KDW Restructuring & Liquidation v. Greenfield United States District Court, S.D. New York. 874 F.Supp.2d 213 (2012) KDW Restructuring & Liquidation Services, LLC (KDW) is the trustee of a litigation trust held on the behalf of debtor Jennifer Convertibles, Inc. (Jennifer). In 2009, Jennifer had losses from a transaction between Jennifer and Jara Enterprise Inc. As a result of the loss, KDW brought an action against the members of Jennifer's 2009 Board of Directors: Harley Greenfield, Edward G Bohn, Kevin L Covle. Rami Abada, and Mark J Berman. All defendants moved to dismiss the breach of fiduciary duty claim based on the business judgment rule JUDGE SHIENDLIN Abada is a director, but voted against all but the final agreement. He also consistently expressed reservations about transactions with Jara. As such. Abada is protected by the business judgment rule. The plaintiffs have not adequately pled specific facts about Abada to demonstrate that he was interested acting in bad faith, lacking a rational purpose, or grossly negligent. Abada is not an interested party-he derived no unfair personal benefit from the transaction. His prior employment at Jara does not plausibly demonstrate that he was reaping a material personal benefit, particularly considering that he thought the deal ill-advised. Neither a bad faith nor duty of loyalty claim against this defendant is facially plausible. The plaintiffs argue that parties who failed to take affirmative action are just as liable as Greenfield. However, Abada considered available expert information from TM Capital and submitted this information to his colleagues. As a result, the claims against Abada are dismissed. Greenfield complains that because of the collective nature of the Complaint, the allegations against him are not sufficient to support a claim. However, there are sufficient specific facts in the Complaint to support claims for breach of the duty of loyalty and breach of the duty to act in good faith against Greenfield. Greenfield presses an overly broad interpretation of the business judgment rule that shields directors whenever a majority of the board is disinterested. This formulation does not take into account the possibility that certain actions can only be explained by bad faith. Greenfield was a founder of Jara. Greenfield's sister, Jane Love, was the controlling shareholder of Jara during the 2009 transactions. He voted to continue shipping to Jara despite Jara's delinquency and corporate counsel's advice that he refrain from voting on Jara- related issues. Drawing reasonable inferences in plaintiff's favor, as I must, these facts suggest that Greenfield may have been an interested party, on both sides of the transaction, reaping a personal benefit. As such, plaintiffs have adequately pled that Greenfield is not protected by the business judgment rule and the breach of the duty of loyalty claim survives. It is also reasonable to infer that Greenfield may have acted in his own interest when consenting to the 2009 transactions. There are sufficient facts to indicate that Greenfield consciously disregarded his conflict of interest-most notably, when he voted to continue shipping inventory to Jara-and had a personal stake in the transaction. Moreover, he is not protected by the business Page 925 judgment rule, because he is an interested party who may not have acted in Jennifer's interest. These three defendants (Berman, Bohn, and Coyle) are not protected by the business judgment rule. They are not interested parties, but the well-pleaded facts suggest that they acted in bad faith. These defendants repeatedly transacted with Jara, despite Jara's debt. their chairman's conflict of interest, and Abada's and TM Capital's warning of minimal benefit. Their desire to press this deal indicates a disregard for the duty to examine all available information-information that was readily at hand through Abada's research. Plaintiffs" reliance on In re Tower Air, Inc is appropriate. In that case, plaintiff's allegations were similarly "explicable only by bad faith. Drawing all reasonable inferences in favor of plaintiffs, it is plausible that these defendants' actions lacked a rational corporate purpose. For the foregoing reasons, Defendants. Seidner's and Abada's motions to dismiss are granted in full. Greenfield's motion is denied. Defendants Berman's Bohn's, and Coyle's motions are denied in part and granted in part: the breach of the duty of loyalty claim is dismissed, the claim of breach of the duty to act in good faith survives. Any amended Complaint must be filed within twenty-one (21) days of the date of this order. The Clerk of the Court is directed to close these motions (Docket Nos. 15, 17 and 20). A conference is scheduled for June 25. at 4:30 p.m. in Courtroom 15C. SO ORDERED. CRITICAL THINKING Are there words or phrases in the court's argument that are ambiguous? Why are these ambiguous words important? ETHICAL DECISION MAKING Suppose you were on the board of directors in this case. The universalization test guides your ethical decisions. Would you have made a different decision? KDW Restructuring & Liquidation v. Greenfield United States District Court, S.D. New York. 874 F.Supp.2d 213 (2012) KDW Restructuring & Liquidation Services, LLC (KDW) is the trustee of a litigation trust held on the behalf of debtor Jennifer Convertibles, Inc. (Jennifer). In 2009, Jennifer had losses from a transaction between Jennifer and Jara Enterprise Inc. As a result of the loss, KDW brought an action against the members of Jennifer's 2009 Board of Directors: Harley Greenfield, Edward G Bohn, Kevin L Covle. Rami Abada, and Mark J Berman. All defendants moved to dismiss the breach of fiduciary duty claim based on the business judgment rule JUDGE SHIENDLIN Abada is a director, but voted against all but the final agreement. He also consistently expressed reservations about transactions with Jara. As such. Abada is protected by the business judgment rule. The plaintiffs have not adequately pled specific facts about Abada to demonstrate that he was interested acting in bad faith, lacking a rational purpose, or grossly negligent. Abada is not an interested party-he derived no unfair personal benefit from the transaction. His prior employment at Jara does not plausibly demonstrate that he was reaping a material personal benefit, particularly considering that he thought the deal ill-advised. Neither a bad faith nor duty of loyalty claim against this defendant is facially plausible. The plaintiffs argue that parties who failed to take affirmative action are just as liable as Greenfield. However, Abada considered available expert information from TM Capital and submitted this information to his colleagues. As a result, the claims against Abada are dismissed. Greenfield complains that because of the collective nature of the Complaint, the allegations against him are not sufficient to support a claim. However, there are sufficient specific facts in the Complaint to support claims for breach of the duty of loyalty and breach of the duty to act in good faith against Greenfield. Greenfield presses an overly broad interpretation of the business judgment rule that shields directors whenever a majority of the board is disinterested. This formulation does not take into account the possibility that certain actions can only be explained by bad faith. Greenfield was a founder of Jara. Greenfield's sister, Jane Love, was the controlling shareholder of Jara during the 2009 transactions. He voted to continue shipping to Jara despite Jara's delinquency and corporate counsel's advice that he refrain from voting on Jara- related issues. Drawing reasonable inferences in plaintiff's favor, as I must, these facts suggest that Greenfield may have been an interested party, on both sides of the transaction, reaping a personal benefit. As such, plaintiffs have adequately pled that Greenfield is not protected by the business judgment rule and the breach of the duty of loyalty claim survives. It is also reasonable to infer that Greenfield may have acted in his own interest when consenting to the 2009 transactions. There are sufficient facts to indicate that Greenfield consciously disregarded his conflict of interest-most notably, when he voted to continue shipping inventory to Jara-and had a personal stake in the transaction. Moreover, he is not protected by the business Page 925 judgment rule, because he is an interested party who may not have acted in Jennifer's interest. These three defendants (Berman, Bohn, and Coyle) are not protected by the business judgment rule. They are not interested parties, but the well-pleaded facts suggest that they acted in bad faith. These defendants repeatedly transacted with Jara, despite Jara's debt. their chairman's conflict of interest, and Abada's and TM Capital's warning of minimal benefit. Their desire to press this deal indicates a disregard for the duty to examine all available information-information that was readily at hand through Abada's research. Plaintiffs" reliance on In re Tower Air, Inc is appropriate. In that case, plaintiff's allegations were similarly "explicable only by bad faith. Drawing all reasonable inferences in favor of plaintiffs, it is plausible that these defendants' actions lacked a rational corporate purpose. For the foregoing reasons, Defendants. Seidner's and Abada's motions to dismiss are granted in full. Greenfield's motion is denied. Defendants Berman's Bohn's, and Coyle's motions are denied in part and granted in part: the breach of the duty of loyalty claim is dismissed, the claim of breach of the duty to act in good faith survives. Any amended Complaint must be filed within twenty-one (21) days of the date of this order. The Clerk of the Court is directed to close these motions (Docket Nos. 15, 17 and 20). A conference is scheduled for June 25. at 4:30 p.m. in Courtroom 15C. SO ORDERED. CRITICAL THINKING Are there words or phrases in the court's argument that are ambiguous? Why are these ambiguous words important? ETHICAL DECISION MAKING Suppose you were on the board of directors in this case. The universalization test guides your ethical decisions. Would you have made a different decision