Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_18-cv-04002/USCOURTS-cand-3_18-cv-04002-2/pdf.json

Nature of Suit Code: 423
Nature of Suit: Bankruptcy Withdrawal 28 USC 157
Cause of Action: 28:0157 Motion for Withdrawal of Reference

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United States District Court

Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

In re DIADEXUS, INC., 

Debtor. 

LEAP TIDE CAPITAL 

MANAGEMENT, LLC, 

Plaintiff, 

vs. 

LORI RAFIELD; LEONE 

PATTERSON; ELIZABETH HUTT 

POLLARD; JAMES R. SULAT; JOHN 

J. SPERZEL; KAREN DREXLER; and 

JOHN T. CURNUTTE, 

Defendants.

Case No. 18-cv-04002-CRB 

ORDER GRANTING IN PART AND 

DENYING IN PART MOTION TO 

DISMISS AND GRANTING IN 

PART AND DENYING IN PART 

REQUEST FOR JUDICIAL NOTICE

This case arises from the Chapter 7 bankruptcy of Diadexus, a medical diagnostics 

company incorporated in Delaware and headquartered in San Francisco. Sec. Amend. 

Compl. (“SAC”) (Dkt. 41) ¶¶ 1-9. After Diadexus declared Chapter 7 bankruptcy, Plaintiff 

Leap Tide Capital Management, LLC, (“Leap Tide”), a Hedge Fund, purchased the rights 

to the Diadexus estate and sued the former officers and directors of Diadexus for gross 

negligence and breach of fiduciary duties in the run up to that bankruptcy. See generally

SAC. Defendants filed one previous motion to dismiss (Dkt. 16), which this Court granted 

orally, Minute Entry (Dkt. 36). Plaintiff has now filed a second amended complaint, which 

Defendants again ask this Court to dismiss (Dkt. 45). 

The SAC makes five claims: (1) breach of fiduciary duty against all defendants, 

SAC ¶¶ 57-67, (2) gross negligence against then-CEO Lori Rafield and then-CFO Leone 

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Patterson, SAC ¶¶ 68-81, (3) breach of fiduciary duty against Rafield, SAC ¶¶ 82-88 (4) 

gross negligence against Rafield, SAC ¶¶ 89-96, and (5) breach of fiduciary duty against 

former members of Diadexus’s board, John Curnutte, Karen Drexler, Elizabeth Hutt 

Pollard, James Sulat, and John Sperzel (the “director defendants”), SAC ¶¶ 97-106. 

The Court hereby GRANTS the Motion to Dismiss as to Claim I against the director 

defendants without leave to amend; GRANTS the Motion to Dismiss as to Claim V 

without leave to amend; GRANTS the Motion to Dismiss as to Claims I and II against 

Patterson without leave to amend; and DENIES the Motion to Dismiss as to Claims I, II, 

III, and IV against Rafield.

Defendants also ask the Court take notice of several documents, including 

Diadexus’s Certificate of Incorporation. Request for Jud. Notice (Dkt. 47). The Court 

hereby TAKES JUDICIAL NOTICE of Diadexus’s Certificate of Incorporation and 

DECLINES TO TAKE JUDICIAL NOTICE of the other documents at this time, as the 

Court does not find them relevant to the analysis of the Motion to Dismiss.

I. BACKGROUND1

The factual allegations in this case concern the conduct by the directors and officers 

of Diadexus, a medical diagnostics company, in the run up to Diadexus’s declaration of 

Chapter 7 bankruptcy. See generally SAC.

In or around August 2014, Diadexus took out a $15 million loan from secured 

lender Oxford Finance LLC (“Oxford”). SAC ¶ 27. That loan required only interest 

payments in the first year and then, in October 2015, required payment of interest and 

principal amortization. Id.

At a meeting of Diadexus’s audit committee in December 2015, Defendants 

Pollard, Sulat, Drexler, Patterson, and Rafield discussed projections that showed Diadexus 

 

1

 As this case is before this Court on a motion to dismiss, the following facts, drawn from the 

SAC, are taken as true. Western Reserve Oil & Gas Co. v. New, 765 F.2d 1428, 1430 (9th Cir. 

1985).

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“running out of cash during the fourth quarter of 2016.” Id. ¶ 28. The committee concluded 

that Diadexus “would not have adequate cash to maintain operations for the 12 months 

following the filing of its 2015 annual report.” Id. Patterson then transmitted both “base 

case” and “upside” budgets to the board, which approved them. Id. ¶ 29. The SAC thus 

alleges that, by December 2015, all defendants knew that Diadexus was in danger of 

running out of money. Id.

Defendants initially hoped to defer the liquidity crisis by convincing Oxford to 

waive its contractual rights to receive principal amortization payments, but Oxford 

declined to do so. Id. ¶ 31. Rafield “promptly communicated” this to the board. Id. Rafield 

and Patterson then prepared a revised forecast for 2016 in which they projected Diadexus 

“would run out of operating cash in the third quarter of 2016, rather than in the fourth 

quarter,” as previously projected. Id. Rafield told the board that Diadexus would be out of 

cash that summer, that Diadexus would become “illiquid in three-to-six months,” and that 

“Oxford could immediately and at any time foreclose on” Diadexus’s operating cash. Id.

¶ 32. Rafield stated that “the only issue that matters to Diadexus is the Oxford Debt.” Id.

Oxford sent a notice of default to Diadexus in April 2016. Id. ¶ 33. Oxford proposed 

engaging with Diadexus in a “reasonable and consensual process to evaluate the state of 

Diadexus and its business plans and to determine appropriate next steps.” Id. ¶ 35. On 

April 12, 2016, Oxford informed Rafield, in her capacity as CEO, that Oxford would agree 

to a forbearance period if a representative of Alvarez & Marsal (“Alvarez”), a “top-tier 

advisory firm specializing in corporate restructuring,” would be permitted to “perform 

diligence on Diadexus’ business” and “participate with management in approving certain 

expenses in a process to be agreed upon with Diadexus.” Id. ¶ 35. Oxford asserted that 

Oxford would decide in its sole discretion on a “day-to-day” basis whether to exercise 

rights and remedies—that is, “sweep” Diadexus’s assets—and that neither delay in 

exercising default remedies nor any ongoing discussions would be a waiver or could be 

relied on by Diadexus as forbearance. Id. ¶ 33. 

Rafield rejected Oxford’s offer because, Plaintiff alleges, it was contrary “to her 

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personal preferences and interests.” Id. ¶ 36 (emphasis omitted). Rafield wrote to 

Diadexus’s counsel and one of the directors, stating that Oxford’s proposal was “unlikely 

to work for [her] personally[,]” that “[she] ha[s] no interest in working for Oxford” and 

that the “company needs to be recapped in order for [her] to remain engaged.” Id. ¶ 36 

(second alteration in original). She also asserted that she did not want to file for bankruptcy 

to “make it easy for Oxford. Let the shareholders sue Oxford for damaging their 

investment for the self interest of Oxford. The board can get someone else to deal with 

Oxford.” Id. ¶ 37. Rafield also ordered that a restructuring attorney must no longer be 

included on emails. Id. ¶ 39. 

The board nonetheless discussed hiring Alvarez on April 13, 2016, and after 

recusing Rafield from the discussion, retained Alvarez. Id. ¶ 42. However, the SAC alleges 

that 

[T]he retention of Alvarez was essentially a sham intended to 

insulate the Defendants from potential liability by merely 

creating an appearance that they were seeking professional 

advice. For example, Rafield stated that she was “confused” as 

to why Alvarez should be on an April 30, 2016 Board call to 

discuss the Company’s urgent financial crisis. Counsel 

explained: “I think they should hear [Alvarez’s] view. Again, 

this is being fully informed for the record and A&M is the 

Company’s advisor. We aren’t protecting against litigation from 

Oxford. We’re protecting from litigation by other creditor and 

equity holders. [...] This is a board protection call, not an 

operational decision call.”

Id.

During this period, Diadexus also received interest from at least six potential 

purchasers. Id. ¶ 45. In May 2016, multiple buyers expressed interest in acquiring 

Diadexus, and at least six entered into non-disclosure agreements to review diligence 

materials contained in an electronic data room. Id. ¶ 45. The SAC alleges that Rafield 

stymied these purchase efforts, even though a purchase would have solved Diadexus’s 

liquidity problems, because the purchasers would not have retained Rafield or payed her 

“expensive compensation package.” Id. ¶¶ 46-47. The SAC also states that “none of the 

other Defendants stopped [Rafield from halting these purchases], even though they knew 

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that she was acting in bad faith and putting her personal interests above those of 

Diadexus.” Id. ¶ 45. It does not explain how they had this knowledge or on what basis they 

would have known this. See id.

Rafield continued to, in the SAC’s words, “dominate and interfere with this 

process.” Id. ¶ 45. She barred Leap Tide, which had signed a non-disclosure agreement

with Diadexus, from conducting diligence and refused to entertain discussions of an 

acquisition. Id. ¶ 46. She also closed the data room and revoked Alvarez’s authority to 

continue the marketing process while Alvarez was reaching out to third parties to develop 

bids. Id. ¶ 48. 

On or shortly before May 27, 2016, Diadexus told Oxford that it might consider a 

sale if it could achieve a cooperative or consensual process for limiting director liability. 

Id. ¶¶ 31, 49. Diadexus’s counsel advised the board that he was convinced of the necessity 

of a Chapter 11 filing, which requires considerable effort. Id. ¶ 50. But Diadexus never 

filed for Chapter 11 bankruptcy, and on June 6, 2016, Oxford swept all of Diadexus’s cash. 

Id. ¶¶ 50-51. The SAC alleges that, when Oxford swept the cash, Diadexus had enough 

cash on hand to file a Chapter 11 case or enter a forbearance agreement which would have 

prevented the sweep. Id. ¶ 51.

On June 10, 2016, Diadexus filed for bankruptcy under Chapter 7, and undertook a 

sale of assets on July 7, 2016, where the assets sold for $4.75 million. Id. ¶¶ 53-55. 

Plaintiff alleges that the harm to Diadexus amounts to tens of millions of dollars. Id. ¶ 55. 

Plaintiff brought the instant suit against three former Diadexus officers—Lori 

Rafield, former CEO and Chairwoman of Diadexus, FAC ¶ 14, Leone Patterson, former 

CFO of Diadexus, FAC ¶ 15, Kenneth Fang, former chief medical officer of Diadexus, 

FAC ¶ 16—and several former board members—Elizabeth Hutt Pollard, James R. Sulat, 

John J. Sperzel, John T. Curnutte, and Karen Drexler. FAC ¶ 17. Defendants moved to 

dismiss under Rule 12(b)(6), and this Court granted the dismissal with leave to amend 

(Dkt. 36). Plaintiff then filed its SAC, which dropped Fang from the action, a claim for 

negligence, and the director defendants from any claims of gross negligence. Defendants 

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again move to dismiss all claims in the SAC under Rule 12(b)(6). Mot. at 1; see Fed. R. 

Civ. P. 12(b)(6).

II. LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(b)(6), the Court must ask whether the 

complaint “contain[s] sufficient factual matter, accepted as true, to ‘state a claim to relief 

that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell 

Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). All factual inferences must be drawn in 

favor of the non-moving party. Western Reserve Oil & Gas Co., 765 F.2d at 1430. But 

courts “are not bound to accept as true a legal conclusion couched as a factual allegation.” 

Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 555).

In addition, this case is governed by Delaware substantive law, because, under the 

Internal Affairs Doctrine, “only one State should have the authority to regulate a 

corporation’s internal affairs,” Edgar v. MITE Corp., 457 U.S. 624, 645 (1982), and 

Diadexus was incorporated in Delaware. See Mot. at vi, 5. The parties do not dispute that 

the substantive legal standards at issue are governed by Delaware law. See Opp. at vi-viii; 

Rep. at 2; see also generally In re Google, Inc. S’holder Deriv. Litig., 2012 WL 1611064,

at *4 (N.D. Cal. May 8, 2012).

There is one wrinkle as to the legal standard that applies to this motion: whether 

Plaintiff must overcome the business judgment rule in order to survive the instant motion. 

The business judgment rule is a presumption under Delaware law “that in making a 

business decision the directors of a corporation 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. 

Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by Brehm v. 

Eisner, 746 A.2d 244 (Del. 2000). To overcome this presumption, “[t]he burden falls upon 

the proponent of a claim to rebut the presumption by introducing evidence either of 

director self-interest, if not self-dealing, or that the directors either lacked good faith or 

failed to exercise due care. If the proponent fails to meet her burden of establishing facts 

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rebutting the presumption, the business judgment rule, as a substantive rule of law, will 

attach to protect the directors and the decisions they make.” Citron v. Fairchild Camera & 

Instrument Corp., 569 A.2d 53, 64 (Del. 1989) (internal citation omitted).

Plaintiff contends that the business judgment rule does not apply at the pleading 

stage, and thus that Plaintiff need not overcome this presumption at this stage of litigation. 

Opp. at 10; see In re Tower Air, Inc., 416 F.3d 229, 238 (3rd Cir. 2005) (“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).”). 

Plaintiff is incorrect. Delaware law makes clear that the business judgment rule 

“operates as both a procedural guide for litigants and a substantive rule of law.” Citron, 

569 A.2d at 64 (emphasis added). The business judgment rule functions as an affirmative 

defense to impose legal requirements on the plaintiff to overcome the rule. Id. Contrary to 

the Third Circuit’s conclusion in In re Tower Air, several other federal courts, including 

courts in this District, have held that the business judgment rule places requirements on 

parties at the pleadings stage. See, e.g., In re Verifone Holdings, Inc. S’holder Derivative 

Litig., 2009 WL 1458233, at *10 (N.D. Cal. May 26, 2009) (“[T]he section 102(b)(7) bar 

may be raised on a Rule 12(b)(6) motion to dismiss.”); Kaye v. Lone Star Fund V (U.S.), 

L.P., 453 B.R. 645, 679 (N.D. Tex. 2011) (explaining that Delaware case law 

“unambiguously holds that the plaintiff bears the burden of proof in rebutting the 

presumption of the business judgment rule). Most significantly, the Ninth Circuit has 

indicated, albeit in an unpublished decision, that the business judgment rule may be 

considered at the pleadings stage. Furman v. Walton, 320 F. App’x 638, 640 (9th Cir. 

2009) (affirming district court’s dismissal of shareholder derivative suit for failure to meet 

pleading standards because of the business judgment rule). This is consistent with the 

general rule that “[w]hen an affirmative defense is obvious on the face of a complaint . . . a 

defendant can raise that defense in a motion to dismiss.” Rivera v. Peri & Sons Farms, 

Inc., 735 F.3d 892, 902 (9th Cir. 2013); accord Cedars-Sinai Med. Ctr. v. Shalala, 177 F.3d 

1126, 1128–29 (9th Cir. 1999) (“[A]ffirmative defenses . . . may also be raised in motions 

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to dismiss filed before the first responsive pleading.”). The business judgment rule is thus 

applicable at the pleading stage. So, Plaintiff must plead sufficient facts to overcome this 

presumption as to director defendants.2

III. DISCUSSION

The SAC sets out five claims for relief, each of which Defendants seek to have 

dismissed. The first claim alleges breach of fiduciary duty against all defendants for failure 

to protect the value of Diadexus’s assets. SAC ¶¶ 57-67. The second alleges gross 

negligence against Rafield and Patterson for failure to protect the value of Diadexus’s 

assets. Id. ¶¶ 68-81. The third alleges breach of fiduciary duty against Rafield for failure to 

conduct a sale or restructuring process timely and in good faith. Id. ¶¶ 82-88. The fourth 

alleges gross negligence against Rafield for failure to conduct a proper and timely sale or 

restructuring process. Id. ¶¶ 89-96. Fifth and finally, the SAC alleges a breach of fiduciary 

duty against the director defendants—Curnutte, Drexler, Pollard, Sulat, and Sperzel—for 

failure to supervise and abdication of responsibility. Id. ¶¶ 97-106. As the five claims in 

the SAC involve overlapping conduct, involve different combination of Defendants, and 

implicate overlapping legal issues, this memo is primarily organized by defendant rather 

than claim.

A. Director Defendants: Breach of Fiduciary Duties

Plaintiff alleges two claims against the director defendants: Claim I alleges a breach 

of the fiduciary duty of loyalty and good faith for failure to protect Diadexus’s assets, and 

Claim V alleges a breach of the fiduciary duty of loyalty and good faith for abdication and 

 

2

 The parties also dispute a second aspect of the business judgment rule. Defendants argue that the 

business judgment rule applies both to directors and officers. See Opp. at vi. However, while there 

is no dispute that the rule applies to directors, whether the business judgment rule applies to 

corporate officers is unsettled under Delaware law. See Amalgamated Bank v. Yahoo! Inc., 132 

A.3d 752, 781 (Del. Ch. 2016) (recognizing a “vibrant debate” over whether the business 

judgment rule applies to officers). Ultimately, however, the claims against the officer defendants 

can be resolved without addressing this issue, because the claims against Patterson fail for 

independent reasons, and the claims against Rafield can overcome, at least at this stage, that 

presumption.

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failure to supervise Rafield. SAC ¶¶ 58, 106. Neither claim is adequately pled.

Directors possess a triad of fiduciary duties—good faith, loyalty, and care. Cede & 

Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993), decision modified on reargument, 

636 A.2d 956 (Del. 1994). The obligation to act in good faith does not establish an 

independent fiduciary duty, but the failure to act in good faith may result in liability 

because the requirement to act in good faith “is a subsidiary element[,]” i.e., a condition, 

“of the fundamental duty of loyalty.” Stone ex rel. AmSouth Bancorporation v. Ritter, 911 

A.2d 362, 369–70 (Del. 2006). 

Importantly for this case, Delaware law permits corporate charters to contain 

exculpatory provisions that “protect[] the directors from personal liability for breaches of 

the duty of care.” Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 239 (Del. 2009) (citing 8 

Del. C. § 102(b)(7)). Section 102(b)(7) further permits a corporation’s certificate of 

incorporation to include:

A provision eliminating or limiting the personal liability of a 

director to the corporation . . . for monetary damages for breach 

of fiduciary duty as a director, provided that such provision shall 

not eliminate or limit the liability of a director: (i) For any breach 

of the director’s duty of loyalty to the corporation or its 

stockholders; (ii) for acts or omissions not in good faith or which 

involve intentional misconduct or a knowing violation of law[.]

8 Del. C. § 102(b)(7). 

Diadexus’s Certificate of Incorporation did precisely that. Article 5.1 of that 

Certificate of Incorporation states, as relevant here, that “[t]o the fullest extent permitted 

by the Delaware General Corporation Law . . . no director of the corporation shall be 

personally liable to the corporation or its stockholders for monetary damages for breach of 

fiduciary duty as a director.” Mot. Ex. 4 at 4 (Dkt. 46-4). Under § 102(b)(7), where an 

exculpatory provision like the one here exists, the “plaintiff must allege a non-exculpated 

breach of the duty of loyalty.” van der Fluit v. Yates, 2017 WL 5953514, at *8 (Del. Ch. 

Nov. 30, 2017). Thus, Diadexus’s Certificate of Incorporation precludes claims against the 

directors except those for breaches of the duty of loyalty and those claims for bad faith or 

intentional misconduct. See Mot. Ex. 4 at 4. So, the director defendants are exculpated 

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from breaches of duty of care. Opp. at 13; Mot. at 9. To survive the instant motion as to 

Claims I or V against the director defendants, Plaintiff must therefore allege a breach of 

the duty of loyalty. See Mot. Ex. 4 at 4. 

Under Delaware law, “a plaintiff can plead that a board breached its duty of loyalty 

by alleging non-conclusory facts, which suggest that a majority of the board either was 

interested in the sales process or acted in bad faith in conducting the sales process.” In re 

Answers Corp. S’holder Litig., 2012 WL 1253072, at *7 (Del. Ch. Apr. 11, 2012). 

Although the SAC does not specify whether Plaintiff believes the director defendants 

breached their duty of loyalty through bad faith conduct or self-interest, see generally

SAC, the Opposition to the Motion to Dismiss suggests that Plaintiff is arguing that the 

director defendants acted in bad faith. Opp. at vii-viii.

To satisfy the “high bar to pleading bad faith,” the defendant’s actions must have 

been “so far beyond the bounds of reasonable judgment that it seems essentially 

inexplicable on any ground other than bad faith.” In re TIBCO Software Inc. S’holder 

Litig., 2015 WL 6155894, at *21 (Del. Ch. Oct. 20, 2015). 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., 970 A.2d at 143. The existence of “some 

process” will generally bar a finding of bad faith. Houseman v. Sagerman, 2014 WL 

1600724, at *7 (Del. Ch. Apr. 16, 2014) (no bad faith where the board’s process included 

“contact[ing] legal counsel” and “reach[ing] out to [an asset sales advisor]” and “hir[ing] 

them to assist in shipping the company.”). If “a board attempts to meet its duties, no matter 

how incompetently, the directors did not consciously disregard their obligations.” In re 

MeadWestvaco Stockholders Litig., 168 A.3d 675, 686 (Del. Ch. 2017). 

Directors are also, as discussed supra, protected by the business judgment rule, 

which sets forth a powerful presumption in favor of actions taken by directors and outlines 

that a decision made by a loyal and informed board will not be overturned by a court 

unless it cannot be “attributed to any rational business purpose.” Cede & Co., 636 A.2d at 

361 (quoting Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971)). “It is almost 

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impossible for a court, in hindsight, to determine whether the directors of a company 

properly evaluated risk and thus made the ‘right’ business decision.” In re Citigroup Inc. 

S’holder Derivative Litig., 964 A.2d 106, 126 (Del. Ch. 2009). This “judicial second 

guessing is what the business judgment rule was designed to prevent.” Id. Conclusory 

allegations without “particularized factual allegations demonstrating bad faith by the 

director defendants” are insufficient to plead bad faith. Id. at 127.

1. Claim I: Failure to Protect the Company’s Value

Claim I alleges that all Defendants breached their fiduciary duty by failing to 

protect the value of the company’s assets when they did not file for Chapter 11 bankruptcy 

or enter into a forbearance agreement. SAC ¶¶ 57-67. Plaintiff relies heavily on In re 

Bridgeport Holdings, Inc., 388 B.R. 548 (Bankr. D. Del. 2008), in which the Bankruptcy 

Court of the District of Delaware held that “[f]iduciaries breach their duty of loyalty by 

intentionally failing to act in the face of a known duty to act, demonstrating a conscious 

disregard for their duties,” id. at 564. Plaintiff urges that the director defendants’ failure to 

take these two steps—filing for Chapter 11 and entering a forbearance agreement—

demonstrates bad faith under this standard. Opp. at 16-17.

Generally, “the decision whether to file for bankruptcy protection or not is generally 

a matter of directors’ business judgment.” In re Fedders N. Am., Inc., 405 B.R. 527, 542 

(Bankr. D. Del. 2009) (citing Odyssey Partners, L.P. v. Fleming Companies, Inc., 735 

A.2d 386, 416–20 (Del.Ch. 1999)). Moreover, Delaware law does not require the board of 

an insolvent company to file for bankruptcy protection. RSH Liquidating Tr. v. Magnacca, 

553 B.R. 298, 313–14 (Bankr. N.D. Tex. 2016) (“[Plaintiff’s] alternative assertion that the 

board should have placed the company in bankruptcy in order to preserve the ‘immediate 

value’ of the company is a permutation of the argument that a board has a duty to avoid 

deepening a company’s insolvency. But, no such cause of action exists under Delaware 

law.” (citing Trenwick Am. Litig.Tr. v. Ernst & Young, 906 A.2d 168, 175 (Del.Ch. 

2006), aff’d sub. nom. Trenwick Am. Litig. Tr. v. Billett, 931 A.2d 438 (Del. 2007))).

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Plaintiff points to a decision from the Bankruptcy Court for the District of 

Delaware, In re Simplexity, LLC, 2017 WL 65069 (Bankr. D. Del. Jan. 5, 2017), in which 

the plaintiffs alleged that defendants violated their fiduciary duties when they failed to file 

for bankruptcy protection. Id. at *4; Opp. at 14. However, Simplexity did not consider 

either an exculpatory clause or the business judgment rule, because Third Circuit precedent 

precludes consideration of those affirmative defenses at the motion to dismiss stage. Id. at 

*8; see also In re Tower Air., Inc., 416 F.3d at 236. It thus denied the motion to dismiss as 

to breach of fiduciary duty without addressing whether the facts there would have 

overcome the business judgment rule. Simplexity, 2017 WL 65069, at *4. In the Ninth 

Circuit, by contrast, as discussed above, the Court may consider these defenses at this 

stage. See Rivera, 735 F.3d at 902; see also Furman, 320 F. App’x at 640. Simplexity, 

then, provides no insight into whether the failure to file for bankruptcy protection or seek 

forbearance, without more, meets the bad faith standard. See Simplexity, 2017 WL 65069,

at *4; see also Rep. at 6-7.

The SAC does not allege that the director defendants took no action; to the contrary, 

the SAC states that the board retained Alvarez, even over Rafield’s objections, and 

consulted with corporate counsel about that possibility. SAC ¶¶ 37, 38, 50. It also 

acknowledges that the terms of the offered forbearance were not “optimal” and that the 

Chapter 11 process “requires considerable effort.” Id. ¶¶ 44, 50. Plaintiff offers no reason 

to conclude that the board’s failure to file for bankruptcy or enter forbearance, without 

more, is “so far beyond the bounds of reasonable judgment that it seems essentially 

inexplicable on any ground other than bad faith.” In re TIBCO Software Inc. S’holder 

Litig., 2015 WL 6155894, at *21; accord Houseman, 2014 WL 1600724, at *7 (“The issue 

before me is not whether [the board’s] actions were sufficient to adequately inform the 

directors about the value of the Company in satisfaction of the duty of care, but rather 

whether the Board knowingly and completely failed to undertake a reasonable sales 

process. To the contrary, the Board did undertake some process aimed at achieving the best 

price for stockholders, and considered, and rejected, obtaining a fairness opinion based on 

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cost. That is not bad faith.”). Though Plaintiff alleges that hiring Alvarez was a cynical 

tactic, SAC ¶ 42, the SAC also states that some board members believed “it is in the best 

interests of the company and all of its constituencies to work with [Alvarez] 

constructively.” SAC ¶ 41. And so the SAC, far from adequately alleging bad faith, 

contains facts that show that the board took steps to promote the best interests of 

Diadexus—even if it did not take the steps that Plaintiff, in hindsight, would have wanted 

it to take.

The SAC’s allegations thus do not contain an “extreme set of facts” necessary to 

plead bad faith. Nor does Plaintiff identify in the Opposition any new facts it would seek to 

plead if given leave to amend. See generally Opp. The Court thus GRANTS the Motion to 

Dismiss as to Claim I against the director defendants without leave to amend.

2. Claim V: Failure to Supervise and Abdication of Responsibility

The next claim against the director defendants, Claim V, alleges that the directors 

breached their fiduciary duties by failing to adequately supervise Rafield and the financial 

affairs of Diadexus. SAC ¶¶ 97-106. It alleges that the directors “permitted Rafield to 

control and dominate the process of dealing with Oxford, the Oxford Loan default, and the 

Company’s known need to enter into a sale or other extraordinary transaction before it ran 

out of financing.” Id. ¶ 103. Plaintiff alleges the directors “disregarded their responsibility 

to act in the best interest of the Company by designating excessive authority to Rafield and 

by failing to supervise her.” Id. 

As with Claim I, because of Diadexus’s Certificate of Incorporation, the only 

fiduciary duty available to Plaintiff is a breach of the duty of loyalty. See 8 Del. C. 

§ 102(b)(7).3 And, as above, that imposes a high bar. 

Plaintiff’s allegations are as follows: The board knew that Rafield had “no interest 

in working for Oxford,” was dismissive of the possibility of shareholder litigation, was 

 

3

 Although 8 Del. C. § 102(b)(7) also permits claims sounding in allegations of bad faith or 

intentional misconduct, Claim V does not appear to allege either against the director defendants. 

See generally SAC ¶¶ 97-106. 

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concerned with her personal interest, and dominated the negotiation process with potential 

purchasers, including closing the data room and preventing purchase by a company, 

Cleveland HeartLab, that would have no need to retain Rafield after the acquisition. SAC 

¶¶ 36-37, 41, 45, 47; see also Opp. at 19-20. Despite these facts, Plaintiff argues, the 

director defendants “permitted Rafield to control and dominate the process of dealing with 

Oxford, Alvarez, the Loan default, and the Company’s need to enter into a sale or other 

extraordinary transaction before it ran out of liquidity. By so doing, they disregarded their 

responsibilities to act in the best interest of the Company, which states to a non-exculpated 

claim for breach of the duties of loyalty and good faith.” Opp. at 20.

These allegations, as with those in Count I, do not meet the high bar for breach of 

the duty of loyalty. As the Court of Chancery has explained, “[n]egligent oversight by 

directors, although certainly not commendable, is not a breach of fiduciary duty. Even 

grossly negligent board action does not imply a non-exculpated breach. A breach of the 

duty of loyalty via bad faith . . . requires disregard so profound that it raises an inference of 

scienter.” McElrath on behalf of Uber Techs., Inc. v. Kalanick, 2019 WL 1430210, at *16 

(Del. Ch. Apr. 1, 2019); accord In re Chelsea Therapeutics, Inc. S’holders Litig., 2016 WL 

3044721, at *1 (bad faith requires conduct “so far beyond the bounds of reasonable 

judgment that it seems essentially inexplicable on any ground other than bad faith.”).

That is simply not the case here. While the defendants allegedly allowed Rafield to 

“dominate and interfere with” the process, not “stopp[ing] her, even though they knew that 

she was acting in bad faith and putting her personal interests above those of Diadexus,” the 

directors were constantly appraised by counsel and restructuring advisor Alvarez. SAC 

¶¶ 41, 42, 44, 45, 50, 103. The directors also deliberated about business decisions 

specifically for the “best interests of the company.” Id. ¶¶ 41, 42. For instance, Sulat wrote 

that “it is in the best interests of the company and all of its constituencies to work with 

[Alvarez] constructively.” Id. ¶¶ 40, 41. Drexler also wrote to the entire board with 

concerns that “removing [Alvarez] might send [Oxford] over the top.” Id. ¶ 48. And, most 

importantly, the director defendants did in fact overrule Rafield’s decisions on the issues of 

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sale and restructuring, for instance hiring Alvarez. Id. ¶ 42. While the board did rely on 

Rafield, they were entitled to do so under Delaware law. See In re MONY Grp. Inc. 

S’holder Litig., 852 A.2d 9, 20 (Del. Ch. 2004) (holding that a board appropriately can rely 

on its CEO to conduct negotiations). And so the SAC does not plead sufficient factual 

allegations to show that the director defendants acted in bad faith. 

Plaintiff’s reliance on In re Bridgeport Holdings, Inc., 388 B.R. 548, 565 (Bankr. D. 

Del. 2008), to support its position that it has met the pleading requirements of bad faith 

regarding the failure to supervise claim, does not alter that conclusion. In Bridgeport, a 

new COO entered the company and, within three days, decided to sell the company’s 

assets. Id. at 565. There was no bidding process and “[o]nly cursory contacts were made to 

search for strategic buyers and no consideration was given to contacting potential financial 

buyers.” Id. After the sale was completed, “[a]t least three competitors complained that 

they did not get sufficient notice of the fact that the Assets were for sale and they would 

have been serious potential buyers had they been given the opportunity. Following the 

public announcement of the transaction, a number of financial market analysts expressed 

the view (with appropriate analysis to back it up) that the $28,000,000 purchase price was 

a small fraction of the value that [the company] obtained . . . . [the plaintiff] filed a 

fraudulent conveyance action against [the company] and [the company] settled that action 

by paying [plaintiff] . . . an amount almost equal to what the . . . Defendants bargained for 

in selling the Assets[.]” Id. at 565-66. On these facts, the Bankruptcy Court held that the 

complaint adequately alleged a violation of the duty of loyalty. Id. at 566. But these 

extreme facts do not track the facts alleged in the SAC; crucially, unlike in Bridgeport, the 

board here was involved in the process, SAC ¶¶ 41-42. Bridgeport, then, has no bearing on 

the analysis here.

The Court thus GRANTS the Motion to Dismiss as to Claim V. Furthermore, given 

that Plaintiff has already been given the opportunity to address the deficiencies in the 

claims against the director defendants and the Opposition does not specify any additional 

facts it would seek to present, see generally Opp., the Court DENIES leave to amend. See

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Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) (whether to grant leave to amend is 

within the district court’s discretion).

B. Patterson

Plaintiff next alleges two claims against Patterson, then the CFO of Diadexus, for 

failure to protect Diadexus’s assets. In Claim I, Plaintiff alleges that Patterson breached her 

fiduciary duty to Diadexus. SAC ¶ 58. In Claim II, Plaintiff alleges Patterson acted grossly 

negligently in failing to protect the value of Diadexus’s assets. Id. ¶ 78. Because Patterson 

was the CFO, not a director, she is not exculpated from duty of care claims. See Mot. Ex. 4 

at 4. As a result, because Claim I simply states that Patterson violated a “fiduciary duty,” 

analyzing that claim requires considering whether the SAC adequately alleged a breach of 

the duty of care, the duty of loyalty, or the duty of good faith. See Malone v. Brincat, 722 

A.2d 5, 10 (Del. 1998) (recognizing that there is a “triad” of fiduciary duties, “due care, 

good faith, and loyalty.”). In addition, under Delaware law, duty of care violations are 

“predicated upon concepts of gross negligence.” Midland Grange No. 27 Patrons of 

Husbandry v. Walls, 2008 WL 616239, at *9 (Del. Ch. Feb. 28, 2008). And so Claim II, 

which alleges that Patterson was grossly negligent, SAC ¶¶ 68-81, tracks the claim for 

breach of the duty of care. 

The SAC contains only four claims about Patterson’s conduct. It states that she 

participated in the audit committee, and in 2015 “led a discussion of base case financial 

projections that showed the Company running out of cash during the fourth quarter of 

2016.” Id. ¶ 28. It also states that she “transmitted the base case and upside budgets to the 

entire Board and requested the Board to approve them.” Id. ¶ 29. It further states that she 

and Rafield “prepared a revised forecast for 2016,” which “projected the Company now 

would run out of operating cash in the third quarter of 2016.” Id. ¶ 31. Finally, it alleges 

that Patterson left Diadexus the same day that Diadexus began its Chapter 7 case. Id. ¶ 52. 

Similarly, the Opposition to the Motion argues only that “Patterson is named, as the 

Company’s most senior financial officer, for failing to act to cause the Company to timely 

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file for bankruptcy or otherwise protect its cash.” Opp. at 15 n.6. That statement cites no 

support in the SAC. Id.

These sparse allegations do not demonstrate gross negligence or a breach of a 

fiduciary duty, even assuming the business judgment rule does not apply to officers.

First, gross negligence is an “extremely stringent” standard. In re Lear Corp. 

S'holder Litig., 967 A.2d 640, 652 (Del. Ch. 2008). It requires the plaintiff show that the 

Defendant acted with “reckless indifference to or a deliberate disregard of the whole body 

of stockholders” or took actions outside “the bounds of reason.” Tomczak v. Morton 

Thiokol, Inc., 1990 WL 42607, at *12 (Del. Ch. Apr. 5, 1990). The SAC does not explain 

how Patterson’s participation in the audit committee, requests that the board approve 

budgets, or departure from Diadexus rise to that level. See generally SAC. Indeed, the 

SAC does not allege those activities were improper in any way, “much less undertaken 

with gross negligence.” Id. The SAC thus fails to adequately plead gross negligence 

against Patterson.

Second, and relatedly, the SAC fails to identify any breach of a fiduciary duty. For 

one thing, the SAC does not identify which duty or duties Plaintiff believes Patterson 

breached. See SAC ¶¶ 68-81. Nor does it identify what conduct Patterson should have 

taken to avoid a violation of a fiduciary duty. See generally id. Indeed, insofar as this claim 

can be understood to allege that Patterson played a role in preventing Diadexus from filing 

for bankruptcy, it appears that that action would not have been within her purview as an 

officer, as “whether to file for bankruptcy protection or not is generally a matter of 

directors’ business judgment” under Delaware law, and Patterson was an officer. In re 

Fedders N. Am., Inc., 405 B.R. at 542 (citing Odyssey Partners, L.P., 735 A.2d at 416–20) 

(emphasis added). The SAC therefore fails to adequately plead a breach of fiduciary duty 

against Patterson.

Moreover, this Court stated at the Motion to Dismiss Hearing on December 21, 

2018, that “[a]s to the gross negligence of the officer defendants . . . it is the Court’s view 

that it should be pled with greater particularity with respect to facts.” H’rg Tr. 3:16-17 

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(Dkt. 38). Additionally, Plaintiff has been unable to offer more specific allegations about 

Patterson’s conduct. The Court thus GRANTS the Motion to Dismiss as to Claims I and II 

against Patterson without leave to amend.

C. Rafield 

The final defendant is Rafield, the then-CEO and a member of the board. SAC ¶ 16. 

The SAC levels four claims against her: breach of fiduciary duty for failure to protect the 

value of Diadexus’s assets (Claim I), gross negligence for failure to protect the value of 

Diadexus’s assets (Claim II), breach of fiduciary duty for failure to conduct sale or 

restructuring (Claim III), and gross negligence for failure to conduct sale or restructuring 

(Claim IV). Confusingly, the SAC fails to specify what conduct it alleges Rafield to have 

taken in her capacity as an officer, and what conduct she took her in capacity as a director. 

See generally SAC. As explained above, this matters because Diadexus’s Certificate of 

Incorporation and 8 Del. C. § 102(b)(7) exculpates directors, but not officers, from many 

claims for breaches of fiduciary duty. Mot. Ex. 4 at 4 (Dkt. 46-4); see Arnold v. Soc’y for 

Sav. Bancorp, Inc., 650 A.2d 1270. 1288 (Del. 1994) (“[W]here a defendant is a director 

and officer, only those actions taken solely in the defendant’s capacity as an officer are 

outside the purview of Section 102(b)(7)” (internal citation omitted)). So, if the claims 

against Rafield for breach of fiduciary duty—Claims I and III—are understood as being 

leveled against her as a director, then Plaintiff would have to demonstrate that Rafield 

violated a duty of loyalty and either acted in bad faith, intentionally engaged in 

misconduct, or knowingly violated the law. See 8 Del. C. § 102(b)(7); Mot. Ex. 4 at 4. By 

contrast, for the claims against Rafield in her officer capacity, the SAC can be understood 

to allege violations of any fiduciary duty.4 

Because the SAC alleges that Rafield violated her fiduciary duties and was grossly 

negligent in both her capacities as a director and an officer, Defendants argue that the 

 

4

 The SAC also fails to state which fiduciary duties Rafield breached. See generally SAC. Instead, 

it states only that it believes that Rafield breached a “fiduciary duty.” Id. ¶¶ 57-67, 82-88.

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complaint would need to specify what actions Rafield took as a director and which she 

took as an officer. Mot. at vii; Rep. at 9-10. The SAC clearly alleges Claims II and IV 

against Rafield in her capacity “as Chief Executive Officer.” SAC ¶¶ 69, 90. Apart from 

Claims II and IV, the factual allegations in the SAC do not specify activities that are 

distinct to officers as opposed to directors, save for the process of “successfully completing 

a chapter 11 process,” much of which must be supplied by a debtor’s chief executive 

officer and chief financial officer.” Id. ¶ 50. 

Only one Delaware case supports Defendants’ position that the complaint must 

identify which actions were taken in the role of officer and which were taken in the role of 

director: Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270 (Del. 1994). In Arnold, 

the Delaware Supreme Court rejected a claim for breach of the duty of loyalty because the 

“plaintiff has failed to highlight any specific actions [defendant] undertook as an officer 

(as distinct from actions as a director)[.]” 650 A.2d at 1288. However, Arnold addressed a 

motion for summary judgment, id. at 1290, and, as far as the Court is aware, no Delaware 

court has yet had occasion to consider whether that specificity requirement is a substantive 

doctrine that would apply at the pleadings stage or is a Delaware procedural rule. 

Moreover, the Supreme Court of Delaware has held that the same facts that would 

adequately allege a breach of a fiduciary duty against a corporate director would also 

adequately allege a breach of a fiduciary duty against a corporate officer. Gantler v. 

Stephens, 965 A.2d 695, 709 (Del. 2009). And reading Arnold’s requirement for 

specificity into the pleading requirements would run counter to the general principle that at 

the motion to dismiss stage, all “reasonable inferences” must be drawn in favor of the nonmoving party, see Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001), because if the 

allegations that would support a claim against an officer if those allegations were 

understood as having occurred in the officer capacity, an inference should be drawn that 

the conduct was taken in the officer capacity. 

This is also consistent with several other district and bankruptcy courts’ conclusions 

as to the requirement that complaints specify whether actions were taken in a defendant’s 

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role as an officer or a director. See In re Century Electronics Mfg. Inc., 345 B.R. 33, 34, 36 

(Bankr. D. Mass. 2006) (“[T]he exculpatory clause does not shield officers who are also 

directors from breach of fiduciary duty claims arising from their acts taken as officers. 

While it is true that in this case, potentially, the Plaintiffs will have to identify the actions 

taken by the Defendants in their capacity as officers, it does not necessarily follow that 

Plaintiffs will be unable to do so during trial. As a practical matter, it will not be feasible at 

this stage of trial to try to parcel out actions taken by the Defendants in their capacity as 

directors.”); In re Robotic Vision Sys., Inc., 374 B.R. 36, 53–54 (Bankr. D.N.H. 2007) 

(“Costa contends that the complaint fails to make a distinction between the capacity in 

which he took various actions, i.e., whether as an officer or as a director . . . . the Court 

finds that the Trustee has made sufficient allegations, that if true, demonstrate a plausible 

entitlement for relief for breach of fiduciary duty by Costa acting in his capacity as an 

officer . . . . Accordingly, the Court shall not dismiss Counts I and II on that basis. Rather, 

the Trustee will be required at trial to demonstrate in which capacity Costa took specific 

actions[.]”); RSH Liquidating Tr. v. Magnacca, 553 B.R. 298, 316 (Bankr. N.D. Tex. 

2016) (“[I]n the context of a motion to dismiss, reasonable inferences must be drawn in 

favor of the plaintiff. It is reasonable to infer that at least some of Magnacca’s actions were 

taken in his capacity as an officer.”). So, while a lack of clarity regarding what conduct 

Rafield took as an officer or a director may, later, present a hurdle for Plaintiff, see Arnold, 

650 A.2d at 1288, at this stage in litigation, it does not foreclose the claims against Rafield.

a. Claims I and III: Breach of Fiduciary Duty 

Claim I alleges that all Defendants, including Rafield, “were indifferent to their 

known duties by failing to act to preserve and protect the value of Diadexus’ business and 

assets in the face of an imminent, severe, and actually foreseen risk of a cash sweep, such 

as by taking such conventional and customary steps as commencing a chapter 11 case or 

entering into any of the forbearance agreements offered by Oxford.” SAC ¶ 63. By failing 

to act, Rafield was “disloyal and faithless to Diadexus.” Id. ¶ 64. 

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Plaintiff argues that Rafield failed to protect Diadexus’s assets when she failed to 

cause Diadexus to file for Chapter 11 bankruptcy or enter into a forbearance agreement. 

See id. ¶¶ 57-67, 82-88. To bring this claim against Rafield as a director—and thus 

protected by the exculpatory clause—the SAC would need to allege bad faith. See Mot. 

Ex. 4 at 4. However, as an officer, the exculpatory clause does not apply, see id., and thus 

the SAC need only meet the lower bar of plausibly pleading breach of any fiduciary duty.

The SAC adequately pleads a breach of fiduciary duty against Rafield. Perhaps 

most straightforwardly, the SAC makes out a claim for breach of the duty of loyalty. That 

duty can be violated when a person acts not in good faith; “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 duty to act, 

demonstrating a conscious disregard for his duties.” Stone ex rel. AmSouth 

Bancorporation, 911 A.2d at 369. 

The SAC alleges just that: that Rafield acted not in good faith when she prevented 

Diadexus from filing for Chapter 11 protection or enter forbearance (Claim I) and failed to 

conduct a sale of Diadexus or restructure the company to avoid its collapse (Claim III), 

SAC ¶¶ 57-67, 82-88. Specifically, Plaintiff alleges that: (1) Rafield knew by December 

2015 that “there was a substantial likelihood that the Company would run out of operating 

cash during 2016,” and knew by March 13, 2016 that the Company would run out of 

liquidity in the third quarter of 2016. SAC ¶¶ 29, 31. (2) Rafield refused to work with 

Alvarez because “it was contrary to her personal preferences and interests,” writing that it 

was “unlikely to work for me personally” and that she had “no interest in working for 

Oxford.” Id. ¶¶ 35, 36. (3) She stated that she would not “remain engaged” unless the 

company was “recapped” which would allow her to keep her job, rather than sell assets 

which would likely result in her termination. Id. ¶ 36. (4) Rafield refused to devote her 

attention to the sale or refinancing process at multiple critical times, stating to “Company 

counsel and Sulat” that “she was too ‘booked,’” that “the board can get someone else” to 

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deal with Oxford, and that she “refused to spend her time putting together a business plan 

and strategy for Oxford.” Id. ¶¶ 37, 39. (5) Rafield presented an attitude that directors 

observed as “an initial reaction that she wanted a severance trigger.” Id. ¶ 41. (6) She 

expressed open contempt for the interests of creditors and shareholders, stating “I am not 

filing for bankruptcy to make it easy for Oxford. Let the shareholders sue Oxford for 

damaging their investment for the self-interest of Oxford.” Id. ¶ 37. (7) She questioned 

why restructuring advisor Alvarez was on a board call “to discuss the Company’s financial 

crisis.” Id. ¶ 42. (8) Rafield required Leap Tide to “communicate exclusively with Rafield, 

who had a clear conflict, rather than Alvarez, which should have been running the process, 

or some other Company representative who might be less self-interested and less hostile.” 

Id. ¶ 46. (9) Rafield “repeatedly referred to Leap Tide with repugnant language, would not 

permit Leap Tide to conduct diligence or even entertain discussions. Id. (10) She would 

not permit Cleveland HeartLab, which would eventually bid at the chapter 7 auction, to 

access diligence materials. Id. ¶ 47. (11) She antagonized Oxford by “clos[ing] the data 

room and revok[ing] Alvarez’s authority to continue the marketing process.” Id. ¶ 48. (12) 

Rafield admitted that as late as May 27, 2016 that it might consider a sale “if it could 

achieve a cooperative/consensual process for limiting director liability.” Id. ¶ 49. And, (13) 

Rafield did not utilize chapter 11 to secure an adequate sale process. Id. ¶ 50.

These allegations suffice to state a claim for breach of the duty of loyalty because 

they support the inference that Rafield acted to promote her own self-interest—as 

demonstrated, for instance, by her statement that Oxford’s proposal was “unlikely to work

for [her] personally” and she had “no interest in working for Oxford,” id. ¶ 36—and thus 

“intentionally act[ed] with a purpose other than that of advancing the best interests of the 

corporation,” Stone, 911 A.2d at 369. Unlike the director defendants, where there is no 

allegation that they were prioritizing some other purpose over Diadexus’s interests, there 

are such allegations as to Rafield. Cf. SAC ¶ 36. That is, the facts adequately allege that 

Rafield was “intentionally disregarding [her] duties.” In re Chelsea Therapeutics Int’l Ltd. 

Stockholders Litig., 2016 WL 3044721, at *7 (Del. Ch. May 20, 2016).

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This conclusion holds true even if, as Defendants urge, the business judgment rule 

applies both to directors and officers. See Opp. at vi. If that rule applies, “[t]he burden falls 

upon the proponent of a claim to rebut the presumption by introducing evidence” of “selfinterest, if not self-dealing,” or lack of “good faith or fail[ure] to exercise due care.” 

Citron, 569 A.2d at 64 (internal citation omitted). Because the SAC alleges that Rafield 

was acting out of self-interest, it would meet that burden. Cf. In re Chelsea Therapeutics 

Int’l Ltd. Stockholders Litig., 2016 WL 3044721, at *7. Thus, even assuming that the 

business judgment rule applies, the SAC adequately pleads breach of fiduciary duty 

against Rafield. The Court thus DENIES the Motion to Dismiss Counts I and III against 

Rafield.

b. Claims II and IV: Gross Negligence

Under Delaware law, gross negligence is “reckless indifference to or a deliberate

disregard of the whole body of stockholders or actions which are without the bounds of 

reason.” Benihana of Tokyo, Inc. v. Benihana, Inc., 891 A.2d 150, 192 (Del. Ch. 2005), 

aff’d, 906 A.2d 114 (Del. 2006). 

Plaintiff points to the same facts as above to argue that Rafield knew that Oxford 

would execute on Diadexus’s default, yet acted to prevent Diadexus from taking any steps 

to protect the company from being “swept,” for instance by entering a forbearance 

agreement, or to protect Diadexus’s assets. SAC ¶¶ 68-81. 

Defendants argue that these allegations are insufficient because, while the SAC 

states that Oxford presented a “reasonable” forbearance agreement, SAC ¶ 44, the SAC did 

not provide “details” about that agreement. Mot. at 15. But that lack of details does not 

foreclose, at this stage of litigation, the complaint. The allegation in the SAC is that 

Rafield knew that Oxford was going to “sweep” Diadexus, and yet refused to execute that 

agreement and actively blocked that agreement, against Alvarez’s advice, and acted in an 

“inadequately informed basis.” SAC ¶¶ 39, 40. Likewise, the SAC alleges that Rafield 

knew that sweep would adversely affect Diadexus’s assets and yet failed to act. Id. ¶¶ 68-

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These allegations satisfy the requirement of gross negligence. See In re Fedders N. 

Am., Inc., 405 B.R. at 539 (it is gross negligence under Delaware law where “directors and 

officers to fail to inform themselves fully and in a deliberate manner.” (citing Trenwick, 

906 A.2d at 194)). And Defendants’ arguments are not to the contrary; while they dispute 

whether there may be other explanations for Rafield’s conduct, Mot. at 14-16, these 

arguments are unpersuasive where, as here, inferences must be drawn in favor of Plaintiff. 

See Western Reserve Oil & Gas Co., 765 F.2d at 1430. Moreover, unlike the allegations 

against Patterson, the SAC does specifically allege what conduct Rafield engaged in and 

why that conduct led to Diadexus not entering a forbearance agreement. See SAC ¶¶ 35-

50. The SAC thus has stated a plausible claim against Rafield for gross negligence. The 

Court thus DENIES the Motion to Dismiss as to Counts II and IV against Rafield.

D. Judicial Notice

Finally, Defendants ask the Court take notice of four documents: two excerpts from 

Diadexus’s Form 10-Ks filed with the SEC, Oxford’s Notice of Event of Default and 

Reservation of Rights and is referenced in the SAC, and Diadexus’s Certificate of 

Incorporation. Request for Jud. Notice. The Court previously took judicial notice of 

Diadexus’s Certificate of Incorporation. See Minute Entry, Dec. 21, 2018 (Dkt. 36); Opp. 

to Request for Judicial Notice at 4 (Dkt. 50). Plaintiff recognizes that this holding is now 

the law of the case as to the Certificate of Incorporation. Opp. to Request for Jud. Notice at 

4. It does not object to judicial notice of Oxford’s Default Notice. Id. at 4. The Court 

hereby takes judicial notice of Diadexus’s Certificate of Incorporation, as it did in 

addressing the First Motion to Dismiss, see Minute Entry Dec. 21, 2018, but declines to 

take judicial notice of the other documents, as they have no impact on the foregoing 

analysis.

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