Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_04-cv-01739/USCOURTS-azd-2_04-cv-01739-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

In re VistaCare, Inc., )

Derivative Litigation, )

______________________________)

) No. CIV 04-1739-PHX RCB

George Palmetto, et al., )

) O R D E R

Plaintiffs, )

v. )

)

David A. Freeman, et al., )

)

Defendants. ) )

I. Introduction

On August 20, 2004, Plaintiffs George Palmetto, et al., filed

a derivative lawsuit against Defendants David A. Freeman, et al.,

seeking to stand in the shoes of VistaCare, Inc. ("VistaCare") and

bringing claims held by VistaCare. Complt. (doc. 1). On November

23, 2005, Defendants Freeman, Perry G. Fine, William J. McBride,

Pete A. Klisares, David W. Faeder, and Geneva B. Johnson

("Individual Defendants") filed a motion to dismiss the case due to

a lack of personal jurisdiction. Mot. Lack of P. Jurisdiction

(doc. 17). Thereafter, all the defendants filed a motion to 

Case 2:04-cv-01739-RCB Document 42 Filed 08/30/06 Page 1 of 20
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1 In the case at bar, the defendants are Richard R. Slager, Mark

E. Liebner, Pete A. Klisares, David W. Faeder, Perry G. Fine, Ronald

A. Matricaria, William J. McBride, Geneva B. Johnson, and David A.

Freeman ("Defendants"). All of the defendants, except for Liebner

and Freeman, are the "Director Defendants." The nominal defendant is

VistaCare, Inc. ("VistaCare").

2

 In their Reply, Defendants made a request for oral argument on

this matter. (doc. 39). Such request is untimely, pursuant to Local

Rule 7.2(f). Thus, the Court shall deny Defendants' request.

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dismiss Plaintiffs' consolidated derivative complaint pursuant to

Federal Rule of Civil Procedure 12(b)(6). Mot. (doc. 20).1

On November 30, 2005, and upon stipulation by the parties, the

Court ordered Defendants' motion to dismiss for lack of personal

jurisdiction stayed pending resolution of Defendants' motion to

dismiss pursuant to Fed.R.Civ.P. 12(b)(6). Order (doc. 26). In

addition, the Court determined a specific briefing schedule for

Defendants' motion to dismiss for lack of personal jurisdiction,

should Defendants' motion to dismiss pursuant to Fed.R.Civ.P.

12(b)(6) be denied in whole or in part. Id. Following the Court's

order, Defendants' motion to dismiss pursuant to Fed.R.Civ.P.

12(b)(6) was fully briefed on February 9, 2006. Reply (doc. 39).2

Having carefully considered the arguments presented by the parties,

the court now rules.

II. Background Facts

VistaCare is one of the leading providers of hospice services

in the United States. VistaCare receives most of its revenue from

Medicare, whose payments are subject to an annual "cap." 

Generally, the total cap for any specific site is calculated by

multiplying the fiscal-year per-patient cap amount by the number of

first-time, Medicare-eligible patients enrolled during the cap

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year, and then adjusting for several factors. If Medicare pays for

services during the fiscal years beyond the cap amount, it may seek

repayment of the excess. 

From about November 2003 to August 2004, VistaCare

consistently reported financial growth. However, on August 5,

2004, VistaCare issued a press release announcing its second

quarter financial results for the quarter ending June 30, 2004. In

that release, VistaCare revised downward its financial projections

for the remainder of 2004, in part because it increased reserves

against future Medicare cap reimbursements. By the following

day's closing, the price of VistaCare's stock decreased by 18%. 

Thereafter, a press release dated December 6, 2004, revealed that

VistaCare faced the accrual of an additional $7.8 million for the

Medicare cap, resulting in a net loss for the quarter of $6.2

million. In response to these actions, Plaintiffs filed this

litigation. 

III. Standard of Review

A Rule 12(b)(6) motion to dismiss is proper where there is

either a "lack of a cognizable legal theory" or the absence of

sufficient facts alleged to support a cognizable legal theory. 

Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir.

1988). Such a motion may be granted only if "it appears beyond

doubt that the plaintiff can prove no set of facts in support of

his claim which would entitle him to relief." Conley v. Gibson,

355 U.S. 41, 45-46 (1957).

In deciding such a motion, all material allegations of

the complaint are accepted as true, as well as all

reasonable inferences to be drawn from them...Dismissal

is proper only where there is no cognizable legal theory

or an absence of sufficient facts alleged to support a

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cognizable legal theory.

Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001) (internal

citations omitted). The parties agree that Delaware law applies in

this matter. Mot. (doc. 20) at 2-3; Resp. (doc. 32) at 4. 

IV. Discussion - Demand Futility

The decision to bring a lawsuit in the name of a corporation

is a responsibility that rests with the board of directors. See

Spiegel v. Buntrock, 571 A.2d 767, 773 (Del. 1990). If the

majority of the board can weigh the pros and cons of bringing suit

without being controlled by outside forces, the board is entitled

to decide whether to initiate a lawsuit. Id. at 773-74. This

holds true even if meritorious claims are made in a demand; a board

may forego litigation if, in exercising its business judgment, the

board decides that it is best for the company not to do so. Id.

at 777. Because derivative suits brought by shareholders

"challenge the propriety of decisions made by directors pursuant to

their managerial authority, [courts] have repeatedly held that the

stockholder plaintiffs must overcome the powerful presumptions of

the business judgment rule before they will be permitted to pursue

the derivative claim." Rales v. Blasband, 634 A.2d 927, 933 (Del.

1993). 

Delaware Chancery Court Rule 23.1 ("Rule 23.1") provides that

a derivative complaint must "allege with particularity the efforts,

if any, made by the plaintiff to obtain the action the plaintiff

desires from the directors...and the reasons for the plaintiff's

failure to obtain the action or for not making the effort." Here,

Plaintiffs concede that they never made a demand on VistaCare's

board, claiming that to do so would have been "futile." Complt.

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(doc. 1) at ¶ 61. Thus, Plaintiffs must plead with particularity

facts sufficient to support their futility assertion. See Aronson

v. Lewis, 473 A.2d 805, 815 (Del. 1984), overruled on other grounds

by Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000). Demand futility

is judged at the time the plaintiff filed the complaint. See

Harris v. Carter, 582 A.2d 222, 229-30 (Del. Ch. 1990). 

The burden to establish demand futility is "more onerous than

that required to withstand a Rule 12(b)(6) motion to dismiss." 

Levine v. Smith, 591 A.2d 194, 207 (Del. 1991), overruled on other

grounds by Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000). "What

the pleader must set forth are particularized factual statements

that are essential to the claim." Brehm, 746 A.2d at 254. 

Conclusory language "does not comply with these fundamental

pleading mandates." Id. However, a plaintiff is not required to

plead evidence inasmuch as discovery is foreclosed. See Levine,

591 A.2d at 207. In any event, if a plaintiff fails to meet these

stringent requirements, the complaint must be dismissed even if it

pleads otherwise meritorious claims. See Kaufman v. Belmont, 479

A.2d 282, 286 (Del. Ch. 1984).

Actions that may be challenged by a derivative lawsuit fall

into one of two categories: (1) an affirmative act undertaken by

the directors; or (2) no specific board action is challenged. See

Rales, 634 A.2d at 933-34. Where a shareholder, such as in the

case at bar, does not challenge a specific action or decision of

the board, demand may be excused where the complaint raises a

reasonable doubt that a majority of the board's directors are

disinterested and independent. Id. at 930. Under this test, a

shareholder establishes that demand would have been futile only if

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a majority of the board: (1) faces a substantial likelihood of

liability under the specific facts alleged in the derivative

complaint; or (2) is controlled by one or more directors who face a

substantial likelihood of liability. Id. at 936-37. 

In the case at bar, Plaintiffs allege that Defendants caused

VistaCare's shares to trade at artificially inflated levels through

the issuance of false and misleading statements, and failed to

supervise VistaCare so as to properly reserve for the company's

Medicare reimbursements. Complt. (doc. 1) at ¶¶ 8-10. The parties

do not dispute that Plaintiffs are not challenging an affirmative

act by the board, and, thus, must establish demand futility under

the test set forth in Rales. 

A. Substantial Likelihood of Liability

In their motion to dismiss, Defendants assert that Plaintiffs

have failed to plead particularized facts to create a reasonable

doubt that four VistaCare directors – a majority – could

independently consider a litigation demand. Mot. (doc. 20) at 5. 

A director is not independent only if particularly pled facts

demonstrate that "a corporate decision [on the demand] will have a

materially detrimental impact on a director, but not on the

corporation and the stockholders." Rales, 634 A.2d at 936. The

key inquiry "is whether the plaintiffs have pled facts that show

that...[the] directors face a sufficiently substantial threat of

personal liability to compromise their ability to act impartially

on a demand." Guttman v. Huang, 823 A.2d 492, 503 (Del. Ch. 2003). 

To plead a substantial threat of personal liability, Plaintiffs

must set forth particularized facts showing that a defendant

either: (1) "personally profited from stock sales while in knowing

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3 This type of claim is also known as a Caremark claim, named in

reference to In re Caremark Int'l Derivative Litig., 698 A.2d 959,

967 (Del. Ch. 1996).

4 Defendants note that the Complaint identifies a third director

who sold stock – Freeman – but he was not a member of VistaCare's

board when Plaintiffs filed this action. Mot. (doc. 20) at 6. Thus,

he is not relevant to the demand futility analysis. See Harris, 582

A.2d at 230. 

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possession of material, non-public information[;]" or (2)

"committed a non-exculpated breach of fiduciary duty by failing to

oversee the company's compliance with legally mandated accounting

and disclosure standards."3 Guttman, 823 A.2d at 503. Here,

Defendants assert that Plaintiffs do not allege a single

particularized fact that supports either of these two

possibilities. Mot. (doc. 20) at 6. 

First, Defendants argue that Plaintiffs' insider trading

allegations fail to establish the necessary particularized facts

required to show demand futility. Id. at 6-7. "[P]laintiffs

generally proffer that two directors, Slager and Fine, purportedly

engaged in 'illegal insider trading.'"4

 Id. at 6. Specifically,

Defendants assert that Plaintiffs fail to raise any facts regarding

information that the directors acquired and knew showing that the

stock sales were "entered into and completed on the basis of, and

because of adverse material non-public information." Id. "Given

that Slager and Fine do not face personal liability for insider

trading, it cannot be said that they were unable to consider a

litigation demand." Id. at 7. 

Moreover, Defendants note, and Plaintiffs do not dispute in

their response, that all of the stock sales made by Slager and Fine

were non-discretionary sales made pursuant to a "10b5-1 stock

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trading plan." Mot. (doc. 20) at 7. They maintain that under

10b5-1 plans, sellers cannot deviate from the plan by changing the

amount, price or timing of their sale. 17 C.F.R. § 240.10b5-

1(c)(1)(i)(C) (2005). Accordingly, Defendants argue that the

timing of such trades cannot be deemed suspicious since they

eliminate the ability to time stock sales based upon inside

information. Mot. (doc. 20) at 7. 

Second, Defendants assert that Plaintiffs have not pled facts

that indicate that a majority of VistaCare's board committed an

actionable breach of fiduciary duty. Id. at 7-9. Delaware law

limits the fiduciary breaches for which a director may be liable to

a company. Section 102(b)(7) of the Delaware General Corporation

Law permits shareholders to ratify a charter provision insulating

directors from liability for all fiduciary breaches that result

from mistake or negligence. 8 DEL. C. § 102(b)(7). The parties do

not dispute that VistaCare's shareholders have approved such a

provision. Mot. (doc. 20) at 7; Resp. (doc. 32) at 17. Hence,

only fiduciary breaches involving intentional misconduct, bad faith

or disloyalty can form the basis of a cause of action against the

directors. See Malpiede v. Townson, 780 A.2d 1075, 1094-95 (Del.

2001). In order to show the requisite bad faith, a plaintiff must

demonstrate that a defendant "allowed a situation to develop and

continue which exposed the corporation to enormous [] liability and

that in so doing they violated a duty to be active monitors of

corporate performance." Caremark, 698 A.2d at 967. 

Here, Defendants contend that the core of Plaintiffs'

allegations is that the directors permitted VistaCare to wrongly

predict the amount of Medicare cap reimbursements it would owe. 

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Mot. (doc. 20) at 7-8. However, they maintain that Plaintiffs

merely assert without factual support that Defendants knowingly

participated in the alleged wrongdoing. Id. at 8. "[P]laintiffs

do not allege how any director was involved in VistaCare's efforts

to estimate reserves for future Medicare cap payments. Plaintiffs

do not identify a single corporate document, conversation, or board

meeting that purportedly appraised any board member, much less a

majority, that additional reserves for future Medicare cap

assessments were necessary." Id. For these reasons, Defendants

argue that none of VistaCare's directors face a substantial

likelihood of being found liable to VistaCare for intentionally

breaching their fiduciary duty. Id. at 9.

Third, Defendants assert that Plaintiffs' remaining arguments

for demand futility are generalized statements applicable to any

director of a public company and, thus, are irrelevant. Mot. (doc.

20) at 9. Specifically, Defendants assert that Plaintiffs' claims

that (1) the Director Defendants engaged in the alleged wrongdoing

to "protect and enhance" their positions, and (2) that demand is

futile because Defendants would have to "sue themselves," resulting

in a loss of insurance and/or personal liability in excess of

insurance coverage limits, are arguments that have been

consistently rejected by courts. Id. (citing Growbow v. Perot, 539

A.2d 180, 188 (Del. 1988); Lewis v. Straetz, 1986 WL 2252, at *4-*5

(Del. Ch. Feb. 12, 1986); Brehm, 746 A.2d at 257 n.34; Aronson, 473

A.2d at 818; Decker v. Clausen, No. Civ. A. Nos. 10.684, 10,685,

1989 WL 133617, at *2 (Del. Ch. Nov. 6, 1989)). Defendants

maintain that such "boilerplate allegations" do not sufficiently

plead demand futility. Id. 

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In response to Defendants' arguments, Plaintiffs assert that

they have met their burden for demonstrating demand futility in

this case. Resp. (doc. 32) at 5. "[P]laintiffs' burden here is

not to prove wrongdoing or demonstrate that they are likely to win

on the merits; rather, plaintiffs' burden at the pleading stage is

only to allege particularized facts which, if true, would give a

reasonable shareholder reason to doubt the ability of four of the

seven members of the VistaCare Board to consider a demand." Id.

First, Plaintiffs maintain that Defendants Slager and Fine are

directly interested in the insider trading allegations in the

Complaint because each of them received a personal financial

benefit from those transactions. Id. at 7. Moreover, Plaintiffs

allege that Slager and Fine knowingly traded large percentages of

their holdings in VistaCare while in possession of undisclosed

material adverse information, in order to personally profit from

the artificially inflated price of the company's stock. Id. at 7-

8. Plaintiffs note that in the Complaint, they stated:

As a result of their access to and review of

internal corporate documents; conversations and

connections with other corporate officers,

employees and directors; and attendance at

management and Board meetings, each of the

defendants knew the adverse non-public information

regarding the improper accounting. While in

possession of this material adverse non-public

information regarding the Company...

Slager sold 116,000 shares of VistaCare stock for

proceeds of $3,949,288.67, which represents more

than ten times the total compensation paid to

Slager during FY:03. ...he sold 36% of his total

holdings during the Relevant Period; and

Fine sold 41,500 shares of VistaCare stock for

proceeds of $1,125,012.60. ...he sold 57% of his

total holdings during the Relevant Period. Because

these defendants received personal financial

benefits from the challenged insider trading

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transactions, these defendants are interested and

demand upon them is futile.

Complt. (doc. 1) at ¶ 67(a)(i)-(ii). Under "the standard set

forth in" Zimmerman v. Braddock, No. 18473-NC, 2005 WL 2266566, at

*8 (Del. Ch. Sept. 8, 2005), Plaintiffs argue that they have

adequately alleged that Slager and Fine had knowledge of material

information that formed the basis of their trades, subjecting them

to a "substantial likelihood of liability and rendering them

incapable of impartially evaluating a demand to commence and

vigorously prosecute this action." Resp. (doc. 32) at 8.

 Second, Plaintiffs argue that Defendants McBride, Klisares

and Matricaria, all members of the Audit Committee, lack

independence and are interested because they face a substantial

likelihood of liability for their involvement in the dissemination

of false and misleading statements. Id. Plaintiffs assert that

there is "no doubt" that the press releases, Forms 10-Q and Form

10-K issued during the relevant period were false and misleading. 

Id. They base this assertion on the Honorable Frederick J.

Martone's finding that "similar facts alleged by plaintiffs in a

related class action demonstrate the falsity of these statements." 

Id. (citing In re VistaCare Inc. Sec. Litig., No. 04-CV-1661-PHXFJM, Order at 3 (D. Ariz. Aug. 18, 2005)). 

Plaintiffs note that the Audit Committee Charter defines the

Audit Committee's responsibilities as:

...assist[ing] the Board of Directors in

fulfilling its responsibility for oversight of the

quality and integrity of the accounting, auditing,

and reporting practices of the company, and such

other duties as directed by the Board. The

Committee's role includes a particular focus on

the qualitative aspects of financial reporting to

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shareholders, and on the company's processes to

manage business and financial risk, and for

compliance with significant applicable legal,

ethical, and regulatory requirements. 

Complt. (doc. 1) at ¶ 67(c). Plaintiffs maintain that to

accomplish this role, the Charter expressly requires the Audit

Committee to evaluate the "[s]tatus of significant accounting

estimates and judgments (e.g., reserves) and special issues (e.g.,

major transactions, related party transactions, accounting

changes)," to conduct a "[r]eview of the Annual Report on Form 10-

K and proxy statement, including MD&A," to "[d]iscuss earnings

press releases and other financial information and earnings

guidance provided to analysts and rating agencies," to conduct a

"[r]eview of Quarterly Reports on Form 10-Q, including MD&A," and

to conduct an "[a]ssessment of internal control" at least

annually. Id.

Plaintiffs argue that "[d]espite their duties to ensure that

VistaCare issued proper financial statements and guidance and

their personal review of those statements, the members of the

Audit Committee allowed the false press releases and financial

statements and even recommended to the Board to include the false

financial statements in VistaCare's Form 10-K filed with the SEC

for the Fiscal Year 2003." Resp. (doc. 32) at 9-10. Thus, they

assert that any demand on the members of the Audit Committee would

have been futile, because the members were actively involved in

the review and dissemination of all of the statements Plaintiffs

allege were false and misleading. Id. at 10.

. . .

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B. Control of a Majority of the Board by an Interested 

Director

Defendants contend that their motion to dismiss should be

granted because Plaintiffs have failed to show that any interested

director controlled a majority of the directors on the VistaCare

board. Mot. (doc. 20) at 10. At the outset, Defendants maintain

that because Plaintiffs have not shown that any director lacks

independence, the issue of control is irrelevant. Id. Moreover,

Defendants argue that Plaintiffs have not produced any facts that

establish that any director controlled or "dominated" the board. 

Id. They contend that any arguments asserting that such

domination existed because (1) the directors, who were members of

the Nominating and Corporate Governance Committee, "singularly

control the other defendants' awards and positions[,]" or (2) the

directors held professional relationships with each other, are

irrelevant. Id. Defendants argue that Plaintiffs do not, and

cannot, allege any facts demonstrating that any interested

director controlled other directors. Id. at 11. 

In contrast, Plaintiffs again assert that they have met their

burden for demonstrating demand futility in this case. Resp.

(doc. 32) at 5. First, Plaintiffs argue that Defendant Slager is

controlled by the members of the Compensation Committee due to his

employment as President, Chairman and Chief Operating Officer

("CEO") of VistaCare. Id. at 6. They contend that Slager cannot

be independent because his principal profession is his employment

with VistaCare, pursuant to which he receives "$375,798 in salary

alone." Id. Hence, Plaintiffs assert that Slager is not

independent from Defendants Johnson, Matricaria and Klisares,

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because they comprise the Compensation Committee and are

responsible for evaluating and determining the compensation of the

CEO. Id. "Because of his status as an inside director, and the

concomitant substantial compensation he receives, defendant Slager

could not consider a demand adverse to the Director Defendants

serving on the Compensation Committee." Id. (citing the following

in support of their argument: Rales, 634 A.2d at 937; Steiner v.

Meyerson, No. 13139, 1995 WL 441999, at *10 (Del. Ch. July 19,

1995); In re The Student Loan Corp. Derivative Litig., No. 17799,

2002 WL 75479, at *3 (Del. Ch. Jan. 8, 2002)).

Second, Plaintiffs assert that Defendants Slager, Klisares

and Faeder lack independence due to their "entangling

relationships." Resp. (doc. 32) at 6. Plaintiffs note that

Slager, Klisares and Faeder are "long-time business associates,

all involved in the start-up and/or development of Karrington

Health, Inc. ("Karrington"), which in 1998, was acquired by

Sunrise Assisted Living, Inc." Id. at 11. Slager was the

founder, Chairman and CEO of Karrington, and Klisares was COO and

President of Karrington. Id. In addition, Plaintiffs note that

Slager is the Executive Vice President and a director of Sunrise,

and that Klisares is also a director of Sunrise. Id. "As a

result, these entangled relationships create strong incentives for

these defendants to avoid suing each other, thereby showing demand

would have been futile." Id. 

V. Analysis - Demand Futility 

A. Alleged Insider Trades by Slager and Fine

In order to satisfactorily show that Slager and Fine face a

"substantial likelihood" of liability for insider trading,

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Plaintiffs must plead facts that support the conclusion "that each

sale by each individual defendant was entered into and completed

on the basis of, and because of adverse material non-public

information." Guttman, 823 A.2d at 505 (citing Stepak v. Ross,

1985 WL 21137, at *5 (Del. Ch. Sept. 5, 1985)). Plaintiffs, in

their response, assert that under "the standard set forth in"

Zimmerman v. Braddock, No. 18473-NC, 2005 WL 2266566, at *8 (Del.

Ch. Sept. 8, 2005), they have adequately alleged that Slager and

Fine had knowledge of material information that formed the basis

of their trades, subjecting them to a "substantial likelihood of

liability." The Court, however, finds this statement misplaced,

as the "standard" utilized in Zimmerman is the same as that

defined in Guttman, holding that "[t]o proceed on an insider

selling claim, a plaintiff must show 'that each sale by each

individual defendant was entered into and completed on the basis

of, and because of, adverse material non-public information.'" 

Zimmerman, No. 18473-NC, 2005 WL 2266566, at *8 (quoting Guttman,

823 A.2d at 505). 

The court in Zimmerman noted that the plaintiffs in that

matter had adequately pled facts that created a reasonable

inference that the specific defendants had "knowledge-directly and

by imputation-of [the companies'] problems." Id. In contrast

with the case at bar, the plaintiffs in Zimmerman pled particular

facts that indicated that concerns about the companies at issue in

the case had been expressed to the defendants and that the

defendants had access to "Pricing Reports, Demographic Analyses,

Network Operations Center Reports, and Promotion Reconciliation

Reports," all of which detailed enough information to reveal the

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difficulties one of the companies faced. Id. Here, Plaintiffs

plead no such facts. 

In the case at bar, Plaintiffs claim that "[a]s a result of

their access to and review of internal corporate documents;

conversations and connections with other corporate officers,

employees and directors; and attendance at management and Board

meetings, [Slager and Fine] knew the adverse non-public

information regarding the improper accounting." Complt. (doc. 1)

at ¶ 67(a). Such conclusory statements do not satisfy the strict

requirements of Rule 23.1. Plaintiffs fail to indicate how or in

what form the "non-public information regarding the improper

accounting" was disclosed to Slager and Fine through any of these

listed mechanisms. Absent from the Complaint are well-pled,

particularized facts detailing the specific information that would

have come to their attention in their roles at VistaCare, and an

indication as to why they would have perceived any accounting

irregularities. In the absence of specific facts that support a

rational inference that Slager or Fine had some basis to believe

that VistaCare's financial statements were materially misleading

in a manner that inflated the company's stock price, the mere fact

that two of the directors sold large portions of their stock does

not support the conclusion that they face a real threat of

liability. Consequently, the Court concludes that Plaintiffs have

failed to plead particular facts that show that Slager and Fine

face a "substantial likelihood" of liability for insider trading. 

B. The Audit Committee

The Court also does not find that Plaintiffs have

successfully pled particular facts that establish their Caremark

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claim. To establish that VistaCare's Audit Committee members are

"interested" directors, Plaintiffs must plead facts that show that

each member, who was a director, faces a "substantial likelihood"

of liability. "The 'mere threat' of personal liability in the

derivative action does not render a director interested; however,

a 'substantial likelihood' of personal liability prevents a

director from impartially considering a demand." Seminaris v.

Landa, 662 A.2d 1350, 1354 (Del. Ch. 1995). 

Here, the parties do not dispute that the directors are

exempt from liability for violations of their duty of care. See

Mot. (doc. 20) at 7; Resp. (doc. 32) at 17. Additionally, the

parties agree that to show a "'substantial likelihood' of personal

liability," Plaintiffs must plead specific facts that implicate

breaches of the directors' duties of loyalty and good faith. Id.;

see also Emerald Partners v. Berlin, 726 A.2d 1215, 1227 (Del.

1999). The Court finds that Plaintiffs have failed to plead such

facts. 

Here, Plaintiffs basically assert that the Audit Committee,

which includes Director Defendants McBride, Klisares and

Matricaria, "allowed the false press releases and financial

statements and even recommended to the Board to include the false

financial statements in VistaCare's Form 10-K filed with the SEC

for the Fiscal Year 2003." Resp. (doc. 32) at 9-10. They allege

that such Director Defendants were "required to take an active

role in the review and dissemination of all of [VistaCare's]

financial statements and communications concerning [VistaCare's]

results, operations and prospects." Id. at 10. "By failing to

properly carry out their duties as guardians of VistaCare's

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financial results, [the three Director Defendants] breached their

fiduciary duties[.]" Id. Such conclusory claims, however, are

not sufficient to survive a motion to dismiss.

In Guttman, the court considered Caremark claims brought by

shareholders against directors of a specific corporation. 823

A.2d at 499, 505-07. The plaintiffs in Guttman asserted demand

futility because, among other things, the defendant directors

"failed to oversee the process by which [the corporation] prepared

its financial statements so as to ensure that the resulting

statements had integrity and met legal standards." Id. at 505. 

Thus, the plaintiffs argued that the defendant directors faced

liability for breaches of their fiduciary duties and, therefore,

lacked the ability to act impartially on a demand. Id. at 499. 

The court, however, concluded that the plaintiffs failed to

sufficiently plead particular facts to establish their claims. 

Id. at 506-08. 

In this case, the plaintiffs have not come close

to pleading a Caremark claim. Their conclusory

complaint is empty of the kind of fact pleading

that is critical to a Caremark claim, such as

contentions that the company lacked an audit

committee, that the company had an audit committee

that met only sporadically and devoted patently

inadequate time to its work, or that the audit

committee had clear notice of serious accounting

irregularities and simply chose to ignore them or,

even worse, to encourage their continuation.

Id. at 506-07. The circumstances described in Guttman are on par

with those currently before this Court.

Here, Plaintiffs do not plead particular facts (1) that

indicate how Director Defendants McBride, Klisares and Matricaria

were involved or failed "to take an active role" in the review and

dissemination of the alleged false statements; (2) that designate

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a specific false statement that was reviewed and used by the Audit

Committee; or (3) that indicate how and when these Defendant

Directors learned that any alleged statement was false. The fact

that Judge Martone concluded that "similar facts" sufficiently

demonstrated the falsity of the contested financial statements in

order to survive a motion to dismiss is irrelevant to the analysis

of whether the particular Director Defendants in this matter are

"interested" for purposes of a demand futility analysis. The mere

fact that the documents may have been false is not dispositive on

the issue of whether McBride, Klisares and Matricaria face a

"substantial likelihood" of liability for breaches of their duties

of loyalty or good faith. The Court finds no factual indication

of bad faith on the part of Defendants McBride, Klisares and

Matricaria. Consequently, the Court concludes that Plaintiffs

have failed to plead particular facts that show that such Director

Defendants face a "substantial likelihood" of liability. 

In light of the fact that the Court finds no Director

Defendant to be facing a "substantial likelihood" of liability,

the issue of their control over a majority of the VistaCare board

is irrelevant and need not be analyzed. Due to Plaintiffs'

failure to show that demand on the VistaCare board was futile,

Defendants' motion to dismiss shall be granted. Consequently,

Defendants' arguments regarding Plaintiffs' alleged failure to

state a claim in their Complaint also need not be analyzed by the

Court. 

Therefore,

IT IS ORDERED that Defendants' motion to dismiss Plaintiffs'

consolidated derivative complaint pursuant to Federal Rule of

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Civil Procedure 12(b)(6) (doc. 20) is GRANTED. 

IT IS FURTHER ORDERED that Individual Defendants' motion to

dismiss for lack of jurisdiction (doc. 17) is DENIED as moot.

DATED this 29th day of August, 2006.

Copies to counsel of record

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