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UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

MARVIN H. MAURRAS REVOCABLE TRUST and 

YONGQIAN ZHAO, derivatively on behalf of 

ACCRETIVE HEALTH, INC., 

Plaintiffs,

vs.

EDGAR M. BRONFMAN JR., J. MICHAEL CLINE, 

STEVEN N. KAPLAN, STANLEY N. LOGAN, 

DENIS J. NAYDEN, ARTHUR H. SPIEGEL III, and 

MARY A. TOLAN, MARK A. WOLFSON,

Defendants,

and

ACCRETIVE HEALTH, INC.,

Nominal Defendant.

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12 C 3395

12 C 6019

Judge Feinerman

MEMORANDUM OPINION AND ORDER

In these consolidated shareholder derivative lawsuits, Marvin H. Maurras Revocable 

Trust (“Maurras Trust”) and Yongqian Zhao claim on behalf of Nominal Defendant Accretive 

Health, Inc., that Accretive’s directors—Edgar M. Bronfman, Jr., J. Michael Cline, Steven N. 

Kaplan, Stanley N. Logan, Denis J. Nayden, Arthur H. Spiegel III, Mary A. Tolan, and Mark A. 

Wolfson—violated fiduciary duties they owed Accretive under Delaware law and breached 

federal securities law. In particular, the 130-page, four-count consolidated verified shareholder 

derivative complaint alleges that Defendants: (1) breached their duties of loyalty and good faith 

by knowingly causing or permitting Accretive to violate various state and federal laws with the 

result that Accretive’s stock value plummeted when the alleged violations came to light; (2) 

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breached their fiduciary duty to maintain internal controls regarding Accretive’s compliance with 

federal and state healthcare, debt collection, and consumer protection laws; (3) made untrue 

statements or omissions of material fact in connection with the purchase or sale of Accretive 

stock, in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and 

SEC Rule 10b-5, 17 C.F.R. § 240.10b-5; and (4) breached § 29(b) of the Securities Exchange 

Act, 15 U.S.C. § 78cc(b), by receiving incentive compensation and fees while violating § 10(b) 

and Rule 10b-5. Doc. 72. Unless otherwise noted, all docket references are to Case 12 C 3395.

Defendants have moved to dismiss the complaint for failure to adequately allege demand 

futility under Federal Rule of Civil Procedure 23.1(b)(3)(B) and, alternatively, for failure to state 

a claim upon which relief can be granted. Doc. 93. The complaint is dismissed for failure to 

adequately allege demand futility, but the dismissal is without prejudice and with leave to file an 

amended complaint.

Background

In considering the motion to dismiss, the court assumes the truth of the complaint’s 

factual allegations, though not its legal conclusions. See Munson v. Gaetz, 673 F.3d 630, 632 

(7th Cir. 2012). Besides the complaint itself, the court must consider “documents attached to the 

complaint, documents that are critical to the complaint and referred to in it, and information that 

is subject to proper judicial notice,” along with additional facts set forth in Plaintiffs’ brief 

opposing dismissal, so long as those facts “are consistent with the pleadings.” Geinosky v. City 

of Chicago, 675 F.3d 743, 745 n.1 (7th Cir. 2012). The facts set forth below are stated as 

favorably to Plaintiffs as permitted by the complaint and the other materials just mentioned, with 

all reasonable inferences drawn in Plaintiffs’ favor. See Westmoreland Cnty. Emp. Ret. Sys. v. 

Parkinson, __ F.3d __, 2013 WL 4266586, at *8 (7th Cir. Aug. 16, 2013) (in evaluating whether 

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plaintiffs in a derivative suit have adequately pleaded demand futility, “any inferences 

reasonably drawn from the factual allegations of the complaint must be viewed in the light most 

favorable to the plaintiffs”) (quoting In re Abbott Labs. Derivative S’holder Litig., 325 F.3d 795, 

803 (7th Cir. 2003)).

The distinction between factual allegations that must be taken as true and conclusory 

assertions that must be ignored is crucial to the resolution of this motion. Plaintiffs repeatedly 

submit that their theory of demand futility rests not on the premise that Defendants were unaware 

of Accretive’s ongoing (alleged) legal violations due to inadequate reporting mechanisms, but on 

the premise that Defendants “knew about [Accretive’s] violations of debt collection and health 

privacy laws, but decided to forego costly compliance and put short-term unlawful gain above

the interest of [Accretive].” Doc. 108 at 35; see also id. at 32 (“the Court must apply the 

Aronson test [for demand futility] because Plaintiffs allege that a majority of Accretive’s Board 

had actual knowledge of illegal wrongdoing, yet consciously decided not to take any steps to 

prevent or remedy the situation”); id. at 35 (“Plaintiffs do not allege mere lack of oversight, and 

no fair reading of the Complaint supports that conclusion”); id. at 36 (“Here, Plaintiffs provide 

particularized facts that the Individual Defendants knew about [Accretive’s] unlawful debt 

collection practices and systematic violations of patient rights and yet failed to take any action to 

prevent or remedy the issues.”); id. at 39 (“the Individual Defendants knowingly permitted 

Accretive to systematically violate numerous debt collection and patient privacy laws in its quest 

to maximize short-term profits at the expense of the long-term value of the Company”). As 

discussed in detail below, Plaintiffs have adequately alleged that Accretive broke the law. But 

given Plaintiffs’ theory of demand utility, resolution of this motion turns on whether Plaintiffs 

have adequately alleged that the Defendants other than Tolan had sufficient knowledge of 

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Accretive’s illegal actions and yet consciously refrained from taking steps to remedy the 

situation. Because this is a long opinion, and in an effort to most clearly set forth the court’s 

rationale for concluding that demand futility has not been adequately alleged, the Background 

section will address certain pleading issues when recounting certain of the complaint’s key 

allegations.

Accretive’s business and history. Accretive is a Delaware corporation that is publicly 

traded on the New York Stock Exchange. Doc. 72 at ¶ 21. Accretive is a debt collector whose 

business is contracting with hospitals to collect payments from their patients and their insurers. 

Id. at ¶ 3. Accretive is distinguished from run-of-the-mill debt collectors by its use of private 

patient data to make predictions about individual patients that will guide its debt collection 

practices and by its integration of its debt collection services into the entire cycle of healthcare 

provision; in Accretive’s words, it offers end-to-end “revenue cycle management services” to 

help hospitals “more efficiently manage their revenue cycles, which encompass patient 

registration, insurance and benefit verification, medical treatment documentation and coding, bill 

preparation, and collections.” Id. at ¶ 31. Accretive’s board of directors consists of the eight 

individual defendants and one director emeritus, who is not permitted to vote and who will not 

be mentioned again. Id. at ¶ 21. One defendant, Mary Tolan, is both a director and Accretive’s 

CEO and President; the other seven defendants are outside directors, meaning that they are not 

Accretive officers. Id. at ¶¶ 22-29. Accretive also has an Audit Committee, which during the 

period of alleged wrongful conduct (November 2010 through November 2012) was composed of 

Logan, Kaplan, and Wolfson. Id. at ¶¶ 2, 265.

Accretive was formed in 2003 by two private equity and hedge fund firms, Accretive 

LLC (“Accretive LLC,” to distinguish it from nominal defendant Accretive Health, Inc., which is 

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referred to as “Accretive”) and Oak Hill Capital Management, LLC. Id. at ¶ 32. These two 

firms have controlled Accretive throughout its existence: they hired Tolan to be Accretive’s 

founding CEO, each firm has two of its officers on Accretive’s Board (Bronfman, Cline, 

Nayden, and Wolfson), and they continued to wield influence through their ownership of a 

substantial portion of Accretive’s stock. Ibid. Accretive held an initial public offering in May 

2010 and a second public offering in March 2011. Id. at ¶¶ 33, 36. Most of the defendants—

Tolan, Cline, Bronfman, Nayden, Wolfson, and Spiegel—made millions of dollars each from 

sales of Accretive stock. Id. at ¶¶ 33-38.

Defendants’ debt collection history. The complaint details the “tarnished history 

regarding debt collection practices” of one of Accretive’s two founding firms, Accretive LLC. 

Id. at ¶¶ 39-44. In short, Accretive LLC got in trouble with the Minnesota Attorney General in 

2009 after buying substantial ownership and control stakes in both a Minnesota-based arbitration 

company, which handled many consumer credit card collections arbitrations, and a major debt 

collection agency. Id. at ¶¶ 39-40. The Attorney General alleged that the arbitration company

misled consumers and the public by holding itself out as a neutral forum despite its extensive 

cross-ties with Accretive LLC and its debt collection firm, which created a conflict of interest. 

Id. at ¶ 41. Soon thereafter, the arbitration company left the consumer arbitration business and 

the debt collector filed for bankruptcy. Id. at ¶ 42. Plaintiffs submit that Bronfman, Cline, 

Nayden, Wolfson, and Tolan were familiar with these transactions and with the Attorney 

General’s objection to them, and therefore “were aware of the highly regulatory history in 

Minnesota regarding debt collection practices and of the Minnesota Attorney General’s 

successful litigation against [the arbitration company] .... They knew that Lori Swanson, who 

was elected Attorney General in 2006 and re-elected for a four-year term in 2010, would not 

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tolerate fast and loose debt collection practices that misled consumers in her state.” Id. at ¶ 44. 

This personal knowledge and experience could be relevant here because a central allegation in 

this lawsuit, discussed below, is that Defendants failed to monitor Accretive closely enough to 

prevent it from engaging in unlawful debt collection practices, or even that Defendants knew 

about those practices but did nothing to stop them.

The Fairview contracts. Fairview Health Services is a nonprofit that owned several 

hospitals in Minnesota at all relevant times and had fiscal year 2010 revenues of around $2.8 

billion. Id. at ¶ 45. Accretive’s business relationship with Fairview was formed through two 

contracts made in 2010. Id. at ¶ 46. The first was the “Revenue Cycle Operations Agreement” 

(“RCA”) signed in March 2010. Ibid. Under the RCA, Fairview outsourced day-to-day revenue 

cycle operations (that is, billing and debt collection) to Accretive; Fairview executed a power of 

attorney to empower Accretive to make billing decisions on its behalf as related to Medicare, 

Medicaid, and third-party insurers. Ibid. In 2011, Accretive’s revenue under the RCA was 

around $100 million, which was roughly 12% of Accretive’s total revenue that year. Ibid. 

Accretive received both a base fee and incentive payments from Fairview for increasing the 

percentage of the money owed to Fairview by patients and their insurers that was actually paid. 

Id. at ¶ 48. The RCA empowered Accretive to control, reassign, and fire Fairview employees 

associated with the revenue cycle. Id. at ¶ 47. Accretive’s RCA with Fairview was one of 

approximately fifty similar agreements Accretive had with other hospital groups in the United 

States. Id. at ¶ 52.

The second contract between Accretive and Fairview was the “Quality and Total Cost of 

Care” contract (“QTCC”). Id. at ¶ 53. Plaintiffs describe the QTCC as “Accretive’s crown jewel 

and the template for its future business plan”; Fairview was the first (and so far the only) client to 

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sign a QTCC with Accretive, but Accretive hoped that the Fairview QTCC would serve as a 

model to be duplicated with other hospitals. Id. at ¶¶ 53, 56. The QTCC greatly increased 

Accretive’s integration into Fairview’s business by allowing Accretive to assist Fairview in 

negotiations with HMOs and insurers, to manage health risk assessments for patients, to 

automate care plans, to manage the pharmacy, and to decide the duration of hospital stays for 

Fairview patients. Id. at ¶ 53. The QTCC also allowed Accretive to rate and assess the financial 

performance of Fairview’s doctors, to assign patients to various risk categories, and to pay 

incentives to the more “efficient” doctors based on their patients’ risk scores. Id. at ¶ 54. 

Accretive projected that it would take in $60 million in revenue for every $1 billion in net 

revenues to Fairview, with the bulk of this income coming from incentive fees. Id. at ¶¶ 54-55.

The entire Accretive board (other than Logan, who was not yet a director) approved the 

QTCC on October 21, 2010, after being extensively briefed on its terms. Id. at ¶ 57. Due to the 

QTCC’s central place in Accretive’s business model, the board received regular updates on it. 

Id. at ¶ 60. For example, at the board meeting held on November 2, 2010, the board was

presented with the QTCC’s details and informed that it was expected to cut almost $500 million 

in healthcare costs for Fairview by 2015. Ibid. As Accretive’s CEO, Tolan made several public 

statements promoting the value to Accretive of the QTCC, and in its Form 10-K filed with the 

SEC on February 29, 2012, Accretive claimed that it expected to earn $60 million in revenue 

from the QTCC each year. Id. at ¶¶ 61-62.

Key to the QTCC was a software system called “AccretiveQ.” Id. at ¶ 59. AccretiveQ 

took as its inputs highly personal patient data, and its outputs were “risk scores” for use in 

managing care plans, pharmacy management, and hospital stay durations. Ibid. AccretiveQ’s 

computer model identified “high priority” patients, those whom Accretive viewed as the sickest 

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5% of the population and expected to account for 50% of healthcare costs. Ibid. The model also 

generated “Willingness to Pay” scores for patients, which incorporated sensitive patient 

information such as race, religion, zip code, and medical history. Ibid.

Accretive’s allegedly unlawful debt collection practices. To maximize Fairview’s 

savings and, concomitantly, its own incentive revenues, Accretive sought to shift the focus at 

Fairview in a way that would increase savings and income at the expense of patient care. Id. at 

¶ 63. For instance, Accretive made Fairview staff understand that if they did not collect money 

from patients who were seeking emergency room treatment, they would be fired. Id. at ¶ 64. 

“Accretive’s money-collecting techniques included concerted efforts to collect from patients 

before they were admitted to the hospital, at their bedside, and even in the emergency room 

itself. Accretive and Fairview tracked and graded each Fairview employee based on the patient’s 

estimated share of the bill they collected each week. ... [A]n Accretive manager sent an email to 

several Fairview employees after one of them collected a past due balance from a patient, saying, 

‘I witnessed the entire event and it was like poetry.’” Id. at ¶ 67.

Accretive prepared scripts for emergency room attendants to use with patients and their 

families that were intended to imply (falsely and unlawfully) that the patient would not be treated 

until the payment was made. Id. at ¶ 68. A Fairview risk management consultant suggested that 

Accretive’s aggressive debt collection practices might be violating the Emergency Medical 

Treatment and Active Labor Act (“EMTALA”), 42 U.S.C. § 1395dd et seq., also known as the 

“Patient Anti-Dumping Law,” which requires hospitals to provide stabilizing treatments to 

patients with emergency conditions without regard to insurance coverage or ability to pay. Id. at 

¶ 78. Ultimately, Fairview was found to have violated EMTALA and other federal patientprotection laws. Id. at ¶ 79.

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Fairview personnel complained that Accretive’s tracking of their collection rates was 

demeaning and harmful to staff morale while contributing little to collections, but Accretive Vice 

President of Business Development Peter VanRiper replied that “we’ll continue with it as-is. 

Our experience is that collections performance just doesn’t get to target performance without this 

level of rigor.” Id. at ¶ 70. Plaintiffs’ allegations continue along the lines of the foregoing. Id. 

at ¶¶ 71-78.

Accretive’s debt collection behavior at Fairview’s hospitals and elsewhere resulted in a 

large number of civil suits being filed against Accretive under the Fair Debt Collection Practices 

Act (“FDCPA”), 15 U.S.C. § 1692 et seq., and similar Minnesota statutes. Doc. 72 at ¶¶ 80, 85-

88. For example, Accretive was sued for leaving a message about a debt owed by one person on 

another person’s answering machine, contrary to the FDCPA’s prohibition on communication by 

a debt collector with persons other than the debtor. Id. at ¶ 85; see 15 U.S.C. § 1692c(b). 

Moreover, despite entering in March 2010 into the Fairview RCA, under which Accretive began 

to act as Fairview’s debt collector, Accretive did not become licensed as a debt collection agency 

with the Minnesota Department of Commerce until January 2011. Doc. 72 at ¶ 83.

For purposes of this motion to dismiss, there is no dispute about the allegations just set 

forth; as it must at the pleadings stage, the court will take as true that Accretive engaged in that 

alleged conduct and that it thereby violated the FDCPA, the EMTALA, and Minnesota law. The 

more important issue is what level of awareness Defendants had of these unlawful activities.

Plaintiffs allege that the unlawful practices were in keeping with “the tone at the top set 

by at least five Board members ... —Bronfman, Cline, Nayden and Wolfson—and the CEO 

Tolan, who were all more concerned with short-term gain than faithfully stewarding the longterm interests of” Accretive, id. at ¶ 63, and that “[u]pper management at Accretive, particularly 

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Defendant Tolan, knew of and approved of this strong arm approach,” id. at ¶ 65. Plaintiffs do 

not make any specific allegations to back up their conclusory statements about the “tone at the 

top”; they do not say, for instance, that Tolan or any other defendant told Fairview employees 

that they would be fired if they did not demand pre-treatment payments from emergency room 

patients, or that they directed Accretive employees to tell Fairview employees those things. 

Rather, Plaintiffs’ specific allegations are of actions by Tolan’s inferiors, including VanRiper, 

Ken Stoll (Vice President of Client Services), Tim Barry (President of Quality), an employee 

named Brandon Weber, and an employee named Andrew Crook to whom Plaintiffs’ counsel

immaturely and unprofessionally refer as “Andrew ‘I Am Not A’ Crook.” Id. at ¶¶ 63-64, 66. 

Plaintiffs allege that “Barry directly reported to Defendant Tolan and Crook, in turn, directly 

reported to Barry,” id. at ¶ 65, but absent any factual allegation suggesting that Tolan knew of or 

encouraged the illegal practices, one cannot reasonably infer that Barry and Crook would have 

told Tolan that they were encouraging unlawful behavior. There is no general rule that corporate 

officials are presumed to know everything their subordinates know or that they are presumed to 

be complicit in their underlings’ law-breaking. To the contrary, “Delaware courts routinely 

reject the conclusory allegation that because illegal behavior occurred, internal controls must 

have been deficient, and the board must have known so.” Desimone v. Barrows, 924 A.2d 908, 

940 (Del. Ch. 2007). The principle applies even to members of an audit committee or other 

subsection of the board. See South v. Baker, 62 A.3d 1, 17 (Del. Ch. 2012) (“As numerous 

Delaware decisions make clear, an allegation that the underlying cause of a corporate trauma 

falls within the delegated authority of a board committee does not support an inference that the 

directors on that committee knew of and consciously disregarded the problem for purposes of

Rule 23.1.”) (citing cases).

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Plaintiffs also allege that “Accretive’s Board knew about, and indeed approved the 

QTCC contract in October 2010, and yet still failed to ensure that the Company met the very 

minimal requirement of licensure” to act as a debt collector in Minnesota. Id. at ¶ 83. However, 

Plaintiffs do not allege that the directors were aware that Accretive was operating without a 

license, and nor do they allege that the “very minimal” task of compliance with applicable 

licensing regimes is the sort of thing that did rise or should have risen to the board level. 

Drawing such an inference in Plaintiffs’ favor would not be reasonable, as a corporate board is 

permitted to assume that direction or oversight from the board is not needed to ensure that the 

firm’s employees take care of such mundane tasks. See In re Pfizer, Inc. Derivative Sec. Litig., 

307 F. App’x 590, 593 (2d Cir. 2009) (refusing to infer that the Pfizer board had knowledge of 

“the existence of [a scientific study] that may have found cardiovascular risks related to [a Pfizer 

drug] ... simply because it existed and was related to Pfizer’s ‘core’ business”); In re ITT Corp. 

Derivative Litig., 653 F. Supp. 2d 453, 461-62 (S.D.N.Y. 2009) (rejecting the plaintiffs’ 

submission that the board of a defense manufacturing company was aware of the company’s 

failure to obtain temporary export licenses for its night vision goggles, a matter for which outside 

counsel had been retained, where the complaint did not allege that the issue was brought to the 

board’s attention); Ferre v. McGrath, 2007 WL 1180650, at *6 (S.D.N.Y. Feb. 16, 2007) 

(“Allegations of knowledge explained solely by the directors’ service as directors, without more, 

are insufficient as a matter of law—even where, as here, the plaintiff alleges that the matters in 

suit relate to the corporation’s ‘core’ business.”); see also In re Caremark Int’l Inc. Derivative 

Litig., 698 A.2d 959, 968 (Del. Ch. 1996) (“Most of the decisions that a corporation, acting 

through its human agents, makes are, of course, not the subject of director attention. Legally, the 

board itself will be required only to authorize the most significant corporate acts or transactions: 

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mergers, changes in capital structure, fundamental changes in business, appointment and 

compensation of the CEO, etc.”).

Plaintiffs allege that several of the FDCPA lawsuits described in the complaint were

settled and that Defendants, or at least some of them, presumably were aware of the settlements. 

Doc. 72 at ¶ 88. The argument is that the lawsuits (or the underlying violations) constituted 

“compliance incident[s] at a B level or higher,” that Accretive’s Director of Internal Audit was 

supposed to bring such incidents to the Audit Committee’s attention and presumably did so, that 

some Defendants sat on the Audit Committee, and that the Audit Committee would have to 

disclose the risk created by the lawsuits to the entire board. Ibid. The court takes all this as true 

for purposes of this motion: Defendants knew Accretive was being sued for FDCPA violations, 

and could have concluded that there might have been some merit to the accusations. But all that 

means is that Defendants knew about possible prior violations and were on notice of the 

possibility of present or future violations; that does not make it reasonable to infer that 

Defendants had actual knowledge of ongoing violations, much less that they encouraged or 

condoned such violations. See In re SAIC Inc. Derivative Litig., __ F. Supp. 2d __, 2013 WL 

2466796, at *18 (S.D.N.Y. June 10, 2013) (noting that “magnitude and duration [of a company’s 

alleged wrongdoing] may be probative of whether the Board knew or should have known about a 

violation of the law, though these factors will rarely suffice in their own right to satisfy Rule 

23.1’s requirement ... that plaintiffs allege with particularity actual or constructive board 

knowledge,” and refusing to infer that the board had knowledge of the ongoing wrongdoing 

solely based on the fact that one project’s costs “ballooned from $63 million in 2001 to $700 

million by 2010”) (citation and internal quotation marks omitted); In re Intel Corp. Derivative 

Litig., 621 F. Supp. 2d 165, 174 (D. Del. 2009) (holding that even where there is evidence that 

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the directors knew of “the ongoing investigations into Intel’s alleged anti-competitive business 

practices,” that alone is “insufficient for the Court to draw the significant inference that the 

Directors had constructive knowledge that an alleged failure to respond to the ‘red flags’ would 

be a breach of their fiduciary duties,” given that “Plaintiff fails to identify what the Directors 

actually knew about the ‘red flags’ and how they responded to them”); see also Jacobs v. Yang, 

2004 WL 1728521, at *6 n.31 (Del. Ch. Aug. 2, 2004) (holding that demand futility was not 

adequately pleaded where the plaintiff asserted that “the current board had knowledge of [the 

challenged transactions, which began several years earlier] and failed to recover on behalf of [the 

company] for any wrongdoing”). 

Given this, the complaint does not adequately allege that Defendants were or should have 

been aware that Accretive was committing FDCPA violations of such magnitude as to threaten 

the company’s relationship with Fairview or its ability to do business in Minnesota. The 

distinction between actual knowledge of the alleged violations (or intent that the violations 

occur), on the one hand, and the mere failure to monitor for possible violations, on the other, is 

significant because Plaintiffs’ theory of demand futility is premised in substantial part on the 

allegation that “a majority of Accretive’s Board had actual knowledge of illegal wrongdoing, yet 

consciously decided not to take any steps to prevent or remedy the situation,” and not that the 

board was unaware of illegal wrongdoing due to its failure to institute proper monitoring 

mechanisms. Doc. 108 at 32 (emphasis added). Thus, the inquiry turns on the extent of 

Defendants’ actual knowledge of ongoing violations. As discussed below, Plaintiffs have not 

adequately pleaded that Defendants other than Tolan possessed the requisite knowledge. 

The complaint also addresses a court-ordered agreement between Fairview and the 

Minnesota Attorney General that existed throughout Accretive’s relationship with Fairview and 

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that placed further restrictions on Fairview’s (and, by extension, Accretive’s) debt collection 

practices. Doc. 72 at ¶¶ 93-121. These allegations do not add much to those just discussed, so a 

brief summary suffices. Fairview became concerned that some of Accretive’s debt collection 

policies were putting Fairview in violation of its agreement with the Minnesota Attorney 

General. Id. at ¶ 99. After numerous complaints from Fairview, and responses from Accretive 

that Fairview found inadequate to address its concerns, Fairview decided to “transition its debt 

collection business away from Accretive effective January 31, 2012.” Id. at ¶ 119. Shortly 

thereafter, Fairview terminated all relations with Accretive. Id. at ¶ 120.

Again, the key question for purposes of this motion is not whether Accretive was causing 

Fairview to violate its agreement with the Minnesota Attorney General—Plaintiffs have 

adequately alleged that it was—but how much Defendants knew about the gravity of the 

situation. Plaintiffs allege that when Fairview employees began to be concerned that Accretive 

was making them violate the agreement, “[t]he alarm escalated through Fairview’s organization, 

reaching its Board of Directors, and escalated through Accretive’s organization, coming on 

numerous times directly to the attention of Defendant CEO Mary Tolan. It is reasonable to infer

that Defendant Tolan briefed the entire Board, the Audit Committee and certainly the four 

private equity directors [Cline, Bronfman, Nayden, and Wolfson] about the frustrations that the 

Fairview Board was expressing to her about Accretive’s glaring violations of the law. 

Nevertheless, the minutes of the Audit Committee and of the Board of Directors show that the 

Board took absolutely no action to remedy the egregious violations of federal and Minnesota law 

by Accretive executives and employees.” Id. at ¶ 99 (emphasis added).

Plaintiffs have adequately alleged that Tolan had actual knowledge of Fairview’s 

complaints and that Accretive had violated the law. But contrary to Plaintiffs’ assertion, it is not 

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reasonable to infer from those facts that Tolan would have explained this situation to the board, 

and in particular it is not reasonable to infer that she would have told the board that Accretive 

was engaged in “glaring violations of the law.” That the board and Audit Committee minutes 

show that Defendants took no action on the issue does not plausibly suggest that Defendants 

were briefed on the Accretive-Fairview strife and its underlying causes but decided to take no

action. See Wood v. Baum, 953 A.2d 136, 142 (Del. 2008) (“Delaware law on this point is clear: 

board approval of a transaction, even one that later proves to be improper, without more, is an 

insufficient basis to infer culpable knowledge ... on the part of individual directors.”); In re 

Bidz.com, Inc. Derivative Litig., 773 F. Supp. 2d 844, 856 (C.D. Cal. 2011) (holding that the 

allegation that “each individual director had knowledge of the existence of shill bidding at Bidz, 

yet failed to take any action to curb the shill bidding,” did not sufficiently allege demand futility 

because the plaintiffs “failed to allege particularized facts demonstrating that the [directors] 

actually knew about the alleged shill bidding, failed to act in light of such knowledge, and did so 

knowing their conduct breached their fiduciary duties to the company or otherwise broke the 

law”) (internal quotation marks omitted) (citing Stone v. Ritter, 911 A.2d 362, 369-70 (Del. 

2006)). More generally, it is not reasonable to infer that whenever a company has violated a law 

and the CEO is aware of that violation, the CEO will inform the board—particularly where, as 

here, the violations are alleged to have been pursuant to the CEO’s plan to put short-term profits 

before principles. Doc. 72 at ¶ 63; see In re Johnson & Johnson Derivative Litig., 865 F. Supp. 

2d 545, 571-72 (D.N.J. 2011) (refusing to infer that the board had knowledge of an ongoing 

violation, even where the CEO “had knowledge of, and responsibility for, and approved and 

ultimately as CEO directed the use of the Company’s ... kickback strategy” and had received 

warning letters from the FDA, reasoning that “[w]ithout allegations that [the CEO] shared his 

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knowledge with the Board, the Court cannot conclude that the Board was ever aware of the FDA 

letters”).

Plaintiffs also allege that Tolan and other Accretive executives put together a “FairviewAccretive Partnership Discussion,” which set forth “Ideas to Address Issues with AG and Overall 

Relationship.” Doc. 72 at ¶¶ 107-109. Among those “ideas” was “Board oversight on 

relationship,” and Plaintiffs allege that the referenced board is Accretive’s, not Fairview’s. Id. at 

¶ 109. But the fact that Accretive’s executives suggested more board oversight as a way of 

addressing Fairview’s concerns with Accretive’s practices does not support a reasonable

inference that the board (other than Tolan) was aware of the alleged Accretive misconduct giving 

rise to those concerns; to the contrary, the fact that the executives suggested more oversight 

reflects the executives’ view that the board was not aware of the specifics of the FairviewAccretive strife at the time the “Partnership Discussion” was formulated. Moreover, there is no 

allegation that the “board oversight” plan was ever implemented.

Plaintiffs make another attempt to establish actual knowledge in ¶ 92 of their complaint:

All of the above [that is, the allegations about various unlawful debt collection 

activities, including violations of the court-ordered agreement between 

Fairview and the Minnesota Attorney General that imposed further 

restrictions, Doc. 72 at ¶ 90] was clearly known by the Individual Defendants. 

The Company’s 2010 10-K and the 2011 10-K both stated that “our new 

business opportunities have historically been generated through high-level 

industry contacts of members of our senior management team and boards of 

directors and positive references from existing customers.” The Board also 

knew, as stated in both 2010 and 2011 10-Ks, that “in rendering our services, 

we must comply with customer policies and procedures regarding charity 

care, personnel, compliance and risk management as well as applicable 

federal, state and local laws and regulations.” Despite their own description 

of their duties and responsibilities, and despite the Board’s familiarity with the 

RCA and the QTCC contracts, whose execution required that Accretive 

adhere to Fairview’s obligations under its agreement with the Minnesota AG, 

the Board failed to even oversee that the Company was appropriately 

registered as a debt collector in the state of Minnesota. Moreover, the Board 

knew that under both the RCA, and especially the QTCC contract, Accretive 

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would be intimately involved with the operations of the ten Fairview 

hospitals. Nevertheless, the Board minutes reveal that neither the Board nor 

the Audit Committee took any steps to ensure that Accretive’s debt collection 

practices complied with the Fairview-Minnesota Attorney General 

Agreement.

Doc. 72 at ¶ 92. These factual allegations support Plaintiffs’ contentions that “the Board failed 

to even oversee that the Company was appropriately registered as a debt collector” and that 

“neither the Board nor the Audit Committee took any steps to ensure that Accretive’s debt 

collection practices complied with the” agreement between Fairview and the Minnesota Attorney 

General. However, nothing in this passage or the complaint as a whole raises the reasonable 

inference that Defendants actually knew of Accretive’s unlawful practices, as opposed to being 

simply ignorant of those practices. True, nothing in the complaint is necessarily inconsistent

with Defendants’ having knowledge of Accretive’s unlawful activities, but mere consistency 

does not suffice; Plaintiffs must make factual allegations that give rise to a reasonable inference 

of knowledge, and they have failed to do so. See McReynolds v. Merrill Lynch & Co., Inc., 694 

F.3d 873, 885 (7th Cir. 2012) (“Where a complaint pleads facts that are ‘merely consistent with’ 

a defendant’s liability, it ‘stops short of the line between possibility and plausibility of 

entitlement to relief.’”) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 554, 557 (2007)); In re 

Capital One Derivative S’holder Litig., __ F. Supp. 2d __, 2013 WL 3242685, at *17 (E.D. Va. 

June 21, 2013) (“It is not enough for plaintiffs to plead that the directors as a whole became 

aware of the red flags because they were disclosed in the financial statements. Plaintiffs must 

plead with particularity that each individual director was aware of the red flags.”); In re Forest 

Labs., Inc. Derivative Litig., 450 F. Supp. 2d 379, 387 (S.D.N.Y. 2006) (“Because Rule 23.1 

requires particularized allegations, the pleading standard is higher than the standard applicable to 

a pleading subject to a motion to dismiss pursuant to Rule 12(b)(6).”).

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Finally, Plaintiffs allege:

All five Defendants affiliated with Accretive LLC (Defendants Cline, 

Bronfman, Nayden, Wolfson and Tolan) knew about the importance to the 

Minnesota Attorney General of debt collection practices from their prior 

experience of the Attorney General’s lawsuit that effectively dismantled the 

Forum. They also knew of the critical importance of the Fairview contracts to 

the Company’s revenue. ... Despite this knowledge and in breach of their 

fiduciary duties of loyalty to the Company, these five directors neglected to 

see that Accretive took any meaningful steps at all to comply with Minnesota 

law in its implementation of the Fairview contracts.

Doc. 72 at ¶ 121. This allegation does not suggest that Defendants were actually aware of 

Accretive’s violations, but merely that they should have taken steps that would have made them 

aware, through better monitoring and compliance systems, and yet failed to do so. In other 

words, it is precisely the kind of allegation that Plaintiffs disclaim making in support of their 

position on demand futility. Doc. 108 at 35 (“Plaintiffs are not asserting that the Board rendered 

itself blissfully unaware of Accretive’s ongoing violations by having inadequate reporting 

mechanisms”); id. at 32, 36, 39.

Accretive’s alleged violations of patient privacy laws. As mentioned above, Accretive 

possessed a great deal of highly sensitive personal medical and financial information about 

patients at the hospitals it contracted with. Doc. 72 at ¶ 122. That sort of data is subject to 

privacy protection laws that regulate the steps that firms possessing the data must take to prevent 

it from being obtained by persons not authorized to see or use it; among these laws are the Health 

Insurance Portability and Accountability Act of 1996 (“HIPAA”), 42 U.S.C. § 1320d et seq., and 

the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”), 42 

U.S.C. § 17921 et seq., along with regulations promulgated thereunder. Plaintiffs allege that 

Accretive violated these statutes or their appurtenant regulations by failing to implement the 

policies and procedures they require. Doc. 72 at ¶ 122.

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Plaintiffs focus on one incident in particular. Accretive’s employees worked mainly on 

laptops, with the result that private patient data was on the laptops’ hard drives. Id. at ¶ 124. In 

February 2011, Accretive acknowledged that four such laptops had been stolen out of 

employees’ cars, that in each case the employee had irresponsibly left the laptop in his or her car 

in plain view, and that the laptops often contain “tons of patient health and financial 

information.” Ibid. Accretive further acknowledged that such thefts raise the specter of “HIPAA 

fines and penalties up to $1.5m per incident & significant loss of reputation.” Ibid. Yet 

whatever steps Accretive took to prevent further thefts were insufficient, as five additional 

laptops were stolen during 2011. Id. at ¶ 125. Worse, Accretive employees had failed to encrypt 

the data on thirty laptops in 2011, meaning that any data on those laptops would be especially 

susceptible to disclosure were they to fall into the wrong hands. Ibid.

In July 2011, the laptop of an Accretive employee named Matthew Doyle was stolen 

from his unattended rental car. Id. at ¶ 127. The laptop was unencrypted and contained vast 

quantities of private data on some 23,000 patients. Ibid. This was contrary to the HIPAA and 

the HITECH Act, which provide that employees should have access only to the data set 

necessary to the performance of their duties. Id. at ¶ 130. After the theft became public, 

Fairview began hearing complaints from patients about the invasion of their privacy. Id. at 

¶ 128. Accretive’s response was just to tell its staff to do a better job of hiding their laptops 

when they leave them in their cars. Id. at ¶ 129.

Again, the important question at this stage of the litigation is how much Defendants knew 

about Accretive’s violations. Logan, Wolfson, Kaplan, and Tolan were informed of the theft of 

Doyle’s laptop at Audit Committee meetings in September and November 2011. Id. at ¶¶ 133-

134. The Audit Committee did not discuss remedial measures at the September meeting, but at 

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the November meeting it decided to “develop procedures and communications protocol to ensure 

that employees periodically remove client data from laptops,” recognizing that Accretive’s 

“policies require our employees to access only the minimum amount of [personal patient data] 

needed to perform their duties.” Id. at ¶¶ 135, 137. Even then, the committee did not discuss 

encryption. Id. at ¶ 137. It is reasonable to infer that members of the Audit Committee were 

aware that the Doyle theft was not the only laptop theft Accretive had experienced. Id. at ¶ 138.

Another source of patient privacy trouble was Accretive’s operations in India, where 

Accretive had outsourced much of its business and where the majority of its employees were 

located. Id. at ¶ 139. Wolfson, Kaplan, and Tolan learned about the privacy risks posed by the 

India operations at an Audit Committee meeting in February 2010. Id. at ¶ 142. In particular, 

they were told that an “internal risk assessment survey” had concluded that “HIPAA/data 

privacy” was a “high risk” area for Accretive, a risk that included “information being transferred 

to India.” Ibid. They also were informed that there were not “enough resources in this area [data 

privacy] to provide all of the in-depth healthcare expertise/regulatory knowledge for individuals 

unfamiliar with the industry,” though it is not clear from the complaint whether this warning was 

with reference to India or to Accretive’s operations in general. Ibid. The Audit Committee was 

given more warnings about potential weaknesses in Accretive’s data privacy policies at meetings 

held in February 2011 and February 2012. Id. at ¶ 143. Plaintiffs allege that there was “no 

indication that any action whatsoever had been taken in the intervening months.” Ibid. Plaintiffs 

do not point to any actual legal violations associated with Accretive’s India operations—they 

refer in passing to a “password sharing incident in India,” id. at ¶ 141, but the reference is so

ambiguous as to be meaningless—and nor do Plaintiffs say that anyone ever brought a legal 

action against Accretive arising out of those operations. Their allegation, rather, is that the Audit 

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Committee’s apparent lack of concern about warnings regarding the India operations supports 

the inference that Defendants were not taking the necessary steps to implement internal policies 

to monitor and prevent data privacy violations, despite knowing that such violations could have a 

substantial negative impact on Accretive’s business. Id. at ¶ 146.

Accretive’s alleged violations of anti-discrimination laws. Plaintiffs allege that 

Accretive violated anti-discrimination laws by calculating and applying “Willingness to Pay” 

(“WTP”) scores for Fairview patients. Id. at ¶¶ 147-153. The model used by Accretive to 

calculate the scores sought to estimate for each patient how much of that patient’s bill the patient 

was likely to pay. Id. at ¶ 147. Accretive would then use that score to choose the method by 

which it would attempt to collect from the patient. Id. at ¶ 148. For instance, where the model

suggested that a patient had a high willingness to pay, Accretive would offer her a lower 

discount than it otherwise would, while patients with medium WTP would be “accelerated 

through the process and move to legal sooner than accounts in other segments.” Ibid.

The data mining model used by Accretive to generate WTP scores relied on 142 data 

points about each patient, including zip code, gender, marital status, religion, insurance type, 

average household income (the average in the patient’s zip code, presumably), average 

dependents in the patient’s zip code, and so forth. Id. at ¶ 149. Plaintiffs point out that the Equal 

Credit Opportunity Act, 15 U.S.C. § 1691(a)(1), prohibits creditors from discriminating “on the 

basis of ... religion ... or marital status.” Doc. 72 at ¶ 151. Plaintiffs also assert that Accretive’s 

“use of religion, sex and marital status in calculating its WTP” violated the Minnesota Human 

Rights Act. Id. at ¶¶ 152-153. Plaintiffs do not suggest that Defendants had actual knowledge 

that Accretive’s computer model relied in part on prohibited factors, and nor do they suggest that 

Accretive was ever subjected to legal action for these alleged violations.

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Accretive’s public statements. Plaintiffs recount many public statements made by 

Accretive to support their claims that Defendants violated federal securities law. Id. at ¶¶ 154-

236. The bulk of these statements were press releases, particularly press releases announcing 

quarterly financial results; Forms 10-Q and 10-K filed with the SEC; and conference calls 

associated with each press release during which Tolan discussed Accretive’s financial results and 

business plans. Plaintiffs attribute the press releases to Defendants and the conference calls to 

Tolan alone. E.g., id. at ¶¶ 156, 160. The gist of Plaintiffs’ complaint about those statements is 

that Accretive said things that would give the public the impression that Accretive had a bright 

future, and that Accretive did not say that it was simultaneously threatening that future by failing 

to take steps to prevent FDCPA, patient privacy, and other violations that might jeopardize its 

relationship with Fairview and the substantial profits provided by that relationship. Id. at ¶¶ 154-

155. Representative is ¶ 157, which deals with the press release issued by Accretive to announce 

the signing of the QTCC contract with Fairview. After referring to various actions by Accretive 

(those discussed in detail above) that threatened its relationship with Fairview, Plaintiffs allege 

that “[a]s a result of the foregoing, the Individual Defendants lacked a reasonable basis for their 

positive statements regarding the Company’s working relationship with Fairview and the 

Company’s financial condition and future business prospects.” Id. at ¶ 157(e).

The Minnesota Attorney General’s enforcement action. In February 2012, Accretive 

signed a consent order with the Minnesota Department of Commerce. Id. at ¶ 237. As part of 

the consent order, Accretive agreed to cease debt collection activities in Minnesota. Ibid.

On March 29, 2012, Accretive made public the fact that it would no longer be collecting 

debts on behalf of Fairview. Id. at ¶ 239. That same day, Accretive’s stock price fell nearly 

19%. Id. at ¶ 240. In April, the Minnesota Attorney General released a report describing alleged 

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violations by Accretive of federal and state health, debt, and consumer laws. Id. at ¶ 241. The 

New York Times subsequently ran an article titled “Debt Collector Is Faulted for Tough Tactics 

in Hospitals,” which referred to the Minnesota Attorney General’s allegations and quoted a 

Fairview employee as saying that “[p]atients are harassed mercilessly” by Accretive’s debt 

collectors. Id. at ¶ 242. The report and article caused a further 41% fall in Accretive’s stock 

price. Id. at ¶ 243. As of November 2012, the stock price was $10.97 per share, down from $20-

$27 per share, the range at which it had been trading prior to the negative publicity beginning in 

March 2012. Ibid.

In May 2012, Accretive was subjected to congressional investigations, including a 

hearing at which Accretive Senior Vice President Greg Kazarian apologized on behalf of the 

company for its improper debt collection practices. Id. at ¶ 245. In July 2012, the Minnesota 

Attorney General filed a “second amended and supplemental complaint” against Accretive. Id. 

at ¶ 246. On July 30, 2012, Accretive entered into a settlement agreement with the Minnesota 

Attorney General pursuant to which it paid $2.5 million in fines, agreed to wind down all of its 

Minnesota business operations, and agreed not to conduct business in Minnesota or on behalf of 

a Minnesota client for up to six years. Id. at ¶ 247.

The present lawsuit. This consolidated lawsuit was initially filed as two separate suits by 

Maurras Trust and Zhao. Doc. 1 (12 C 3395); Doc. 1 (12 C 6019). The cases were consolidated 

under Case 12 C 3395, Doc. 68 (12 C 3395), after which Plaintiffs filed a Consolidated Verified 

Shareholder Derivative Complaint, Doc. 72. Neither Plaintiff made a demand on Accretive’s 

board; rather, as discussed below, they allege that demand was futile and should therefore be 

excused because there is reasonable doubt as to whether at least half of Accretive’s eight 

directors are disinterested and independent and, in the alternative, because there is reasonable 

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doubt as to whether Defendants are entitled to business judgment rule protection since they 

knowingly caused Accretive to break the law. Id. at ¶¶ 276-299.

Two other related derivative suits filed against Defendants in Illinois state court were 

removed to this court, Nos. 12 C 6781 and 12 C 6798, but the court remanded those suits upon 

concluding that it lacked subject matter jurisdiction. See Haith ex rel. Accretive Health, Inc. v. 

Bronfman, __ F. Supp. 2d __, 2013 WL 788214 (N.D. Ill. Mar. 1, 2013). Those suits did not 

present any federal claims, and the parties in those suits were not completely diverse. Id. at *1.

As for this case, subject matter jurisdiction is secure. The court has jurisdiction over the 

federal securities claims under 28 U.S.C. § 1331 and supplemental jurisdiction over the 

Delaware law claims under 28 U.S.C. § 1367(a). Even putting aside the federal claims, the court 

has diversity jurisdiction under 28 U.S.C. § 1332(a). The parties are completely diverse. 

Plaintiff Maurras Trust is a citizen of Arkansas because its trustee, Marvin H. Maurras, is a 

citizen of that State. Doc. 72 at ¶ 19; see Grede v. Bank of New York Mellon, 598 F.3d 899, 901 

(7th Cir. 2010) (“a trust’s citizenship is that of the trustee, rather than the beneficiaries, for the 

purpose of 28 U.S.C. § 1332(a)”). Plaintiff Zhao is a citizen of Massachusetts. Doc. 72 at ¶ 20. 

Defendants Tolan, Cline, Kaplan, and Logan are citizens of Illinois; Defendants Bronfman and 

Spiegel are citizens of New York; Defendant Nayden is a citizen of Rhode Island; and Defendant 

Wolfson is a citizen of California. Id. at ¶¶ 22-29. Finally, nominal defendant Accretive is a 

citizen of Delaware, its state of incorporation, and Illinois, its principal place of business. Id. at 

¶ 21; see 28 U.S.C. § 1332(c)(1); Weinstein v. Schwartz, 422 F.3d 476, 478 (7th Cir. 2005) (for 

diversity jurisdiction purposes, “a corporation is aligned as a defendant in a shareholder’s 

derivative suit”). The amount in controversy exceeds § 1332(a)’s $75,000 threshold. Doc. 72 at 

¶ 16.

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Discussion

As noted above, Plaintiffs claim that Defendants (1) breached their duties of loyalty and 

good faith by knowingly causing or permitting Accretive to violate various state and federal laws 

with the result that Accretive’s stock value plummeted when the alleged violations became 

public; (2) breached their fiduciary duty to maintain internal controls regarding Accretive’s 

compliance with federal and state laws; (3) made untrue statements or omissions of material fact 

in connection with the purchase or sale of Accretive stock, in violation of federal securities law; 

and (4) breached federal securities law by receiving incentive compensation and fees while 

violating § 10(b) and Rule 10b-5. The parties agree that Delaware law applies to Counts I and II

because Accretive is a Delaware corporation, see Bagdon v. Bridgestone/Firestone, Inc., 916 

F.2d 379, 382 (7th Cir. 1990) (corporate governance lawsuits are decided under the law of the 

corporation’s state of incorporation), and that Counts III and IV are governed by federal law.

Defendants have moved to dismiss the complaint on the ground that Plaintiffs have not 

adequately pleaded demand futility under Rule 23.1(b) and, alternatively, that none of the 

complaint’s four counts states a claim upon which relief can be granted. Because Plaintiffs have 

failed to adequately plead demand futility, there is no need to reach the alternative argument—

although there is some substantive discussion of the federal securities claims in the section of the 

opinion addressing whether Plaintiffs have adequately alleged for demand futility purposes that a 

requisite number of Defendants are disinterested under Delaware law. Before addressing 

demand futility, it is necessary to reach Defendants’ argument that certain paragraphs of the 

complaint should be stricken under Rule 12(f).

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I. Defendants’ Motion to Strike

Rule 12(f) provides in relevant part that “[t]he court may strike from a pleading an

insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.” Fed. R. 

Civ. P. 12(f). Defendants contend that the court should strike the complaint’s sixty or so 

paragraphs that supposedly “piggyback” off of the unproven allegations in the Minnesota 

Attorney General’s complaint against and consent order with Accretive. Doc. 97 at 20-23 & n.5 

(listing the supposedly immaterial paragraphs); Doc. 120 at 38-40. Defendants say: “Plaintiffs’ 

Complaint relies heavily on allegations raised in a now-defunct complaint filed by the Minnesota 

Attorney General and a related Compliance Review. None of these allegations are within the 

personal knowledge of Plaintiffs; rather, they are simply copied-and-pasted or paraphrased from 

the Attorney General’s pleadings and press announcements.” Doc. 97 at 20-21.

As an initial matter, it is not at all clear that those allegations are not based on Plaintiffs’

personal knowledge. Although many of Plaintiffs’ allegations overlap with those in the 

Minnesota Attorney General’s complaint, Plaintiffs assert that their “allegations are based upon 

personal knowledge as to themselves and their own acts, and upon information and belief 

developed from the investigation and analysis of their counsel, which includes, among other 

things, the review of certain of [Accretive’s] Board of Director minutes, Audit Committee 

minutes, Board packages and standard operational manuals garnered through a request for such 

information pursuant to 8 Del. C. § 220, materials received from the Minnesota Attorney General 

pursuant to the Data Practices Act (Minn. Stat. 13.01 et seq. 2012), public filings by Accretive 

with the [SEC], press releases, news reports, analyst reports, matters of public record available 

from various state and federal government websites, complaints pending against [Accretive] in 

state and federal courts, and other information available in the public domain.” Doc. 72 at pp. 1-

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2. Defendants do not explain how the court can conclude on the pleadings that Plaintiffs’ 

allegations tracking the Minnesota Attorney General’s allegations are not based on Plaintiffs’ 

own knowledge derived from the other materials that Plaintiffs reviewed. If Plaintiffs’ factual 

allegations are true, as the court must assume at this stage, then it is hardly surprising that the 

Minnesota Attorney General and Plaintiffs reached the same conclusions about Accretive 

through their separate investigations.

Defendants submit that “as a matter of well-settled law, Plaintiffs may not rely on the 

Minnesota Attorney General’s investigation or Accretive Health’s settlement of the Minnesota 

Attorney General’s lawsuit—which involved no admission of fault or liability by the 

Company—in support of their Complaint.” Doc. 97 at 21. To support this submission, 

Defendants cite only a few federal district court opinions. Id. at 21-22. As the Seventh Circuit 

has “noted repeatedly, a district court decision does not have stare decisis effect [and] ... is not a 

precedent,” and that “[t]he fact of such a decision is not a reason for following it.” Midlock v. 

Apple Vacations West, Inc., 406 F.3d 453, 457-58 (7th Cir. 2005). One of the cases cited by 

Defendants speaks of “the well-established precedent [holding] that references to preliminary 

steps in litigations and administrative proceedings that did not result in an adjudication on the 

merits or legal or permissible findings of fact are, as a matter of law, immaterial under Rule 

12(f).” In re Rough Rice Commodity Litig., 2012 WL 473091, at *4 (N.D. Ill. Feb. 9, 2012) 

(internal quotation marks omitted). Although it described that rule as “well-established,” Rough 

Rice also noted that no decision of the Seventh Circuit or of any other court of appeals other than 

the Second Circuit had spoken to the question “whether it is sufficient for a plaintiff to plead a 

manipulation violation by merely parroting a CFTC settlement, entered into without admitting or 

denying any of the allegations.” Id. at *5 (internal quotation marks omitted).

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The Second Circuit decision is Lipsky v. Commonwealth United Corp., 551 F.2d 887 (2d 

Cir. 1976). The plaintiff in that case included within the complaint “a series of references to 

SEC objections to various [of the defendant’s] registration and proxy statements,” and attached 

to the complaint an SEC complaint that had been filed against the defendant but that had been 

resolved by consent decree, with no admissions or findings of liability. Id. at 892. The 

defendant contended that those references should be stricken as immaterial under Rule 12(f) 

because neither the SEC complaint nor the consent decree could be introduced into evidence. Id. 

at 892-93. Both the Second Circuit and the plaintiff agreed that those documents were 

inadmissible as evidence. Id. at 893. The Second Circuit determined on that basis that the SEC 

complaint and consent decree were indeed immaterial under Rule 12(f). See ibid. (noting that “it 

is settled that the motion [under Rule 12(f)] will be denied, unless it can be shown that no 

evidence in support of the allegation would be admissible,” but holding that “neither a complaint 

nor references to a complaint which results in a consent judgment may properly be cited in the 

pleadings under the facts of this case”). The court concluded: “The order of the district court 

[granting the motion to strike] is modified to the extent that plaintiff be permitted to amend his 

complaint to particularize the alleged inadequacies ..., omitting any references to the complaint 

of the SEC against [the defendant]. Rule 12(f) should be construed strictly against striking 

portions of the pleadings on the grounds of immateriality, and if the motion is granted at all, the 

complaint should be pruned with care.” Id. at 894.

This court understands Lipsky to stand for the proposition that an allegation as to what a 

complaint (or other document) filed in another litigation says is immaterial under Rule 12(f) 

where that complaint is inadmissible as evidence. This is a narrow proposition, in keeping with 

the Second Circuit’s view that “Rule 12(f) should be construed strictly against striking portions 

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of the pleadings on the grounds of immateriality.” Ibid. By contrast, where a plaintiff does not 

make allegations about the content of an inadmissible document but rather alleges independently 

sourced and appropriately supported facts that track (“piggyback on”) that inadmissible 

document’s factual allegations, the plaintiff’s allegations are not immaterial under Lipsky’s 

interpretation of Rule 12(f) because the rationale of Lipsky—that an allegation is immaterial if it 

could not possibly be supported by admissible evidence—is inapplicable in that instance.

Under this reading of Lipsky, most or all of the allegations challenged by Defendants are 

perfectly acceptable under Rule 12(f). For instance, Defendants contend that ¶ 46 of the 

complaint is immaterial. Doc. 97 at 23 n.5. That paragraph states:

Fairview and Accretive entered into two contracts defining their business 

relationship in 2010. On March 29, 2010, Fairview and Accretive entered into 

the “Revenue Cycle Operations Agreement” (“RCA”), under which Fairview 

delegated to Accretive the authority to manage all day-to-day aspects of the 

revenue cycle operations, going so far as to execute a power of attorney to 

fully empower Accretive to make billing decisions for the hospital as it related 

to Medicaid, Medicare, and third-party insurers. See Exhibit A at 4. 

According to Accretive’s Form 10-K filed with the SEC on February 29, 

2010, Accretive received approximately $100 million from Fairview in 2011 

just from the RCA, which accounted for roughly 12% of Accretive’s revenue 

in 2011.

Doc. 72 at ¶ 46. That allegation is not covered by the rule of Lipsky because it could be proved 

by evidence other than the inadmissible Minnesota Attorney General complaint and consent 

decree; most obviously, it could be proved by the RCA and the Form 10-K referenced in the 

allegation. Most of the challenged paragraphs are similarly undisturbed by Lipsky, though where 

the complaint does simply allege the contents of inadmissible documents, the court will disregard 

those allegations. To the extent that the nonprecedential district court opinions cited by 

Defendants go beyond Lipsky to reach allegations that simply allege the same facts alleged in the 

Minnesota Attorney General’s complaint, this court declines to follow those cases.

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II. Demand Futility

Federal Rule of Civil Procedure 23.1(b), which establishes the pleading requirements for 

federal court derivative actions, provides that the complaint must “state with particularity: (A) 

any effort by the plaintiff to obtain the desired action from the directors or comparable authority 

and, if necessary, from the shareholders or members; and (B) the reasons for not obtaining the 

action or not making the effort.” Fed. R. Civ. P. 23.1(b)(3). Plaintiffs concede that “[n]o 

demand was made on the Board,” but contend that demand would have been futile and therefore 

was not required under Rule 23.1(b)(3)(B). Doc. 72 at ¶ 276. “[F]ederal law governs the degree 

of detail that the plaintiff must furnish when it gives its ‘reasons for not obtaining the action or 

not making the effort.’” Westmoreland Cnty. Emp. Ret. Sys., 2013 WL 4266586, at *1 (quoting 

Fed. R. Civ. P. 23.1(b)(3)(B)). Delaware substantive law governs whether the complaint’s 

demand futility allegations are sufficient to plead demand futility. See Kamen v. Kemper Fin. 

Servs., Inc., 500 U.S. 90, 96-98, 108-09 (1991) (noting that the demand requirement is 

substantive and thus is governed by state law with respect to state law causes of action, and 

holding that federal common law incorporates state demand futility law with respect to federal 

causes of action); Westmoreland Cnty. Emp. Ret. Sys., 2013 WL 4266586, at *4; Abbott Labs., 

325 F.3d at 804.

There are two distinct demand futility tests under Delaware law, one arising from

Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984), and the second from Rales v. Blasband, 634 

A.2d 927, 934 (Del. 1993). See Wood, 953 A.2d at 140 (describing both tests). Defendants 

argue that the Rales test applies, Doc. 97 at 25; Doc. 120 at 13-14, while Plaintiffs maintain that 

“the Court must apply the Aronson test because Plaintiffs allege that a majority of Accretive’s 

Board had actual knowledge of illegal wrongdoing, yet consciously decided not to take any steps 

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to prevent or remedy the situation,” Doc. 108 at 32. By pressing Aronson as opposed to Rales, 

Plaintiffs have forfeited and likely waived any argument that their allegations satisfy Rales.

“The Aronson test applies to claims involving a contested transaction i.e., where it is 

alleged that the directors made a conscious business decision in breach of their fiduciary duties. 

That test requires that the plaintiff allege particularized facts creating a reason to doubt that (1) 

the directors are disinterested and independent or that (2) the challenged transaction was 

otherwise the product of a valid exercise of business judgment.” Wood, 953 A.2d at 140 

(footnotes, brackets, and internal quotation marks omitted). “The test is ‘in the disjunctive[:] if 

either prong is satisfied, demand is excused.’” Westmoreland Cnty. Emp. Ret. Sys., 2013 WL 

4266586, at *4 (Seventh Circuit’s alteration) (quoting Brehm v. Eisner, 746 A.2d 244, 256 (Del. 

2000)). The court will consider both prongs in turn.

A. Disinterestedness and Independence

Demand futility is sufficiently alleged where there is reason to doubt that at least half of 

the directors lack disinterestedness or independence. See Beneville v. York, 769 A.2d 80, 85-86 

(Del. Ch. 2000) (demand is excused where at least half of the directors on a board with an even 

number of directors are interested or non-independent). The board in this case consists of eight 

directors, so Plaintiffs must adequately allege that four are either interested or non-independent. 

The court assumes that Tolan, as President and CEO of Accretive, lacks independence, and so 

Plaintiffs must allege facts giving rise to a reason to doubt that three of the other seven directors 

were interested or non-independent. See In re Goldman Sachs Grp., Inc. S’holder Litig., 2011 

WL 4826104, at *7 (Del. Ch. Oct. 12, 2011) (“It can be assumed that Blankfein and Cohn, as 

officials of Goldman, would be found to be interested or lack independence.”).

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1. Disinterestedness

Plaintiffs argue that at least three directors other than Tolan lack disinterestedness for 

either of two reasons. The first is that at least three directors face a substantial likelihood of 

personal liability for their connection to the wrongdoing alleged in this lawsuit, and the second is

that at least three directors received illicit personal financial gains from the alleged wrongdoing.

To show lack of disinterestedness on the ground that directors face a substantial 

likelihood of personal liability, a plaintiff must do more than merely name the directors as 

defendants and plead a claim against them that is sufficient to survive dismissal under Rule 

12(b)(6). As Aronson explains, “the mere threat of personal liability for approving a questioned 

transaction, standing alone, is insufficient to challenge either the independence or 

disinterestedness of directors, although in rare cases a transaction may be so egregious on its face 

that board approval cannot meet the test of business judgment, and a substantial likelihood of 

director liability therefore exists.” 473 A.2d at 815. In other words, the possibility that a 

director may be found personally liable usually is insufficient; rather, it renders him nondisinterested only where the challenged transaction is so egregious as to fall outside the 

protection of the business judgment rule. Plaintiffs have failed to establish that demand is 

excused due to a substantial likelihood of personal liability because they have not alleged that 

directors other than Tolan were responsible for a decision “so egregious on its face” that the 

business judgment rule could not apply.

The business judgment rule is “a presumption 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.” Gantler v. Stephens, 965 A.2d 695, 

705-06 (Del. 2009) (quoting Aronson, 473 A.2d at 812). It is axiomatic that “a court will not 

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substitute its judgment for that of the board if the ... decision can be attributed to any rational 

business purpose.” Id. at 706 (quoting Unocal v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 

1985)) (internal quotation marks omitted). Plaintiffs contend that Defendants are not entitled to 

business judgment rule protection because they consciously decided to allow Accretive to break 

the law. Doc. 108 at 38-39, 45-48.

“The business judgment rule normally protects all lawful actions of a board of directors, 

provided they were taken in good faith.” Kahn ex rel. DeKalb Genetics Corp. v. Roberts, 679 

A.2d 460, 465 (Del. 1996). The presumption is rebutted by a showing of bad faith, which “may 

be shown where ‘the fiduciary ... acts with the intent to violate applicable positive law.’” Ryan 

v. Gifford, 918 A.2d 341, 357 (Del. Ch. 2007) (quoting Stone, 911 A.2d at 369). There are other 

scenarios in which the business judgment rule is inapplicable, but this is the only one Plaintiffs

have argued. Doc. 108 at 38-39 (“Corporate directors cannot act beyond their lawful powers, 

and their conscious decision to allow illegal conduct is not a valid exercise of business judgment. 

... [T]he Individual Defendants knowingly permitted Accretive to systematically violate 

numerous debt collection and patient privacy laws in its quest to maximize short-term profits at 

the expense of the long-term value of the Company.”). It follows that Plaintiffs have forfeited, at 

least for purposes of this motion to dismiss, any other scenarios that might apply. See Kirksey v. 

R.J. Reynolds Tobacco Co., 168 F.3d 1039, 1041 (7th Cir. 1999) (“Our system of justice is 

adversarial, and our judges are busy people. If they are given plausible reasons for dismissing a 

complaint, they are not going to do the plaintiff’s research and try to discover whether there 

might be something to say against the defendants’ reasoning.”). 

The question, then, is whether Plaintiffs have adequately alleged that three directors other 

than Tolan acted with the intent to violate the law or that they knew Accretive was violating the 

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law and did nothing about it. As discussed more specifically in the Background section above, 

Plaintiffs have failed to adequately allege that Defendants other than Tolan had knowledge of 

Accretive’s unlawful activities. See Desimone, 924 A.2d at 940 (“Delaware courts routinely 

reject the conclusory allegation that because illegal behavior occurred, ... the board must have 

known so.”). It necessarily follows that Plaintiffs have failed to allege that those Defendants 

intentionally broke the law, intentionally caused Accretive to do so, or knowingly permitted 

Accretive to do so. See In re Lear Corp. S’holder Litig., 967 A.2d 640, 654-55 (Del. Ch. 2008) 

(noting that “a very extreme set of facts would seem to be required to sustain a disloyalty claim 

premised on the notion that disinterested directors were intentionally disregarding their duties,” 

and rejecting the plaintiffs’ liability theory as “untenable” because they failed to plead facts 

suggesting knowledge that their actions would injure the company or its stockholders); Stanley v. 

Arnold, 2012 WL 5269147, at *8 (S.D. Ohio Oct. 23, 2013) (explaining that “[a] plaintiff must 

plead with specificity which documents, which conversations, which employees, or which 

reports show the supposed failure and the necessary intent to harm or reckless disregard, so as to 

substantiate the accusations of demand futility,” and concluding that the complaint failed to 

adequately allege demand futility because “there are no allegations of reports to the Board or any 

evidence of the Board’s knowledge of any purported failure to comply with the [agreement]”) 

(internal quotation marks omitted); Strong ex rel. Tidewater, Inc. v. Taylor, 877 F. Supp. 2d 433, 

445 (E.D. La. 2012) (“[w]hat is glaringly missing from Plaintiff’s Complaint are any allegations 

that any one of the Individual Defendants knowingly made a deceptive or incomplete 

communication”) (emphasis added).

The circumstances presented in Abbott Labs., where the Seventh Circuit held that the 

plaintiffs had adequately alleged board action “so egregious on its face that board approval 

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cannot meet the test of business judgment,” Aronson, 473 A.2d at 815, are materially different 

than those presented here. In Abbott Labs., 

The chairman of the board received copies of the two Warning Letters in 

1994 and another in early 1999. Although the district court described the 

language in the Warning Letters as “boilerplate” and stated that the plaintiffs 

“ascribe much greater importance to the warning letters than they probably 

deserve,” continuing violations of federal regulations over a period of six 

years cannot be minimized. ...

The FDA met at least ten times with Abbott representatives, including 

White and other senior officers, concerning the continuing violations. The 

WALL STREET JOURNAL published information about Abbott’s FDA 

problems in 1995. By 1999, even a third-party analyst questioned why Abbott 

continued to “drag [ ] their feet fixing the [FDA] problems.” Although Abbott 

sought to negate the effects of this news in its press release of 1999, the 

release itself substantiates the fact that the company, and, correspondingly, the 

board of directors, knew of the problems and were aware that the FDA had 

threatened to file an injunction against Abbott.

* * *

... We find that six years of noncompliance, inspections, 483s, Warning 

Letters, and notice in the press, all of which then resulted in the largest civil 

fine ever imposed by the FDA and the destruction and suspension of products 

which accounted for approximately $250 million in corporate assets, indicate 

that the directors’ decision to not act was not made in good faith and was 

contrary to the best interests of the company.

325 F.3d at 808-09 (alterations in the original) (internal citations omitted).

The allegations of director knowledge in this case do not even remotely compare to those 

in Abbott Labs.; there were no questions by third-party analysts, no regulatory inspections or 

inquiries into Accretive’s conduct, and no regulatory warning letters issued to Accretive, and 

while there was an article about Accretive in the press, it appeared after the time period during 

which most if not all of Defendants’ misfeasance is alleged to have occurred. Although the facts 

in Abbott Labs. certainly do not set a floor for purposes of what must be pleaded to allege that 

director defendants violated the business judgment rule, the allegations here fall well short of the 

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line. See In re Capital One Derivative S’holder Litig., 2013 WL 3242685, at *13 n.18 

(distinguishing Abbott Labs. on similar grounds); In re SAIC Derivative Litig., 2013 WL 

2466796, at *19-22 (same); Gulbrandsen ex rel. Wells Fargo & Co. v. Stumpf, 2013 WL 

1942158, at *5 (N.D. Cal. May 9, 2013) (same); In re Abbott Depakote S’holder Derivative 

Litig., 909 F. Supp. 2d 984, 998 (N.D. Ill. 2012) (same); Garza ex rel. Navistar Int’l Corp. v. 

Belton, 2010 WL 3324881, at *8-9 (N.D. Ill. Aug. 13, 2010) (same).

The Seventh Circuit’s recent decision in Westmoreland County Employee Retirement 

System is distinguishable for much the same reason. The plaintiffs in that case alleged that the 

directors of Baxter International, Inc., consciously disregarded their responsibility to bring 

Baxter into compliance with a 2006 consent decree with the federal Food and Drug 

Administration (“FDA”) that required the company to take remedial steps regarding a particular 

product, which caused Baxter to lose more than $500 million after an FDA-mandated recall of 

that product in 2010. Westmoreland Cnty. Emp. Ret. Sys., 2013 WL 4266586, at *1. The 

plaintiffs alleged that the Baxter directors were aware of the 2006 consent decree, the company’s 

efforts to comply with the decree, and the FDA’s severe dissatisfaction with those efforts, and 

yet failed to ensure that the company complied with the decree to the FDA’s satisfaction; 

ultimately, the FDA had enough with Baxter’s languishing efforts and ordered the recall. Id. at 

*2-3. Specifically, the plaintiffs alleged: “Despite repeated warnings from the FDA that Baxter’s 

remedial efforts were insufficient—warnings that were directly communicated to CEO Parkinson 

and passed along to the board of directors—the board took no action to ensure the company’s 

timely compliance with the law, choosing instead to work on the new [product] despite its legal 

obligations regarding the old [product, which had been subject to the 2006 consent decree].” Id. 

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at *6 (emphasis added). Here, by contrast, as set forth in detail above, Plaintiffs’ allegations do 

not permit a reasonable inference that Defendants had anywhere near that degree of knowledge.

An allegation that at least three Defendants other than Tolan violated federal securities 

law by causing Accretive to make false public statements that inflated its stock price might 

excuse demand by threatening those Defendants with personal liability. See In re Countrywide 

Fin. Corp. Derivative Litig., 554 F. Supp. 2d 1044, 1057 (C.D. Cal. 2008) (noting the substantial 

overlap between the standard for stating a claim under § 10(b) of the Securities Exchange Act 

and the standard for excusing demand, and finding a strong inference of scienter based on 

plaintiffs’ allegations “that the Individual Defendants misled the public with regard to the rigor 

of Countrywide’s loan origination process, the quality of its loans, and the Company’s financial 

situation”); id. at 1082 (adding that “[f]or the same reasons that it found a strong inference of 

scienter, the Court finds that the Complaint pleads evidence of a ‘sustained or systematic failure 

of the board to exercise oversight,’ so as to create a substantial likelihood of liability for 

[Individual Defendants]”). Plaintiffs, however, have failed to adequately allege securities law 

violations by Defendants other than Tolan. “The elements of a section 10(b) Securities 

Exchange Act claim are: (1) a material misrepresentation or omission by the defendant in 

connection with the purchase or sale of securities; (2) scienter; (3) reliance; (4) economic loss; 

and (5) loss causation.” AnchorBank, FSB v. Hofer, 649 F.3d 610, 617 (7th Cir. 2011). 

“Scienter” in this context “means ‘knowledge of the statement’s falsity or reckless disregard of a 

substantial risk that the statement is false.’” Pugh v. Tribune Co., 521 F.3d 686, 693 (7th Cir. 

2008) (quoting Higginbotham v. Baxter Int’l, Inc., 495 F.3d 753, 756 (7th Cir. 2007)). 

Heightened pleading standards apply to Plaintiffs’ federal securities law claims due to the Private 

Securities Litigation Reform Act of 1995 (“PSLRA”), which requires Plaintiffs to “state with 

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particularity facts giving rise to a strong inference that the defendant acted with the required state 

of mind.” 15 U.S.C. § 78u-4(b)(2). The Supreme Court explained what is meant by “strong 

inference” in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007):

It does not suffice that a reasonable factfinder plausibly could infer from the 

complaint’s allegations the requisite state of mind. Rather, to determine 

whether a complaint’s scienter allegations can survive threshold inspection for 

sufficiency, a court governed by [§ 78u-4(b)(2)] must engage in a comparative 

evaluation; it must consider, not only inferences urged by the plaintiff ... but 

also competing inferences rationally drawn from the facts alleged. An 

inference of fraudulent intent may be plausible, yet less cogent than other, 

nonculpable explanations for the defendant’s conduct. To qualify as “strong” 

within the intendment of [§ 78u-4(b)(2)], we hold, an inference of scienter 

must be more than merely plausible or reasonable—it must be cogent and at 

least as compelling as any opposing inference of nonfraudulent intent.

Id. at 314 (emphasis added).

As described in the Background section, Plaintiffs’ allegations are not inconsistent with 

the possibility that Defendants (other than Tolan) knew the facts that, according to Plaintiffs, 

made Accretive’s public statements false. But the far more compelling inference on the 

pleadings is that those directors were not aware of Accretive’s various legal violations and so did 

not act with scienter in causing Accretive to make optimistic public statements about its 

relationship with Fairview. Thus, Plaintiffs have not adequately alleged that any Defendant 

other than Tolan made or caused Accretive to make statements with knowledge that those 

statements were false or that there was a substantial risk that they were false. See Winters v. 

Stemberg, 529 F. Supp. 2d 237, 251 (D. Mass. 2008) (holding that the plaintiffs insufficiently 

alleged scienter based on their claim that the defendants filed proxy statements inflating the 

financial health of the company and hiding the alleged fact that backdating occurred, reasoning 

that the plaintiffs “allege only eleven of fifty-one stock option grants occurred at suspicious 

times, and this Court can readily imagine plausible, nonculpable explanations for the post-grant 

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rise in stock price with regard to this small subset”); In re Verisign, Inc., Derivative Litig., 531 F. 

Supp. 2d 1173, 1206 (N.D. Cal. 2007) (rejecting the plaintiffs’ allegation that company directors 

acted with scienter by holding and exchanging company stock in the midst of a backdating 

scheme that inflated stock prices, reasoning that the plaintiffs “fail[] to allege, with respect to 

each defendant, facts giving rise to a strong inference that each such defendant acted with 

deliberate recklessness or engaged in conscious misconduct,” and dismissing “as generalities” 

the facts pled—“that dozens of options were backdated, that such alleged backdating violated the 

applicable option plans, that the alleged backdating occurred on multiple occasions, and that the 

VeriSign stock price rose after the alleged grants”). And absent that predicate, Plaintiffs have 

not adequately alleged that any Defendant other than Tolan is sufficiently threatened with 

personal liability for purposes of establishing demand futility.

Plaintiffs’ second reason for finding that several defendants (Cline, Bronfman, Nayden, 

Wolfson, and Tolan) lack disinterestedness is that they gained financially from Accretive’s 

illegal behavior “by taking advantage of a lucrative secondary stock offering at a time when the 

Company’s stock was artificially inflated.” Doc. 108 at 48. Plaintiffs say that Accretive’s stock 

price was artificially inflated by Defendants’ positive public statements about Accretive’s 

business prospects and by their failure to disclose facts—Accretive’s violations of the FDCPA, 

patient privacy laws, and so forth—that would have cast doubt on those positive statements and 

led the market to decrease its valuation of Accretive. Plaintiffs conclude that “[b]ecause 

defendants Cline, Bronfman, Nayden, Wolfson, and Tolan received millions of dollars in 

personal financial benefit that was not shared by either the stockholders or the Company, those 

directors cannot be considered disinterested.” Id. at 49.

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The trouble with this theory is that a director does not become interested for demand 

futility purposes merely because he has sold shares of the company’s stock. As the case cited by 

Plaintiffs explains, “the mere fact that stocks were traded by an officer or director does not 

establish a breach of the duty of loyalty. A director is free to trade in the corporation’s stock 

without liability to the corporation. In fact, when directors and officers own stock or receive 

compensation in stock, they should be expected to trade those securities in the normal course of 

events.” McCall v. Scott, 239 F.3d 808, 825 (6th Cir. 2001) (citations omitted); see also Beam ex 

rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961, 974 (Del. Ch. 2003) 

(holding that directors’ sales of stock in the company did not “place[] them in a position inimical 

to their duties to the Company,” and remarking that “[w]ere [the court] to decide otherwise, 

directors of every Delaware corporation would be faced with the ever-present specter of suit for 

breach of their duty of loyalty if they sold stock in the company on whose Board they sit”), aff’d, 

845 A.2d 1040 (Del. 2004); Guttman v. Huang, 823 A.2d 492, 502 (Del. Ch. 2003) (“Although 

insider sales are (rightly) policed by powerful forces—including the criminal laws—to prevent 

insiders from unfairly defrauding outsiders by trading on non-public information, it is unwise to 

formulate a common law rule that makes a director ‘interested’ whenever a derivative plaintiff 

cursorily alleges that he made sales of company stock in the market at a time when he possessed 

material, non-public information.”); In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 

1424 (3d Cir. 1997) (“We will not infer fraudulent intent from the mere fact that some officers 

sold stock.”). Thus, that Defendants made a lot of money from selling Accretive stock does not 

excuse Plaintiffs from meeting the demand requirement.

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2. Independence

Plaintiffs contend that “five Defendants—Spiegel, Bronfman, Cline, Nayden, and 

Wolfson—lack independence because they have longstanding personal and lucrative financial 

relationships with their intertwined private equity firms and each other, and as such, these 

countervailing strong loyalties render these men incapable of making a decision with only the 

best interests of the corporation in mind.” Doc. 108 at 42. “In making the required judgment [as 

to whether a director is independent,] no single factor—such as receipt of directorial 

compensation; family or social relationships; approval of the transaction attacked; or other 

relationships with the corporation (e.g., attorney or banker)—may itself be dispositive in any 

particular case. Rather, the question is whether the accumulation of all factors creates the 

reasonable doubt [that the directors are independent] to which Aronson refers.” Harris v. Carter, 

582 A.2d 222, 229 (Del. Ch. 1990). Plaintiffs say that the following facts show that those five 

Defendants lack independence. Doc. 108 at 43-44.

First, Plaintiffs allege that Nayden, Wolfson, Cline, and Bronfman are partners at the two 

firms that founded Accretive—Oak Hill and Accretive LLC—and that those firms continue to 

own interests in Accretive. Specifically, Nayden and Wolfson are managing partners at Oak 

Hill, which Wolfson founded, while Cline and Bronfman are partners at Accretive LLC, which 

Cline founded. Oak Hill owns 8.2% of Accretive’s common stock, and Accretive LLC retains an 

unspecified interest in Accretive. Plaintiffs suggest that Bronfman owes his position at Accretive 

LLC to Cline (who founded that firm), making Bronfman dependent on Cline. Second, Plaintiffs 

allege that Nayden, Wolfson, Cline, Bronfman, and Spiegel each own substantial shares in 

Accretive (ranging from 1.4% to 8.2% of its stock); Nayden, Bronfman, and Spiegel personally 

profited by selling Accretive stock in Accretive’s two public offerings (with profits ranging from 

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$6.6 million to $45.9 million); and each of these five receives a salary from Accretive for serving 

as a director (ranging from $155,000 to $175,000 in 2011). Third, Plaintiffs allege that Cline 

serves on the boards of other firms along with other various other Accretive directors: He serves 

on the board of Arise Virtual Solutions (which is owned by Accretive LLC) with Tolan; on the 

board of Accolade, Inc., with Spiegel; and on the boards of Fandango and AlphaStaff (both also 

owned by Accretive LLC) with Bronfman.

These allegations do not raise a reasonable doubt as to the independence of any director

other than Tolan. The outside director Defendants are not rendered non-independent by their 

affiliations with Oak Hill and Accretive LLC, even though those affiliations presumably are the 

reason why they were made directors. As Aronson explained: “[I]t is not enough to charge that a 

director was nominated by or elected at the behest of those controlling the outcome of a 

corporate election. That is the usual way a person becomes a corporate director. It is the care, 

attention and sense of individual responsibility to the performance of one’s duties, not the 

method of election, that generally touches on independence.” Aronson, 473 A.2d at 816. 

Fundamentally, the allegations regarding Defendants’ affiliations with Oak Hill and Accretive 

LLC simply mean that they have substantial control over Accretive through the firms that they 

control, which for practical purposes is indistinguishable from their personally owning large 

stakes in Accretive. See In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 808, 822 (Del. 

Ch. 2005) (holding that the complaint failed to adequately allege that Bechtel, a JPMorgan 

director, was not independent based on the fact that he was the CEO and director of another 

company that did lucrative business with a bank managed by JPMorgan, and the fact that his 

company was engaged in an investment partnership with JPMorgan and its affiliates, reasoning 

that “[a]lthough Bechtel’s company has received over $2 billion from [a bank managed by 

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JPMorgan] ..., the plaintiffs do not allege that the money was somehow connected to Bechtel’s 

relationship with [JPMorgan] or that future [funding for Bechtel’s company] would be 

jeopardized if Bechtel voted against [JPMorgan’s CEO]”). And it is not clear what relevance 

Defendants’ ownership of Accretive stock could have to the independence analysis. Indeed, “it 

has been thought that having directors who actually owned a meaningful, long-term common 

stock stake was a useful thing, because that would align the interests of the independent directors 

with the common stockholders and give them a personal incentive to fulfill their duties 

effectively.” LC Capital Master Fund, Ltd. v. James, 990 A.2d 435, 452 (Del. Ch. 2010).

Nor is Defendants’ independence affected by the fact that they sold some of their stock 

and made a great deal of money from doing so. As noted above, “when directors and officers 

own stock or receive compensation in stock, they should be expected to trade those securities in 

the normal course of events.” McCall, 239 F.3d at 825. Plaintiffs focus heavily on Defendants’ 

wealth, but they do not explain how Defendants’ ownership and sale of Accretive stock could 

make them non-independent. They certainly do not suggest that Defendants other than Tolan are 

beholden to Tolan for their money.

As for the fact that Accretive pays its directors rather than expecting them to work for 

free, “the mere fact that a director receives compensation for her service as a board member adds 

little or nothing to demand-futility analysis, without more—i.e., unless the pleadings 

demonstrate, for example, that the status or compensation was somehow ‘material’ to the 

director or otherwise outside the norm.” Khanna v. McMinn, 2006 WL 1388744, at *16 (Del. 

Ch. May 9, 2006) (footnote and internal quotation marks omitted). If a CEO somehow had 

effective power to terminate the director, then the fact that the director’s compensation for being 

a director was a substantial part of the director’s total income might render him dependent on the 

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CEO and thereby undermine his independence. But there is no allegation that Tolan had that 

power here, and no allegation that Defendants’ compensation for serving as Accretive directors 

were material in comparison to their total income. See MCG Capital Corp. v. Maginn, 2010 WL 

1782271, at *20 (Del. Ch. May 5, 2010) (“For director compensation to create independence 

problems, however, it must be shown that the compensation is material to the director.”); 

Selectica, Inc. v. Versata Enters., Inc., 2010 WL 703062, at *14 (Del. Ch. Feb. 26, 2010) (same).

And Plaintiffs provide no basis to conclude that director compensation of $155,000 to $175,000 

per year is “outside the norm” for corporations of Accretive’s scale.

The two cases cited by Plaintiffs to support their argument that Defendants’ director 

compensation is material, Doc. 108 at 42 n.14, are irrelevant because they discuss not 

compensation paid by the corporation to its directors for their services as directors, but money 

paid to the directors by other interested parties for other work. See Kahn v. Portnoy, 2008 WL 

5197164, at *8-9 (Del. Ch. Dec. 11, 2008) (holding that the directors were not independent of the 

CEO where they held paid positions with other entities controlled by the CEO); In re The 

Limited, Inc. S’holders Litig., 2002 WL 537692, at *6 (Del. Ch. Mar. 27, 2002) (holding that the 

director was not independent of the firm’s CEO where he was paid $150,000 annually to serve a 

consultant to the firm and where the CEO controlled who the firm hires as a consultant). There 

is no suggestion that Tolan effectively controlled who would serve on Accretive’s board or that 

any of the other directors held other paid positions from which Tolan could fire them.

Nor are Defendants rendered non-independent by their personal relationships. The 

Delaware Supreme Court has held that reasonable doubt as to a director’s independence could 

“arise either because of financial ties, familial affinity, a particularly close or intimate personal or 

business affinity or because of evidence that in the past the relationship caused the director to act 

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non-independently vis à vis an interested director.” Beam ex rel. Martha Stewart Living 

Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1051 (Del. 2004). That said, the Delaware Supreme 

Court held in the same decision: “[S]ome professional or personal friendships, which may border 

on or even exceed familial loyalty and closeness, may raise a reasonable doubt whether a director 

can appropriately consider demand. This is particularly true when the allegations raise serious 

questions of either civil or criminal liability of such a close friend. Not all friendships, or even 

most of them, rise to this level and the Court cannot make a reasonable inference that a 

particular friendship does so without specific factual allegations to support such a conclusion.” 

Id. at 1050 (quoting Beam, 833 A.2d at 979).

Applying that standard, the Delaware Supreme Court held that the following allegations 

were insufficient to create such a doubt that a firm’s other directors were dependent on Martha 

Stewart, who controlled the firm in question:

Allegations that Stewart and the other directors moved in the same social 

circles, attended the same weddings, developed business relationships before 

joining the board, and described each other as “friends,” even when coupled 

with Stewart’s 94% voting power, are insufficient, without more, to rebut the 

presumption of independence. They do not provide a sufficient basis from 

which reasonably to infer that Martinez, Moore and Seligman may have been 

beholden to Stewart. Whether they arise before board membership or later as 

a result of collegial relationships among the board of directors, such 

affinities—standing alone—will not render presuit demand futile.

Id. at 1051. The alleged relationships in Beam were much stronger than the relationships alleged 

here among Defendants. It follows that these alleged relationships do not cast a reasonable doubt 

on Defendants’ independence. See Khanna, 2006 WL 1388744, at *16 (explaining that “[t]he 

Court’s analysis in Beam was primarily directed at social relationships, but it also may inform 

the evaluation of allegations of business relationships,” as “the heightened strength of 

relationship required to find that a director’s ‘discretion would be sterilized’ renders allegations 

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concerning most ordinary relationships of limited value, at most”); Orman v. Cullman, 794 A.2d 

5, 27-28 (Del. Ch. 2002) (holding that “[t]he naked assertion of a previous business relationship 

is not enough to overcome the presumption of a director’s independence,” and finding that the 

plaintiffs failed to challenge the independence of certain directors who had “longstanding 

business relations” with other board members); Freuler v. Parker, 803 F. Supp. 2d 630, 646 n.24 

(S.D. Tex. 2011) (noting that “Delaware courts have made clear that a plaintiff showing that 

demand would be futile must do more tha[n] conclusorily assert entangling alliances”). 

As required by Delaware law, the court has considered Plaintiffs’ arguments regarding 

independence both separately and together. See Harris, 582 A.2d at 229 (“the question is 

whether the accumulation of all factors creates the reasonable doubt [that the directors are 

independent] to which Aronson refers”). Having reviewed the allegations, the court concludes 

that they are insufficient to raise a reasonable doubt as to the independence of Defendants other 

than Tolan.

B. Business Judgment Rule

Where, as here, “the underlying transaction was approved by a disinterested and 

independent board majority, then the court moves to the second inquiry: whether the plaintiff 

‘has alleged facts with particularity which, if taken as true, support a reasonable doubt that the 

challenged transaction was the product of a valid exercise of business judgment.’” In re China 

Agritech, Inc. S’holder Derivative Litig., 2013 WL 2181514, at *15 (Del. Ch. May 21, 2013) 

(quoting Aronson, 473 A.2d at 815). Under this second prong of the Aronson test, “demand may 

be excused if ‘in rare cases a transaction may be so egregious on its face that board approval 

cannot meet the test of business judgment, [resulting in] a substantial likelihood of director 

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liability.’” Abbott Labs., 325 F.3d at 808 (quoting Brehm, 746 A.2d at 259) (Seventh Circuit’s

alterations).

As noted above, Plaintiffs’ position that Defendants are not entitled to the protections of 

the business judgment rule rests on the premise that Defendants knew of Accretive’s misconduct 

and deliberately chose to take no action in response. Doc. 108 at 38-39. Under these 

circumstances, analysis under Aronson’s second prong overlaps entirely with the discussion of 

the business judgment rule in the “substantial likelihood of personal liability” portion of the 

disinterestedness inquiry in Section II.A.1, supra. See Aronson, 473 A.2d at 815 (“the mere 

threat of personal liability for approving a questioned transaction, standing alone, is insufficient 

to challenge either the independence or disinterestedness of directors, although in rare cases a 

transaction may be so egregious on its face that board approval cannot meet the test of business 

judgment, and a substantial likelihood of director liability therefore exists”); In re INFOUSA, 

Inc. S’holders Litig., 953 A.2d 963, 972, 995 (Del. Ch. 2007) (holding that certain directors 

faced a significant likelihood of personal liability based on their willingness to issue Form 10-Ks 

that contained material misrepresentations of the benefits provided to one director, and noting 

that “[i]n many cases, the relevant analysis [to resolve plaintiffs’ allegations challenging the 

business judgment of the board] will include a showing by the plaintiffs that directors were either 

interested in the transaction or dominated by [a certain director]”); In re SAIC Derivative Litig., 

2013 WL 2466796, at *13 (“the particularized allegations essential to creating reasonable doubt 

as to a substantial likelihood of personal liability for breach of fiduciary duties may also 

implicate the question whether the Board can avail itself of business judgment protections”). 

Indeed, Plaintiffs’ argument that there is a reasonable doubt as to Defendants’ disinterestedness 

under the first Aronson prong is materially identical to their argument under the second Aronson

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prong. Doc. 108 at 36-39, 45-48; see In re Am. Int’l Grp., Inc. Derivative Litig., 700 F. Supp. 2d 

419, 431 (S.D.N.Y. 2010) (“Plaintiffs frequently argue that there is reason to doubt that a 

majority of directors are disinterested because the complaint alleges director conduct so

egregious on its face that board approval cannot meet the test of business judgment, and a 

substantial likelihood of director liability therefore exists.”) (internal quotation marks omitted). 

Accordingly, as to the second prong of the Aronson test, Plaintiffs’ contention that Defendants’ 

actions do not enjoy the protection of the business judgment rule is rejected for the reasons given 

in Section II.A.1, supra. 

Conclusion

Plaintiffs’ complaint is dismissed because it does not adequately plead demand futility.

As Plaintiffs request, Doc. 108 at 62 n.25, the dismissal is without prejudice and with leave to 

replead. See Fed. R. Civ. P. 15(a)(2) (“The court should freely give leave [to amend] when 

justice so requires.”); Bogie v. Rosenberg, 705 F.3d 603, 608 (7th Cir. 2013) (“When a complaint 

fails to state a claim for relief, the plaintiff should ordinarily be given an opportunity, at least 

upon request, to amend the complaint to correct the problem if possible.”); Foster v. DeLuca, 

545 F.3d 582, 584 (7th Cir. 2008) (“District courts routinely do not terminate a case at the same 

time that they grant a defendant’s motion to dismiss; rather, they generally dismiss the plaintiff's 

complaint without prejudice and give the plaintiff at least one opportunity to amend her 

complaint.”). Plaintiffs have until October 22, 2013, to file an amended consolidated complaint; 

Defendants will have until November 19, 2013, to answer or otherwise plead.

September 24, 2013 

United States District Judge

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