Reed v. Linehan (In Re Soporex, Inc.)

PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW

BARBARA J. HOUSER, Bankruptcy Judge.

Before the Court are several motions to dismiss the second amended complaint (the “Complaint”) filed by Diane G. Reed as chapter 7 trustee (the “Trustee”) of the estates of four related chapter 7 debtors (the “Debtors”). The Debtors, together with other affiliates, filed voluntary petitions for relief under chapter 7 on August 22, 2008. The four debtors on whose behalf the Trustee filed the Complaint are Soporex, Inc. (“Inc.”), Soporex Respiratory, Inc. (“SRI”), Soporex Respiratory II, Inc. (“SRI 2”), and Winmar Diagnostics North Central, Inc. (“Winmar”).

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They are collectively defined in the Complaint as the “Soporex Debtors,” and the latter three are further defined as the “Operating Subsidiaries.” The defendants are eight individuals (collectively, the “Defendants”), each of whom held various director and/or officer positions with one of the Soporex Debtors. Stephen D. Linehan (“Linehan”), Richard J. Sabolik (“Sabo-lik”), and Scott D. Smith (“Smith”) (collectively, the “Officers”) were officers of Inc. during the times relevant to the allegations in the Complaint; Linehan was also chairman of Inc.’s board of directors (the “Board”). John Dudinsky, Jr. (“Dudin-sky”), Ronald G. Geary (“Geary”), Thomas Hansen (“Hansen”), Mickey Letson (“Let-son”) and Doyle Privett (“Privett”) (collectively, the “Outside Directors”) were not officers of any of the Soporex Debtors, but served on the Board.

I. PROCEDURAL BACKGROUND

In very broad brush, the Complaint alleges the following claims: Count 1, against only Linehan, alleges breaches of the fiduciary duties of loyalty and due care. Count 2 alleges that same claim against Sabolik. Count 8, against Smith and Sabolik, alleges a claim for corporate waste. Count 4, against the Outside Directors, alleges breaches of the duties of loyalty and due care. Count 5 alleges that same claim against Letson. Count 6 con-

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statutes an objection to proofs of claim filed in the Inc. case by Sabolik and Smith, which proofs of claim assert amounts allegedly owed for unpaid compensation for services rendered or unpaid benefits. Count 7 asserts that the Trustee is entitled to an award of attorneys’ fees, expenses, and costs incurred by the Trustee in the prosecution of this adversary proceeding “to the extent allowed by applicable law.”

Compl.,

¶ 216.

Four of the Outside Directors have filed a motion to dismiss Count 4, which is the only claim asserted against them.

2

The fifth outside director, Letson, is separately represented and has filed his own motion to dismiss the Complaint, directed to Counts 4 and 5, which are the two claims asserted against him. Letson also joins in the motion filed by the other Outside Directors as to Count 4, and further asserts as to Count 4 that the Trustee, who specifically excludes Letson from some of the factual allegations in support of Count 4, fails to exclude Letson from other factual allegations, some of which complain of acts or omissions that occurred after Letson resigned his position on the Board, and Count 4 should be dismissed as against Letson for this additional reason. The Officers have filed a motion to dismiss as to Count 1 against Linehan, Count 2 against Sabolik, and Count 3 against Sabo-lik and Smith. These three motions to dismiss will be collectively referred to herein as the “Motions.”

Each of the Motions is asserted under Fed.R.Civ.P. 12(b)(6), made applicable here by Fed. R. Bankr.P. 7012. All of the Defendants contend that the Complaint fails to state a claim upon which relief can be granted with regard to the Counts 1-5.

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II. LEGAL ANALYSIS

A. Threshold Issue of Authority to Finally Determine the Trustee’s Claims.

Although no party has raised an issue with respect to this Court’s ability to hear

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and finally determine the claims asserted by the Trustee in the Complaint, and in fact the Trustee alleges that all of her claims against the Defendants are “core” claims, in light of the Supreme Court’s recent decision in

Stern v. Marshall,

— U.S.-, 131 S.Ct. 2594 , 180 L.Ed.2d 475 (2011), this Court must consider whether it has the constitutional authority to finally determine the Trustee’s claims as an Article I tribunal. A brief discussion of

Stem

is necessary.

Stem

concerned a bankruptcy court’s authority to hear and finally determine a debtor’s common-law counterclaim to a proof of claim filed against the bankruptcy estate. The Supreme Court held that a bankruptcy court, as an Article I tribunal, may not constitutionally enter a final judgment over a debtor’s counterclaim that would not necessarily be resolved by the resolution of the debtor’s objection to the claimant’s proof of claim.

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Id.

at 2618 . According to the Supreme Court, although “public rights” disputes may be decided by non-Article III tribunals, public rights disputes must involve rights “integrally related to a particular federal government action.”

Id.

at 2613 . The debtor’s counterclaim in

Sterb

did not constitute a “public rights” dispute.

Id.

at 2614 . Thus, according to the Supreme Court, entering a final judgment with respect to the debtor’s counterclaim, which would not have been decided by the allowance of the claimant’s proof of claim, would be an impermissible exercise of the judicial power of the United States by a non-Article III tribunal.

Id.

at 2615 . This was so notwithstanding the fact that (i) the relevant statute — 28 U.S.C. § 157 (b)(1)— expressly authorized the bankruptcy judge to “hear and determine ... all core proceedings ... arising in a case under title 11,” that were referred to it by the district court under 28 U.S.C. § 157 (a), and (ii) “counterclaims by the estate against persons filing claims against the estate” are expressly defined to be a “core proceeding.” 28 U.S.C. § 157 (b)(2)(C). While Chief Justice Roberts stated in his majority opinion that the

Stem

holding was quite narrow and would have a limited practical impact,

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many lower courts and commenta

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tors are struggling to understand its broader implications, if any.

See, e.g.,

Jonathan Azoff and Thomas Szaniawski,

Stern v. Marshall and the Limits of Consent,

30 Am. Bankr. L. J. 28 (2011); Ralph Brubaker,

Article Ill’s Bleak House (Part II): The Constitutional Limits of Bankruptcy Judges’ Core Jurisdiction,

31 No. 9 Bankr. L. Letter 1 (2011);

In re Extended Stay, Inc.,

No. 09-13764-JMP, 2011 WL 5532258 (S.D.N.Y. Nov. 10, 2011);

In re Davis,

No. 05-15794-GWE, 2011 WL 5429095 (Bankr.W.D.Tenn. Oct. 5, 2011);

In re Teleservices Group, Inc.,

456 B.R. 318 (Bankr.W.D.Mich.2011).

As relevant here and as noted previously, two of the Defendants&emdash;i.e., Sabo-lik and Smith, filed proofs of claim in the Inc. case for amounts allegedly owed to them for unpaid compensation and benefits. Count 6 of the Complaint is the Trustee’s objection to those proofs of claim. However, the Trustee is also asserting affirmative state law claims against them and is seeking to recover significant monetary damages from them. Specifically, and as noted previously, Count 2 of the Complaint contains a claim against Sabolik for breach of the fiduciary duties of due care and loyalty, while Count 3, against Smith and Sabolik, alleges a claim for corporate waste. In deciding whether Smith and Sabolik are owed unpaid compensation and benefits by Inc. as asserted in their proofs of claim, this Court will not be called upon to decide the Trustee’s state law claims against them as pled in Counts 2 and 3. Thus, at least with respect to the Trustee’s claims against Smith and Sabo-lik,

Stem

is directly implicated and, according to the Supreme Court, this Court lacks constitutional authority to finally determine the Count 2 and 3 claims as pled in the Complaint.

So, the question becomes, if this Court lacks constitutional authority to determine the Trustee’s counterclaims against Smith and Sabolik,

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what, if anything, can this Court do with respect to the Count 2 and 3 claims? The starting point in answering this question must be the statute itself. Of course, and as noted previously, Congress expressly provided in 28 U.S.C. § 157 (a) that bankruptcy courts could hear and finally determine all core proceedings and then Congress statutorily defined as core proceedings “counterclaims by the estate against persons filing claims against the estate.” The

Stem

court found this statutory grant of authority unconstitutional. Congress also expressly provided in 28 U.S.C. § 157 (c)(1) that bankruptcy courts could “hear a proceeding that is not a core proceeding but that is otherwise related to

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a ease under title 11,” and thereafter submit “proposed findings of fact and conclusions of law to the district court,” which would then enter any final order or judgment “after considering the bankruptcy judge’s proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.” Finally, Congress expressly provided in 28 U.S.C. § 157 (c)(2), that with the consent of the

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litigants, the district court could refer a “related to” proceeding to a bankruptcy court to hear and finally determine subject to an appeal to the district court under section 158 of title 28.

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With this background in mind, the question remains&emdash;what can this Court do with respect to a statutorily defined “core” proceeding that the Supreme Court has held in

Stem

cannot be finally determined by a bankruptcy court? Can it issue proposed findings and conclusions to the district court as it is expressly authorized to do by statute with respect to those proceedings that are “related to” a bankruptcy case? For the reasons set forth below, this Court concludes the answer to this question is yes.

First, the Supreme Court itself at least implied in

Stem

that the effect of its decision was to “remove” certain claims from “core bankruptcy jurisdiction,” and to relegate them to the category of claims that are merely “related to” bankruptcy proceedings and thus are subject to being heard, but not finally determined, by bankruptcy courts when it stated that

the current bankruptcy system ... requires the district court to review de novo and enter final judgment on any matters that are “related to” the bankruptcy proceedings, and permits the district court to withdraw from the bankruptcy court any referred case, proceeding, or part thereof. [Respondent] has not argued that the bankruptcy courts are barred from “hearing” all counterclaims or proposing findings of fact and conclusions of law on those matters, but rather that it must be the district court that finally decides them. We do not think the removal of counterclaims such as [Petitioner’s] from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute; we agree with the United States [appearing as

amicus curiae]

that the question presented here is a “narrow” one.

Id.

at 2620 . And, as noted previously, this Court has statutory authority to issue proposed findings of fact and conclusions of law to the district court with respect to “related to” proceedings. 28 U.S.C. § 157 (c)(1).

Second, the Supreme Court’s analysis in

Stem

also provides strong authority for the proposition that there remain only two types of proceedings under 28 U.S.C. § 157 : (1) “core” proceedings that arise “in” a bankruptcy case or “under” title 11, and (2) “non-core” proceedings that are “related to” a bankruptcy case. The

Stem

Court came to this conclusion after holding § 157(b)(1) “ambiguous,” thus requiring an authoritative interpretation. 131 S.Ct. at 2604-05 . In short, the Supreme Court concluded that there were “[t]wo options. The statute does not suggest that any other distinctions need be made.”

Id.

at 2605 .

Third, and in the alternative, if there is now a third type of proceeding not expressly addressed in 28 U.S.C. § 157 &emdash;ie., statutorily defined “core” proceedings over which a bankruptcy court lacks constitutional authority to finally determine&emdash; there is no constitutional impediment, and should be no other impediment, to a bank-

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ruptey court hearing this type of proceeding and then issuing proposed findings of fact and conclusions of law to the district court for de novo review. Admittedly, there is no express statutory authority to do so in title 28. No doubt that is because Congress fully expected that the bankruptcy courts would hear and finally determine all core proceedings in accordance with 28 U.S.C. § 157 (b)(1). From this Court’s perspective, it is absurd to think that simply because Congress did not anticipate the Supreme Court’s ruling in

Stem

when it enacted, in 1984, 28 U.S.C. §§ 1384 (which vests jurisdiction over bankruptcy cases and proceedings in such cases in the district courts) and 157 (which permits the district court to refer bankruptcy cases and all proceedings “arising under title 11 or arising in or related to a case under title 11” to the bankruptcy courts) that the bankruptcy courts can now do nothing with respect to these types of claims. Since Congress expressly provided for the issuance of proposed findings of fact and conclusions of law with respect to “related to” proceedings over which the bankruptcy court had no authority to issue a final judgment except if the litigants expressly consented, there is no reason to believe that any impediment exists to this Court issuing proposed findings and conclusions to the district court with respect to core proceedings of the type that the

Stem

court has now concluded may not constitutionally be finally determined by a bankruptcy judge. If this Court issues proposed findings of fact and conclusions of law to the district court with respect to the Trustee’s Count 2 and 3 claims, an Article III tribunal with jurisdiction over the Debtors’ bankruptcy cases and all arising in, under and related to proceedings will actually decide the issues.

See

28 U.S.C. § 1334 (a) and (b). That passes both Constitutional muster and facilitates the expeditious resolution of bankruptcy cases and proceedings, over which the district court now must have greater involvement.

Finally, at least two other courts have come to the same

conclusion

— i.e., that Stern did not strip the bankruptcy courts of the authority to hear these types of claims and to propose findings of fact and conclusions of law to the district court for de novo review.

See, e.g., Field v. Lindell (In re Mortgage Store, Inc.),

No. 11-00439 JMS/RLP, 2011 WL 5056990 at *5-6 (D.Hawai’i Oct. 5, 2011) (concluding that under these circumstances it must “determine what ‘Congress would have intended’ in light of [Stem’s] constitutional holding” and that “Congress’ intent in enacting 28 U.S.C. § 157 is clear enough on its face— Congress intended that bankruptcy courts, to the extent possible, should adjudicate cases relating to Title 11. Thus, the court has little difficulty in finding that Congress, if faced with the prospect that bankruptcy courts could not enter final judgments on certain ‘core’ proceedings, would have intended them to fall within 28 U.S.C. § 157 (c)(1) granting bankruptcy courts authority to enter findings and recommendations.”);

Paloian v. American Express Co. (In re Canopy Financial, Inc.),

No. 09B 44943, 2011 WL 3911082 (N.D.Ill. Sept. 1, 2011).

For these reasons, this Court will issue proposed findings of fact and conclusions of law to the district court with respect to that portion of the Officers’ Motion addressing the Trustee’s Count 2 and 3 claims against Sabolik and Smith.

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With respect to the Trustee’s Count 1, 4 and 5 claims against Linehan, the Outside Directors, and Letson (none of whom filed proofs of claim against the Debtors), the Trustee also asserts that these claims are “core” under 28 U.S.C. § 157 (b)(2)(0) because they affect “the liquidation of the assets of the estate.” While it is true that the Trustee seeks to liquidate her claims against these defendants, which claims are assets of the Debtors’ estates, it appears we have another statutorily defined “core” proceeding over which this Court lacks constitutional authority to finally determine based upon the Supreme Court’s analysis in

Stem,

to which we now turn.

Many are debating the breadth of the Supreme Court’s decision in

Stem.

The arguments are interesting and, in some instances, mind-numbing. For today, I leave those arguments to others because I believe that the issue before me can be more simply, and practically, decided. It would be incredibly ironic for this Court to lack constitutional authority to finally determine the Trustee’s breach of fiduciary duty and corporate waste claims against Smith and Sabolik (when they actually inserted themselves into Inc.’s bankruptcy case by filing a proof of claim) as the Supreme Court has clearly held in

Stem,

but to have constitutional authority to finally determine the Trustee’s breach of fiduciary duty claims (arising from substantially the same acts or failures to act) against Linehan, the Outside Directors, and Letson, who chose not to involve themselves in the Debtors’ bankruptcy cases at all until they were forced to do so by the Trustee’s decision to sue them here. As a practical matter, this Court concludes that such a result is irreconcilable with the Supreme Court’s analysis in

Stem.

If this Court lacks constitutional authority to finally determine one set of breach of fiduciary duty claims against two former officers of certain of the Debtors, surely it lacks constitutional authority to finally determine substantially identical sets of breach of fiduciary duty claims against other former officers and/or directors of certain of the Debtors.

Accordingly, this Court concludes that it lacks the constitutional authority to finally determine the Trustee’s claims against the remaining Defendants, who have not filed proofs of claims. As such, and for the reasons discussed above, this Court will also issue proposed findings of fact and conclusions of law to the district court with respect to the balance of the Officers’ Motion and the other Motions addressing the Trustee’s Count 1, 4, and 5 claims against Linehan, the Outside Directors, and Let-son.

B. The Relevant Standard for Deciding the Motions

A complaint must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). While a complaint need not contain detailed factual allegations, it must contain “more than labels and conclusions, and a formulaic recitation of a cause of action’s elements will not do.”

Bell Atl. Corp. v. Twombly,

550 U.S. 544, 545 , 127 S.Ct. 1955 , 167 L.Ed.2d

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929 (2007);

see also Ashcroft v. Iqbal,

556 U.S. 662 , 129 S.Ct. 1937, 1949 , 73 L.Ed.2d 868 (2009);

Erickson v. Pardus,

551 U.S. 89 , 127 S.Ct. 2197, 2200 , 167 L.Ed.2d 1081 (2007);

Jebaco Inc. v. Harrah’s Operating Co. Inc.,

587 F.3d 314, 318 (5th Cir.2009);

McCall v. Southwest Airlines Co.,

661 F.Supp.2d 647, 653 (N.D.Tex.2009). A plaintiff must allege enough facts to state a claim for relief that is “plausible” on its face.

Tiuombly,

550 U.S. at 570 , 127 S.Ct. 1955 . “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”

Iqbal,

129 S.Ct. at 1949 . This plausibility standard is not a probability requirement, but does require more than mere possibility. If a complaint “pleads facts that are merely consistent with a defendant’s liability, it stops short of the line between possibility and plausibility of entitlement to relief.”

Id.

(internal quotation marks omitted). Moreover, “a court is not to strain to find inferences favorable to the plaintiff and is not to accept [as true] conclusory allegations, unwarranted deductions, or legal conclusions.”

St. Paul Commodities, LLC v. DB Fleet, LLC,

No. 3:09-CV-582-L, 2009 WL 3378598 , at *2 (N.D.Tex. Oct. 21, 2009) (citing

R2 Invs. LDC v. Phillips,

401 F.3d 638, 642 (5th Cir.2005)).

The Supreme Court held in

Iqbal

that the “plausibility” standard articulated in

Twombly

applies in all civil cases.

Morgan v. Hubert,

335 Fed.Appx. 466 (5th Cir.2009) (discussing Iqbal). The Supreme Court has set out a two-pronged approach for reviewing a motion to dismiss for failure to state a claim.

Iqbal,

129 S.Ct. at 1949-50 ;

McCall,

661 F.Supp.2d at 653 . First, the reviewing court may identify those statements in a complaint that are actually conclusions, even if presented as factual allegations.

Iqbal,

129 S.Ct. at 1949-50 ;

McCall,

661 F.Supp.2d at 653 . Such conclusory statements, unlike proper factual allegations, are not entitled to a presumption of truth.

Iqbal,

129 S.Ct. at 1949-50 ;

McCall,

661 F.Supp.2d at 653 . It is the conclusory nature of the statements rather than any fanciful or nonsensical nature “that disen-titles them to the presumption of truth.”

Iqbal,

129 S.Ct. at 1951 ;

McCall,

661 F.Supp.2d at 653 . Second, the reviewing court presumes the truth of any remaining “well-pled factual allegations,” and determines whether these factual allegations and their reasonable inferences plausibly support a claim for relief.

Iqbal,

129 S.Ct. at 1950 ;

McCall,

661 F.Supp.2d at 653 .

C. The Duties of Loyalty and Due Care Under Delaware Law

The duty of loyalty is most classically invoked when a director stands on both sides of a transaction and it prohibits the director from deriving any personal benefit through self-dealing.

Anadarko Petroleum Corp. v. Panhandle E. Corp.,

545 A.2d 1171 (Del.1988). Until fairly recently, the Delaware courts spoke in terms of a “triad” of fiduciary duties: that of good faith, loyalty and due care.

Cede & Co. v. Technicolor, Inc.,

634 A.2d 345, 361 (Del.1993),

modified on other grounds,

636 A.2d 956 (Del.1994). In two decisions rendered in 2006, the Delaware Supreme Court both clarified that the duty of good faith is not a standalone, separate duty but rather is an element of the duty of loyalty, and defined its contours.

See Stone v. Ritter,

911 A.2d 362 (Del.2006) and

In re Walt Disney Co. Deriv. Litig.,

906 A.2d 27 (Del.2006). Thus, the duty of loyalty now encompasses cases where the fiduciary fails to act in good faith.

Stone v. Ritter,

911 A.2d at 370 (“the fiduciary duty of loyalty is not limited to cases involving a financial or other cognizable fiduciary conflict of interest ... a director

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cannot act loyally towards the corporation unless she acts in the good faith belief that her actions are in the corporation’s best interest”) (quoting

Guttman v. Huang,

823 A.2d 492, 506 (Del.Ch.2003)).

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However, also until fairly recently, the duty to act in good faith has been “relatively uncharted,”

Disney,

906 A.2d at 64 , and it is has often been discussed, as in the

Disney

case itself, in the context of a discussion on the duty of care, although the Delaware Supreme Court has now made clear that it is a sub-set of the duty of loyalty. The

Disney

court noted that at least “three different categories of fiduciary behavior are candidates for the ‘bad faith’ perjorative label.”

Id.

The first category identified by the

Disney

court involves “ ‘subjective bad faith,’ that is, fiduciary conduct motivated by an actual intent to do harm. That such conduct constitutes classic, quintessential bad faith is a proposition so well accepted in the liturgy of fiduciary law that it borders on axiomatic.”

Id.

The second category, at the opposite end of the spectrum, is conduct which involves a lack of due care&emdash;“that is, fiduciary action taken solely by reason of gross negligence and without any malevolent intent.”

Id.

The

Disney

court concluded that such gross negligence, including a failure to inform oneself of available material facts, without more, cannot constitute bad faith.

Id.

at 65-66 . The

Disney

court then discussed the third category, which lies between the first two on the spectrum-conduct involving “intentional dereliction of duty, a conscious disregard for one’s responsibilities.”

Id.

at 66 . The

Disney

court held that such conduct is properly treated as a violation of the fiduciary duty to act in good faith, for two reasons:

First, the universe of fiduciary misconduct is not limited to either disloyalty in the classic sense (i.e., preferring the adverse self-interest of the fiduciary or of a related person to the interest of the corporation) or gross negligence. Cases have arisen where corporate directors have no conflicting self-interest in a decision, yet engage in misconduct that is more culpable than simple inattention or failure to be informed of all facts material to the decision. To protect the interests of the corporation and its shareholders, fiduciary conduct of this kind, which does not involve disloyalty (as traditionally defined) but is qualitatively more culpable than gross negligence, should be proscribed. A vehicle is needed to address such violations doctrinally, and that doctrinal vehicle is the duty to act in good faith. The Chancellor implicitly so recognized in his Opinion, where he identified different examples of bad faith as follows:

The good faith required of a corporate fiduciary includes not simply the duties of care and loyalty, in the narrow sense that I have discussed them above, but all actions required by a true faithfulness and devotion to the interests of the corporation and its shareholders. A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known

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duty to act, demonstrating a conscious disregard for his duties. There may be other examples of bad faith yet to be proven or alleged, but these three are the most salient.

Those articulated examples of bad faith are not new to our jurisprudence. Indeed, they echo pronouncements our courts have made throughout the decades.

Disney,

906 A.2d at 66 . Second, the

Disney

court noted that the Delaware legislature has recognized this “intermediate category of fiduciary misconduct, which ranks between conduct involving subjective bad faith and gross negligence,”

Disney,

at 67, in section 102(b)(7)(h) of the Delaware General Corporation Law, which authorizes a Delaware corporation to include a provision in its certificate of incorporation exculpating directors from monetary damage liability for a breach of the duty of care with certain exceptions, one of which is for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law. The

Disney

court noted that because the statute exculpates directors only for conduct amounting to gross negligence, its denial of exculpation for acts not in good faith must encompass the intermediate category of misconduct.

In

Stone v. Ritter,

911 A.2d 362 (Del.2006), the Delaware Supreme Court refined its analysis further, in the context of what has become known as a

Caremark claim

— i.e., a claim predicated on a board’s failure to exercise corporate oversight— which derives its name from

In re Caremark Int’l Inc. Deriv. Litig.,

698 A.2d 959 (Del.Ch.1996). The

Caremark

case itself involved the court’s consideration of a settlement of a suit involving claims that the board of directors of Caremark International, Inc. (“Caremark”) breached their fiduciary duty of care to Caremark in connection with alleged violations by Care-mark employees of federal and state laws regulating health care providers. As the

Caremark

court noted, the complaint before it did not allege either director self-dealing or “the more difficult loyalty-type problems arising from cases of suspect director motivation.”

Caremark,

at 967. Instead, the complaint alleged that Care-mark’s board “allowed a situation to develop and continue which exposed the corporation to enormous legal liability and that in so doing they violated a duty to be active monitors of corporate performance,” which the

Caremark

court characterized as “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.”

Id.

The

Caremark

court then noted that liability for a breach of the duty to exercise appropriate attention may arise in two distinct contexts: liability may arise from a board decision that results in a loss because that decision was ill-advised or negligent, or it may arise from an unconsidered failure of the board to act in circumstances in which due attention would have prevented the loss. The

Caremark

court noted that the former cases are subject to review under the business judgment rule, so long as the decision made was the result of a process that was either deliberately considered in good faith or was otherwise rational.

Id.

In such cases, compliance with the duty of care is not judged by reference to

the content

of the board decision, but rather by the process employed in reaching the decision. The second category of cases in which director liability is possible results from “unconsidered inaction.”

Caremark,

at 968. In such cases, the

Caremark

court held that “only a sustained or systematic failure of the board to exercise oversight — such as an utter failure to attempt to assure a reasonable information and reporting system exists — will establish the lack of good

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faith that is a necessary condition to liability. Such a test of liability&emdash;lack of good faith as evidenced by a sustained or systematic failure of a director to exercise reasonable oversight&emdash;is quite high.”

Caremark,

at 971.

As noted by the court in

In re Citigroup Shareholder Deriv. Litig.,

964 A.2d 106, 122-28 (Del.Ch.2009), although the

Caremark

decision, which articulated the standard for “oversight liability,” involved a claim for breach of the duty of care, the Supreme Court in

Stone

(i) explicitly approved the

Caremark

standard for oversight liability cases, (ii) made clear that the duty breached in such cases is the duty to act in good faith, and (iii) made clear that the duty of good faith is not a stand-alone liability, but rather is a subsidiary element&emdash;i.e., a condition, of the duty of loyalty. The

Stone

court further held that the necessary conditions predicate for director oversight liability are:

(a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention. In either case, imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations. Where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith.

Stone,

911 A.2d at 370 .

Cases subsequent to

Caremark

and

Stone

have construed an oversight liability claim as one requiring “proof that a director acted inconsistent with his fiduciary duties and, most importantly, that the director

knew

that he was so acting.”

In re Massey Energy Co.,

C.A. No. 5430-VCS, 2011 WL 2176479 (Del.Ch. May 31, 2011). In other words, a plaintiff must allege that “a director

knowingly

violated a fiduciary duty or failed to act in violation of a

known

duty to act, demonstrating a

conscious

disregard for her duties.”

In re Citigroup Shareholder Deriv. Litig.,

964 A.2d 106, 125 (Del.Ch.2009) (emphasis in original). As the Delaware Supreme Court has noted, “there is a vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties.”

Lyondell Chem. Co. v. Ryan,

970 A.2d 235, 243 (Del.2009). A plaintiff must plead facts “suggesting that the board knew that internal controls were inadequate, that the inadequacies could leave room for illegal or materially harmful behavior, and that the board chose to do nothing about the control deficiencies that it knew existed.”

Desimone v. Barrows,

924 A.2d 908, 940 (Del.Ch.2007) (finding that complaint alleging abdication of the board’s duty to monitor compliance with applicable laws and regulations governing issuance of stock options failed to state a claim). In the transactional context, “an extreme set of facts is required to sustain a disloyalty claim premised on the notion that disinterested directors were intentionally disregarding their duties.”

Lyondell,

970 A.2s at 243.

The typical

Caremark

claim involves a claim that the board is liable for damages that arise from a failure to properly monitor or oversee employee misconduct or legal violations.

In re Citigroup Shareholder Deriv. Litig.,

964 A.2d 106, 122-23 (Del.Ch.2009). However, in

Citigroup,

the plaintiffs attempted to state

Caremark

oversight liability claims where they alleged that the board ignored “red flags” respecting the impending financial crisis in

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the housing market and thus failed in their duty of oversight to prevent Citigroup’s involvement in the subprime mortgage market, leading to inappropriate business risk. The

Citigroup

court found that this was a “bit of a twist” on the traditional

Caremark

claim, noting that:

when one looks past the lofty allegations of duties of oversight and red flags used to dress up these claims, what is left appears to be plaintiff shareholders attempting to hold the director defendants personally hable for making (or allowing to be made) business decisions that, in hindsight, turned out poorly for the Company. Delaware courts have faced these types of claims many times and have developed doctrines to deal with them — the fiduciary duty of care and the business judgment rule. These doctrines properly focus on the decision-making process rather than on a substantive evaluation of the merits of the decision.

Citigroup,

964 A.2d at 124 . While acknowledging a duty of oversight, the

Citigroup

court held that the obligation to implement and monitor a system of oversight

does not eviscerate the core protections of the business judgment rule — protections designed to allow corporate managers and directors to pursue risky transactions without the specter of being held personally liable if those decisions turn out poorly. Accordingly, the burden required for a plaintiff to rebut the presumption of the business judgment rule by showing gross negligence is a difficult one, and the burden to show bad faith is even higher ... the presumption of the business judgment rule, the protection of an exculpatory § 102(b)(7) provision, and the difficulty of proving a

Caremark

claim together function to place an extremely high burden on a plaintiff to state a claim for personal director liability for a failure to see the extent of a company’s business risk.

Citigroup,

964 A.2d at 125 (finding that plaintiffs did not state a claim for failure of oversight). The

Citigroup

court held that to recognize the claims before it under a theory of director oversight liability would

undermine the long established protections of the business judgment rule. It is well established that the mere fact that a company takes on business risk and suffers losses — even catastrophic losses — does not evidence misconduct, and without more, is not a basis for personal director liability. That there were signs in the market that reflected worsening conditions and suggested that conditions may deteriorate even further is not an invitation for this Court to disregard the presumptions of the business judgment rule and conclude that the directors are liable because they did not properly evaluate business risk. What plaintiffs are asking the Court to conclude from the presence of these ‘red flags’ is that the directors failed to see the extent of Citigroup’s business risk and therefore made a ‘wrong’ business decision by allowing Citigroup to be exposed to the subprime mortgage market.

Citigroup,

964 A.2d at 130 .

In sum, notwithstanding the plaintiffs attempts to plead their theory of the case as a

Caremark

claim, the

Citigroup

court declined to extend the oversight liability theory to a claim alleging a failure to monitor business risk in Citigroup’s operations. Instead, that court reviewed that claim under the duty of care and the business judgment rule.

Under Delaware law, the duty of care requires that in making business decisions, corporate directors must consider all material information reasonably available.

San Antonio Fire & Police

*372

Pension Fund v. Amylin Pharmaceuticals, Inc.,

983 A.2d 304 (Del.Ch.2009). The appropriate standard to establish a breach of the duty of care is one of gross negligence, which has been defined as “reckless indifference” or conduct beyond the “bounds of reason.”

McPadden v. Sidhu,

964 A.2d 1262 (Del.2008). As one court has noted, the definition of gross negligence in Delaware corporate law is “extremely stringent.”

In re Lear Corp. Shareholder Litig.,

967 A.2d 640, 652 (Del.Ch.2008). The challenged decision must be “so grossly off-the-mark as to amount to reckless indifference or a gross abuse of discretion.”

Id. (quoting Solash v. Telex Corp.,

1988 WL 3587 at *9 (Del.Ch. Jan. 19, 1988)). The standard for judging the informational component of the directors’ decision-making “does not mean that the board must be informed of every fact. The board is responsible for considering only material facts that are reasonably available, not those that are immaterial or out of the board’s reasonable reach.”

San Antonio Fire & Police Pension Fund,

983 A.2d at 318 .

11

With these principles firmly in mind, the Court turns to an analysis of the Motions.

D. The Outside Directors’ (minus Letson) Motion

As against the Outside Directors, the Trustee alleges that at all relevant times, each was a member of the Board and, as such, each owed the fiduciary duties of loyalty and due care to Inc. and its shareholders. Further, the Trustee alleges that Inc. was insolvent no later than May 2008, and upon its insolvency, the Outside Directors’ fiduciary duties extended to Inc.’s creditors. The Trustee alleges that each of the Outside Directors breached those duties, individually and collectively, as follows:

(i) They knowingly failed to make informed decisions critical to the ongoing business operations of Inc. and the Operating Subsidiaries.

(ii) By their total lack of active involvement in the business operations of Inc. and the Operating Subsidiaries, they demonstrated a conscious disregard and indifference for their fiduciary duties with respect to the management of Inc.’s business operations, and this reckless disregard and indifference to their fiduciary duties constitutes bad faith.

(iii) They failed to provide oversight in the management of Inc.’s business during the critical period of December, 2007 through August 22, 2008 and failed to employ a financial crisis manager to operate the businesses of the Operating Subsidiaries.

(iv) They failed to ensure that Inc. and the Operating Subsidiaries established

*373

and maintained proper financial accounting methods for their ongoing operations.

(v) They failed to perform any of their duties as members of Board committees, including the operations committee that was responsible for overseeing the business operations of Inc.

(vi) They failed to develop a plan, process or procedure to address the declining financial condition of Inc. and the Operating Subsidiaries.

(vii) They improperly delegated decision-making authority for Inc. and the Operating Subsidiaries to Sabolik and Smith following Linehan’s involvement in a car accident on July 18, 2008.

(viii) They improperly delegated to Sa-bolik and Smith decision-making authority for terminating the business operations of Inc. and the Operating Subsidiaries and for the “orderly liquidation” of their operating assets.

(ix) They failed to take any steps to preserve the going concern value of the Operating Subsidiaries’ business operations and to preserve the value of SRI and SRI 2’s accounts receivable.

The Complaint does not identify which of these nine items the Trustee contends constitute a breach of the fiduciary duty of care, and which she contends constitute a breach of the fiduciary duty of loyalty. The Trustee simply alleges that as a direct and proximate result of these acts and omissions, Inc. and the Operating Subsidiaries and their respective creditors suffered substantial damages and the assets of Inc. were impaired. For these alleged breaches, the Trustee seeks damages consisting of at least the total amount of unpaid creditors’ claims, which is estimated to be in excess of $21.5 million. The Trustee further alleges that the damages sustained relate to (i) the loss of payments due to SRI and SRI 2 from Medicare and other insurers, (ii) the loss of value of SRI’s and Winmar’s businesses, which were allegedly fraudulently transferred to Med 4 Home, Inc. (“Med 4 Home”);

12

(in) the loss of the full going concern value of Winmar, (iv) the loss of funds preferentially and/or fraudulently transferred by Inc. to Inc.’s insiders and to certain of Inc.’s creditors; and (v) the administrative fees and expenses incurred by the bankruptcy estates of Inc. and the Operating Subsidiaries to administer these bankruptcy estates, to liquidate their assets, and to prosecute the claims and causes of actions arising from the Defendants’ gross negligence.

The Complaint is lengthy. The Outside Directors note that with respect to the claims pled against them, the Trustee essentially complains of the Outside Directors’ acts/ómissions in four factual areas, and the Trustee agrees, for the most part, with this characterization.

13

First,

*374

the Outside Directors note that the Trustee’s allegations appear to take issue with the Board’s decision to enter into an agreement with Carecentric National, LLC (“Carecentric”) for billing services (the “Carecentrie Allegations”).

See Compl,

¶¶ 49-77. Specifically, the Trustee alleges that when Inc. and SRI acquired a respiratory pharmaceutical business with 26,000 active patients in 2006, it did not have a billing and collection system in place to service those patients and therefore hired an outside vendor, Care-centric, to perform that function pursuant to a letter agreement signed in March, 2006. The Trustee alleges that the letter agreement called for the execution of a more formal and detailed contract within a month, but negotiations “dragged on” and the formal agreement was not signed until May 2007.

Compl,

¶ 52. The Trustee alleges that Carecentrie performed very poorly under the letter agreement, which resulted in millions of dollars of uncollected accounts receivable, and notwithstanding that alleged fact, the Board “rubber-stamped” the officers’ request to approve the more formal agreement with Carecen-tric following an April 25, 2007 Board meeting.

Compl,

¶¶ 64-65.

Second, the Outside Directors note that the Trustee appears to contend that the Board did not sufficiently address the continuing financial decline of Inc. and the Operating Subsidiaries (the “Financial Decline Allegations”). Specifically, the Trustee alleges that in the first quarter of 2008, Inc.’s primary lender under a revolving credit facility was acquired by GE Business Financial Services, Inc. (“GE”). At that time, funds had been over-advanced under the credit facility, such that GE sent a default letter in May, 2008,

Compl.,

¶ 88, stating that GE would not be making any further advances. Although the Trustee concedes that the Outside Directors were not told of a forbearance agreement with GE or that the Operating Subsidiaries lacked the cash needed to operate beyond July, 2008, the Trustee alleges that the Outside Directors had been informed that Inc. had committed a “major breach” of its credit agreement, and thus the Outside

*375

Directors were on notice of Inc.’s and the Operating Subsidiaries’ “dire” financial condition, and that despite this knowledge, “the Outside Directors took no action to remedy Soporex’s financial crisis and they failed to investigate the financial consequences of Soporex’s breach.”

Compl.,

¶ 91. The Trustee further alleges that the Outside Directors were aware of the significant billing and collection problems, the write-offs of bad debt due to Carecentric’s poor performance, a decrease in the reimbursement rate for Albuterol (a respiratory medication), GE’s notice of default letter, and the termination of credit by one of Soporex’s primary pharmaceutical suppliers, and yet the Board held no meetings.

Compl.,

¶¶ 150-151.

Third, the Outside Directors note that the Trustee alleges some facts attempting to plead that the Board’s decision to file a bankruptcy petition for relief under chapter 7 rather than one under chapter 11 was a breach of their fiduciary duties (the “Bankruptcy Decision Allegations”).

See Compl.,

¶¶ 159-174.

Fourth and finally, the Outside Directors note that the Trustee alleges some facts that attempt to plead that the Board approved a corporate resolution authorizing chapter 7 filings which constituted an improper delegation of decision-making authority for Inc. and the Operating Subsidiaries to Sabolik and Smith, and an abdication of their duties (the “Corporate Resolution Allegations”).

See Compl.

¶¶ 169-180.

The parties have thus focused their attention primarily upon the Carecentric Allegations, the Financial Decline Allegations, the Bankruptcy Decision Allegations and the Corporate Resolution Allegations. The Court will analyze these allegations in detail after addressing a threshold matter in dispute between the parties as explained below.

In short, the parties disagree about the proper application of the business judgment rule at the pleading stage. The Trustee asserts that the business judgment rule is an affirmative defense, such that her complaint need not “plead around” the business judgment rule or negate this affirmative defense, citing to

Stanziale v. Nachtomi (In re Tower Air, Inc.),

416 F.3d 229 (3rd Cir.2005). In

Tower Air,

the Third Circuit noted that

[generally speaking, we will not rely on an affirmative defense such as the business judgment rule to trigger dismissal of a complaint under Rule 12(b)(6). A complaint may be dismissed under Rule 12(b)(6) where an unanswered affirmative defense appears on its face, however. Stanziale’s Amended Complaint declares that the business judgment rule does not vitiate any of his claims. He thus must plead that he overcomes the presumption created by that rule — that Tower Air’s directors and officers acted in good faith and on an informed basis.

Tower Air,

416 F.3d at 238 . The Trustee asserts that since she did not reference the business judgment rule in her Complaint, she is not required to plead facts to overcome the presumption it creates.

The

Tower Air

decision has been criticized.

See, e.g., In re IT Group, Inc.,

No. 02-10118, 2005 WL 3050611 at *8, n. 10. More importantly, it has been rejected in this district.

14

United States District Judge Barbara Lynn recently had this issue squarely before her in

Kaye v. Lone Star Fund v. (U.S.), L.P.,

453 B.R. 645 (N.D.Tex.2011). In the

Kaye

case, the defendant corporate directors argued that the plaintiff liquidating trustee must “plead around” the presumption created

*376

by the business judgment rule in order to survive a motion pursuant to Rule 12(b)(6). The plaintiff, citing

Tower Air,

argued that he need not allege facts from which the court could reasonably infer that the presumption was rebutted. The district court in

Kaye

first recognized that Delaware’s courts have held unambiguously that

the plaintiff

bears the burden of proof to rebut the business judgment rule’s presumption.

15

The district court then noted:

[b]y definition, an affirmative defense is a defense that “[t]he defendant bears the burden of proving.”

Black’s Law Dictionary

(9th ed. 2009). Thus, describing the presumption created by the business judgment rule as an affirmative defense is, at best, a dubious characterization of the rule. In

Tower Air,

the court observed that “Delaware courts consider Chancery Rule 8’s specificity requirements as consonant with notice pleading, but such notice pleading bears scant resemblance to the federal species.”

Tower Air,

416 F.3d at 236-37 . This led the Third Circuit to hold that “[t]he District Court [had] erred by assuming that Delaware’s notice pleading cases are interchangeable with federal notice pleadings cases.”

Id.

at 237 . Even if this Court were to accept the conclusion that Delaware and federal courts interpret their textually identical notice pleading rules differently, a difference regarding the level of detail each requires of a plaintiffs factual allegations does not warrant relegating the business judgment rule to a defense that corporate directors and officers may successfully assert only after discovery. As one Delaware district court concluded, “[The] protections [of the business judgment rule] are a substantive point of law that ... stands largely independent ... of ... the notice purpose inherent in procedural rules of pleading.”

In re IT Group, Inc.,

No. 02-10118, Civ. A. 04-1268-KAJ, 2005 WL 3050611 , at *8 n. 10 (D.Del. Nov. 15, 2005) (citations omitted).

An examination of

Tower Air’s

practical consequences further justifies not applying it here. Allowing plaintiffs to avoid the business judgment rule’s effects by omitting any mention of it from their pleadings provides plaintiffs “a powerful and perverse incentive to ‘dummy-up’ about the obvious implications of the business judgment rule when drafting their complaints in the first instance.”

Id.

Thus, “because

[Tower Air]

sees a problem not when facts are omitted but only when they are presented, the predictable and unfortunate result will be deliberately obtuse allegations.”

Id.

Such an outcome “truly bears scant resemblance to the operation of the business judgment rule in Delaware courts.”

Id.

Therefore, the Court declines to apply

Tower Air

here.

Kaye,

453 B.R. at 679-80 .

Instead, the district court held that in order to state a claim for breach of fiduciary duty under Delaware law that is plausible on its face, a plaintiff must plead factual content that allows the court to draw the reasonable inference that in making the challenged decision, the directors or officers breached their duties of loyalty or care, and a plaintiff may not simply allege that a fiduciary “undertook a business strategy that was all consuming and foolhardy and that turned out badly and there

*377

by seek to have the court infer that the later failure resulted from [a breach of the duties of care or loyalty].”

Id.

at 680 (quoting

Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P.,

906 A.2d 168, 197 (Del.Ch.2006),

aff'd

931 A.2d 438 (Del. 2007)). As the district court pointed out, such allegations “are merely consistent with wrongdoing, and often have an obvious alternative explanation — that sometimes business strategies and decisions do not pan out despite the best intentions and the most exacting care.”

Kaye,

453 B.R. at 680 .

This Court finds

Kaye

persuasive, and thus concludes that the Trustee must plead factual content sufficient to rebut the presumption afforded the Outside Directors by Delaware’s business judgment rule. Under that rule, the business decisions of a company’s board are insulated by a presumption that in making a business decision, the directors 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.”

Gantler v. Stephens,

965 A.2d 695, 705-06 (Del.2009). The party challenging the directors’ decision bears the burden of rebutting the presumption afforded by the business judgment rule.

Id.

at 706 . To rebut the presumption, the plaintiff must show that the board breached the duty of loyalty or the duty of care.

Id.

If the plaintiff fails to rebut the presumption, the decisions of the directors will not be disturbed unless they acted in a manner that cannot be attributed to a rational business purpose.

Brehm v. Eisner,

746 A.2d 244, 264 (Del.2000). Therefore, to withstand a 12(b)(6) motion, the Trustee must have alleged facts plausibly showing that the Outside Directors’ actions were the result of disloyalty or lack of due care, or that their conduct cannot be attributed to a rational business purpose.

Kaye,

453 B.R. at 679 .

The Court will address the Carecentric Allegations, the Financial Decline Allegations, the Bankruptcy Decision Allegations, and the Corporate Resolution Allegations in turn.

1. The Carecentric Allegations

The Trustee alleges that when they acquired the pharmacy business in 2006, Inc. and SRI had only 15 business days to prepare for operations involving over 26,-000 patients, and that SRI could not establish its own billing and collection system because the majority of patients were Medicare or Medicaid patients, so collections had to be processed electronically through the Medicare and Medicaid reimbursement programs and no one initially hired by Inc. had the requisite expertise to set up these systems.

Compl,

¶ 44-47. Therefore, according to the Trustee, (i) Inc. had to use an outside vendor, and Carecentric was chosen,

Compl,

¶ 49, and (ii) Carecentric and Inc. entered into a letter agreement in March of 2006, which agreement called for the execution of a more extensive written contract within a month.

Compl,

¶¶ 51-52. As noted previously, the Trustee alleges that negotiations for the written contract “dragged on,” such that the formal written contract was not signed until May, 2007.

Compl,

¶ 52. The Trustee further alleges that (i) almost immediately under the letter agreement, SRI experienced problems with Ca-recentric’s performance resulting in hundreds of claims being rejected by insurers,

Compl,

¶ 54, (ii) in November of 2006, Inc. hired Teresa Camfield (“Camfield”) to oversee Careeentric’s billing and collection activities,

Compl,

¶ 55, (iii) later that month, Camfield prepared a report detailing the problems with Carecentric’s performance and recommending corrective action and sent the report to Linehan and

*378

Sabolik,

Compl.,

¶¶ 56-57, (iv) despite Camfield’s report, Carecentric’s poor performance continued and, as a result, SRI’s aged receivables continued to increase,

Compl,

¶ 58, (v) Inc.’s Chief Operating Officer sent an email to various corporate officers in February of 2007 expressing alarm,

Compl,

¶ 59, (vi) in response, Cam-field also emailed those same officers, recommending that billing and collections systems be moved “in house,”

Compl,

¶ 60, and (vii) despite those warnings, Linehan, Sabolik and Smith failed to immediately bring collections in-house and instead recommended to the Board in April, 2007 that it approve the formal contract between Soporex and Carecentric.

Compl,

¶ 61.

According to the Trustee, the contract that the Board approved at the April, 2007 Board meeting contained a limitation of liability provision that limited Carecen-tric’s liability for damages to the total amount of fees paid to it by Inc.

Compl,

¶ 62-63. The Trustee alleges that at the time of the April, 2007 Board meeting, Linehan, Sabolik and Smith were aware that Carecentric had negligently performed under the initial letter agreement, that SRI would have to write off nearly $3 million in bad debt due to Carecentric’s failure to perform, and that they knew or should have known that the total fees paid to Carecentric as of the date of the Board meeting was approximately $900,000, such that Inc. would not be able to recover the full amount of damages it had already sustained as a result of Carecentric’s poor performance.

Compl,

¶¶ 64-65. The Trustee further alleges that despite this knowledge and “with no apparent discussion about the fact that (i) CareCentric had materially breached the CareCentric Letter Agreement, (ii) SRI had already sustained over $3 million in damages as a result of such breach, and (iii) Soporex would not be able to recover these damages based upon the contractual limitation on damages contained in the CareCentric Services Agreement, the Soporex Board ‘rubber-stamped’ Linehan’s and Smith’s request to approve the CareCentric Services Agreement.”

Compl.,

¶ 65.

However, at that same April, 2007 Board meeting, the Trustee alleges that the Board also approved an agreement between Inc. and Convergent Media Network, Ltd. (“CMAEON”) to provide the software and data processing systems necessary to bring the billing and collection functions in-house, although the Trustee alleges that decision was made without “appropriate due diligence” to determine whether CMAEON could provide the necessary services.

Compl.,

¶ 68-69. The Trustee alleges that unbeknownst to Inc., CMAEON had to write and construct the software system from scratch.

Compl,

¶ 70. The Trustee also alleges that (i) it was not until November, 2007 that Inc.’s officers finally instructed others to transfer SRI’s billing and collections systems to in-house systems.

Compl.,

¶ 67, and at a December, 2007 Board meeting, the Board was told that the transition of the systems from Carecentric to an in-house system was not yet complete,

Compl,

¶ 71, (ii) Inc. was not able to use the in-house system until February, 2008,

Compl,

¶ 72, and (iii) when Carecentric learned that Inc. was moving its systems in-house, Carecentric denied Inc. access to its data, which was stored on Carecentric’s servers, so Inc. was unable to bill and collect, and had to hire Med Staff Plus, Inc. (“Med Staff’) at a cost of $100,000 per month to try to collect its accounts.

Compl,

¶ 75. The Trustee further alleges that (i) in July, 2008, Inc. also brought its “re-billing” functions in-house, because it could no longer afford to pay Med Staff,

Compl.,

¶ 76, (ii) the re-billing process was terminated in August of 2008, when Inc. shut its doors, and (iii) SRI had to write off bad

*379

debt of in excess of $7 million, and a substantial portion of this loss could have been avoided if SRI’s billing and collection functions had been brought in-house in February, 2007.

Compl,

¶ 77.

Next, the Trustee alleges that (i) the Outside Directors “never took any kind of affirmative action to address Soporex’s operational and financial problems, even after significant adverse financial events were brought to their attention, such as the significant problems with the billing and collection of the SRI accounts receivable, the multimillion dollar write offs of pharmacy bad debt due to CareCentric’s negligent performance

...Compl.

at ¶ 150, (ii) despite being told at their April, 2007 Board meeting of the problems with Carecentric’s performance, the Outside Directors nevertheless approved the Care-centric contract, and also the agreement with CMAEON,

Compl,

¶ 153, and (iii) at their September, 2007 Board meeting, the Outside Directors were informed that SRI was not collecting its accounts, had written off over $2 million in bad debt, but took no corrective action.

Compl,

¶ 154.

As it relates to the Outside Directors’ (minus Letson) Motion and stripped to their essence, all of these allegations are tantamount to a complaint that (i) the Outside Directors approved the Ca-recentric agreement when they shouldn’t have, (ii) the Outside Directors’ decision constituted a “rubber stamp” of the officers’ recommendations, and (iii) the Outside Directors didn’t move quickly enough to move the billing functions in-house. The Complaint contains no allegations of self-dealing with respect to the Carecentric transaction, and thus to the extent the Trustee contends that the Outside Directors’ conduct breached their duty of loyalty, the Trustee must be relying on a lack of good faith.

16

The Complaint fails to allege subjective bad faith, and thus the Trustee’s theory appears to be that the Outside Directors’ conduct constitutes an intentional dereliction of duty or conscious disregard of their responsibilities.

Disney,

906 A.2d at 66 . At most, however, the Complaint alleges negligence (arguably, not even gross negligence), which the

Disney

court has held is insufficient to constitute bad faith for purposes of a breach of the duty of loyalty under Delaware law.

To the extent that the Trustee is attempting to assert a director oversight liability claim, the Carecentric Allegations do not rise to the level required by the decisions in

Caremark

and

Stone .

The Trustee has not alleged a “sustained or systematic failure of the board to exercise oversight.”

Caremark,

698 A.2d at 968 . Moreover, the Court notes that the Trus

*380

tee, like the plaintiff in

Citigroup,

is attempting to stretch the oversight liability cases beyond the factual contexts in which they have been decided. The Trustee does not allege a failure to monitor or oversee employee misconduct or legal violations. Rather, the Trustee here alleges a claim similar to that in

Citigroup

— that the Outside Directors failed to generally monitor the operations of the business and so exposed it to losses. That type of claim is most properly analyzed under a duty of care theory. Moreover, the Carecentric Allegations plead no facts supporting any inference that the Outside Directors

knew

they were acting inconsistently with their fiduciary obligations such that a director oversight liability claim would lie.

Lyon-dell,

970 A.2d at 243 .

Lastly, the Court notes that the Trustee’s theory is somewhat undercut by her own allegations. While alleging that the Outside Directors “rubber stamped” the decision to proceed with the Carecentric agreement at their April, 2007 Board meeting, the Trustee also alleges that the Board approved the hiring of CMAEON to replace Carecentric once the needed software was constructed and that the Board received a status report on CMAEON’s progress at a later Board meeting. The Trustee does

not,

tellingly, allege that Inc. had any alternative to approving the Care-centric agreement in April of 2007, that there were other outside vendors who could have provided the same service better or on more favorable terms, or that the billing and collections functions could have been brought in-house any earlier than they were.

For all of these reasons, the Court concludes that the Trustee has not stated a plausible breach of the duty of loyalty claim against the Outside Directors to the extent she relies upon the Carecentric Allegations.

The Trustee fares no better to the extent she relies upon a breach of the duty of care claim. The Carecentric Allegations do not rise to the level of “reckless indifference” or conduct “beyond the bounds of reason,”

McPadden v. Sidhu,

964 A.2d 1262 (Del.2008), or conduct so “grossly off-the-mark as to amount to reckless indifference or a gross abuse of discretion.”

In re Lear Corp. Shareholder Litig.,

967 A.2d 640, 652 (Del.Ch.2008). And, as noted earlier, claims seeking to impose liability for a board decision that results in a loss because that decision was ill-advised are reviewed under the business judgment rule, without reference to the

content

of the decision but rather the process employed in reaching it. While the Trustee does allege that the Outside Directors “rubber stamped” the decision to enter into the Carecentric agreement, that conclusory statement is unsupported by any factual content and thus does not meet a plausibility standard.

Thus, the Court concludes that the Trustee’s breach of fiduciary duty claim against the Outside Directors, to the extent it relies on the Carecentric Allegations, must be dismissed.

2. The Financial Decline Allegations

The Trustee alleges that in the first quarter of 2008, GE acquired Merrill Lynch Business Financial Services, Inc., which had entered into a revolving credit facility with Inc., SRI and two other subsidiaries of Inc.

Compl.,

¶ 87. According to the Trustee, those borrowers were out of compliance with borrowing base covenants under the credit facility and were over-advanced at the time of GE’s acquisition. The Trustee further alleges that GE sent Inc. a default letter on May 14, 2008,

Compl.,

¶ 88, and informed Inc. that GE would not be making any further advances. Then, according to the Trustee, Linehan and Sabolik, after receiving this default

*381

letter, sent a memo to the Outside Directors that painted too rosy a picture and told the Outside Directors that “we will be able to utilize the credit facility to meet our working capital needs through the closing of our recapitalization.”

Compl.,

¶ 89. The Trustee alleges that although Inc. entered into a forbearance agreement with GE, the Outside Directors were not informed of this development or that the Operating Subsidiaries would lack the funds necessary to operate the businesses by mid-July.

Nevertheless, the Trustee alleges that the Outside Directors had been informed that Inc. had committed a “major breach” of its credit agreement, and thus the Outside Directors were on notice of Inc.’s and the Operating Subsidiaries’ “dire” financial condition, and that despite this knowledge, “the Outside Directors took no action to remedy Soporex’s financial crisis and they failed to investigate the financial consequences of Soporex’s breach.”

Compl.,

¶ 91. The Trustee alleges that in part due to Linehan’s constant assurances that venture capital money was just around the corner, the Outside Directors never addressed the continuing financial decline of Soporex and the Operating Subsidiaries.

Compl,

¶ 136. The Trustee further alleges that the Outside Directors were aware of the significant billing and collection problems, the write-offs of bad debt due to Careeentric’s poor performance, a decrease in the reimbursement rate for Albu-terol (a respiratory medication), GE’s notice of default letter, and the termination of credit by one of Soporex’s primary pharmaceutical suppliers, and yet the Board held no meetings.

Compl.,

¶¶ 150-151.

However, the Trustee also alleges that when Inc. determined in mid-May of 2008 that it lacked sufficient cash to operate past July, Linehan and Sabolik failed to inform the Outside Directors of Inc.’s dire financial situation.

Compl.,

¶ 147. The Trustee concedes that “the Outside Directors were misled and kept in the dark about the Soporex Debtors’ ever-worsening financial condition,” but she alleges that the Outside Directors were provided with sufficient information from which they could and should have concluded that Linehan’s and Sabolik’s reports on the financial status of the Soporex Debtors were false and misleading,

Compl.,

¶ 152, yet they took no corrective action.

Compl.,

¶ 154. The Trustee alleges that despite clear signs of Soporex’s financial distress presented to the Outside Directors in December, 2007, none of the Outside Directors sought to convene a subsequent meeting of the Board and no meeting was held until late July, 2008.

Compl.,

¶¶ 151, 157.

The Complaint does not specifically identify the theory upon which the Trustee contends that the Financial Decline Allegations constitute a breach of fiduciary duty.

17

The Complaint contains no allegations of self-dealing with respect to the Financial Decline Allegations, and thus to the extent the Trustee contends that the Outside Directors’ conduct breached their duty of loyalty, the Trustee must be relying on a lack of good faith. The Complaint fails to allege subjective bad faith, and thus the Trustee’s theory appears to be

*382

that the Outside Directors’ conduct constitutes an intentional dereliction of duty or conscious disregard of their responsibilities.

Disney,

906 A.2d at 66 . At most, however, the Complaint alleges negligence (arguably, not even gross negligence as defined by Delaware law), which the

Disney

court has held is insufficient to constitute bad faith for purposes of a breach of the duty of loyalty.

To the extent that the Trustee is attempting to assert a director oversight liability claim, the Financial Decline Allegations do not rise to the level required by the decisions in

Caremark

and

Stone .

The Trustee has not alleged a “sustained or systematic failure of the board to exercise oversight.”

Caremark,

698 A.2d at 968 .

While at first blush the Complaint contains allegations that the Board did not meet between December, 2007 and July, 2008, when it was allegedly aware of the “dire” and “critical” financial decline of Inc. and the Operating Subsidiaries, that allegation, upon closer scrutiny of the Trustee’s other factual allegations (or lack thereof), is largely unsupported as to the Outside Directors’ knowledge of the “dire” or “critical” financial decline; and therefore, cannot support a plausible claim that the Outside Directors knowingly and consciously disregarded known duties to act or systematically and sustainably failed to exercise oversight. The Trustee essentially points to four “red flags” that the Trustee alleges were flying and ignored by the Outside Directors, notwithstanding the fact that the Trustee concedes that “the Outside Directors were misled and kept in the dark about the Soporex Debtors’ ever-worsening financial condition.... ”

Compl.,

¶ 152. First, the Trustee points to the “significant problems with the billing and collection of the SRI accounts receivable [and] the multimillion dollar write-offs of pharmacy bad debt due to Careeentric’s negligent performance.... ”

Compl.,

¶ 150. Second, the Trustee points to the “significant decrease in the Albuterol reimbursement rate.... ”

Id.

Third, the Trustee points to GE’s “notice of default letter dated May 14, 2008.... ”

Id.

Fourth, the Trustee points to “the termination of available credit with Soporex’s primary pharmaceuticals supplier, Harvard.”

Id.

As to the first “red flag,” the Trustee alleges that the Outside Directors were informed at the April, 2007 Board meeting of problems with Carecentric’s performance and that Soporex would have to write off bad debt. The Trustee also alleges that at the September, 2007 Board meeting, the Outside Directors were again told that SRI was not collecting its accounts receivable and that SRI had written off $2.1 million in bad debt.

However, the Trustee also alleges that (i) at the April, 2007 Board meeting, the Board approved a contract with CMAEON to write software to bring the billing and collection functions in-house,

Compl.,

¶ 69, and (ii) the Board was provided a status report about the transition of those functions to an in-house system at its December, 2007 Board meeting.

Compl.,

¶ 7 1. According to the Trustee, (i) at some point (the Complaint is not clear as to when) Soporex hired a third party vendor, Med Staff, to re-submit to insurers the claims that Carecentric had failed to property submit,

Compl,

¶ 75, (ii) the Board was aware of this hiring by December, 2007,

Compl.,

¶ 156, (iii) on February 1, 2008, Soporex was using its in-house system for new pharmacy orders,

Compl,

¶ 72, (iv) in February, 2008, Soporex sued Carecentric,

Compl,

¶ 74, (v) by July of 2008, Soporex had also brought the re-billing process, for which it had hired Med. Staff, in-house.

Compl.

¶ 76. These factual allegations undercut the Trustee’s conclusory statements that the Outside Directors did nothing to

*383

address the problems with Carecentric. While the Trustee complains of the lack of Board meetings between December, 2007 and July, 2008, it appears that the Board had already taken corrective actions before December,

2007

— ie., a contract with CMAEON had already been signed to develop software that would allow the billing and collections system to be brought in-house and the writing of the software was underway.

As to the second “red flag,” — the decrease in the Albuterol reimbursement rate — the entirety of the Trustee’s factual allegations respecting this issue is as follows:

One of the significant business challenges that faced Soporex and SRI was the change in Medicare reimbursement for Albuterol, a respiratory medication which represented approximately 35% of SRI’s sales in 2006-07. During the third and fourth quarters of 2007 and the first quarter of 2008, Soporex enjoyed a relatively high Medicare reimbursement rate for Albuterol. In July, 2007 the Centers for Medicare & Medicaid Services increased the Medicare reimbursement rate for Albuterol from $0.21 to $1.31 per vial, or an increase of more than 600%. At the time of this increase in the Albuterol reimbursement rate, Hewlett and Camfield warned Li-nehan and Sabolik that the increase in the reimbursement rate for Albuterol was a temporary increase, and that Al-buterol would eventually return to its historically low reimbursement rate. As Hewlett and Camfield predicted, in the fall of 2007 federal healthcare officials proposed revised reimbursement guidelines for Albuterol and other medications which substantially decreased the Albuterol reimbursement rate. These revised guidelines were approved and implemented through legislation which was enacted on December 29, 2007.

Compl.,

¶¶ 78-81. The Trustee fails to allege how this change impacted Inc. or the Operating Subsidiaries, if at all. She simply alleges a change. The Trustee also fails to allege that the Board (specifically, the Outside Directors) was aware of this change. Moreover, the Trustee does not allege what the Board could have done by having a meeting to change Medicare’s reimbursement rates for Albuterol or mitigate its impact, if any.

The third “red flag,” — GE’s notice of default letter — also requires some discussion. Of significance, there is no allegation that the Outside Directors saw this letter prior to May 22, 2008.

Compl.,

¶ 89. Moreover, the Trustee alleges that the memo sent by Linehan and Sabolik to the Outside Directors on May 22, 2008 “portrayed a much different picture concerning Soporex’s credit default than was evidenced by the May 14th letter.”

Compl.,

¶ 89. The Trustee also alleges that notwithstanding the default letter, Linehan and Sabolik told the Outside Directors that “we expect that we will be able to utilize the credit facility to meet our working capital needs through the closing of our recapitalization.”

Id.

The Outside Directors were

not

told that Soporex would lack funds to operate past mid-July.

Compl.,

¶¶ 90, 147. The Trustee further alleges that throughout 2007 and 2008, Li-nehan aggressively pursued what the Trustee characterizes as a “pie in the sky” business plan, which called for the acquisition of several other companies, to be funded through new capital investments by outside investors, and hired an investing banking firm to assist in that process.

Compl.,

¶ 131. The Trustee also alleges that Linehan viewed additional acquisitions as a means to cure financial and cash flow problems.

Compl.,

¶ 135. In addition, the Trastee alleges that Linehan sought to

*384

recapitalize Inc. and between May, 2008 and July, 2008, Inc. was discussing a $49 million investment package with Capital Resource Partners.

Compl.,

¶ 134. According to the Trustee, the Outside Directors were assured that “venture capital money was just around the corner.”

Compl.,

¶ 136.

These allegations, taken as whole and viewed in the light most favorable to the Trustee, show that notwithstanding the GE default notice, the Outside Directors were aware of other facts that mitigated its effects. The Trustee does not allege that any of this was unreasonable.

Moreover, there are no factual allegations supporting the Trustee’s “pie in the sky” characterization of the efforts to turn around what the Trustee alleges was a deteriorating financial condition. The Trustee does not allege that the Outside Directors were, or should have been, aware that these efforts would prove unsuccessful. While the Trustee’s further allegation that the Outside Directors did not ask for financial reports could be consistent with the Outside Directors’ liability, when taken as a whole and viewed in the light most favorable to the Trustee, the Financial Decline Allegations are just that — merely consistent with liability — and such allegations “stop[] short of the line between possibility and plausibility of entitlement to relief.”

Iqbal,

129 S.Ct. at 1949 .

The fourth “red flag,” — the termination of credit by a principal supplier — does not tip the scales to plausibility. Most importantly, there are simply no factual allegations that the Outside Directors (except for Letson, who will be addressed separately below) were, or should have been, aware of this circumstance.

Compl.

¶¶ 95-103.

For these reasons, these “red flags” do not support a claim that the Outside Directors consciously disregarded their duties by acting inconsistently with those duties with knowledge that they were so acting. Moreover, in the context of the Financial Decline Allegations, the Trustee is, once again, like the plaintiff in

Citigroup,

trying to stretch the oversight liability cases beyond the factual contexts in which they have been decided. The Trustee does not allege a failure to monitor or oversee employee misconduct or legal violations. Rather, the Trustee here alleges a claim similar to that in

Citigroup

— that the Outside Directors failed to generally monitor the operations of the business and so exposed it to losses. That type of claim is most properly analyzed under a duty of care theory. Moreover, the Financial Decline Allegations plead no facts supporting any inference that the Outside Directors

knew

they were acting inconsistently with their fiduciary obligations.

Lyondell,

970 A.2d at 243 .

The Trustee fares no better to the extent she relies upon a breach of the duty of care claim. In light of the Court’s analysis above, the Financial Decline Allegations do not rise to the level of “reckless indifference” or conduct “beyond the bounds of reason,”

McPadden v. Sidhu,

964 A.2d 1262 (Del.2008), or conduct so “grossly off-the-mark as to amount to reckless indifference or a gross abuse of discretion.”

In re Lear Corp. Shareholder Litig.,

967 A.2d 640, 652 (Del.Ch.2008).

Thus, the Court concludes that the Trustee’s breach of fiduciary duty claim against the Outside Directors, to the extent it relies on the Financial Decline Allegations, must be dismissed.

3. The Bankruptcy Decision Allegations

The Trustee alleges that in late July, 2008, Sabolik and Smith contacted a bankruptcy attorney, Mark Chevallier (“Chevallier”) to discuss “bankruptcy op

*385

tions.”

Compl.,

¶ 159. According to the Trustee, although a Board meeting was held on July 28, 2008, a quorum of the Board was not present and no action was taken, although Chevallier was present.

Compl.,

¶ 160. The Trustee alleges that additional Board meetings were held on August 6, 14 and 19, 2008.

Compl.,

¶ 162. The Trustee further alleges that the minutes from the August 6 Board meeting show that the Board discussed having another meeting with Chevallier but that there was no discussion of what type of bankruptcy might be filed.

Compl.,

¶ 162. According to the Trustee, Chevallier attended the August 14 Board meeting and informed the Board of its “bankruptcy options,” but the Trustee alleges that there was no discussion about how Inc. or the Operating Subsidiaries might finance their operations in chapter 11 through the use of cash collateral.

Compl.,

¶ 168. The Trustee alleges that despite the fact that Win-mar was operating profitably (before being burdened with Inc.’s overhead), the Outside Directors made no effort to (i) sell Winmar as a going concern prior to filing bankruptcy, (ii) contact the people who had sold the business to Winmar to see if they would be interested in re-acquiring it, or (iii) preserve its going concern value by continuing its operations during a chapter 11 case.

Compl.,

¶ 164.

The Trustee further alleges that the Outside Directors failed to consult with GE to see if GE would permit the use of cash collateral or would provide financing in a potential chapter 11 case,

Compl,

¶ 165, but “in the very last hours before the Chapter 7 cases were filed,” GE contacted Sabolik and Smith and discussed the possibility of a liquidating chapter 11 case.

Compl.,

¶ 167. The Trustee alleges that although Chevallier told the Outside Directors (other than Letson, who had already resigned from the Board) that they could sell the Operating Subsidiaries as going concerns in chapter 11, the Outside Directors “rejected this approach and chose instead to file Chapter 7 cases ...” and that they “never once considered the alternative of filing Chapter 11 cases to preserve the going concern value.... ”

Compl.,

¶ 166.

According to the Trustee, (i) on August 14, 2008, the Board deferred its consideration of a resolution authorizing a bankruptcy filing until it could meet with Linehan (who had been in a serious car accident) to seek his counsel,

Compl.,

¶ 168, and (ii) the Board requested that Sabolik and Smith meet with Linehan in his hospital room, and thereafter, at their August 19 Board meeting, the Board adopted a resolution authorizing the filing of chapter 7 bankruptcy petitions for the debtors.

Compl.,

¶ 169. According to the Trustee, by failing to consider or act on a chapter 11 option, the Outside Directors “wantonly disregarded their fiduciary duties of due care and loyalty....”

Compl,

¶ 166.

Again, the Trustee does not identify whether she seeks to challenge the decision to file chapter 7 petitions rather than chapter 11 petitions under a theory of a breach of the duty of loyalty or under a theory of breach of the duty of care.

18

As noted earlier, because the Trustee has not alleged either self-dealing in the classic sense nor subjective bad faith, the only theory upon which this decision could constitute a breach of the duty of loyalty is if the Trustee pleads factual content showing plausibly that this conduct involved an intentional dereliction of duty or a conscious

*386

disregard for their responsibilities, and the Trustee must allege that the Outside Directors

knew

that they were acting inconsistently with their fiduciary duties. The Court concludes that the Complaint falls short.

Essentially, the Trustee argues that the Outside Directors improperly rejected chapter 11 filings. The Trustee alleges that the Outside Directors were informed of their “bankruptcy options,” but rejected the idea of selling the Operating Subsidiaries as going concerns while in chapter 11. Notably, however, the Complaint does not allege that there was any ability to finance operations in chapter 11. Nor does the Complaint allege that any higher price could have been obtained for the assets of the Operating Subsidiaries in chapter 11. The Trustee does allege that GE contacted Sabolik “in the very last hours before” the cases were filed to discuss “the possibility of a liquidating Chapter 11 case,” but the Trustee alleges nothing else with respect to the companies’ ability to function as going concerns in chapter 11. The Trustee’s argument that the companies could have sustained operations and could have been sold as going concerns is purely speculative, devoid of factual support.

19

Moreover, the Trustee fails to allege sufficient facts showing that the Outside Directors, who had consulted with bankruptcy counsel and management, had any reason to know that a decision to file under chapter 7 instead of chapter 11 would violate their fiduciary obligations. In these circumstances, the Court cannot conclude that the Trustee has pled a plausible claim for relief on a breach of the duty of loyalty claim.

The Trustee fares no better with respect to a breach of the duty of care claim. The Trustee has not pled facts sufficient, even when viewed in the light most favorable to the Trustee, to state a plausible claim under the “extremely stringent”

In re Lear Corp. Shareholder Litig.,

967 A.2d at 652 , definition of gross negligence in

Delaware

— i.e., that the decision to file under chapter 7 rather than under chapter 11 was beyond “the bounds of reason,”

McPadden v. Sidhu,

964 A.2d at 1262, or “so grossly off-the-mark” as to amount to reckless indifference or a gross abuse of discretion.

Id.

Moreover, as noted by the

Caremark

court, compliance with a director’s duty of care

can never be appropriately judicially determined by reference to

the content of the board decision

that leads to a corporate loss, apart from consideration of the good faith

or

rationality of the process employed. That is, whether a judge or jury considering the matter after the fact, believes a decision substantively wrong, or degrees of wrong extending through “stupid” to “egregious” or “irrational,” provides no ground for director liability, so long as the court determines that the process employed was either rational or employed in a good faith effort to advance corporate interest .... the core element of any corporate law duty of care inquiry [is] whether there was good faith effort to be informed and exercise judgment.

Caremark,

698 A.2d at 967, 969 .

Here, the Trustee’s own allegations show that the Outside Directors conferred,

*387

several times, with bankruptcy counsel, were informed of their “bankruptcy options,” and consulted with Linehan before making any decision. The Trustee has not alleged factual content from which, even presuming its truth, the Court can reasonably infer that the process employed in reaching the decision to file under chapter 7 rather than chapter 11 was either employed in bad faith or was irrational.

Thus, the Court concludes that the Trustee’s breach of fiduciary duty claim against the Outside Directors, to the extent it relies on the Bankruptcy Decision Allegations, must be dismissed.

4. The Corporate Resolution Allegations

The Trustee alleges that the corporate resolution authorizing the chapter 7 filing for Inc. provided:

WHEREAS, as a result of [Soporex’s] financial condition, it is necessary, appropriate and desirable for [Soporex] to seek protection under the United States bankruptcy laws; specifically, Chapter 7 of the U.S. Bankruptcy Code (the “Code”) for the orderly liquidation of the Company. NOW, THEREFORE, BE IT RESOLVED, that [Soporex] is hereby authorized and directed to file a petition under Chapter 7 of the Code and to take any and all actions necessary, appropriate and desirable in connection with such filing and the orderly liquidation of [Soporex], BE IT FURTHER RESOLVED, that the officers of [Sopo-rex], or anyone of them acting alone, are hereby authorized and directed to take any and all other actions, and to negotiate, execute, deliver and file, for and on behalf of [Soporex], any and all certificates, consents and other documents, instruments and agreements as any such officer may deem necessary, appropriate or advisable in order to file such petition or otherwise carry out the purposes of these resolutions. BE IT FURTHER RESOLVED, that all actions heretofore taken by such officers of the Company in furtherance of the actions contemplated in these resolutions be, and they hereby are, ratified, adopted, and approved in all respects.

Compl,

¶ 169. The Trustee further alleges that Sabolik and Smith unilaterally determined what should be done to terminate the business operations of Inc. and the Operating Subsidiaries and used the resolutions to fraudulently transfer to Med 4 Home “Soporex’s most valuable assets, namely, SRI’s patient lists, files and patient records.”

Compl.,

¶ 172. According to the Trustee, SRI’s and Winmar’s businesses were sold to Med 4 Home for $40,000 hours before the bankruptcy filings,

Compl,

¶ 172, in part based on Sabo-lik’s and Smith’s “incorrect belief that they could face personal civil or criminal liability for ‘patient dumping’ if they did not transfer the patient list and patient data to some third party before ceasing SRI’s business operations.”

Compl,

¶ 173. The Trustee alleges that no such sanctions exist,

id.,

but their actions nevertheless were motivated by “selfish concern for their own personal welfare” and were otherwise reckless and in bad faith.

Id.

The Trustee’s primary complaint about the Outside Directors, as opposed to Sabo-lik and Smith, is that they did not request any documents to determine the value of the assets of Soporex and the Operating Subsidiaries and failed to obtain a business valuation before adopting the resolution quoted above.

Compl,

¶ 174. From these facts, the Trustee alleges that the Outside Directors improperly delegated decision-making authority for terminating the business operations and for the orderly liquidation of the assets of the Operating Subsidiaries and failed to take steps to

*388

preserve the going concern value of the Operating Subsidiaries.

Compl.,

¶ 201.

The Trustee argues in her brief that the resolution essentially authorized Sabolik and Smith to proceed with the orderly liquidation of Winmar and SRI, and under section 271(a) of the Delaware General Corporation Law, a board of directors cannot authorize the sale of all or substantially all of the assets of the corporation without approval of the majority of shareholders, and the board cannot delegate to the officers responsibility for liquidating a corporation’s assets. Thus, the Trustee argues that the Outside Directors’ adoption of the resolution quoted above was an

ultra vires

act under Delaware law, which is not protected by the business judgment rule.

The first problem with the Trustee’s argument is that the resolution does not constitute “carte blanche” authority to the officers to liquidate all of the assets of Inc. and the Operating Subsidiaries. Rather, the Court reads the resolution as authorizing a bankruptcy filing for the purpose of conducting an orderly liquidation. The second problem with the Trustee’s argument is that even assuming the resolution is read as broadly as the Trustee suggests, the Complaint fails to allege that the Board did not obtain shareholder approval.

For the same reasons the Court has concluded that the Trustee has not pled a plausible claim for either a breach of the duty of loyalty or a beach of the duty of care with respect to the Bankruptcy Decision Allegations,

see supra

at pp. 43-45, the Court also concludes that the Trustee has not plead a plausible claim for relief against the Outside Directors for breach of either fiduciary duty with respect to the Corporate Resolution Allegations.

20

The Court does not read the resolution as broadly as the Trustee does. The

sole

factual allegation against the Outside Directors is that they did not request documents to determine the value of the assets or obtain a business valuation. This sole fact, without more, is insufficient to state a plausible claim for relief as it does not show that the Outside Directors were either intentionally derelict in their duties or were consciously aware that their adoption of the resolution authorizing the bankruptcy filings was giving the officers

carte blanche

authority with respect to the liquidation of the companies’ assets. The Trustee does not allege that the Outside Directors were otherwise unaware of the value of the assets, or were aware that the assets were worth more than could be obtained for them in chapter 7, or any non-speculative facts showing that other alternatives were available and consciously disregarded. Nor does the Trustee allege facts showing that the adoption of this corporate resolution was “so grossly off the mark as to amount to reckless indifference or a gross abuse of discretion.”

In re Lear Corp. Shareholder Litig.,

967 A.2d 640 , 652 n. 45 (Del.Ch.2008)

(quoting Solash v. Telex Corp.,

1988 WL 3587 (Del.Ch. Jan. 19, 1988)).

Thus, the Court concludes that the Trustee’s breach of fiduciary duty claim against the Outside Directors, to the extent it relies on the Corporate Resolution Allegations, must be dismissed.

For all of these reasons, the Court concludes that Count 4 of the Complaint must be dismissed against the Outside Directors.

E. Letson’s Motion

Letson has joined in the other Outside Directors’ Motion with respect to Count 4,

*389

and therefore asserts all of the same bases for dismissal.

Br. In Supp. Of Def. Mickey Letson’s Mot. To Dismiss Trustee’s Second Amended Compl.,

¶ 9. Letson also asserts an additional ground for dismissal of Count

4

— i.e., the Trustee alleges that Letson resigned from the Board on July 16, 2008,

Compl.,

¶¶ 17, 181, and thus Letson cannot be liable for alleged improper acts or omissions by the Board after that date. The Trustee concedes that Let-son is not liable for aets/omissions by the Board after July 16, 2008.

Pltfs Br. In Supp. Of Her Resp. In Opp. To Def. Mickey Letson’s Mot. To Dismiss Second Amended Compl.,

p. 9. As applied to the Carecentric Allegations, the Financial Decline Allegations, the Bankruptcy Decision Allegations, and the Corporate Resolution Allegations, this concession alone results in the dismissal of Count 4 as to Letson to the extent Count 4 relies upon the Bankruptcy Decision Allegations and the Corporate Resolution Allegations.

With respect to the Carecentric Allegations, the Court concludes that Let-son’s Motion should be granted, for all of the reasons set forth above in the Court’s discussion of these allegations as they apply to the other Outside Directors.

See supra

at 32-34. With respect to the Financial Decline Allegations, the Court concludes the same — but further discussion is required.

Since the Trustee has not pled, with respect to the Financial Decline Allegations, Letson’s subjective bad faith, the Trustee must premise her duty of loyalty claim on what the

Disney

court referred to as the intermediate category of conduct— intentional dereliction of duty or a conscious disregard for one’s responsibilities.

Disney,

906 A.2d at 66 . In its

Stone

decision, the Delaware Supreme Court held that the imposition of liability “requires a showing that the directors knew that they were not discharging their fiduciary obligations.”

Stone,

911 A.2d at 370 ;

In re Massey Energy Co.,

C.A. No. 5430-VCS, 2011 WL 2176479 (Del.Ch. May 31, 2011);

In re Citigroup Shareholder Deriv. Litig.,

964 A.2d 106, 125 (Del.Ch.2009) (emphasis in original). In such cases, “an extreme set of facts is required to sustain a disloyalty claim premised on the notion that disinterested directors were intentionally disregarding their duties.”

Lyondell,

970 A.2s at 243. The Court concludes that the one “red flag” specifically applicable to

Letson

— i.e., that one of the Soporex Debtors’ suppliers had refused to extend further credit — is insufficient, even when viewed in the light most favorable to the Trustee, to state a claim under the stringent standard that must be met in order to state a breach of the duty of loyalty claim. This is so for the following reasons.

The Trustee alleges that Letson was aware as of May 16, 2008 that Inc. was in default of its obligations to The Harvard Drug Group (“Harvard”), and that Letson was involved in the negotiation of an agreement made on May 22, 2008 to repay Harvard in accordance with a payment schedule.

Compl.,

¶ 95.

21

The Trustee further alleges that on June 6, 2008, Let-son was involved in negotiations for an exclusive purchase agreement with Harvard. Lastly, the Trustee alleges that Letson was copied on a July 8, 2008 email sent by Harvard to Inc.’s Chief Financial Officer, Joe Gaudio (“Gaudio”), notifying Gaudio that Harvard was not going to ship any product to SRI until the invoices that were more than 30 days past due were paid in full, and that under the exclusive

*390

purchase agreement with Harvard, SRI could not purchase medications from any other supplier.

Compl.,

¶ 97. These allegations, taken as true and viewed in the light most favorable to the Trustee, allege that Letson was (i) aware of Inc.’s difficulties with its principal pharmaceutical supplier, Harvard, and (ii) involved in efforts to make payments to Harvard and restructure the debt due to Harvard. These facts are insufficient to state a claim for an intentional dereliction of duty by Letson or that Letson acted in conscious disregard of his responsibilities to Inc. In other words, this singular red flag — that Inc. was behind on payments to its principal supplier and Letson knew it and was involved in efforts to restructure the debt owed to that supplier, is insufficient for the Court to draw a plausible inference that Letson knew he had to take unidentified steps to address Inc.’s financial decline and intentionally disregarded that duty.

Moreover, to the extent the Trustee is attempting to assert a director oversight liability claim, the Trustee once again attempts to stretch a

Caremark

claim beyond its boundaries. As discussed above, the classic

Caremark

claim involves a claim that the directors are liable for damages that arise from a failure to properly monitor or oversee employee misconduct or legal violations. Here, the alleged facts more closely resemble those before the court in

In re Citigroup Shareholder Deriv. Litig.,

964 A.2d 106, 122-23 (Del.Ch.2009), where the plaintiffs alleged that the

Citigroup

directors ignored “red flags” respecting the impending financial crisis in the housing market and thus failed in their duty of oversight to prevent Citigroup’s involvement in the subprime mortgage market, leading to inappropriate business risk. This type of claim, as the

Citigroup

court noted, is most appropriately reviewed under a duty of care/business judgment rule standard.

As discussed previously, the appropriate standard under Delaware law to establish a breach of the duty of care is one of gross negligence, which has been defined as “reckless indifference” or conduct beyond the “bounds of reason.”

McPadden v. Sidhu,

964 A.2d 1262 (Del.2008). As one court has noted, the definition of gross negligence in Delaware corporate law is “extremely stringent.”

In re Lear Corp. Shareholder Litig.,

967 A.2d 640, 652 (Del.Ch.2008). The challenged decision must be “so grossly off-the-mark as to amount to reckless indifference or a gross abuse of discretion.”

Id. (quoting Solash v. Telex Corp.,

1988 WL 3587 at *9 (Del.Ch. Jan. 19, 1988)). In short, the Financial Decline Allegations against Let-son do not rise to these levels.

Thus, the Court concludes that the Trustee’s breach of fiduciary duty claim against Letson in Count 4, to the extent it relies on the Financial Decline Allegations, must be dismissed. However, Letson is also sued in Count 5 of the Complaint. Count 5, solely against Letson, alleges a breach of the fiduciary duty of loyalty premised upon Letson’s “dual roles” with Inc. and Harvard.

Compl.,

¶ 206. Letson has moved to dismiss Count 5 in the Letson Motion.

The Trustee has numerous factual allegations in support of her Count 5 claims. The Trustee alleges that at the time SRI commenced its operations in 2006, Letco Medical (“Letco”), which had been founded by Letson and his father in 1983, was SRI’s principal supplier of medications.

Compl,

¶ 92. The Trustee further alleges that Letson was appointed to the Board due to this relationship.

Compl,

¶ 181. According to the Trustee, (i) Letco was acquired by Harvard in 2007,

Compl.,

¶ 93, and (ii) Letson continued as president of Letco (as a division of Harvard) until he

*391

resigned in 2009.

Id.

The Trustee next alleges that (i) due to cash flow problems at Inc. and SRI, the debt owed to Letco (as a division of Harvard) exceeded $1.9 million by May of 2008,

Compl,

¶ 94, (ii) on May 16, 2008, Harvard advised Inc.’s management that it would no longer extend credit to Inc. for the purchase of medications due to the past due balance,

Compl,

¶ 95, and (iii) thereafter, discussions took place between Harvard and Inc. that resulted in a letter agreement dated May 22, 2008 (the “Harvard Letter Agreement”) under which Inc. agreed to pay the outstanding debt under a payment schedule that included a “balloon payment” in the amount of $1,318,152.90 that was to be made on July 28, 2008, or when Soporex closed on its recapitalization.

Id.

The Trustee further alleges that on June 6, 2008, at Harvard’s insistence, Inc. entered into an Exclusive Purchase Agreement with Harvard (the “Harvard EPA”) pursuant to which Inc. agreed to buy seven medications, which represented over 95% of the medications sold by SRI, exclusively from Harvard.

Compl,

¶ 96. The medications and their prices, which the Trustee alleges were determined by Let-son, were set forth in Exhibit A to the Harvard EPA (the “Exhibit A Medications”).

Id.; Compl

¶ 182. According to the Trustee, except for the medication Brovana, the prices for these medications under the Harvard EPA were all higher than the prices set by other suppliers.

Id.

The Trustee alleges that (i) as a result, SRI paid approximately $119,000 more for these medications than it would have paid if it had purchased them from other suppliers,

id.,

(ii) “upon information and belief, when Letson set the prices for the Exhibit A Medications, he knew that the prices he selected were in excess of the amounts Soporex was paying for these same medications (except Brovana) from other suppliers,”

id.,

and (iii) “as an officer of Harvard, Letson personally benefited [sic] from this unfair pricing and the excessive cost of Soporex.”

Compl,

¶ 182.

The Trustee next alleges that the Harvard EPA required Inc. to pay Harvard within 30 days from the invoice date.

Compl,

¶ 97. According to the Trustee, on July 8, 2008, Harvard told Gaudio (Inc.’s CFO) that Inc. was in default under the Harvard EPA and that Harvard was not going to ship any product to SRI until the invoices that were more than 30 days past due were paid in full.

Id.

The Trustee alleges that Gaudio was also reminded that the Harvard EPA prohibited Inc. from purchasing the Exhibit A Medications from any other supplier, and that Letson was copied on the e-mails sent to Gaudio.

Id.

Premised on these emails, the Trustee alleges that “upon information and belief,” Letson was directly involved in the negotiations of the Harvard Letter Agreement and the Harvard EPA.

Compl

¶ 100.

The Trustee further alleges that as a result of the Harvard EPA, Inc. made a payment to Harvard in the amount of $404,052.12, which was in addition to the weekly $75,000 “preferential” payments that Inc. was required to make to Harvard, which, as of July 11, 2008, totaled $525,000.

Compl.,

¶ 98. The Trustee also alleges that by virtue of its leverage under the Harvard EPA, Harvard forced Inc. to make “preferential” payments to Harvard of $1,229,052.12 within the 90 days before its bankruptcy filing. Of this sum, the Trustee alleges that $929,052.12 was paid from May 30, 2008 to July 8, 2008, while Letson was a director of Inc. and was actively involved in Harvard’s efforts to collect the debt SRI owed to it.

Compl,

¶ 99.

The Trustee also alleges that Harvard’s CEO directed Letson to resign from the Board due to a conflict of interest between

*392

Letson’s positions as an officer of Harvard and as a director of Inc.

Compl.,

¶ 101,181. According to the Trustee, (i) Letson resigned from the Board on July 16, 2008,

Compl,

¶ 181, (ii) on July 24, 2008, Inc. and Harvard entered into a First Amendment to the Harvard EPA whereby Inc. was required to pay in advance by wire transfer for each purchase from Harvard,

Compl,

¶ 102, and (iii) on August 19, 2008, Harvard demanded immediate payment of all outstanding invoices which, according to Harvard, totaled $2,503,485.16.

Compl,

¶ 103.

With respect to his Count 5 claim for breach of fiduciary duty against Letson, the Trustee alleges that from March 31, 2006 to July 16, 2008, Letson was one of the Outside Directors of Inc., and was also an officer of Harvard.

Compl,

¶ 204. In addition, the Trustee alleges that for a portion of this time period, Letson was in charge of Harvard’s account relationship with Inc.

Id.

The Trustee also alleges that Letson’s dual roles with Inc. and Harvard enabled him to obtain confidential and proprietary business information, such as information relating to the prices SRI paid to suppliers for the medications it bought, and “upon information and belief, Letson provided to Harvard this confidential and proprietary business information which Harvard then used to its advantage and to the business detriment of Soporex and SRI.”

Compl.,

¶ 206. The Trustee further alleges that Letson used his position with Inc. to “further his own financial and professional interests as an employee and officer of Harvard.”

Id.

Specifically, the Trustee alleges that Letson participated in the negotiations and drafting of (i) the Harvard Letter Agreement, which resulted in Inc. making preferential payments to Harvard in the sum of $825,000, and (ii) the Harvard EPA, which caused Inc. to overpay for medications by $119,000 and which was used by Harvard as leverage to extract additional preferential payments from Inc.

Compl,

¶ 206. The Trustee alleges that by engaging in these activities on behalf of Harvard, Letson abused the position of trust and confidence that he was given as a director of Inc. and thereby breached his duty of loyalty; and as a result, Inc. suffered damages in excess of $1,000,000 and Inc.’s assets were impaired.

Compl,

¶ 207.

In this context, the duty of loyalty requires that a fiduciary act with undivided and unselfish loyalty to the corporation and that there is no conflict between that duty and self-interest.

Weinberger v. UOP, Inc.,

457 A.2d 701 (Del.1983). The classic examples that implicate the duty of loyalty are instances in which a director appears on both sides of a transaction or receives a personal benefit not received by the shareholders generally.

In re Walt Disney Co. Deriv. Litig.,

907 A.2d 693 (Del.Ch.2005);

Cede & Co. v. Technicolor, Inc.,

634 A.2d 345 (Del.1993),

modified on other grounds,

636 A.2d 956 (Del.1994). Thus, a plaintiff may plead a violation of the duty of loyalty by pleading that the defendant “either (1) ‘stood on both sides of the transaction and dictated its terms in a self-dealing way,’ or (2) ‘received in the transaction a personal benefit that was not enjoyed by the shareholders generally.’”

Midland Grange No. 27 Patrons of Husbandry v. Walls,

2008 WL 616239 (Del.Ch. Feb. 28, 2008) (quoting

In re Coca-Cola Enters. Inc. Shareholders Litig.,

N0.1927-CC, 2007 WL 3122370 at *4 (Del.Ch. Oct. 17, 2007)).

22

*393

However, conclusory allegations of an unfair benefit from a transaction are insufficient to state a claim that directors acted in bad faith, thereby breaching their duty of loyalty.

Pfeffer v. Redstone,

965 A.2d 676 (Del.2009). In addition, the alleged personal benefit must “be so significant that it is improbable that a director could perform her fiduciary duties ... without being influenced by her overriding personal interest.”

Id.

at 690

(quoting Hokanson v. Petty,

No. 3438-VCS, 2008 WL 5169633 at *7 (Del.Ch. Dec. 10, 2008)). In other words, to be disqualifying, the nature of the director interest must be substantial, not merely incidental.

McGowan v. Ferro,

859 A.2d 1012, 1029 (Del.Ch.2004).

Applying these legal principals here, the Court concludes that the Complaint fails to state a claim, as the Trustee has not alleged facts showing that Letson was on both sides of the challenged transactions or received any personal benefit from those transactions not conferred on shareholders generally.

23

First, Letson is not alleged to have done anything on behalf of Inc. with respect to the Harvard Letter Agreement or the Harvard EPA, other than having been copied on emails. To the contrary, the Trustee alleges that the Board never met during the time these agreements were entered into.

See, e.g., In re John

Q.

Hammons Hotels Inc. Shareholder Litig.,

No. 758-CC, 2011 WL 227634 (Del.Ch. Jan. 14, 2011) (controlling shareholder was not on both sides of a merger where he did not participate in approval of the merger as a director);

In re Tri-Star Pictures Inc. Litig.,

No. Civ. A. 9477, 1995 WL 106520 (Del.Ch. Mar. 9, 1995);

compare Kaye v. Lone Star Fund V (U.S.), L.P.,

453 B.R. 645 (N.D.Tex.2011) (complaint stated claim where complaint alleged that defendant was director, President and CEO of one company, and acted to approve a spin-off, and that same defendant was also a director, President and CEO of the other company during the spin-off). There are simply no factual allegations that Letson acted on behalf of Inc. with respect to approval of either the Harvard Letter Agreement or the Harvard EPA.

Second, Letson isn’t alleged to have received a benefit not received by shareholders generally. The Trustee simply alleges that Letson benefitted from pricing favorable to Harvard “as an officer of Harvard.”

Compl.,

¶ 182. There are

no

other facts alleged in the Complaint with respect to any personal benefit to Letson from Inc.’s entry into the Harvard Letter Agreement or the Harvard EPA, and no facts showing how Letson’s status as an officer or employee of Harvard conferred any benefit upon him from these transactions.

*394

In her response to Letson’s Motion, the Trustee contends that “the amounts Sopo-rex paid to Harvard Drug obviously benefited [sic] Letson because, as the person in charge of the Soporex vendor relationship, he had responsibility for ensuring that So-porex paid its account obligations to Harvard Drug.”

Pltfs Br. In Supp. Of Her Resp. In Opp. To Def. Mickey Letson’s Mot. To Dismiss the Second Amended Compl.,

p. 7. However, the Trustee has failed to cite any cases, in Delaware or elsewhere, concluding that this type of benefit — presumably, a compliment by his employer for a job well done — is sufficient, and the Court’s research has revealed none.

From this Court’s perspective, the Trustee’s alleged personal benefit to Letson is not “so significant that it is improbable that a director could perform [his] fiduciary duties without being influenced by [his] overriding personal interest.”

Pfeffer v. Redstone,

965 A.2d at 690. The Trustee has not alleged any personal

financial

benefit to Letson at all. She has not alleged that his compensation, or position at Harvard, was in any way improved due to Harvard’s success in collecting the amounts owed to it. Although the Trustee appears to complain that Harvard used its agreements as leverage to extract what the Trustee characterizes (without factual support) as preferential payments, the Trustee does not allege that Letson had any hand in that particular conduct. Nor does the Trustee allege that Letson was involved on Harvard’s behalf in the decision to (i) refuse to extend Inc. further credit, (ii) enter into a short payment schedule, or (iii) enter into or enforce the Harvard EPA.

Further, although the Trustee alleges (upon information and belief) that Letson provided confidential pricing information obtained in his capacity as an Inc. director to Harvard, who then used it to set prices under the Harvard EPA, the Trustee does not allege that Letson had any hand in Inc.’s decision to enter into the Harvard EPA, which Inc. must have known set prices higher than Inc. normally paid for its medications.

24

In short, even taken as true, this allegation does not establish that Letson acted on both sides with regard to the Harvard EPA or obtained any benefit therefrom. Nor does the Trustee allege that Letson acted with the actual intent to harm Inc., which could support a breach of the duty of loyalty premised upon subjective bad faith. Similarly, the Trustee has not alleged that Letson intentionally acted with a purpose other than that of advancing the best interests of Inc.

Disney,

906 A.2d at 66 .

For these reasons, the Court concludes that Count 5 fails to state a claim for breach of fiduciary duty against Letson and must be dismissed.

F. The Officer Defendants’ Motion

As noted earlier, Count 1 of the Complaint, asserted against only Linehan, al

*395

leges breaches of the fiduciary duties of loyalty and due care. Count 2 alleges those same claims against Sabolik. Count 3, against Smith and Sabolik, alleges a claim for corporate waste. The Court will address the Count 3 claim first, followed by the Count 1 claim and the Count 2 claim.

1. The Trustee’s Claim for Corporate Waste Against Smith and Sabolik

The Trustee complains of, essentially, four acts by Sabolik and Smith that allegedly constitute corporate waste: (i) the fraudulent transfer of the “SRI Business;” (ii) the fraudulent transfer of the “Winmar Oxygen Business;” (iii) the abrupt termination of the Winmar sleep-study business operations; and (iv) the abrupt termination of the SRI billing and collection functions when there were, according to Sabolik, in excess of $6.3 million in outstanding accounts receivable.

Compl.,

¶ 193. The factual allegations respecting the transfer of the “SRI Business” and the termination of SRI’s billing and collections functions are generally set forth in ¶¶ 73-76, 172-180 of the Complaint. The factual allegations respecting the transfer of the “Winmar Oxygen Business” and the termination of the Winmar sleep-study business operations are generally set forth in ¶¶ 172-180 of the Complaint.

a. Choice of Law

The Court first notes that the parties disagree, to some extent, about which state’s law governs the Trustee’s claim for corporate waste. Neither party has briefed the choice-of-law issue in any detail. The four acts complained of, however, involve SRI and Winmar. Citing nothing, the Officers assert that corporate waste claims are determined by reference to the law of the state of incorporation, which, in the case of SRI and Winmar, are Missouri and North Dakota, respectively. However, the Trustee’s original complaint contended that the acts complained of constituted waste under Delaware law, and thus the Officers argued that since the Trustee cited to Delaware law, she must not be asserting her claims on behalf of SRI and Winmar and thus the Officers briefed the corporate waste claim under Delaware law.

When the Trustee amended her complaint as of right following the filing of the Motions, she deleted the reference to Delaware law and instead asserted that the conduct constitutes waste under “applicable state law.”

Compl,

¶ 195. In their brief in support of their Motion, the Officers do not address the choice of law issue at all. Therefore, the Officers, while contending that the waste claim should be assessed under Missouri and North Dakota law, have not filed any briefing respecting the allegations that would suffice to state a claim under those states’ law. Rather, the Officers look only to Delaware law in their brief.

25

The Trustee, while conceding that the waste claim is governed by Missouri law (in the case of SRI) and North Dakota law (in the case of Winmar), asserts (citing to nothing) that “Delaware law is also implicated and must be considered because [those entities are] a wholly-owned subsid

*396

iary of Soporex, a Delaware corpora-tion_” Plt

f's Br. In Supp. Of Her Resp. In Opp. To Defs’ Mot. To Dismiss the Second Amended Compl.,

p.

22.

26

The Trustee therefore also briefed the corporate waste claim under Delaware law only.

Thus, in sum, both sides appear to agree that the relevant law is, at least in part, the law of North Dakota and Missouri, although neither have briefed the waste claim under the legal standards applicable in those states. Moreover, the Trustee appears to argue, at least in part, for the application of Delaware law to her waste claims, although citing nothing to support her argument. Sadly, the Court is forced to analyze the choice of law issues without any real input from the parties and then, to the extent the Court agrees that North Dakota and Missouri law control, determine what the law of North Dakota and Missouri is without any assistance from the parties.

In deciding which state’s substantive law governs the issues before the Court, the Court must first determine which choice-of-law rules should be applied. Schm

ermerhorn v. CenturyTel, Inc. (In re Skyport Global Commc’n, Inc.),

No 10-3150, 2011 WL 111427 (Bankr.S.D.Tex. Jan. 13, 2011). It is well-settled that a federal court sitting in diversity must apply the choice of law rules of the forum state in which it sits.

Klaxon Co. v. Stentor Elec. Mfg. Co.,

313 U.S. 487 , 61 S.Ct. 1020 , 85 L.Ed. 1477 (1941). However, neither the United States Supreme Court nor the Fifth Circuit has ruled upon whether a bankruptcy court, which sits not in diversity but by virtue of 28 U.S.C. §§ 1334 and 157, is required to apply federal choice of law rules or is instead to apply the choice

of law rules of the forum state with respect to state law claims.

Skyport,

2011 WL 111427 at *14. In

Tow v. Rafizadeh (In re Cyrus II P’ship),

413 B.R. 609 (Bankr.S.D.Tex.2008), the bankruptcy judge applied federal choice of law rules to a cause of action under 11 U.S.C. § 544 , because it was a federal cause of action rooted in federal bankruptcy law and policy. However, the

Skyport

court distinguished

Tow

because the

Skyport

court was asked to assess whether certain claims were direct claims or were instead derivative claims, which would be barred under a confirmed chapter 11 plan. The

Skyport

court held that “issues regarding the internal affairs of corporations do not implicate the same federal bankruptcy policies addressed in

Tow.

Accordingly, this Court applies forum state choice of law rules to determine which law governs....”

Skyport,

2011 WL 111427 at *15.

This Court finds the

Skyport

court’s analysis persuasive, and thus will similarly apply Texas choice of law rules to determine which states’ laws govern the Trustee’s claim for corporate waste. As noted in

Skyport ,

under Texas choice of law rules, the internal affairs of a foreign corporation are governed by the law of the state of incorporation. Tx. Bus. Org. Code § 1.102 (Vernon’s 2011). Therefore, the Court concludes that the Trustee’s claim of corporate waste with respect to Winmar’s assets is governed by North Dakota law, while her claim of corporate waste with respect to SRI’s assets is governed by Missouri law. The Court will therefore assess the sufficiency of the Trustee’s allegations under the laws of those states.

*397

(1) North Dakota Law

The Court’s own research has failed to reveal a single case in North Dakota that discusses the elements of a claim for corporate waste. The Court notes, however, that North Dakota courts appear to look for guidance in corporate matters to one of the leading treatises on corporate law, William Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations (hereafter,

Fletcher’s Cyclopedia). See, e.g., Aurora Medical Park, LLC v. The Kidney and Hypertension Center, PLC,

784 N.W.2d 151 (N.D.2010) (citing treatise for the proposition that a president may have presumptive authority to institute and defend suits in the corporate name);

Thompson v. Schmitz,

774 N.W.2d 268 (N.D.2009) (citing treatise for the proposition that a shareholder’s loan to a corporation may, in certain circumstances, be deemed a contribution of capital);

Erickson v. Brown,

747 N.W.2d 34 (N.D.2008) (citing treatise for the proposition that a corporation may retain authorized, but unissued, shares). Section 1102 of that treatise provides:

directors and other corporate officers are liable for misappropriation, diversion or conversion of corporate assets ... the essence of a claim of waste is the diversion of corporate assets for improper or unnecessary purposes. Corporate waste has been defined as an exchange of corporate assets so disproportionately small as to lie beyond the range at which any reasonable person might be willing to trade. Thus, a board’s decisions do not constitute corporate waste unless they are exceptionally one-sided ... it has been stated that to recover on a claim of corporate waste, a plaintiff bears -the burden of proving the exchange was so one sided that no business person of ordinary, sound judgment could conclude the corporation has received adequate consideration. Thus, a claim of corporate waste will arise only in a rare, unconscionable case where directors irrationally squander or give away corporate assets.

Fletcher’s Cyclopedia,

§ 1102.

27

(2) Missouri Law

Similarly, there is a dearth of case law in Missouri respecting corporate waste claims. Nevertheless, it is clear that directors of a corporation have no right to convert corporate assets to their own use, or give them away, or to make any self-serving disposition of them against the interests of the corporation.

Zakibe v. Ahrens & McCarron, Inc.,

28 S.W.3d 373 (Mo.App.2000);

Emergency Patient Services, Inc. v. Crisp,

602 S.W.2d 26 (Mo.App.1980). Missouri courts have similarly looked to

Fletcher’s Cyclopedia

for guidance in corporate matters.

See, e.g., 66, Inc. v. Crestwood Commons Redevelopment Corp.,

998 S.W.2d 32 (Mo.1999) (citing treatise for the proposition that the phrase ‘inadequate capitalization’ means assets that are very small in comparison to known risks associated with the planned corporate enterprise);

K.C. Roofing Center v. On Top Roofing, Inc.,

807 S.W.2d 545 (Mo.App.1991) (citing treatise for the

*398

proposition that the corporate veil may be pierced to prevent injustice or inequitable consequences).

The concept of corporate waste as outlined in

Fletcher’s Cyclopedia

is substantially similar to the concept of waste under Delaware law. Delaware courts have described the standard for corporate waste as “onerous, stringent, extremely high, and very rarely satisfied,”

Kates v. Beard Research, Inc.,

No. Civ. A. 1480-VCP, 2010 WL 1644176 at *5 (Del.Ch. Apr. 23, 2010), and to recover, the plaintiff has the burden to prove that a transaction was so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration, and such a claim will be sustained only in the rare, unconscionable case where directors irrationally squander or give away corporate assets.

Id.

Because the parties have

both

cited to Delaware law, there is a dearth of case law in both North Dakota and Missouri, and Delaware law appears to be substantially similar, at least with respect to corporate waste claims, to the standard set forth in

Fletcher’s Cyclopedia,

the Court will apply the standard for waste as set forth in

Fletcher’s Cyclopedia

and under Delaware law.

b. Corporate Waste Claim Against Smith

The Trustee alleges that Smith was an officer of SRI from April 25, 2007 through the petition date.

Compl,

¶ 36. Smith is not alleged to have been an officer or director of Winmar. Absent that allegation, the Trustee’s claims against Smith for corporate waste relating to the assets of Winmar fail to state a claim under

any

state’s law. Although the Trustee alleges that Smith was an officer of Inc.,

Compl,

¶ 23, and that the Board (of Inc.) made decisions on behalf of Winmar’s nonfunctioning board,

Compl,

¶ 113, the Trustee does not allege that Smith was on the Board. Accordingly, the Trustee’s corporate waste claim against Smith with respect to Winmar’s assets fails and must be dismissed.

As to Smith’s involvement in the acts allegedly constituting waste with respect to SRI’s assets, there are relatively few factual allegations that support this claim. There are some factual allegations respecting Smith’s involvement in the decision to enter into the Carecentric contract,

see, e.g., Compl.,

¶¶ 52, 59, 61, 64, 65, 69, 140, but that conduct is not alleged to constitute an act of waste. Similarly, there are some factual allegations respecting Smith’s involvement in discussions with GE,

see, e.g., Compl.,

¶¶ 85, 88, and 90, but that conduct is not alleged to constitute an act of waste. As noted earlier, the conduct that allegedly constitutes waste with respect to SRI’s assets is (i) the fraudulent transfer of the “SRI Business;” and (ii) the abrupt termination of the SRI billing and collection functions when there were in excess of $6.3 million in outstanding accounts receivable.

Compl.,

¶ 193.

As to the termination of SRI’s billing and collection functions when there were millions of dollars in outstanding accounts receivable, the Trustee alleges that (i) in February, 2008, when Carecentric learned that Soporex had brought SRI’s billing and collection functions in-house, Carecentric wrongfully cut off Inc.’s access “to its own pharmacy data and its own billing and collection data,”

28

Compl,

¶ 73; (ii) Inc.

*399

thereafter sued Carecentric,

Compl.,

¶ 74; (iii) Smith (and others) “failed to take any steps to make or obtain copies of SRI’s pharmacy data nor SRI’s billing and collection data,”

Compl,

¶ 75; (iv) Inc. then hired Med Staff to re-submit claims to insurers that Carecentric had improperly submitted (resulting in their rejection),

Compl,

¶ 76; and (v) “when Soporex could no longer afford to pay Med Staff,” the re-billing process was also brought in-house “but was abruptly terminated on August 20, 2008, when all Soporex employees were terminated.”

Compl,

¶ 76. According to the Trustee, (i) at that point, the “billing and collection effort was abandoned and millions of dollars of unbilled or improperly billed claims were lost forever,”

Compl,

¶ 76; and (ii) the cessation of operations preceded the chapter 7 bankruptcy filings by two days,

Comp.,

¶ 172. The Trustee also alleges that the decision to file for relief under chapter 7 rather than under chapter 11 to preserve the going concern value of the Operating Subsidiaries was hastily, unadvisedly and improperly made,

Compl.,

¶¶ 162, 166, although the chapter 7 filing is not alleged to have resulted in an inability to collect any accounts receivable. In fact, there are no facts alleging that a chapter 7 trustee could not, despite the chapter 7 filings, collect accounts receivable. And, to the extent that such an inference can arise from the facts that are alleged, these factual allegations suggest that the inability to collect accounts receivable was caused by

Carecentric,

not by Smith.

The Court concludes that these allegations, even when viewed in the light most favorable to the Trustee, fail to state a claim for corporate waste against Smith. At most, the Trustee alleges that Smith was negligent in failing to make a copy of SRI’s billing and collections data in order to assist in the future collection of accounts receivable. The Trustee alleges that Ca-recentric had cut off Inc.’s (or SRI’s, it is not clear which) ability to access its data, and that Inc. had to hire a third party to resubmit claims that had previously been rejected, but that Inc. terminated its efforts when it could “no longer afford to pay” for that service, and had determined to file for relief under chapter 7. Even taken as true, these factual allegations do not plausibly suggest that Smith “irrationally squandered] or [gave] away corporate assets.”

Fletcher’s Cyclopedia,

§ 1102;

Kates,

2010 WL 1644176 at *5. Thus, this claim against Smith must be dismissed.

As for Smith’s hand in the alleged “fraudulent transfer of the ‘SRI Business,’” the Complaint alleges that the Board, Sabolik and Smith were presented with their “bankruptcy options” by Cheval-lier at a Board meeting, and were told that they could sell the Operating Subsidiaries’ businesses as going concerns during a chapter 11 proceeding, but that they “rejected this approach and chose instead to file Chapter 7 cases.... ”

Compl,

¶ 166. The Trustee also alleges that Smith (and others) failed to consult with GE about the possibility of financing or the use of cash collateral in chapter 11,

Compl,

¶ 165, and failed to contact any potential purchasers for SRI’s mail-order pharmacy business.

Compl.,

¶ 175.

29

According to the Trustee, (i) sometime between August 14-19, 2008, Smith met with Linehan to obtain his consent to a bankruptcy filing,

Compl.,

¶ 168; (ii) Sabolik and Smith thereafter “unilaterally determined what should be done to terminate the business operations of Inc. and the Operating Subsidiaries,”

Compl,

¶ 171; and (iii) Smith and Sabolik “used the bankruptcy resolutions as justification

*400

to fraudulently transfer to Med 4 Home Inc.’s most valuable asset, namely, SRI’s patient lists, files and patient records.”

Compl.,

¶ 172. The Trustee further alleges that (i) the purchase price for SRI’s “respiratory medications business” and “Winmar’s Oxygen Business” was $40,000,

id.;

and (ii) Sabolik and Smith arranged the sale of SRI’s patient list and patient files to Med 4 Home “based upon the incorrect belief that they could face personal civil or criminal liability for ‘patient dumping’ if they did not transfer the patient list and patient data to some third-party before ceasing SRI’s business operations. In fact, there are no criminal or civil sanctions for ‘patient dumping’ for failing to fill patient orders. Nevertheless, Sabolik and Smith believed there were, and this selfish concern for their own personal welfare caused them to act recklessly and in bad faith in disposing of the business assets of SRI and Winmar.”

Compl.,

¶ 173. Then, according to the Trustee, Smith directed Camfield to allow Med 4 Home to take the patient files, despite Camfield telling him that SRI should retain copies of the files.

Compl.,

¶ 179. The Trustee alleges that since “no consideration was received by Soporex for the transfer of SRI’s business

30

which Soporex had purchased for $7,000,000, no business person of ordinary, sound judgment could conclude that Soporex or SRI received adequate consideration.”

Compl.,

¶ 196. The Trustee therefore alleges that Smith “irrationally squandered the going concern value” of SRI’s assets.

Compl.,

¶ 197.

There are no factual allegations in the Complaint respecting the value of SRI as a going concern at the time of the transfer of a portion of its assets to Med 4 Home. Nor are there any facts alleged that plausibly show that SRI could continue to operate as a going concern. A copy of the agreement with Med 4 Home is attached to the Complaint, and it contains the following recitals:

Whereas, the Sellers [SRI and Winmar] have ceased operations of the Business, and Sellers desire to meet their obligations under federal, state, and local laws, regulations, codes or standards, including Medicare, Medicaid, State Board of Pharmacy and such other rules and regulations regarding patient care and continuity of service to provide for the continuity of care of their patients; Whereas, to ensure continuity of patient care, the Sellers desire to transfer the Business to Buyer for the consideration set forth below, and Buyer desires to accept such Business and continue servicing the patients of the Business.

Ex. A to Complaint,

p. 1. The agreement then provides for the sale of certain of SRI’s assets to Med 4 Home, including SRI’s patient files, certain inventory, equipment and supplies, phone numbers, and the right to any billings for any equipment, products, supplies, or services provided by the business after the effective date of the agreement.

Id.

at ¶ 1 . The agreement also provides, however, that SRI did not sell its cash on hand or its accounts receivable to Med 4 Home.

Id.

at ¶ 2 .

The Court concludes that even taken as true, these factual allegations do not plausibly suggest that Smith “irrationally squandered] or [gave] away corporate assets.”

Fletcher’s Cyclopedia,

§ 1102. The concept of corporate waste is “a rigorous test designed to smoke out shady, bad faith deals....”

In re Lear Corp. Shareholder Litig.,

967 A.2d 640, 656 (Del.Ch.

*401

2008). The plaintiff must plead facts showing that no reasonable person of ordinary sound business judgment could view the benefits received [or conferred] in the transaction as a fair exchange for the consideration paid [or received] by the corporation.

Id.

The test for waste is stringent, and if given the facts pled in the complaint, any reasonable person might conclude that the deal made sense, then the judicial inquiry ends.

In re Lear Corp. Shareholder Litig.,

967 A.2d 640, 656 (Del.Ch.2008).

Here, a reasonable person of ordinary sound business judgment could conclude that SRI, which had ceased operations, was concerned about the continuity of care of its patients and needed a third party to take over its patient files immediately upon its cessation of operations. There are no factual allegations showing that the assets

sold

— i.e., the patient lists, certain inventory and SRI’s phone numbers — were worth more than the price paid for them.

31

The Trustee’s incantation of the words “fraudulent transfer” does not add any factual content to the Complaint. The Court therefore concludes that the Complaint fails to state a claim for corporate waste as to Smith with respect to the transfer of SRI’s business and/or assets and must be dismissed.

32

c. Corporate Waste Claim Against Sabolik

As is the case with the allegations against Smith, the Trustee complains of, essentially, four acts by Sabolik that allegedly constitute corporate waste: (i) the fraudulent transfer of the “SRI Business;” (ii) the fraudulent transfer of the “Winmar Oxygen Business;” (iii) the abrupt termination of the Winmar sleep-study business operations; and (iv) the abrupt termination of the SRI billing and collection functions when there were in excess of $6.3 million in outstanding accounts receivable. ¶ 193.

For the same reasons discussed above with respect to Smith, the Court concludes that the Complaint fails to state a claim against Sabolik based upon his alleged conduct with respect to SRI’s billing and collection functions and assets and must be dismissed.

See supra

at pp. 66-69.

*402

As to Winmar, the Trustee alleges that (i) Sabolik was a director of Winmar from December 28, 2006 through the petition date,

Compl.,

¶ 112, although the Trustee also alleges that the Winmar board never met, and the Board (of Inc.), of which Sabolik was not a member, acted as the board for Winmar and made all decisions for the Winmar board,

Compl.,

¶ 113; and (ii) Sabolik was an officer of Winmar at all relevant times.

Compl,

¶ 114. Therefore, according to the Trustee, Sabolik can be held liable for corporate waste with respect to Winmar’s assets. Thus, the Court must assess the sufficiency of the Complaint as it relates to that waste claim.

The factual allegations respecting the abrupt termination of the Winmar sleep-study business operations are generally set forth in ¶¶ 176-177, 194, 195, 197 of the Complaint. The factual allegations respecting Inc.’s acquisition of Winmar are generally set forth in ¶¶ 105-111 of the Complaint, and the factual allegations respecting Winmar’s profitability are set forth in ¶¶ 129-130 of the Complaint.

With respect to the termination of Win-mar’s sleep-study business, the Trustee alleges only that on August 20, 2008, Sabolik told Winmar’s other officers that Winmar (among other companies) would be filing for relief under chapter 7 and that it would therefore cease operations immediately, and that at that time, Winmar’s employees were performing sleep studies at small hospitals and medical clinics in the upper Midwest.

Compl,

¶¶ 176-177. The studies, which were terminated, were being conducted pursuant to approximately 60 contracts between Winmar and various hospitals and clinics. The Trustee alleges that Sabolik (and Smith) made the decision to terminate the sleep-study operations without taking any steps to preserve the going concern value of Winmar’s business, which was operating profitably were it not for being burdened with Inc.’s excessive corporate overhead.

Compl,

¶ 194. The Trustee further alleges that Winmar’s gross profit in 2007 was approximately $2.2 million, but that Winmar also had significant general and administrative expenses due to “exorbitant marketing costs and related personnel expenses” that resulted in net operating income that year of only $541,000.

Compl,

¶ 129. The Trustee also alleges that during the eight months that Winmar operated in 2008, it had a gross profit of $1.2 million, but had “excessive” general and administrative expenses of approximately the same amount, leading to net operating income of only $31,000.

Compl.,

¶ 130. According to the Trustee, after considering interest, depreciation and amortization costs, Winmar’s operating loss for 2008 was just north of $400,000.

Compl,

¶ 130.

The Trustee does

not

allege, however, that Winmar’s sleep study business could have continued as a going concern in light of the other financial problems identified in the Complaint. Moreover, the Trustee does

not

allege that there were buyers ready, willing and able to purchase the sleep-study business as a going concern, or any other factual content supporting an inference that the decision to terminate operations was tantamount to a decision to irrationally squander Winmar’s assets—

ie.,

the going concern value of the sleep study business.

33

*403

The Trustee’s factual allegations with respect to the “the fraudulent transfer of the Winmar Oxygen Business” are generally set forth in ¶¶ 172-180 of the Complaint, and they essentially mirror those with respect to the transfer of SRI’s patient lists and certain other assets to Med 4 Home, except that with respect to Win-mar, what was sold to Med 4 Home was its “oxygen business” (which presumably differs from Winmar’s sleep-study business), and also excluded from the sale (along with cash and accounts receivable) were those assets of Winmar’s oxygen business that were encumbered by a security interest in favor of State Bank and Trust, Fargo, North Dakota.

Ex. A to Complaint,

¶2. As is true with respect to the allegations about the transfer of SRI’s assets, there are no factual allegations showing that the assets

sold

— ie., the patient lists, certain inventory and Winmar’s phone numbers— were worth more than the price paid for them.

34

The Court concludes that even taken as true, these factual allegations do not plausibly suggest that Sabolik “irrationally squandered] or [gave] away corporate assets.”

Fletcher’s Cyclopedia,

§ 1102. As noted previously, the concept of corporate waste is “a rigorous test designed to smoke out shady, bad faith

deals....” In re Lear Corp. Shareholder Litig.,

967 A.2d 640, 656 (Del.Ch.2008). The plaintiff must plead facts showing that no reasonable person of ordinary sound business judgment could view the benefits received [or conferred] in the transaction as a fair exchange for the consideration paid [or received] by the corporation.

Id.

The test for waste is stringent, and if given the facts pled in the complaint, any reasonable person might conclude that the deal made sense, then the judicial inquiry ends.

In re Lear Corp. Shareholder Litig.,

967 A.2d 640, 656 (Del.Ch.2008).

Based upon the allegations in the Complaint, the Court concludes that a reasonable person of ordinary sound business judgment could conclude that Winmar, which had ceased operations, was concerned about the continuity of care of its patients and needed a third party to take over its patient files immediately upon its cessation of operations. Accordingly, the Court also concludes that the Complaint fails to state a claim for corporate waste as to Sabolik.

For all of these reasons, Count 3 of the Complaint must be dismissed.

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2. The Trustee’s Claim for Breach of Fiduciary Duty against Linehan

The Trustee alleges that Linehan was chairman of the Board from 2005 through the petition date,

Compl,

¶ 17, was President of Inc. from 2005 until July 21, 2008, and was its CEO from 2005 through the petition date.

Compl,

¶ 21. According to the Trustee, Linehan was also (i) chairman of SRI’s board from February 9, 2006 through August 20, 2008,

Compl,

¶ 35, (ii) President of SRI until March 31, 2006,

Compl,

¶ 36, (iii) chief executive officer (“CEO”) of SRI from March 31, 2006 through the petition date,

id,.,

(iv) chairman of SRI 2’s board and its CEO from April 13, 2007 through the petition date,

Compl,

¶¶ 40, 41, (v) chairman of Win-mar’s board from December 28, 2006 through August 20, 2008,

Compl,

¶ 112, and (vi) Winmar’s President and Secretary from December 28, 2006 through the petition date.

Compl,

¶ 114.

The Trustee complains of nine specific acts or failures to act that the Trustee contends constituted a breach of Linehan’s fiduciary duties of care and loyalty:

35

(i) as the CEO of Inc. and as the president of SRI, causing SRI to commence business operations without a tested, viable billing and collection system;

(ii) as the CEO of SRI, failing to confer or consult with SRI’s president, Hewlett, regarding the business operations of SRI, and by failing to consult with Hewlett concerning important business decisions that Linehan unilaterally made on behalf of SRI;

(iii) as the CEO of SRI,

36

failing to confer or consult with the vice-president of Winmar, Nelson,

37

regarding the business operations of Winmar, and by failing to consult with Nelson concerning important business decisions that Line-han unilaterally made on behalf of Win-mar;

(iv) as the chairman of the Board, failing to call meetings of the Board when events involving Inc. required that the Board exercise its powers and duties to oversee and conduct the business and affairs of Inc. and its Operating Subsidiaries;

(v) as the chairman of the Board, failing to insure that the committees of the Board carried out their functions as intended under Inc.’s bylaws;

(vi) as the CEO of Inc. and the chairman of the Board, failing to take any action to correct or address the material adverse financial conditions affecting the business operations of Inc. and the Operating Subsidiaries, including but not limited to SRI’s billing and collection problems, SRI’s bad debt write-offs, the significant reduction in Inc.’s borrowing base after GE sent the May 14, 2008 notice of default letter, the restrictions on SRI’s ability to purchase inventory imposed by Harvard, and Inc.’s insolvency which Linehan knew or had reason to know of by no later than mid-May 2008;

(vii) as the CEO of Inc. and chairman of the Board, failing to develop any plan, process, or procedure to address the

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steady financial decline of Inc. and the Operating Subsidiaries;

(viii) as the CEO of Inc., Winmar and SRI 2, and as chairman of the Board, and as an officer and director of SRI and Winmar, failing to retain a financial crisis manager to advise the Board and the boards of the Operating Subsidiaries on the actions that could have been taken to address the declining financial condition of Inc. and the Operating Subsidiaries and, upon insolvency, actions that could and should have been taken to maintain the going concern value of the assets of the Operating Subsidiaries for the benefit of their creditors; and

(ix) as the CEO of Inc. and SRI 2, as an officer and director of SRI, and as an officer and director of Winmar, approving the filing of chapter 7 cases for Inc. and the Operating Subsidiaries without giving any consideration to the orderly wind down of the business operations of the Operating Subsidiaries.

a. Choice of Law

Once again, neither party has briefed the choice of law issues in any detail. As should be clear from the recital of the foregoing nine instances of conduct that allegedly constitute a breach of Line-han’s fiduciary duties, some of the conduct occurred on behalf of one corporation only, and some occurred on behalf of two or more corporations, which complicates the legal analysis slightly. Applying the same choice of law analysis as discussed above,

see supra

pp. 60-62, the Court concludes, since this breach of fiduciary duty claim against Linehan does not implicate any bankruptcy policy, that it should apply the choice of law rules of the forum state (Texas) which, as noted above, point to the law of the state of incorporation of these foreign corporations as the appropriate law governing this claim. Therefore, the Court will look to the law of Delaware to the extent the claim is asserted on behalf of Inc. or SRI 2, to the law of Missouri to the extent the claim is asserted on behalf of SRI, and to the law of North Dakota to the extent the claim is asserted on behalf of Winmar. The Court concludes that the nine instances of conduct summarized above should be analyzed as follows: item (i) implicates the law of both Delaware and Missouri; item (ii) implicates only Missouri law; item (iii) implicates only North Dakota law; items (iv)-(vii) implicate only Delaware law; and items (viii) and (ix) implicate the law of all three states.

The Court has discussed the legal standards for breach of fiduciary duty under Delaware law at length above.

See supra

pp. 13-21. A brief discussion of the relevant legal standards under both Missouri law and North Dakota law follows.

(1) Missouri Law

Missouri recognizes the business judgment rule, and “courts will not interfere with or attempt to control the internal management or policy of a corporation except in eases of fraud, bad faith, breach of trust, gross mismanagement, or ultra vires acts on the part of the officers and directors.”

Leggett v. Missouri State Life Ins. Co.,

342 S.W.2d 833, 851 (Mo. 1961). Or, stated another way, under the business judgment rule, a board decision will not be disturbed unless the judgment is “exercised in an arbitrary and capricious manner or contrary to by-laws or majority stockholders’ action.”

Saigh v. Busch, Inc.,

396 S.W.2d 9, 18 (Mo.App.1965). Similarly, a derivative complaint will be dismissed for failure to state a claim where it fails to allege that the directors or officers performed or perpetrated ultra vires, illegal or fraudulent acts.

Id.

A more recent formulation of the rule is that officers and directors of a corporation are protected by the business

*406

judgment rule from liability for intra vires acts within their authority made in good faith, uninfluenced by any other consideration than the honest belief that the action subserves the best interests of the corporation; and thus, the business judgment rule precludes courts from interfering with corporate decisions (or substituting their judgment as to the proper management of a corporation) absent a showing of fraud, illegal conduct, an ultra vires act, or an irrational business judgment.

Sutherland v. Sutherland,

348 S.W.3d 84 (Mo.App.2011);

Broski v. Jones,

614 S.W.2d 300 (Mo.App.1981);

Jackson v. St. Regis Apartments, Inc.,

565 S.W.2d 178 (Mo.App.1978). The rationale behind the rule requiring illegal, ultra vires or fraudulent acts, or that the business judgment of the board be exercised unfairly or in a dishonest manner, is that such acts cannot be ratified by shareholders.

Neidert v. Neidert,

637 S.W.2d 296 (Mo.App.1982).

Directors and officers in Missouri owe fiduciary duties to the corporation and its shareholders, although those duties have not been neatly categorized in the corporate context.

Fitch v. J.A. Tobin Constr. Co.,

829 S.W.2d 497, 504 (Mo.App. 1992). However, a fiduciary duty has been recognized in the context of due care, without referring to the duty as such.

Boulicault v. Oriel Glass Co.,

283 Mo. 237 , 223 S.W. 423 (1920). As to the duty of loyalty, at least one court has held that a corporate officer or director’s duty to a corporation is governed by the same rules that apply to trustees and agents,

Zakibe v. Ahrens & McCarron, Inc.,

28 S.W.3d 373 (Mo.App. 2000), and Missouri courts have recognized the fiduciary duty of loyalty in the trustee context.

Nixon v. Lichtenstein,

959 S.W.2d 854, 859 (Mo.App.1998) (“a trustee is a fiduciary of the highest order and is required to exercise a high standard of conduct and loyalty”). Therefore, it is fair to conclude that Missouri recognizes the fiduciary duties of loyalty and due care.

The duty of due care has not been as precisely defined under Missouri law as it has been under Delaware law. As noted earlier, Missouri courts have looked to

Fletcher’s Cyclopedia

for guidance in corporate law matters. As to the duty of due care, sections 1029 and 1031 of that treatise provide:

In addition to their duties of loyalty and disclosure ... directors and officers of a corporation are required by law to perform their obligations in accordance with a minimum standard of care. Courts generally apply the duty of care in cases involving alleged negligence, mismanagement, or intentional decisions to commit unlawful acts. Cases involving fraud, self-dealing, and conflicts of interest generally are covered under the duty of loyalty. The standard of care for directors and officers of business corporations is derived from common law and state business corporations codes. This standard is tempered by the business judgment rule, a common-law doctrine under which courts generally refuse to second-guess a business decision, so long as management made a reasonable effort to make an informed decision.

Generally, a corporate director or officer will not be held liable for mere negligent mismanagement untainted by self-dealing. The primary reason for this is the protection afforded to directors and officers by the business judgment rule, which generally insulates them from negligence liability. Of course, there are a number of situations where the business judgment rule does not apply— as, for example, where no decision was made, or where directors have a conflict of interest or where directors failed to take sufficient care to inform themselves

*407

before making a decision. However, these cases generally involve conduct substantially worse than ordinary negligence — indeed, that is often why the business judgment rule did not apply in the first place.... Even where the business judgment rule controls, a director is liable for gross negligence in attending to his or her duties. Director liability for good faith error is generally confined to gross negligence ... most courts now agree that the degree of care required of a director is the degree of care an ordinarily prudent person would exercise in a like position under similar circumstances. An ordinarily prudent person “in a like position” has been interpreted to mean an ordinarily prudent person who was director of the particular corporation. The phrase “under similar circumstances” has been interpreted to mean that a court should take account of the director’s responsibilities in the particular corporation, the information available at the time, and the special background knowledge or expertise the director has.

Fletcher’s Cyclopedia,

§§ 1029,1031.

As to the duty of loyalty in Missouri, it has been recognized in certain cases of self-dealing or unfair profit, although the courts have not used a “duty of loyalty” nomenclature. For example, directors and officers breach their fiduciary duty where they profit by virtue of their position at the expense of the corporation or the rights of the stockholders.

Bromschwig v. Carthage Marble & White Lime Co.,

334 Mo. 319 , 66 S.W.2d 889 (1933). “If by dealing with the property of the corporation or its business for their own purposes, directly or indirectly, they derive a personal profit from it, they may be held trustees ex maleficio, as to such profits, for the benefit of the corporation and those stockholders who have suffered injury or deprivation by their conduct, and be compelled to restore what they have thus converted to their own use.”

Bromschwig,

66 S.W.2d at 892 ;

Ramacciotti v. Joe Simpkins, Inc.,

427 S.W.2d 425 (Mo.1968). In such a circumstance, “it is immaterial whether the company or stockholder has been damaged, and it is not essential to the liability of the director that the company has suffered a loss from what he has done; it is sufficient that he has gained a profit through it.”

Id.

A director will not be permitted to retain any secret profits made by him in breach, or in disregard, of his fiduciary relation.

Id.

A director may not deal with the property of the corporation for his own personal benefit or advantage, profit at the expense of the shareholders, or cause the issuance of stock for his own personal aggrandizement to the detriment of other shareholders or for the purpose of obtaining control of the corporation.

Gieselmann v. Stegeman,

443 S.W.2d 127 (Mo.1969). The Missouri Supreme Court has noted that the duty of loyalty generally imposes an obligation on officers and directors to avoid conflict of interest transactions.

Peterson v. Continental Boiler Works, Inc.,

783 S.W.2d 896 (Mo.1990). The Missouri Supreme Court, quoting Ruder,

Duty of Loyaltya Law Professor’s Status Report,

40 Bus. Law 1383, 1384 (1985) noted that ten substantive areas have been identified in which the duty of loyalty is subject to breach:

[S]elf-dealing, dealings by a corporate parent with its subsidiaries, majority shareholder injury to minority shareholders in corporate acquisition and reorganization transactions, excessive compensation, use of corporate funds to perpetuate control, sale of control at a premium, insider trading, corporate opportunities, competition by corporate officers and directors with their corpo

*408

ration, and fiduciary obligations in bankruptcy.

Peterson,

783 S.W.2d at 905 .

Thus, this Court concludes that Missouri law applies the business judgment rule and recognizes the fiduciary duties of loyalty and due care, although they are not as precisely defined as they are in Delaware.

(2) North Dakota Law

North Dakota has statutes that govern the standard of conduct for directors and officers. The statute that governs the standard of conduct for officers provides:

An officer shall discharge the duties of an office in good faith, in a manner the officer reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.

N.D. CentCode, § 10-19.1-60 (West 2011). In turn, the statute that governs the standard of conduct for directors provides, in relevant part:

1. A director shall discharge the duties of the position of director in good faith, in a manner the director reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. A person who so performs those duties is not liable by reason of being or having been a director of the corporation.

5. A director’s personal liability to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director may be eliminated or limited in the articles. The articles may not eliminate or limit the liability of a director:

a. For any breach of the director’s duty of loyalty to the corporation or its shareholders;

b. For acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;

c. Under section 10-19.1-95 [relating to illegal distributions] or 10-04-17 [relating to issuance and sale of securities];

d. For any transaction from which the director derived an improper personal benefit; or

e. For any act or omission occurring prior to the date when the provision in the articles eliminating or limiting liability becomes effective.

6. In discharging the duties of the position of director, a director may, in considering the best interests of the corporation, consider the interests of the corporation’s employees, customers, suppliers, and creditors, the economy of the state and nation, community and societal considerations, and the long-term as well as the short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation.

N.D. CentCode, § 10-19.1-50 (West 2011). As used in the statute, the term “good faith” is defined as “honesty in fact in the conduct of an act or transaction.” N.D. CentCode, § 10-19.1-01(29) (West 2011).

As these statutes demonstrate, North Dakota recognizes that directors and officers owe fiduciary duties of good faith, loyalty, and due care to the corporation. Brian Winrow,

Director Liability: A Cliche in North Dakota,

84 N.D. L. Rev. 1109 , 1111 (2008)

(“Winrow”).

According to Winrow, the North Dakota statute has “provide[d] directors greater freedom in executing their fiduciary duties by incorporating a range of statutorily sanctioned

*409

factors in the decision-making process. The effect has been to provide the directors with additional justification for pursuing a course of action, thus thwarting the shareholder’s attempt to hold a director monetarily culpable for breaching the fiduciary duty of good faith ... [the statute] expandís] the traditional notion and understanding of the best interest of the corporation by incorporating extrinsic factors.”

Winrow,

at 1113.

There are few reported decisions in North Dakota regarding claims for breach of fiduciary duties by corporate officers and directors. Nevertheless, it is clear that North Dakota courts apply the business judgment rule,

Red River Wings, Inc. v. Hoot, Inc.,

751 N.W.2d 206 (N.D.2008), which prohibits judicial inquiry into the actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes.

Id.

at 221-222 . Corporate directors are shielded from all liability except for self-dealing, willful misconduct or gross negligence.

Id.; In re Conservatorship of Sickles,

518 N.W.2d 673, 680-81 (N.D.1994). Courts will not interfere with the judgment of directors unless their judgment is influenced by personal considerations. When a challenge is made to an action, absent claims of fraud, self-dealing, unconsciona-bility or other misconduct, the court should apply the business judgment rule and should limit its inquiry to whether the □action was authorized and whether it was taken in good faith and in furtherance of the legitimate interests of the [corporation].”

Agassiz West Condominium

Assoc.

v. Solum,

527 N.W.2d 244, 248 (N.D.1995) (applying business judgment rule to decision of a condominium board). Courts will not interfere with the decisions of directors in the reasonable and honest exercise of their judgment where that judgment is uninfluenced by personal considerations.

Dixon v. McKenzie County Grazing Assoc.,

675 N.W.2d 414 (N.D.2004);

Lili v. Cavalier Rural Elec. Co-Op., Inc.,

456 N.W.2d 527 (N.D.1990).

With the relevant standards of conduct in Delaware, Missouri and North Dakota in mind, the Court turns to its analysis of the Trustee’s breach of fiduciary duty claim as against Linehan.

b. Breach of Fiduciary Duty Claim Against Linehan

The Trustee first complains, on behalf of Inc. and SRI, that Linehan breached his fiduciary duty

38

by causing SRI to begin operations without tested, viable billing systems in place. To the extent the claim is asserted on behalf of Inc., it is governed by Delaware law. The Trustee has not alleged any facts suggesting subjective bad faith or self-dealing; and thus, to the extent the Trustee contends that Linehan’s decision to hire an outside vendor (here, Carecentric) to provide these services breached his duty of loyalty, the Trustee must be relying on a lack of good faith, apparently on the theory that Linehan’s decision was an intentional dereliction of duty or was made in conscious disregard of his responsibilities.

Disney,

906 A.2d at 66 . However, there are no factual allegations plausibly suggesting that Linehan was either intentionally derelict or consciously disregarded the need to have a billing and collections system in place. In fact, the Trustee alleges that a third party vendor was hired to perform these functions. Therefore, the Court concludes that the Trustee has failed to state a claim for breach of the duty of loyalty under Delaware law.

*410

The

real

thrust of the Trustee’s allegations is that “the selection of Care-Centric to perform these tasks” was a “poor” one.

Compl.,

¶ 138. This claim is most properly analyzed as a duty of care claim

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