FOR PUBLICATION

ATTORNEYS FOR APPELLANT: ATTORNEYS FOR APPELLEES:

RICHARD E. SHEVITZ JOSEPH H. YEAGER, JR.

SCOTT D. GILCHRIST MATTHEW T. ALBAUGH

Cohen & Malad LLP Baker & Daniels LLP

Indianapolis, Indiana Indianapolis, Indiana

WALTER C. CARLSON

KRISTEN R. SEEGER

Sidley Austin LLP

Chicago, Illinois

IN THE

COURT OF APPEALS OF INDIANA

WILLIAM T. CARTER, derivatively on behalf of )

CNO FINANCIAL GROUP, INC., )

)

Appellant-Plaintiff, )

)

vs. ) No. 49A02-1106-PL-582

)

R. GLENN HILLIARD, et al., )

)

Appellees-Defendants. )

APPEAL FROM THE MARION SUPERIOR COURT

The Honorable David J. Dreyer, Judge

Cause No. 49D10-1006-PL-24523

June 22, 2012

OPINION - FOR PUBLICATION

NAJAM, Judge
2

STATEMENT OF THE CASE

William T. Carter, derivatively on behalf of CNO Financial Group, Inc. (“CNO” 

or “the Company”), formerly known as Conseco, Inc. (“Conseco,” where applicable), 

filed a complaint and later an amended complaint (“Amended Complaint”) against R. 

Glenn Hilliard, Donna A. James, R. Keith Long, Debra J. Perry, C. James Prieur, Neal C. 

Schneider, Michael T. Tokarz, John G. Turner, William Kirsch, Eugene Bullis, Michael 

Dubes, James Hohmann, Edward Bonach, Ali Inanilan, and John Wells (collectively “the 

Defendants”) alleging breach of Defendants’ fiduciary and good faith duties, unjust 

enrichment, abuse of control, gross mismanagement, and waste of corporate assets. The 

Defendants filed a motion to dismiss the Amended Complaint on the ground that Carter 

had failed to allege claims showing that pre-suit demand on CNO’s Board of Directors 

was futile, as required by Delaware Chancery Court Rule 23.1. Following a hearing, the 

trial court granted the motion and dismissed the Amended Complaint. Carter presents 

several issues for review, which we consolidate and restate as:

1. Whether Carter has alleged particularized facts to show that pre-suit 

demand was excused under Delaware law.

2. Whether Carter has alleged particularized facts to show bad faith by 

the Director Defendants so as to excuse pre-suit demand pursuant to 

the standard set by the exculpatory clause in the corporate charter.

We conclude that Carter has not alleged particularized facts to show that the 

Director Defendants face a substantial likelihood of liability for the conduct described in 

the Amended Complaint, nor has he alleged particularized facts to show that the Director 

Defendants breached their duties of good faith and loyalty. Therefore, Carter has not 

shown under Delaware law that pre-suit demand on the Board would have been futile. 
3

As such, we conclude that the trial court did not err when it granted CNO’s motion to 

dismiss for failure to make pre-suit demand on the board of directors. We affirm.1 

FACTS AND PROCEDURAL HISTORY

The facts in this case are not contested. The trial court’s Order Granting 

Defendants’ Motion to Dismiss describes the parties:

Plaintiff Carter is a shareholder of CNO. CNO is a publicly[ ]traded 

insurance holding company headquartered in Carmel, Indiana, and is a 

Delaware corporation. At the time this suit was filed, CNO’s Board of 

Directors consisted of ten individuals, nine of whom were independent, 

outside Board members. Eight of those ten Board members were named as 

defendants: Hilliard, James, Long, Perry, Prieur, Schneider, Tokarz, and 

Turner. Of those eight, Hilliard, James, Long, Perry, Schneider, Tokarz, 

and Turner are non-employee, outside directors (collectively, the “Outside 

Directors”). In addition to serving as a director, Prieur is CNO’s Chief 

Executive Officer. Defendant Bonach is a current officer of CNO.[2] The 

remaining defendants are former officers of CNO.

Appellant’s App. at 14. 

On June 2, 2010, Carter filed a purported shareholder derivative action against the 

Defendants, current and former CNO directors and officers. Hilliard, James, Long, Perry, 

Prieur, Schneider, Tokarz, and Turner are currently CNO directors (“Director 

Defendants”), and Kirsch, Bullis, Dubes, Hohmann, Bonach, Inanilan, and Wells are 

former or present CNO officers (“Officer Defendants”). Carter had not made a demand 

on CNO’s board of directors (“the Board”) before filing the complaint. On July 26, 

Defendants filed a motion to dismiss for failure to make pre-suit demand on the Board. 

On November 1, Carter filed the Amended Complaint. Regarding Defendants, the 

Amended Complaint alleges, in relevant part:

 

1

 We heard oral argument in this case on April 19, 2012.

2

 Since the Amended Complaint was filed, Bonach has become the CEO of the Company. 
4

57. By reason of their positions as officers, directors, and/or fiduciaries of 

CNO and because of their ability to control the business and corporate 

affairs of CNO, Defendants owed CNO and its shareholders fiduciary 

obligations of good faith, loyalty, and candor, and were and are required to 

use their utmost ability to control and manage CNO in a fair, just, honest, 

and equitable manner. Defendants were and are required to act in 

furtherance of the best interests of CNO and its shareholders so as to 

benefit all shareholders equally and not in furtherance of their personal 

interest or benefit. Each director and officer of the Company owes to CNO 

and its shareholders a fiduciary duty to exercise good faith and diligence in 

the administration of the affairs of the Company and in the use and 

preservation of its property and assets, and the highest obligation of fair 

dealing.

58. Defendants, because of their positions of control and authority as 

directors and/or officers of CNO, were able to and did, directly and/or 

indirectly, exercise control over the wrongful acts complained of herein. 

Because of their advisory, executive, managerial, and directorial positions 

with CNO, each of the Defendants had knowledge of material non-public 

information regarding the Company.

59. To discharge their duties, the officers and directors of CNO were 

required to exercise reasonable and prudent supervision over the 

management, policies, practices and controls of the Company. By virtue of 

such duties, the officers and directors of CNO were required to, among 

other things:

a. Exercise good faith to ensure that the affairs of the 

Company were conducted in an efficient, business-like 

manner so as to make it possible to provide the highest 

quality performance of their business;

b. Exercise good faith to ensure that the Company was 

operated in a diligent, honest and prudent manner and 

complied with all applicable federal and state laws, rules, 

regulations and requirements, and all contractual obligations 

including acting only within the scope of its legal authority;

c. When put on notice of problems with the Company’s 

business practices and operations, exercise good faith in 

taking appropriate action to correct the misconduct and 

prevent its recurrence; and

d. Assure that a corporate information and reporting 

system was in place, which the Board concluded is adequate 

and is designed to provide senior management and the Board 

with timely, accurate information sufficient to allow 
5

management and the Board to reach informed judgments 

concerning the Company’s compliance with applicable laws 

and its business performance.

60. Pursuant to the Company’s Corporate Governance Guidelines (the 

“Governance Guidelines”), each member of the Board is specifically 

responsible for “monitoring management’s performance and adherence to 

corporate standards.” Further, according to the Governance Guidelines, 

each member of the Board is responsible for understanding, reviewing, and 

monitoring implementation of the Company’s strategic plans, capital plans, 

operating plans, and budgets to assure effective:

* Capital allocation

* Debt levels and structure

* Investment policies and practices

* Risk and vulnerability assessment and management

* Growth opportunities

* Engagement on central issues facing company

* Grasp of tradeoffs at the heart of the company

61. Moreover, pursuant to the Governance Guidelines, each member of the 

Board is specifically responsible for “focusing on the integrity, quality and 

clarity of the corporation’s financial reports and public disclosures and the 

processes that produce them” and is also duty-bound to “review the 

adequacy of the corporation’s compliance and reporting systems.” Once 

again, in order to adequately fulfill these duties (and their duties under 

Delaware law), the Board was required to ensure that sufficient information 

reporting systems were designed and implemented such that they could 

adequately fulfill their oversight responsibilities. 

62. Pursuant to the Audit Committee’s Charter, the members of the Audit 

Committee are specifically required, inter alia, to:

a. Review the adequacy of the Company’s internal 

controls that could materially affect the Company’s financial 

statements;

b. Review and discuss, prior to public dissemination, the 

annual audited and quarterly unaudited financial statements 

with management;

c. Review and discuss earnings releases;

d. Review the results of internal audits and discuss 

related significant internal control matters with the internal 

auditors and management, including significant reports to 
6

management prepared by the internal auditors and 

management’s responses;

e. Review significant accounting and reporting issues and 

discuss with management and the independent auditor their 

impact on the Company financial statements; and 

f. Review the adequacy and effectiveness of the 

Company’s procedures to ensure compliance with legal and 

regulatory requirements.

63. Pursuant to the Governance Committee’s Charter, the members of the 

Governance Committee are specifically required, inter alia, to:

a. Consider matters of corporate governance and to 

create, maintain and periodically review the Company’s 

corporate governance principles and code of ethics;

b. Adopt policies designed to encourage the highest 

levels of corporate conduct by the Board, the Company and 

its officers, employees, and agents; and

c. Consider the Company’s corporate strategy, including 

the evaluation of any significant acquisitions or divestitures 

or other material transactions involving the Company.

64. Pursuant to the Compensation Committee’s Charter, the members of 

the Compensation Committee are specifically required, inter alia, to:

a. Establish annual and long-term corporate and 

individual performance goals and objectives for the 

Company’s executive officers and key senior officers;

b. Recommend to the Board the compensation of the 

CEO;

c. Approve the compensation for other executive officers 

and key senior officers; and

d. Approve the overall compensation policy including 

cash-based incentive compensation plans and equity-based 

compensation plans.

Id. at 38-44. After detailing certain aspects of Defendants’ conduct beginning in 2003, 

Carter made the following allegations to show that demand is excused in this case:

227.a. A majority of the members of the Board were aware of, or should 

have been aware of, numerous red flags regarding the Company’s serious 

problems with its LTC [Long Term Care] business segment, including 

claims documentation issues, the failure to adequately set reserves, data 
7

integrity issues, budget problems, and market conduct violations. As such, 

a majority of the current Board knew[] or was recklessly indifferent to the 

facts that, among other things: (i) multiple internal control failures caused 

claim loss/reserve data to be inherently unreliable; and (ii) Defendants were 

systematically understating reserves; which (iii) caused the Company’s 

financial statements to be artificially and materially overstated. Notably, 

half of the Company’s current directors (defendants Hilliard, Schneider, 

Tokarz, Turner, and Perry) have served as directors of the Company since 

2004 or prior to 2004. In particular, as alleged herein, by 2003, the Board 

was meeting on a quarterly basis in the “War Room,” to specifically discuss 

issues with LTC with the Company’s senior officers, and these meetings 

began to occur with increasing frequency in 2005. DW1 [confidential 

Defense Witness 1] has also stated that LTC Reports prepared by LTC 

personnel regarding the LTC business containing a range of information 

including claims issues, reserve issues, budget problems, and market 

conduct violations were regularly provided to the Board in connection with 

the War Room meetings, along with comprehensive compliance reports 

personally prepared by DW1 (which “often” dealt, at least in part, with the 

Company’s ongoing LTC issues). Moreover, as discussed above, during a 

nine[-]month period spanning between [sic] 2004 and 2005, a 

comprehensive internal audit of the LTC segment was performed, and after 

the audit was concluded sometime in 2005, as Audit Committee members, 

defendants Schneider, Perry, and Turner received detailed results of this 

audit. Despite clearly being placed on notice of serious issues regarding 

LTC which were causing the Company’s reserves to be inadequately set, 

defendants Hilliard, Schneider, Tokarz, Perry, and Turner consciously 

disregarded their fiduciary duties to CNO when, under their direction, the 

Company’s ongoing LTC issues were not addressed and the Company 

continued to inadequately set reserves over a multi-year period. Thus, 

demand was not required upon Hilliard, Schneider, Tokarz, Perry, and 

Turner. Because Hilliard, Schneider, Perry and Turner comprise a majority 

of the directors on the Board (for demand futility purposes), demand is 

excused;

227.b. Defendants Hilliard, Schneider, Tokarz, Turner, and Perry are also 

interested in a demand because they engaged in conduct which is not 

protected by the business judgment rule in connection with their decision to 

not remedy the serious problems known to them through the various “red 

flags” described above. These directors were clearly placed on notice for 

years of the Company’s problems, yet chose to do nothing to remedy them. 

Thus, demand is excused as to Hilliard, Schneider, Tokarz, Turner, and 

Perry, and because they comprise a majority of the Board, demand is 

excused;
8

227.c. Demand is further excused because the Board failed to exercise its 

good faith judgment to ensure that the Company’s information and 

reporting system was in concept and design adequate to assure the Board 

that appropriate information will come to its attention in a timely manner as 

a matter of ordinary operations. In particular, it is unquestioned that the 

Board had actual knowledge of the Company’s LTC problems and failed to 

do anything to prevent and/or remedy them[;] however[,] this knowledge 

did not come as a result of an adequate system of information[-]reporting 

during the ordinary course of operations. Rather[,] this information came 

to the Board’s attention as a result of various audits, special meetings, and 

government investigations. Had the Board properly ensured that an 

adequate information[-]reporting system was in place from the beginning, 

as they were required to do under Delaware law, the serious problems with 

the Company’s LTC segment could have been remedied before the 

Company suffered the substantial harm alleged herein. Thus, demand is 

futile;

227.d. Demand is also excused because, as detailed herein, the Board 

intentionally misled the Multistate Examiners or permitted others to do so, 

thus clearly illustrating their hostility to the relief sought in this action. 

Accordingly, a reasonable stockholder would not believe, based on the 

confidential witness testimony detailed above, that the Board would have 

been able to properly and impartially consider a demand in good faith. 

Thus, demand is futile;

227.e. Every member of the Board is required to comply with the 

Company’s Corporate Governance Guidelines. The Corporate Governance 

Guidelines require each of the Company’s directors to monitor 

“management’s performance and adherence to corporate standards.” 

Further, the Corporate Governance Guidelines requires [sic] directors to 

focus “on the integrity, quality and clarity of the corporation’s financial 

reports and public disclosures and the processes that produce them.” 

Therefore, defendants Hilliard, James, Long, Perry, Prieur, Schneider, 

Tokarz, and Turner face a substantial likelihood of liability for their 

breaches of fiduciary duties and any demand upon them is futile;

227.f. At times relevant hereto, defendants Long, Schneider, and Turner 

served as members of the Audit Committee. Pursuant to the Audit 

Committee Charter, members of the Audit Committee are charged with 

oversight of the integrity of the Company’s financial statements, public 

disclosures and financial reporting process. Defendants Long, Schneider, 

and Turner breached their fiduciary duties of due care, loyalty, and good 

faith, because the Audit Committee permitted the above false and 

misleading statements to be made, which eventually led to a restatement. 
9

Therefore, defendants Long, Schneider, and Turner face a substantial 

likelihood of liability for their breach of fiduciary duties and any demand 

upon them is futile;

227.g. At times relevant hereto, defendants Perry and Tokarz served as 

members of the Governance Committee. Pursuant to the Governance 

Committee Charter, members of the Governance Committee are charged 

with adopting policies designed to encourage the highest levels of corporate 

conduct by the Board, the Company and its officers, employees and agents. 

Defendants Perry and Tokarz breached their fiduciary duties of due care, 

loyalty, and good faith because the Governance Committee permitted the 

pervasive misconduct described above to go undisclosed. Therefore, 

defendants Perry and Tokarz face a substantial likelihood of liability for 

their breach of fiduciary duties and any demand upon them is futile;

227.h. Defendants Tokarz, Perry, and James are interested as a result of 

their conduct on the Compensation Committee. Pursuant to the Company’s 

Compensation Committee Charter, directors on the Compensation 

Committee are responsible for, inter alia, reviewing and approving the 

compensation of the Company’s senior officers in conduction with 

previously established performance metrics. Defendants Tokarz, Perry, and 

James breached their fiduciary duties of due care, loyalty, and good faith, 

because the Compensation Committee, inter alia, awarded the abovediscussed compensation based on admittedly false financial results as 

evidenced by the Company’s need for a restatement. Further, the 

Compensation Committee has done nothing to rectify its above failures. 

Therefore, defendants Tokarz, Perry, and James (if not the entire Board) 

each face a substantial likelihood of liability for their breach of fiduciary 

duties and any demand upon them is futile; and

227.i. The principal professional occupation of defendant Prieur is his 

employment with CNO as its CEO, pursuant to which he has received and 

continues to receive substantial monetary compensation and other valuable 

benefits. As a result, in the Company’s most recent annual proxy statement 

filed in April 2010, the Board has conceded that Prieur is a nonindependent director. Thus, defendant Prieur lacks independence, 

rendering him incapable of impartially considering a demand to commence 

and vigorously prosecute this action.

Id. at 103-08.

On December 17, Defendants filed a motion to dismiss the Amended Complaint 

under Delaware and Indiana law, alleging that Carter had not shown that pre-suit demand 
10

was excused. On April 21, 2011, the trial court held oral argument on the motion to 

dismiss. And on June 2, the trial court entered its order granting that motion and 

dismissing the Amended Complaint (“the Order”). The Order provides, in relevant part:

B. The Allegations

CNO, through its subsidiaries, engages in the development, 

marketing, and administration of supplemental health insurance, annuity, 

individual life insurance, and other insurance products for senior and 

middle-income markets in the United States. Carter’s Amended Complaint 

focuses principally on the Company’s Long Term Care run-off business 

(“LTC”) during the period from August 2005 through March 2008. Among 

other things, Carter claims that Defendants concealed problems with the 

Company’s claims handling process[] and that those problems impacted 

CNO’s ability to accurately determine its liabilities and establish reserves. 

Carter alleges that numerous improper claims practices occurred in the LTC 

business, which in turn distorted and understated the Company’s true 

claims exposure. Carter further alleges that the [D]efendants issued a series 

of false and misleading statements.

* * *

On February 25, 2008, CNO announced that it would delay the filing 

of its Form 10-K for the year ended December 31, 2007, and restate its 

financial results for 2005 and 2006. On March 28, 2008[,] CNO finalized 

its restatement. Thereafter, CNO announced on August 11, 2008[,] its plan 

to transfer LTC to an independent trust and contributed capital to the trust 

when LTC was transferred.

Carter alleges that the Company was harmed by these events. He 

further alleges that he did not make a demand on CNO’s Board before 

filing suit because it would have been futile to do so.

C. The Related Federal Securities Litigation

Carter based this shareholder derivative litigation largely on prior 

pending federal securities litigation filed in the United States District Court 

for the Southern District of New York. That litigation is styled Plumbers & 

Pipefitters Local Union No. 719 Pension Trust Fund v. Conseco, Inc., No. 

09-CV-6966 (S.D.N.Y.). The majority of Carter’s confidential witness 

allegations are taken from the Plumbers complaint. . . . Plumbers names 

only the officer defendants from this litigation. It does not name any of the 
11

Outside Directors as defendants or direct any of its confidential witness 

allegations at those individuals.[fn]

[Footnote: Defendants point out that Carter modified all 

but one of the confidential witness allegations from Plumbers

when he incorporated them into the complaints he has filed 

here, changing the subject of the allegations to include the 

Outside Director defendants.]

The Plumbers matter was dismissed March 30, 2011. In dismissing 

that litigation, United States District Court Judge John G. Koetl held that 

the information that the CNO officer defendants allegedly possessed 

relating to LTC’s prospects, reserves, and record keeping did not “support[] 

a strong and plausible inference that the [defendants] made any of the 

challenged public statements with knowledge that they were false or with 

reckless indifference[.] . . . To the contrary, nearly all of this information 

was addressed in some form in the company’s lengthy and thorough public 

disclosures.” Plumbers & Pipefitters Local Union No. 719 Pension Trust 

Fund v. Conseco, Inc., 09 Civ. 6966 (JGK), 2011 U.S. Dist. LEXIS 34241, 

at *57 (S.D.N.Y. Mar. 30, 2011). Judge Koetl further held that the 

Plumbers complaint was “wholly devoid of any particularized allegation 

connecting the individual defendants to information suggesting unlawful 

activity within the company[,]” (id. at *62-*63), and did not support the 

inference that anyone knowingly made material misstatements[,] (id. at 

*64-*65). Judge Koetl also detailed inadequacies of the confidential 

witness allegations on which Carter heavily relies here.

Appellant’s App. at 14-17 (some alterations in original). In sum, the trial court granted 

the motion to dismiss, finding that Carter had not shown that demand was futile as 

required by Delaware law. Carter now appeals. 

DISCUSSION AND DECISION

Derivative actions are suits “‘asserted by a shareholder on the corporation’s behalf 

against a third party . . . because of the corporation’s failure to take some action against 

the third party.’” G&N Aircraft, Inc. v. Boehm, 743 N.E.2d 227, 234 (Ind. 2001) 

(quoting Black’s Law Dictionary 455 (7th Ed. 1999)). They are brought “to redress an 

injury sustained by, or enforce a duty owed to, a corporation.” Id. (citation and internal 
12

quotation marks omitted). Derivative actions are brought in the name of the corporation 

and are usually governed by Trial Rule 23.1 and Indiana Code Section 23-1-32-1. 

Before filing a derivative action, a plaintiff must make a demand on the board of 

directors to take action against the third party on behalf of the corporation as sought in 

the complaint. Indiana Trial Rule 23.1 provides: “[T]he complaint shall also allege with 

particularity the efforts, if any, made by the plaintiff, to obtain the action he desires from 

the directors or comparable authority and the reasons for his failure to obtain the action or 

for not making the effort.” The issues presented in this case turn on whether the plaintiff 

in a shareholder derivative action has pleaded facts sufficient to avoid the requirement 

that he make a demand on the board before filing suit. 

The substantive law on demand is the law of the state of incorporation. Piven v. 

ITT Corp. (In re ITT Derivative Litig.), 932 N.E.2d 664, 667 (Ind. 2010) (citing Kamen

v. Kemper Fin. Servs. Inc., 500 U.S. 90 (1991)). CNO Financial is incorporated in 

Delaware. Therefore, while we apply the procedural rules of Indiana, we must consider 

Delaware substantive law to determine whether demand is excused in this case. See id. 

Delaware Court of Chancery Rule 23.1 is almost identical to Indiana Trial Rule 23.1 and 

also requires the shareholder in a derivative action to make a demand on the board before 

filing suit. That rule, which is part of the substantive law of Delaware on demand futility, 

provides in relevant part:

In a derivative action brought by one or more shareholders or members to 

enforce a right of a corporation . . . , the corporation . . . having failed to 

enforce a right which may properly be asserted by it, the complaint . . . 

shall also allege with particularity the efforts, if any, made by the plaintiff 

to obtain the action the plaintiff desires from the directors or comparable 
13

authority and the reasons for his failure to obtain the action or for not 

making the effort.

Del. Ch. Ct. R. 23.1. The Delaware Supreme Court has explained the reason for that rule:

It is a fundamental principle of the Delaware General Corporation 

Law that “[t]he business and affairs of every corporation organized under 

this chapter shall be managed by or under the direction of a board of 

directors . . . .” Thus, “by its very nature [a] derivative action impinges on 

the managerial freedom of directors.” Therefore, the right of a stockholder 

to prosecute a derivative suit is limited to situations where either the 

stockholder has demanded the directors pursue a corporate claim and the 

directors have wrongfully refused to do so, or where demand is excused 

because the directors are incapable of making an impartial decision 

regarding whether to institute such litigation. 

Stone v. Ritter, 911 A.2d 362, 366-67 (Del. 2006) (alterations in original) (citations 

omitted). 

Appellate review of decisions applying Delaware Chancery Court Rule 23.1 is de 

novo. Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000). Here, the Defendants used a 

Rule 12(b)(6) motion to dismiss as the vehicle for alleging Carter’s failure to meet the 

pleading requirements discussed below. Our review of a trial court’s grant or denial of a 

motion to dismiss for failure to state a claim is similarly de novo. 

PricewaterhouseCoopers, LLP v. Massey, 860 N.E.2d 1252, 1256 (Ind. Ct. App. 2007), 

trans. denied.

Pleading Burden

A plaintiff seeking to avoid the demand requirement of Delaware Chancery Court 

Rule 23.1 faces a high pleading burden. That burden has been described as follows:

The demand requirement is not a mere procedural formality, but rather an 

important stricture of substantive law. Court of Chancery Rule 23.1 

requires that the complaint allege “with particularity” the reasons for the 

plaintiff’s failure to make a demand on the board. This standard is more 
14

stringent than the pleading standard under Court of Chancery Rule 

12(b)(6). Thus, it is plaintiff’s burden to plead, with allegations of 

particularized facts, why making a demand would have been futile. 

Edward P. Welch et al., Folk on the Delaware General Corporation Law § 327.4.2.2, at 

GCL-XIII-83 to -84 (5th ed. 2012) (footnotes omitted). Conclusory allegations of fact or 

law that are not supported by allegations of specific fact may not be taken as true. 

Brehm, 746 A.2d at 254. 

Rule 23.1 is not satisfied by conclusory statements or mere notice pleading. 

On the other hand, the pleader is not required to plead evidence. What the 

pleader must set forth are particularized factual statements that are essential 

to the claim. Such facts are sometimes referred to as “ultimate facts,” 

“principal facts” or “elemental facts.” Nevertheless, the particularized 

factual statements that are required to comply with the Rule 23.1 pleading 

rules must also comply with the mandate of Chancery Rule 8(e) that they 

be “simple, concise and direct.” A prolix complaint larded with conclusory

language . . . does not comply with these fundamental pleading mandates. 

Id. (footnotes omitted). 

Nevertheless, the “reasonable doubt” standard of Aronson[ v. Lewis, 

473 A.2d 805 (Del. 1984), discussed below,] unavoidably calls upon the 

trial court to make a decision that is highly particular and involves informed 

judgment. That judgment will be factual in nature and will determine 

whether the accumulation of all relevant factors pleaded creates a 

reasonable doubt as to the availability of business judgment protection. 

Delaware courts have refused to establish a particular “reasonable doubt” 

standard, but instead employ an objective analysis to determine whether a 

plaintiff’s complaint contains the facts necessary to support a finding of 

reasonable doubt.

Welch, supra, § 327.4.2.2, at GCL-XIII-84 (footnotes omitted). “The pre-suit demand 

futility analysis must be conducted for each claim in a stockholder derivative action.” Id.

at GCL-XIII-85. 
15

Aronson Test

In cases based on a particular decision or transaction of a board of directors, the 

test for determining whether demand is excused is set out in Aronson v. Lewis.

3

 Under 

that test, demand will be excused only if the plaintiff alleges in the complaint 

particularized facts creating a reasonable 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.” 473 A.2d at 814. Under the first prong of 

Aronson, a director is “‘interested if he will be materially affected, either to his benefit or 

detriment, by a decision of the board, in a manner not shared by the corporation and the 

stockholders.’” Welch, supra, § 327.4.2.4.1., at GCL-XIII-89 (quoting Seminaris v. 

Landa, 662 A.2d 1350, 1354 (Del. Ch. 1995)).4 Under the second prong of the Aronson

test, the shareholder plaintiff must demonstrate a reasonable doubt that the challenged 

transaction was otherwise the product of a valid exercise of business judgment. Aronson, 

473 A.2d at 814. 

Rales Test

In some cases, the conduct complained of in the derivative action may not be 

based on a particular business decision or transaction. For example, the shareholder 

plaintiff may allege that the corporation has been damaged by the board’s failure to act. 

“Where there is no conscious decision by directors to act or refrain from acting, the

 

3

 Carter does not point to one or more particular transactions as the basis for his claims. 

Therefore, the Aronson test does not apply. However, it is described here because it is the foundation for 

the evolution of the pleading standard tests that followed.

4

 With the exception of Prieur, Carter does not contend that the Director Defendants were not 

independent, only that they are interested. 
16

business judgment rule has no application.” Rales v. Blasband, 634 A.2d 927, 934 (Del. 

1993), abrogated on other grounds by Hamilton Partners, L.P. v. England, 11 A.3d 1180, 

1207 (Del. Ch. 2010), (citing Aronson, 473 A.2d at 813). “Instead, it is appropriate in 

these situations to examine whether the board that would be addressing the demand can 

impartially consider its merits without being influenced by improper considerations.” 

Rales, 634 A.2d at 934. In such cases, the court 

must determine whether or not the particularized factual allegations of a 

derivative stockholder complaint create a reasonable doubt that, as of the 

time the complaint is filed, the board of directors could have properly 

exercised its independent and disinterested business judgment in 

responding to a demand. If the derivative plaintiff satisfies this burden, 

then demand will be excused as futile. 

Id. at 935. The parties agree that the Rales test applies in this case. 

Issue One: Demand Futility

In paragraph 227 of the Amended Complaint, Carter sets out nine reasons that 

demand on the board was not required before filing his complaint. We consider each of 

the demand futility allegations in turn under the Rales test. Again, under that test we 

must determine whether Carter’s Amended Complaint alleges particularized factual 

allegations creating a reasonable doubt that, as of the time the Amended Complaint was 

filed, a majority of the Director Defendants could have properly exercised their

independent and disinterested business judgment in responding to a demand. See id. at 

935. In other words, here we must review the Amended Complaint to determine whether 

Carter has made particularized factual allegations to show a reasonable doubt that a 

majority of the ten-member Board, at least six of them, could have impartially considered 
17

the merits of demand without being influenced by improper considerations. See id. at 

934. 

“A director is considered interested where he or she will receive a personal 

financial benefit from a transaction that is not equally shared by the stockholders.” Rales, 

634 A.2d at 936. “Directorial interest also exists where a corporate decision will have a 

materially detrimental impact on a director, but not on the corporation and the 

stockholders.” Id. Additionally, the mere threat of personal liability is insufficient to 

show that a director is interested. See id. But a director’s interest may be demonstrated 

by showing that that director faces a substantial likelihood of liability. See id. 

Carter first contends that demand on the board was excused because:

227.a. A majority of the members of the Board were aware of, or should 

have been aware of, numerous red flags regarding the Company’s serious 

problems with its LTC business segment, including claims documentation 

issues, the failure to adequately set reserves, data integrity issues, budget 

problems, and market conduct violations. As such, a majority of the 

current Board knew[] or was recklessly indifferent to facts that, among 

other things: (i) multiple internal control failures caused claim loss/reserve 

data to be inherently unreliable; and (ii) Defendants were systematically 

understating reserves; which (iii) caused the Company’s financial 

statements to be artificially and materially overstated. Notably, half of the 

Company’s current directors (defendants Hilliard, Schneider, Tokarz, 

Turner, and Perry) have served as directors of the Company since 2004 or 

prior to 2004. In particular, as alleged herein, by 2003, the Board was 

meeting on a quarterly basis in the “War Room,” to specifically discuss 

issues with LTC with the Company’s senior officers, and these meetings 

began to occur with increasing frequency in 2005. [Confidential Defense 

Witness 1 (“DW1”)] has also stated that LTC Reports prepared by LTC 

personnel regarding the LTC business containing a range of information 

including claims issues, reserve issues, budget problems, and market 

conduct violations were regularly provided to the Board in connection with 

the War Room meetings, along with comprehensive compliance reports 

personally prepared by DW1 (which “often” dealt, at least in part, with the 

Company’s ongoing LTC issues). Moreover, as discussed above, during 

the nine[-]month period spanning between [sic] 2004 and 2005, a 
18

comprehensive internal audit of the LTC segment was performed, and after 

the audit was concluded sometime in 2005, as Audit Committee members, 

defendants Schneider, Perry, and Turner received detailed results of this 

audit. Despite clearly being placed on notice of serious issues regarding 

LTC which were causing the Company’s reserves to be inadequately set, 

defendants Hilliard, Schneider, Tokarz, Perry, and Turner consciously 

disregarded their fiduciary duties to CNO when, under their direction, the 

Company’s ongoing LTC issues were not addressed and the Company 

continued to inadequately set reserves over a multi-year period. Thus, 

demand was not required upon Hilliard, Schneider, Tokarz, Perry and 

Turner. Because Hilliard, Schneider, Tokarz, Perry and Turner comprise a 

majority of the directors on the Board (for demand futility purposes), 

demand is excused[.] 

227.b. Defendants Hilliard, Schneider, Tokarz, Perry and Turner are also 

interested in demand because they engaged in conduct which is not 

protected by the business judgment rule in connection with their decision 

not to remedy the serious problems known to them through the various “red 

flags” described above. These directors were clearly placed on notice for 

years of the Company’s problems, yet chose to do nothing to remedy them. 

This decision is not a protected business judgment. Thus, demand is 

excused as to Hilliard, Schneider, Tokarz, Turner, and Perry, and because 

they comprise a majority of the Board, demand is excused[.]

Appellant’s App. at 103-05. Details supporting these allegations are found earlier in the 

Amended Complaint. But Carter has not stated anywhere in the Amended Complaint 

particularized facts on which we could conclude that a majority of the Board members, or 

any of them, received a personal financial benefit or detriment not shared by the 

stockholders. Nor does the Amended Complaint allege facts to show that the named 

directors face a substantial likelihood of liability arising from their alleged failure to 

“remedy serious problems known to them through the various ‘red flags’ described 

above.” Id. 

In sum, the conclusory allegations in these sub-paragraphs are insufficient to 

satisfy the Rales test. To the extent Carter contends that the business judgment rule 
19

offers no protection, that rule has no application under the Rales test in any event. Rales, 

634 A.2d at 934. Sub-paragraphs 227.a. and 227.b. do not contain particularized 

allegations of fact to show that the Director Defendants were not disinterested or faced a 

substantial risk of liability for their performance as directors. Therefore, Carter has not 

shown in sub-paragraphs 227.a. or 227.b. that demand was futile. 

Carter next contends:

227.c. Demand is further excused because the Board failed to exercise its 

good faith judgment to ensure that the Company’s information and 

reporting system was in concept and design adequate to assure the Board 

that appropriate information will come to its attention in a timely manner as 

a matter of ordinary operations. In particular, it is unquestioned that the

Board had actual knowledge of the Company’s LTC problems and failed to 

do anything to prevent and/or remedy them[;] however[,] this knowledge 

did not come as a result of an adequate system of information[-]reporting 

during the ordinary course of operations. Rather[,] this information came 

to the Board’s attention as a result of various audits, special meetings, and 

government investigations. Had the Board properly ensured that an 

adequate information[-]reporting system was in place from the beginning, 

as they were required to do under Delaware law, the serious problems with 

the Company’s LTC segment could have been remedied before the 

Company suffered the substantial harm alleged herein. Thus, demand is 

futile[.]

Appellant’s App. at 105-06. Again, Carter has not alleged, here or elsewhere in the 

Amended Complaint, that a majority of the Directors were interested or faced a 

substantial likelihood of liability for the conduct described in sub-paragraph 227.c. Nor 

does this sub-paragraph summarize conduct that is detailed elsewhere in the Amended 

Complaint for which we could conclude that the Directors were interested or faced a 

substantial likelihood of liability. Thus, the demand futility allegations in sub-paragraph 

227.c. also fail the Rales test. 

Carter further contends that: 
20

227.d. Demand is also excused because, as detailed herein, the Board 

intentionally misled the Multistate Examiners or permitted others to do so, 

thus clearly illustrating their hostility to the relief sought in this action. 

Accordingly, a reasonable stockholder would not believe, based on the 

confidential witness testimony detailed above, that the Board would have 

been able to properly and impartially consider a demand in good faith. 

Thus, demand is futile[.]

Appellant’s App. at 106. With regard to the Multistate Examination, Carter alleges that 

“false and misleading information was provided to the Multistate Examiners,” and he 

details the nature of the misinformation in paragraphs 165 through 170 of the Amended 

Complaint. Id. at 75. There Carter alleges that “Defendants falsely reported”

information to the Multistate Examiners and “misrepresented . . . that the inappropriate 

use of [a certain claims processing method, the No Letter Close,] was discontinued by 

May 2007[.]” Id. at 78. But the complaint does not allege that the Board’s duties 

included providing information to or in any way interacting with the Multistate 

Examiners. Such work was likely the responsibility of the Company’s senior officers and 

their subordinates. And the Complaint does not allege with particularity facts to show

that the Board was aware and “permitted others” to mislead or misinform the Multistate 

Examiners. Id. at 106. 

The allegations in sub-paragraph 227.d. are conclusory and do not show that the 

Director Defendants were interested or faced a substantial risk of liability with regard to 

the Multistate Examination. And the Multistate Examiners did not find any particular 

person or persons liable for the problems they found at Conseco. As such, Carter has not 

shown that demand is excused as to the Board’s conduct regarding the Multistate 

Examination. 
21

With regard to the Board’s duties under the corporate Governance Guidelines, 

Carter alleges:

227.e. Every member of the Board is required to comply with the 

Company’s Corporate Governance Guidelines. The Corporate Governance 

Guidelines require each of the Company’s directors to monitor 

“management’s performance and adherence to corporate standards.” 

Further, the Corporate Governance Guidelines requires [sic] directors to 

focus “on the integrity, quality and clarity of the corporation’s financial 

reports and public disclosures and the processes that produce them.” 

Therefore, defendants Hilliard, James, Long, Perry, Prieur, Schneider, 

Tokarz, and Turner face a substantial likelihood of liability for their 

breaches of fiduciary duties and any demand upon them is futile[.] 

Appellant’s App. at 106. In sum, Carter alleges that the named Director Defendants 

faced a substantial risk of liability because they did not perform their duties on the board 

in compliance with the Corporate Governance Guidelines. But elsewhere the Amended 

Complaint alleges that the Board was aware of and met to find solutions for the problems 

plaguing the LTC segment. Specifically, beginning in 2003 the Director Defendants met 

quarterly “to address[] multiple and serious problems with LTC[.]” Id. at 63. Those 

meetings increased in frequency beginning in 2005. The meetings to address the 

problems in the LTC segment demonstrate that the Board was attempting to monitor 

“management’s performance and adherence to corporate standards.” Id. Moreover, 

following the Multistate Examination, the company agreed to a settlement under which it 

agreed to pay more than $32 million in fines and costs, $30 million of which was 

dedicated to claims-handling improvements and restitution. Again, Carter has not alleged 

with particularity facts to show that the Director Defendants did not perform their duties

in compliance with the Corporate Governance Guidelines. As such, Carter has not shown 

that the Director Defendants are subject to a substantial likelihood of liability for the 
22

conduct described in sub-paragraph 227.e. and, therefore, that sub-paragraph does not 

show that demand was excused. 

Finally, Carter asserts the following three claims based on the named Directors’ 

memberships on the Governance Committee, the Audit Committee, and the 

Compensation Committee respectively as bases for excusing demand:

227.f. At times relevant hereto, defendants Long, Schneider, and Turner 

served as members of the Audit Committee. Pursuant to the Audit 

Committee Charter, members of the Audit Committee are charged with 

oversight of the integrity of the Company’s financial statements, public 

disclosures and financial reporting process. Defendants Long, Schneider, 

and Turner breached their fiduciary duties of due care, loyalty, and good 

faith, because the Audit Committee permitted the above false and 

misleading statements to be made, which eventually led to a restatement. 

Therefore, defendants Long, Schneider, and Turner face a substantial 

likelihood of liability for their breach of fiduciary duties and any demand 

upon them is futile[.]

227.g. At times relevant hereto, defendants Perry and Tokarz served as 

members of the Governance Committee. Pursuant to the Governance 

Committee Charter, members of the Governance Committee are charged 

with adopting policies designed to encourage the highest levels of corporate 

conduct by the Board, the Company and its officers, employees and agents. 

Defendants Perry and Tokarz breached their fiduciary duties of due care, 

loyalty, and good faith because the Governance Committee permitted the 

pervasive misconduct described above to go undisclosed. Therefore, 

defendants Perry and Tokarz face a substantial likelihood of liability for 

their breach of fiduciary duties and any demand upon them is futile;

227.h. Defendants Tokarz, Perry, and James are interested as a result of 

their conduct on the Compensation Committee. Pursuant to the Company’s 

Compensation Committee Charter, directors on the Compensation 

Committee are responsible for, inter alia, reviewing and approving the 

compensation of the Company’s senior officers in conduction with 

previously established performance metrics. Defendants Tokarz, Perry, and 

James breached their fiduciary duties of due care, loyalty, and good faith, 

because the Compensation Committee, inter alia, awarded the abovediscussed compensation based on admittedly false financial results as 

evidenced by the Company’s need for a restatement. Further, the 

Compensation Committee has done nothing to rectify its above failures. 
23

Therefore, defendants Tokarz, Perry, and James (if not the entire Board) 

each face a substantial likelihood of liability for their breach of fiduciary 

duties and any demand upon them is futile[.]

Id. at 106-08. Even if we were to conclude that the detailed factual allegations preceding 

paragraph 227 in the Amended Complaint support Carter’s contention that the named 

Directors breached their respective Committee duties, Carter has not alleged with 

particularity facts to show that the named Directors faced a substantial likelihood of 

liability as a result of such breaches. Therefore, Carter has failed in these sub-paragraphs 

to show that demand is excused under Rales.

5

 

In sum, the Amended Complaint does not include particularized factual allegations 

that would create a reasonable doubt as to whether a majority of the Director Defendants 

could have properly exercised their disinterested business judgment in responding to a 

demand. See Rales, 634 A.2d at 935. Nor do the allegations show that the Director 

Defendants face a substantial likelihood of liability for the inadequate conduct set out in 

the Amended Complaint. See id. As such, Carter has not shown that demand was 

excused under Rales.

6

 

 

5

 Carter makes a final allegation regarding demand, namely that demand is excused as to Prieur 

because Prieur, as a CEO of the Company, is not independent. Defendants concede that Prieur is not 

independent. We conclude that Carter has not shown that any other Directors are interested or not 

independent, and demand could not be excused based solely on Prieur not being an independent director. 

6

 In their briefs and at oral argument, the parties also debated whether the Amended Complaint 

states oversight claims under In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. 

Ch. 1996). Oversight or Caremark claims arise where a claim is not based on a particular transaction or 

decision but, instead, on an “unconsidered failure of the board to act in circumstances in which due 

attention would, arguably, have prevented the loss.” Caremark, 698 A.2d at 967. Caremark claims must 

satisfy an even higher burden for demand to be excused, namely, “(1) that the directors knew or (2) 

should have known that violations of law were occurring and, in either event, (3) that the directors took 

no steps in a good faith effort to prevent or remedy that situation, and (4) that such failure proximately 

resulted in the losses complained of[.]” Id. at 971. But the Rales test also applies to Caremark claims. 

Wood v. Baum, 953 A.2d 136, 140 (Del. 2008). Because we conclude that Carter’s Amended Complaint 
24

Issue Two: Exculpatory Provision

Carter also contends that the trial court erred “by even considering, much less 

relying on, CNO’s exculpatory provision in granting the motion” to dismiss. Appellant’s 

Brief at 39. As discussed below, where a corporate charter contains an exculpatory 

provision, a derivative action plaintiff faces a higher and slightly different burden to 

avoid demand than under the Rales test. Carter argues that the burden imposed by the 

inclusion of an exculpatory provision in a corporate charter does not apply at the motion 

to dismiss stage and, even if that higher burden may be considered, that he has met that 

burden. Assuming for the sake of argument that the exculpatory provision applies to the 

claims in the Amended Complaint, we consider whether the Amended Complaint alleges 

particularized facts to show that demand would have been futile under the higher and 

slightly different standard that arises under CNO’s exculpatory clause.

7

 

CNO’s certificate of incorporation contains an exculpatory provision provided for 

in Delaware Code title 8, section 102(b)(7).8 In such cases, director defendants are 

“exculpate[d] from personal liability for violations of fiduciary duty, except for, among 

 

has not satisfied the Rales test for excusing demand, we need not consider whether the allegations in the 

Amended Complaint satisfy the even higher demand futility burden imposed on oversight claims. 

7

 If we were to conclude that Carter’s Amended Complaint asserts claims that are not subject to 

the higher pleading burden under the exculpatory clause, we would be left to evaluate his claims under 

Rales. We have already determined that Carter has not shown that demand was futile under Rales. 

8

 Delaware Code title 8, section 102(b)(7) provides, in relevant part, that a certificate of 

incorporation may include

[a] provision eliminating or limiting the personal liability of a director to the corporation 

or its stockholders for monetary damages for breach of fiduciary duty as a director, 

provided that such provision shall not eliminate or limit the liability of a director: (i) For 

any breach of the director’s duty of loyalty to the corporation or its stockholders; (ii) for 

acts or omissions not in good faith or which involve intentional misconduct or a knowing 

violation of law; . . or (iv) for any transaction from which the director derived an 

improper personal benefit. . . . .
25

other things, breaches of the duty of loyalty or actions or omissions not in good faith or 

that involve intentional misconduct or a knowing violation of the law.” In re Citigroup 

Inc. S’holder Derivative Litig., 964 A.2d 106, 124 (Del. Ch. 2009). “Such a provision 

can exculpate directors from monetary liability for a breach of the duty of care, but not 

for conduct that is not in good faith or a breach of the duty of loyalty.” Stone, 911 A.2d 

at 367. Where, as here, a corporation has included a § 102(b)(7) exculpatory clause in 

the certificate of incorporation, “a serious threat of liability may only be found to exist if 

the plaintiff pleads a non-exculpated claim against the directors based on particularized 

facts.” In re Citigroup, 964 A.2d at 124. “[T]he risk of liability does not disable 

[directors] from considering a demand unless particularized pleading permits the court to 

conclude that there is a substantial likelihood that the directors’ conduct falls outside the 

liability exemption.” Welch, supra, § 327.4.2.4.2, at GCL-XIII-94.

The standard for assessing oversight liability under Caremark and the standard for 

assessing a disinterested director’s decision under the duty of care when the company has 

adopted a § 102(b)(7) exculpatory provision are similar. Id. at 125. 

In either case, a plaintiff can show that the director defendants will be liable 

if their acts or omissions constitute bad faith. A plaintiff can show bad 

faith conduct by, for example, properly alleging particularized facts that 

show that a director consciously disregarded an obligation to be reasonably 

informed about the business and its risks or consciously disregarded the 

duty to monitor and oversee the business.” 

Id. That is to say, if, after applying the Rales test a court determines that “‘a majority of 

the board is impartial . . . ,’ the court must then ‘consider whether the complaint sets forth 

particularized facts that plead a non-exculpated claim of breach of fiduciary duty against 

a majority of the board, thereby stripping away their first-blush veneer of impartiality.’” 
26

King v. Baldino, 648 F. Supp. 2d 609, 617 (citing Guttman v. Huang, 823 A.2d 492, 501 

(Del. Ch. 2003)) (footnote omitted). In Issue One above, we applied the Rales test and 

determined that Carter has not shown a reasonable likelihood that the Director 

Defendants were interested. Next we must consider whether Carter has shown the lack of 

impartiality by demonstrating that the Director Defendants’ conduct constituted a breach 

of the duty of good faith or loyalty.

We first observe that Carter’s entire analysis regarding his burden in light of the 

exculpatory clause is found in only two paragraphs of his Appellant’s Brief. And those 

paragraphs contain absolutely no citations to the record to point out which claims support 

the argument. We remind counsel that analysis of an issue on appeal must be supported 

in relevant part by citations to the Appendix or parts of the Record on Appeal relied on, 

and failure to do so can result in waiver. Ind. Appellate Rule 46(A)(8)(a). And we will 

not search the record to find a basis for a party’s argument. Nealy v. Am. Family Mut. 

Ins., 910 N.E.2d 842, 845 n.2 (Ind. Ct. App. 2009), trans. denied. Waiver 

notwithstanding, we exercise our discretion to consider the merits of Carter’s 

Section 102(b)(7) claim.

Carter contends that “Section 102(b)(7) does not shield Defendants from liability 

where, as here, there are allegations of a conscious disregard of one’s responsibilities and 

other serious internal control deficiencies.” Appellant’s Brief at 42. Paragraphs 224 

through 227 of the Amended Complaint pertain to Carter’s demand allegations, although 

the detailed supporting factual allegations are found elsewhere in the complaint. In the 
27

demand allegations Carter alleges the following breaches of duty relevant to his claim 

that demand was excused notwithstanding the exculpatory provision:

1. “Despite clearly being placed on notice of serious issues regarding LTC 

which were causing the Company’s reserves to be inadequately set, 

defendants Hilliard, Schneider, Tokarz, Perry, and Turner consciously 

disregarded their fiduciary duties to CNO when, under their direction, the 

Company’s ongoing LTC issues were not addressed and the Company 

continued to inadequately set reserves over a multi-year period.” (¶ 227.a.)

2. “[T]he Board failed to exercise its good faith judgment to ensure that the 

Company’s information and reporting system was in concept and design 

adequate to assure the Board that appropriate information will come to its 

attention in a timely manner and as a matter of ordinary operations.” (¶ 

227.c.)

3. “[T]he Board intentionally misled the Multistate Examiners or permitted 

others to do so, thus clearly illustrating their hostility to the relief sought in 

this action.” (¶ 227.d.)

4. Members of the Audit Committee “breached their fiduciary duties of 

due care, loyalty, and good faith, because the Audit Committee permitted 

the above false and misleading statements to be made, which eventually led 

to a [financial] restatement.” (¶ 227.f.)

5. Members of the Governance Committee “breached their fiduciary duties 

of due care, loyalty, and goof faith, because the Governance Committee 

permitted the pervasive misconduct described above to go undisclosed.” (¶ 

227.g.)

6. Members of the Compensation Committee “breached their fiduciary 

duties of due care, loyalty, and goof faith, because the Compensation 

Committee, inter alia, awarded . . . compensation based on admittedly false 

financial results as evidenced by the Company’s need for a restatement” 

and “has done nothing to rectify its [stated] failures.” (¶ 227.h.) 

Appellant’s App. at 104-08. 

We assume without holding that the paragraphs quoted immediately above allege 

bad faith by the conscious disregard of duties, the failure to exercise good faith, the 

intentional misleading of the Multistate Examiners, and the breach of the duty of good 
28

faith constitutes bad faith. But, as we determined in Issue One above, Carter has not 

alleged with particularity facts to show that the Directors consciously disregarded or 

breached their duties to the corporation, failed to exercise good faith judgment, or misled 

the Multistate Examiners. Indeed, Carter acknowledges in the Amended Complaint that 

the Director Defendants were aware of the problems in the LTC segment, including the 

reserves inadequacies, data integrity problems, and lack of policy records. He also 

acknowledges that the Director Defendants met quarterly in “War Room” meetings to 

address those issues from 2003, increased the frequency of those meetings in 2005, and 

attempted to remedy some of the problems by hiring consultants and implementing 

various new internal procedures. And in 2005 CNO’s quarterly financial filing with the 

Securities and Exchange Commission disclosed that the LTC segment’s losses had been 

larger than expected. Starting in 2006, CNO issued press releases disclosing problems in 

the LTC segment and that those problems had affected the company’s overall financial 

performance.9 

Carter has not made particularized factual allegations to support his conclusion 

that Director Defendants knew or should have known the exact extent of the problems in 

the LTC segment. Nor has he made particularized factual allegations to show that they 

 

9

 In Plumbers & Pipefitters Local Union No. 719 Pension Trust Fund v. Conseco, Inc., 2011 WL 

1198712, at *60-*61 (S.D. N.Y.), the district court found that Conseco had made “extensive disclosures” 

from which the 

most compelling inference is that the [Conseco officers] actively and diligently sought to 

apprise the market of information relevant to Conseco’s corporate prospects, and the risks 

and prospects of the LTC business and the challenges it faced, particularly with respect to 

reserves. The most compelling inference, in the face of the extensive negative 

information that was disclosed, is that the defendants were unaware of any more severe 

material adverse information[] and that much of what the plaintiff calls inadequate 

disclosures are simply pejorative characterizations of what was disclosed. 
29

hid the fact or extent of those problems from the internal auditors, the Multistate 

Examiners, or the public. The facts as alleged in the Amended Complaint point in the 

opposite direction. Therefore, we conclude that Carter’s Amended Complaint does not 

include particularized facts to support his allegations that the Director Defendants acted 

in bad faith in their capacity as members of CNO’s board of directors. 

Conclusion

Pre-suit demand on a board of directors is a prerequisite to filing a derivative 

action. Here, to show that demand on the Director Defendants would have been futile,

the Amended Complaint must allege with particularity facts to show either that the 

directors could not have made a disinterested decision upon demand or that they faced a 

substantial likelihood of liability for their conduct as board members. The Amended 

Complaint contains only conclusory allegations on these points. Carter also could have 

avoided demand by showing that the Director Defendants had breached their duties of 

good faith or loyalty. Again, the Amended Complaint falls short, failing to allege with 

particularity facts to show such breaches. Therefore, again, Carter has not shown that 

demand would have been futile. As such, the trial court did not err when it granted 

Defendants’ motion to dismiss for failure to make pre-suit demand. 

Affirmed. 

BAKER, J., and VAIDIK, J., concur.