bankruptcy Court’s determination that the business judgment rule shields the

Defendant from liability.

D.

Because this Court concludes that the Bankruptcy Court correctly

applied the business judgment rule in this case, and that the business

judgment rule shields the Defendant from liability, the Court will not address

the Defendant’s argument that he is shielded from liability based on certain

indemnification clauses contained in his employment contract.

V.

For the foregoing reasons, the Court will affirm the Bankruptcy Court’s

Order granting summary judgment for the Defendant in this case.

ORDER

IT IS, THEREFORE, ORDERED that the Bankruptcy Court’s Order

granting the Defendant’s Motion for Summary Judgment [BK 20-03061, Doc.

88] is hereby AFFIRMED.

IT IS SO ORDERED.

Signed: August 5, 2025

Martifi Reidinger Ly,

Chief United States District Judge WG

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