FILED

U.S. COURT OF APPEALS

ELEVENTH CIRCUIT

 APRIL 30, 2010

JOHN LEY

CLERK

 [DO NOT PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

________________________

No. 08-14346

________________________

D. C. Docket No. 07-20793-CV-ASG

BARRY E. MUKAMAL, 

as Liquidating Trustee and Director and 

Officer Trustee of Far & Wide Corporation, et al.,

Plaintiff-Appellant, 

versus

PHIL BAKES, 

ANDREW C. MCKEY, 

CRAIG TOLL,

GEORGE GREMSE, 

LOAN CAPITAL FUNDING, LLC, et al.,

Defendants-Appellees.

________________________

Appeal from the United States District Court

for the Southern District of Florida

_________________________

(April 30, 2010)
Before EDMONDSON and PRYOR, Circuit Judges, and CAMP,* District Judge.

CAMP, District Judge:

This appeal is from the district court’s partial final judgment in a proceeding

arising from the bankruptcy of Far & Wide enterprises (“Far & Wide”), a

conglomerate of travel companies (collectively, the “Debtors”). The Debtors filed

for bankruptcy in the United States Bankruptcy Court for the Southern District of

Florida in Miami in September 2003. The bankruptcy court confirmed a

liquidating plan of reorganization, which appointed Appellant, Barry Mukamal,

(“Appellant” or “Trustee”) as trustee of two trusts created to pursue claims on

behalf of the Debtors and Debtors’ creditors who had voted to accept the

liquidation plan. Appellees, the defendants in the district court proceeding, are

former directors and officers of Far & Wide (the “Individual Defendants”), as well

as Far & Wide’s majority shareholder, Wellspring Capital Management, LLC

(“Wellspring”). 

The Trustee brought this action against Wellspring, the Individual

Defendants, and several other entities alleging a variety of claims. The claims on 

this appeal are based on allegations that Wellspring and the Individual Defendants 

________________

* Honorable Jack T. Camp, United States District Judge for the Northern District of

Georgia, sitting by designation.

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breached their fiduciary duties to the Far & Wide entities. Wellspring and the

Individual Defendants moved to dismiss these claims, and the district court found

that the Trustee failed to state a claim for the alleged breaches of fiduciary duty

and granted the motion to dismiss. Upon a review of the record, the parties’

briefs, and having the benefit of oral argument, we conclude the district court did

not err and we affirm.

I. BACKGROUND

A. The Parties to this Dispute

The principal Debtor, Far & Wide, is a Delaware corporation formed in

March 1999 to purchase travel companies. The Individual Defendants were

officers and/or served on the board of directors of Far & Wide. Even though Far

& Wide was incorporated in Delaware, the majority of its operations were in

Florida.

Wellspring is a Delaware corporation that manages private investment

partnerships, such as Loan Capital Funding, LLC, which focus on investing in or

acquiring companies. Wellspring and the Individual Defendants formed the

1

Loan Capital Funding, LLC acted as a conduit between Wellspring and the Debtors. 1

Although the Trustee also named Loan Capital Funding, LLC as a defendant in the underlying

litigation, the Court refers to both Wellspring individually and Wellspring and Loan Capital

Funding, LLC collectively as “Wellspring”.

3
Debtor companies by consolidating various travel companies. Wellspring

invested $45 million in the Debtors and acquired a majority of their stock. 

Wellspring also required the Debtors to appoint four of its partners to Far &

Wide’s six-member board of directors. With a majority of the board, Wellspring

exercised a controlling interest in the Debtors. 

From the time of the company’s creation, Far & Wide planned to purchase

and consolidate a number of smaller travel companies and to sell the resulting

conglomerate to the highest bidder for a profit. Appellant alleges that Wellspring

and the Individual Defendants violated their fiduciary duty of loyalty to Far &

Wide by pursuing a plan that maximized their own self-interest but was harmful in

the long-term to Far & Wide’s creditors. 

Far & Wide established lines of credit with a number of banks to raise

capital. In 1999, the Debtors entered into a loan agreement with a group of banks

to infuse $70 million into the Debtors. The Debtors provided their assets as

collateral. A year later, the Debtors obtained an additional $20 million in

unsecured financing.

B. The Decline of Far & Wide

Time and circumstance, however, intervened in Far & Wide’s plan. Fewer

travelers took overseas trips after the September 11, 2001, terrorist attacks and the

4
subsequent outbreak of the SARS virus in Asia. Far & Wide faced a liquidity

crises when the companies it owned and relied upon for operating funds faltered

because of the struggling travel market. As a result, Far & Wide defaulted on the

$70 million bank loan. After defaulting, Wellspring and the Individual

Defendants represented to the banks that a single purchaser could still be found to

purchase the consolidated travel enterprises. Based on these representations, the

banks, which could have foreclosed, instead entered into a forbearance agreement.

The banks, however, required the Debtors to hire consultants to aid in the daily

operations of the Debtors’ business.

In 2002, Far & Wide hired an outside company to solicit potential

purchasers. Pursuant to its agreement with the banks, Far & Wide also hired

KPMG and The Recovery Group (“TRG”), a firm specializing in turnaround and

crisis management. KPMG was retained to review Far & Wide’s records and to

advise the directors and officers on how better to keep the company’s books and

records. Far & Wide’s management neither implemented TRG’s

recommendations, nor implemented the bookkeeping and other advice it received

from KPMG.

The Trustee alleges that Wellspring and the Individual Defendants, in their

attempt to sell the travel enterprises for a sufficient price to obtain a return on their

5
investment, used false and misleading indicators of the Debtors’ financial health.

In addition, the Trustee alleges that Wellspring and Far & Wide chose not to file

for bankruptcy or wind down the Debtors at that time because it would have

caused them to lose their $45 million investment. The Trustee alleged Far & Wide

was insolvent by April 2002.

In October 2002, the Debtors began a reorganization. Part of that

reorganization included two $10 million loans. The Debtors sought and obtained

consent to the loans and the restructuring from major creditors. One of the loans

came from Wellspring, which charged an interest rate of 10% over prime and not

less than 14.75%. Additionally, Wellspring insisted that its loan be repaid before

all the claims of the Debtors’ other creditors were paid. Wellspring and the

Individual Defendants also converted a portion of Wellspring’s equity position

into a debt claim, which would have higher priority in the event of a bankruptcy.

These loans allowed the Debtors to continue operating their businesses. Even

though the conditions were arguably unfairly favorable to Wellspring, the Debtors

do not allege that Wellspring received any benefit as a result of the loan

agreement, which was never repaid. Nor was there any allegation that the loan

could have been obtained on more favorable terms. Certain of the Trustee’s

claims in the district court, however, seek to subordinate the Wellspring loan to

6
other creditors’ obligations and to recharacterize Wellspring’s $12 million dollar

debt claims as equity. The district court denied the motion to dismiss these claims,

and the Trustee continues to pursue them in district court. 

In July 2003, when the two $10 million loans came due, the Debtors could

not repay the loans. Despite being insolvent, the Debtors continued operating the

travel businesses, selling trips to customers, and purchasing services from vendors

until September 23, 2003. Between July 2003 and September 23, 2003, the

Debtors used customers’ deposits to pay operating costs. Some of those customers

lost their deposits and did not receive their travel arrangements because of the

bankruptcy. These customers have priority bankruptcy claims of more than $5.6

million. After bankruptcy, assets for which the Debtors had paid $150 million

were sold for a net of $14 million. 

C. The Trustee’s Allegations in the Complaint and Amended Complaint

The Trustee brought a number of claims against Wellspring and the

Individual Defendants based on their having exercised control of the Far & Wide

entities. The Trustee stated the following claims in the original Complaint:

1. The individual directors and officers of Far & Wide breached their fiduciary

duties to the Debtors.

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2. These individuals also breached their fiduciary duties to the Debtors’

creditors.

3. These individuals aided and abetted each other in breaching their fiduciary

duties to the Debtors and to Debtors’ creditors.

4. Wellspring aided and abetted the Individual Defendants’ breaches of their

fiduciary duties to both the Debtors and the Debtors’ creditors.

5. The claims of the Individual Defendants against the bankruptcy estate

should be equitably subordinated in the bankruptcy to the claims of other

creditors.

6. Wellspring misstated its purported debt claims in the bankruptcy and the

debt claims should be recharacterized as equity.

7. Wellspring’s claims against the bankruptcy estate should also be equitably

subordinated to the claims of the other creditors.

8. Ernst & Young, LLP (“Ernst & Young”), who prepared audited financial

statements for the Debtors, aided and abetted the breach of fiduciary duties

by Wellspring and the Individual Defendants, breached their duty of care to

the Debtors and the Debtors’ creditors, and committed professional

malpractice.

8
Subsequently, Ernst & Young and the Trustee agreed to submit the claims

against Ernst & Young to arbitration, and the district court granted Ernst &

Young’s motion to compel arbitration. After Ernst & Young was removed,

Wellspring and the Individual Defendants moved to dismiss the Complaint in its

entirety pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. The

district court denied Wellspring’s and the Individual Defendants’ motion to

dismiss the claims for subordination and for recharacterization of debt (numbers

five, six, and seven above), which continue before the district court. The district

court dismissed the remaining claims (numbers one, two, three, and four above).

With the Court’s permission, Appellant filed an 82 page Amended Complaint on

December 5, 2007, which included the following claims:

a. Direct claims of the Debtors against Wellspring and the Individual

Defendants for breach of fiduciary duties.

b. Derivative claims of the Debtors’ creditors alleging that Wellspring and the

Individual Defendants breached fiduciary duties to the Debtors.

c. Direct claims of the Debtors against Wellspring and the Individual

Defendants for deceptive and unfair trade practices.

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d. Direct Claims by the Debtors against Wellspring and the Individual

Defendants for aiding and abetting each other’s breach of their fiduciary

duties.

e. Derivative Claims by the Debtors’ creditors against Wellspring and the

Individual Defendants for aiding and abetting each other’s breach of their

fiduciary duties.

Wellspring and the Individual Defendants moved to dismiss the Amended

Complaint. The district court granted the motion, dismissed the Amended

Complaint, and entered partial final judgment pursuant to Rule 54(b) of the

Federal Rules of Civil Procedure so that the Trustee could appeal the dismissal of

the breach of fiduciary duty claims while the claims for subordination and for

recharacterization of debt proceeded in the district court.

D. The Issues on Appeal

Appellant appeals the district court’s dismissal of the Debtors’ direct claims

for breach of fiduciary duty by Appellees, the dismissal of the Debtors’ creditors’

direct claims against Appellees for breach of fiduciary duty owed to them, and the

dismissal of the creditors’ derivative claims against Appellees. Appellant also

appeals the dismissal of the related aiding and abetting claims. Finally, Appellant

appeals the district court’s decision to apply Delaware rather than Florida law to

10
the fiduciary duty claims. Appellant does not appeal the dismissal of the deceptive

trade practices claims (claim c. above) or the dismissal of the claims against Ernst

& Young (claim 8. above), which were compelled to arbitration. The equitable

subordination claims, the claim for recharacterization of Wellspring’s (claims 5.,

6., and 7. above) debt as equity, and a claim against Wellspring for disallowance

of a claim in bankruptcy continue in the district court. 

II. JURISDICTION

The district court had jurisdiction over this case pursuant to 28 U.S.C. §

1334, which provides that district courts have original jurisdiction over civil

proceedings related to bankruptcy cases brought under Title 11. This Court has

jurisdiction over an appeal from the final judgment of the district court pursuant to

12 U.S.C. § 1291. See also Thigpen v. Smith, 792 F.2d 1507, 1516 n.15 (11th Cir.

1986) (federal appellate courts have jurisdiction to review partial final judgments

entered pursuant to Fed. R. Civ. P. 54(b)). 

III. STANDARD OF REVIEW

This Court reviews the district court’s dismissal for failure to state a claim

de novo, accepting the allegations in the Complaint and Amended Complaint as

true and construing those facts in the light most favorable to the Trustee. Mills v.

Foremost Ins. Co., 511 F.3d 1300, 1303 (11th Cir. 2008). The Court reviews a

11
district court’s order dismissing claims for lack of standing de novo. Miccosukee

Tribe of Indians v. Florida State Athletic Com’n, 226 F.3d 1226, 1228 (11th Cir.

2000). Finally, the district court’s decision to apply Delaware substantive law to

the Trustee’s claims is a legal question, which the Court also reviews de novo. 

Grupo Televisa, S.A. v. Telemundo Comm. Group, Inc., 485 F.3d 1233, 1239

(11th Cir. 2007).

To survive a motion to dismiss, a complaint need not contain “detailed

factual allegations,” but it must contain sufficient factual allegations to suggest the

required elements of a cause of action. Bell Atlantic Corp. v. Twombly, 550 U.S.

544, 127 S. Ct. 1955, 1964-65 (2007); Watts v. Fla. Int’l Univ., 495 F.3d 1289,

1295-96 (11th Cir. 2007). “[A] formulaic recitation of the elements of a cause of

action will not do.” Twombly, 550 U.S. at 555-56. Nor will mere labels and legal

conclusions withstand a 12(b)(6) motion to dismiss. Id. This is a stricter standard

than the Supreme Court described in Conley v. Gibson, 355 U.S. 41, 45-46, 79 S.

Ct. 99, 102 (1957), which held that a complaint should not be dismissed for failure

to state a claim “unless it appears beyond doubt that the plaintiff can prove no set

of facts in support of his claim which would entitle him to relief.” Twombly, 550

U.S. at 577. Under the standard articulated by the Supreme Court in Twombly, the

12
complaint cannot suggest the existence of a claim; the complaint must contain

“enough facts to state a claim to relief that is plausible on its face.” Id. at 570. 

IV. DISCUSSION

A. Choice of Applicable Law

 The Trustee brought this case in Florida, alleging that the Individual

Defendants and Wellspring breached fiduciary duties owed to Far & Wide and its

creditors. Although the acts forming the basis of the Trustee’s claims occurred

largely in Florida, both Far & Wide and Wellspring were incorporated in

Delaware. The district court held that Delaware law, not Florida law, applied to

the substantive claims asserted by the Trustee. On Appeal, Appellant contends

that the district court erred by applying Delaware law.

The district court had jurisdiction of this matter pursuant to 28 U.S.C. §

1334. Federal courts sitting in diversity apply the forum state’s choice of law

rules. United States Fid. & Guar. Co. v. Liberty Surplus Ins. Corp., 550 F.3d

1031, 1033 (11th Cir. 2008); Grupo Televisa, 485 F.3d at 1240. Federal courts

have adopted this principle in cases arising under 28 U.S.C. § 1334, when the

underlying rights and obligations of the parties are defined by state law. See

Official Comm. of Unsecured Creditors v. Donaldson, Lufkin & Jenrette Sec.

13
Corp., No. 00-8688, 2002 WL 362794, *5 (S.D.N.Y. Mar. 6, 2002). The Trustee

filed this action in Florida; therefore, Florida’s choice of law rules apply. 

The fiduciary duties owed to a corporation by its officers and directors

concern the internal affairs of a corporation. See Edgar v. Mite Corp., 457 U.S.

624, 645, 102 S. Ct. 2629, 2642 (1982) (“matters peculiar to the relationships

among or between the corporation and its current officers, directors, and

shareholders” are a corporation’s internal affairs); see also Nagy v. Riblet Prods.

Corp., 79 F.3d 572, 576 (7th Cir. 1996) (applying the internal affairs doctrine to

claims of breach of fiduciary duty by a controlling shareholder). The Florida

Business Corporation Act provides that the internal affairs of a corporation are

governed by the laws of the state of incorporation. Fla. Stat. § 607.1505(3);

Chatlos Found., Inc. v. D’Arata, 882 So. 2d 1021, 1023 (Fla. 5th DCA 2004)

(applying the internal affairs doctrine as codified by the Florida Not for Profit

Corporation Act, which is identical to Fla. Stat. § 607.1505(3)). 

[The Florida Business Corporation Act] does not authorize this state

to regulate the organization or internal affairs of a foreign corporation

authorized to transact business in this state. 

Fla. Stat. § 607.1505(3). The Restatement (Second) of Conflict of Laws also

provides that the internal affairs of corporations are governed by the laws of the

14
state of incorporation. See Restatement (Second) of Conflict of Laws §§ 302-9

(1971). 

As claims concerning the internal affairs of Far & Wide, the fiduciary duty

claims asserted by the Trustee are governed by the law of Delaware, the state of

incorporation. Fla. Stat. § 607.1505(3); Chatlos, 882 So. 2d at 1023. An

exception to the internal affairs doctrine exists in the “unusual case” where the

forum state has a more significant relationship to the parties and the occurrence. 

Restatement (Second) of Conflict of Laws §§ 302, 306, 309. The Trustee

contends that Florida has a more significant relationship to this dispute, and, thus,

the internal affairs doctrine should not apply to this case. As the district court

noted, however, the Trustee has not shown that Florida has the type of overriding

interest in applying its laws to this dispute so as to rebut the presumption that the

laws of the state of incorporation apply to claims for breach of fiduciary duty by

officers, directors, and a majority shareholder. See Restatement (Second) of

Conflict of Laws § 6 (1971) (setting forth factors to consider for determining

whether a forum other than the state of incorporation has a more significant

relationship to the parties or occurrence). Accordingly, the district court was

correct to apply Delaware law to the substantive claims in this dispute.

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B. Appellant’s Attempt to Bring Creditors’ Claims Directly Against Wellspring

and the Individual Defendants

In the original Complaint, the Trustee sought to bring claims against the

Individual Defendants and Wellspring for breaching a fiduciary duty owed directly

to the creditors after the Debtors became insolvent. See supra Part I.C.claims 2-4.

In the Amended Complaint, the Trustee attempted to bring derivative claims on

behalf of the creditors based on the Individual Defendants’ and Wellspring’s

breaches of fiduciary duties owed to the Debtors. See supra Part I.C. claims b,d. 

The district court dismissed the direct creditor claims in the original Complaint,

holding Delaware law did not recognize direct creditor claims under North

American Catholic Educational Programming Foundation, Inc. v. Gheewalla, et

al., 930 A.2d 92, 101 (Del. 2007). The district court alternatively held that the

Trustee did not have standing to bring direct creditors’ claims on behalf of less

than all creditors under Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416,

92 S. Ct. 1678 (1972), and E.F. Hutton & Co. v. Hadley, 901 F.2d 979, 986 (11th

Cir. 1990). The district court dismissed the derivative claims as duplicative and a

waste of judicial resources. We find that the district court was correct for the

following reasons.

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1. Delaware Law Does Not Recognize Direct Claims for Breach of Fiduciary

Duty by the Debtors’ Creditors.

The original Complaint asserted three direct claims on behalf of the

Debtors’ creditors against Wellspring and the Individual Defendants for breach of

fiduciary duty. The Trustee argued that both the Individual Defendants and

Wellspring owed fiduciary duties directly to the Debtors’ creditors once Far &

Wide became insolvent. The district court dismissed the creditors’ direct claims

for breach of fiduciary duty under Delaware law. Appellant appeals the dismissal

as error.

Delaware law recognizes that officers and directors are given wide latitude

to run a corporation as they see fit for the benefit of shareholders. Michelson v.

Duncan, 407 A.2d 211, 217 (Del. 1979). Appellant argues, therefore, that the

directors’ and officers’ duties change once a corporation becomes insolvent

because Delaware courts have long recognized that, when a corporation becomes

insolvent, its property must be administered as a trust fund for the benefit of

creditors. See Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications

Corp., 1991 WL 277613, at *1155 n.55 (Del. Ch. 1991) (describing the “curious”

17
incentives and divergence of interests creditors and directors face during

insolvency); Bovay v. H.M. Byllesby & Co. 38 A.2d 808, 813 (Del.1944).

Appellant contends that, upon insolvency, the officers and directors owe a

fiduciary duty directly to creditors, which requires them to maximize the

company’s value for the creditors, as the corporation’s residual value holders.

See, e.g., Geyer v. Ingersoll Publications Co., 621 A.2d 784, 787-88 (Del. Ch.

1992) (suggesting that a fiduciary duty to creditors arises at insolvency); see

generally Richard M. Cieri & Michael J. Riela, Protecting Directors and Officers

of Corporations That Are Insolvent: Important Considerations, Practical

Solutions, 2 DePaul Bus. & Comm. L.J. 295, 301-02 (2004) (drawing the

inference from prior Delaware authority that insolvency alters the nature of

fiduciaries’ duties); Laura Lin, Shift of Fiduciary Duty Upon Corporate

Insolvency: Proper Scope of Directors’ Duty to Creditors, 46 Vand. L. Rev. 1485,

1512 (1993) (same). 

The Delaware Supreme Court provided clear guidance on this issue in

Gheewalla, 930 A.2d at 101. In Gheewalla, a creditor of a Delaware corporation

brought direct claims for breach of fiduciary duty against three of the

corporation’s directors. Id. at 94. The complaint alleged that three directors used

18
their control of the corporation to favor Goldman Sachs in violation of their

fiduciary duties to the corporation. Id. The directors moved to dismiss the

complaint for failure to state a claim. Id.

The Delaware Supreme Court held that creditors of an insolvent company

do not have a direct claim against directors or managers for breach of fiduciary

duty. Id. The Court explained that under Delaware law, “[d]irectors owe their

fiduciary obligations to the corporation and its shareholders.” Id. at 99. Because

directors and officers do not owe a fiduciary duty to creditors, even after

insolvency, the district court correctly dismissed the Debtors’ creditors’ direct

claims for breach of fiduciary duty.

C. The Creditors’ Derivative Claims Are Mirror Images of the Debtors’ Claims

and Cannot be Brought in the Same Action.

In the Amended Complaint, the Trustee also brought derivative claims by

the Debtors’ creditors. These claims attempt to assert derivatively the identical

direct claims of the Debtors for breaches of fiduciary duty and depend on the

same factual allegations. The district court referred to them as “mirror images” of

the Debtors’ claims and, in a well-reasoned analysis, dismissed these derivative

claims as duplicative of the Debtors’ direct claims.

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A plaintiff may only recover from a defendant once for a single claim. See

St. Luke’s Cataract & Laser Inst., P.A. v. Sanderson, 573 F.3d 1186, 1203 (11th

Cir. 2009). If the Debtors succeed on the direct claims against the Individual

Defendants then the creditors’ derivative claims must fail because the Individual

Defendants cannot be liable twice for the same claim. See Gen. Tel. Co. v.

EEOC, 446 U.S. 318, 333, 100 S. Ct. 1698, 1708 (1980) (“courts can and should

preclude double recovery by an individual”); White v. United States, 507 F.2d

1101, 1103 (5th Cir. 1975) (“no duplicating recovery of damages for the same

injury may be had”).2 If, however, the Debtors’ direct claims fail to state a claim

then the creditors’ derivative claims must also fail because the claims are based

on the same factual allegations. Accordingly, this Court affirms the district

court’s dismissal of Counts III, IV, V, VI, and VII of the Amended Complaint.

D. Appellant’s Complaint and Amended Complaint Failed to State a Claim for

Breach of Fiduciary Duty by Defendants. 

The Trustee does have standing to bring direct claims for breach of

fiduciary duty on behalf of the Debtors. The Amended Complaint alleges that

Wellspring and the Individual Defendants breached both the fiduciary duty of

Fifth Circuit decisions rendered on or before September 30, 1981, are binding precedent 2

on this court. See Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc).

20
loyalty and the fiduciary duty of care owed to the Debtors. The claims are based

on allegations that the Individual Defendants and Wellspring operated Far &

Wide with the goal of continuing its operations until it could be sold for a profit

and refused to take other measures that may have better preserved its value for the

creditors. The Trustee specifically focuses on the secured loan transaction

between the Debtors and Wellspring in October 2002 as a primary example of

this breach of duty. 

The Trustee contends that Wellspring was preferred over other

shareholders, and that the Individual Defendants, as interested inside directors,

are not entitled to the protection of the business judgment rule. The Trustee

contends that because the Individual Defendants are not protected by the business

judgment rule, the burden shifts to the Individual Defendants and Wellspring to

demonstrate that the loan was “entirely fair.” For the following reasons, this

Court finds that the district court did not err in dismissing the breach of fiduciary

duty claims asserted against the Individual Defendants and Wellspring since the

Complaint failed to state sufficient facts “to state a claim to relief that is plausible

on its face.” Twombly, 550 U.S. at 570.

1. The Duty of Loyalty

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Under Delaware law, “[t]he essence of the duty of loyalty is that ‘corporate

officers and directors are not permitted to use their position of trust and

confidence to further their private interests.’” 1-4 Corporate Governance: Law

and Practice § 4.03 (quoting Guth v. Loft, 5 A.2d 503, 510 (Del. 1939)). The

duty of loyalty requires a fiduciary to act in the best interests of the corporation. 

Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993) (“the duty of

loyalty mandates that the best interest of the corporation and its shareholders take

precedence over any interest possessed by a . . . controlling shareholder and not

shared by the stockholders generally.”) A claim for breach of the duty of loyalty

under Delaware law exists where (1) the company is harmed or (2) a fiduciary

personally profits from a corporate opportunity. See Oberly v. Kirby, 592 A.2d

445, 463 (Del. 1991) (holding a breach of the fiduciary duty of loyalty can exist

where either the beneficiary is harmed or the fiduciary uses knowledge gained

from his position to advance his independent interests).

The Amended Complaint alleges that the Individual Defendants and

Wellspring breached the duty of loyalty by favoring the interests of Wellspring

over those of the Debtor. In short, the Amended Complaint alleges that the

Individual Defendants managed Far & Wide for the benefit of a majority

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shareholder and that Far & Wide obtained a loan from Wellspring in October

2002, which allowed the company to continue to run its troubled businesses

rather than preserving its value for the creditors.

As a threshold matter, the conclusory allegations concerning breach of the

duty of loyalty in both complaints are not supported by the necessary factual

allegations “to state a claim to relief that is plausible on its face.” Twombly, 550

U.S. at 570. Moreover, the Trustee alleges injury only to the Debtors’ creditors. 

For example, the Amended Complaint alleges that the decision to accept the loan

from Wellspring in 2002 and continue operating the business “resulted in the

diminution in value of Far & Wide’s assets to a point where Far & Wide did not

have any ability to pay its liabilities to its creditors when bankruptcy protection

was finally sought....”

In order to state a claim for breach of the duty of loyalty, the Trustee must

allege facts that indicate either Far & Wide or its minority shareholders, not Far &

Wide’s creditors, were injured by the action of the Individual Defendants. See

Cede & Co., 634 A.2d at 361 (stating that a breach of the duty of loyalty can exist

where a fiduciary pursues his own interest over that of the shareholders). Neither

the Complaint nor the Amended Complaint contain sufficient factual allegations

to support such a claim. The Trustee does not allege facts demonstrating that the

23
majority shareholders were preferred in any way over the minority shareholders. 

No allegations indicate that the loan could have been obtained on more favorable

terms, that the Individual Defendants personally benefitted, or that Wellspring

benefitted at all since the loan was never repaid. 

 The only injury alleged in the Amended Complaint was to the Debtors’

creditors as a result of Far & Wide staying in business longer and deepening its

insolvency, when it would have been in the best interest of the creditors for Far &

Wide to cease business and liquidate. Delaware law, however, does not

recognize a cause of action for “deepening insolvency.” Trenwick Am. Litig.

Trust v. Ernst & Young, LLP, 906 A.2d 168, 174, 204 (Del. Ch. 2006). 

Even when a firm is insolvent, its directors may, in the appropriate

exercise of their business judgment, take action that might, if it does

not pan out, result in the firm being painted in a deeper hue of red.

The fact that the residual claimants of the firm at that time are

creditors does not mean that the directors cannot choose to continue

the firm's operations in the hope that they can expand the inadequate

pie such that the firm's creditors get a greater recovery.

Id. at 174.

The Trustee alleges that the actions taken by the board of directors were

done so that the company could continue operating in an attempt to facilitate a

sale of the corporation to a third party. The sale, however, would have

24
maximized the value to all shareholders. Recent Delaware cases hold that

officers and directors do not breach the duty of loyalty by exercising their

business judgment and continuing to operate an insolvent corporation rather than

entering bankruptcy and preserving assets to pay creditors. Trenwick, 906 A.2d

at 174; Gheewalla, 930 A.2d at 99 (explaining that the general rule is that

directors of a corporation do not owe creditors duties beyond the relevant

contractual terms). 

In fact, Gheewalla presents an analogous factual situation. In Gheewalla, a

creditor of Clearwire Holdings, Inc. (“Clearwire”) sued several directors of

Clearwire for breach of fiduciary duty. Gheewalla, 930 A.2d at 94. The creditors

alleged that the directors breached their fiduciary duties once Clearwire became

insolvent and effectively went out of business because the directors allowed the

corporation to continue holding certain licenses. Id. at 97-99. Holding onto these

licenses required large expenditures of cash each month, which otherwise would

have been available for creditors had the corporation liquidated. Id. at 97-99 The

Delaware Supreme Court stated:

It is well established that the directors owe their fiduciary obligations

to the corporation and its shareholders. While shareholders rely on

directors acting as fiduciaries to protect their interests, creditors are

afforded protection through contractual agreements, fraud and

fraudulent conveyance law, implied covenants of good faith and fair

25
dealing, bankruptcy law, general commercial law and other sources of

creditor rights.

Id. at 99. All these remedies are available to the creditors in the present situation,

and they continue to pursue some in the district court. If they were wronged, they

have ample recourse, but the remedies do not include bringing a claim for breach

of fiduciary duty where the only alleged injury is a deepening insolvency which

harmed only creditors. 

Since Delaware law does not recognize a duty to liquidate, and the

Amended Complaint fails to allege sufficient facts to demonstrate the necessary

elements of a claim for breach of the duty of loyalty to the Debtors, the district

court did not err in dismissing Appellant’s claim for breach of the fiduciary duty

of loyalty.

2. The Duty of Care

“The fiduciary duty of care requires that directors of a Delaware

corporation use that amount of care which ordinarily careful and prudent men

would use in similar circumstances, and consider all material information

reasonably available in making business decisions.” In re Walt Disney Co., 907

A.2d 693, 749 (Del. Ch. 2005) (internal quotation and citation omitted). A

deficiency in the process employed by the directors is only actionable as a breach

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of the duty of care if the director’s actions are “grossly negligent.” Id. Gross

negligence includes a director’s failure to inform him or herself of available

material facts when making a decision on behalf of the corporation. See In re

Walt Disney Co., 906 A.2d 27, 64-64 (Del. Super. Ct. 2006); Smith v. Van

Gorkhom, 488 A.2d 858, 874 (Del. 1985) (holding that board members who

voted to approve a merger without reviewing any documentation regarding the

adequacy of the proposed purchase price violated the duty of care), overruled on

other grounds by Gantler v. Stephens, 965 A.2d 695, 713 n.45 (Del. 2009); Cede

& Co. v. Technicolor, 634 A.2d 345, 367-68 (Del. 1993) (holding that the duty of

care requires directors to act on an informed basis). Simply put, the standard is

procedural, rather than substantive. In fact, Delaware law allows a company’s

board to even make an “irrational” decision, so long as the decision-making

process employed by the board “was either rational or employed in a good faith

effort to advance corporate interests.” In re Caremark Int’l Derivative Litig., 698

A.2d 959, 967 (Del. Ch. 1996) (emphasis in original). Thus, directors who make

a decision after employing a rational decision-making process and considering the

pertinent information will not be liable for a breach of the fiduciary duty of care. 

In re Caremark, 698 A.3d at 967; Cede & Co., 634 A.2d at 367-68. Moreover,

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even upon insolvency, the duty of care to the corporation remains the same. 

Gheewalla, 930 A.2d at 101. 

The Amended Complaint fails to allege that the Individual Defendants did

not employ a rational decision-making process or did not consider material

information when making the decision to obtain additional loans and continue

operating Far & Wide rather than proceed into bankruptcy. The Amended

Complaint alleges only that the Individual Defendants “refused or failed to follow

[the] advice” of the two independent consultants hired by Far & Wide’s

management. To state a claim for breach of the duty of care under Delaware law,

a plaintiff must allege more than that the directors and officers of a corporation

received information from outside consultants, but decided not follow this advice. 

Cede & Co., 634 A.2d at 367-68. Here, the Individual Defendants discharged

their obligations under the duty of care by hiring consultants and by considering

the consultants’ advice, even if they did not follow the advice. Id. Accordingly,

the district court properly dismissed Counts VI and XI of the Amended

Complaint.

E. The Amended Complaint Failed To State A Claim for Aiding and Abetting a

Breach of Fiduciary Duty.

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In order to state a claim for aiding and abetting a breach of fiduciary duty

under Delaware law, a plaintiff must allege: (1) the existence of a fiduciary

relationship, (2) that the fiduciary breached its duty, (3) that a defendant, who is

not a fiduciary, knowingly participated in the breach, and (4) that damages to the

plaintiff resulted from the concerted action of the fiduciary and the non-fiduciary. 

Gotham Partners L.P. v. Hallwood Realty Partners, et al., 817 A.2d 160, 172 (Del.

2002) (quoting Wallace v. Wood, 752 A.2d 1175, 1180 (Del. Ch. 1999)). The

Amended Complaint alleges that the Individual Defendants and the Wellspring

Defendants aided and abetted each others’ breaches of fiduciary duties.

The underlying breaches of fiduciary duty that form the basis for the

Debtors’ claims for aiding and abetting are the same breaches of fiduciary duty

that the Court finds fail as a matter of law. See supra Part IV.D.1-2. Because the

underlying breach of fiduciary duty claims fail, the claims that Wellspring and the

Individual Defendants aided and abetted those breaches must follow suit. See

Gotham Partners, 817 A.2d at 172 (a claim for aiding and abetting a breach of

fiduciary duty requires that the fiduciary breach its duty). The district court

correctly dismissed the aiding and abetting claims, and this Court affirms the

district court’s dismissal of Counts IV, VII, IX, and XII.

V. CONCLUSION

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For the foregoing reasons, this Court AFFIRMS the judgment of the

district court.

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