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BRICKFIELD & DONAHUE 

PAUL B. BRICKFIELD 

70 Grand Avenue, Suite 102 

River Edge, NJ 07661 

Telephone: 201/488-7707 

201/488-9559 (fax) 

Attorneys for Plaintiff 

[Additional counsel appear on signature page.] 

UNITED STATES DISTRICT COURT 

DISTRICT OF NEW JERSEY 

CITY OF ROSEVILLE EMPLOYEES’ 

RETIREMENT SYSTEM, Derivatively 

on Behalf of KID BRANDS, INC., 

Plaintiff, 

vs. 

BRUCE G. CRAIN, et al., 

Defendants, 

– and – 

KID BRANDS, INC., a New Jersey 

corporation, 

Nominal Defendant. 

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No. 2:11-cv-02919-JLL-CCC 

PLAINTIFF’S OMNIBUS 

OPPOSITION TO DEFENDANTS’ 

AND NOMINAL DEFENDANT KID 

BRANDS, INC.’S MOTIONS TO 

DISMISS 

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TABLE OF CONTENTS 

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I. INTRODUCTION ...........................................................................................1

II. THE COMPLAINT’S FACTUAL ALLEGATIONS .....................................6

III. DEFENDANTS’ MOTIONS TO DISMISS SHOULD BE DENIED............9

A. Plaintiff Adequately Alleges Demand Futility......................................9

1. Standards for Demand Futility....................................................9

2. The Complaint States a Claim for Breach of Loyalty 

Under AmSouth .........................................................................15

a. Defendants Had a Known Duty to Implement 

Internal Controls to Ensure KBI Met Its Payment 

Obligations Under U.S. Customs Rules and Local 

Foreign Laws ..................................................................17

b. Defendants Failed to Implement Internal Controls 

at KBI..............................................................................19

3. Demand Is Futile Because Each KBI Board Member 

Faces a Substantial Likelihood of Liability Resulting 

from Their Breach of Loyalty...................................................22

4. Demand Is Further Excused Because the Entire KBI 

Board Breached Its Fiduciary Duty of Loyalty by Making 

False Statements to Shareholders .............................................25

B. Plaintiff’s Claims for Relief Are Adequately Pled .............................27

1. Pleading Standard Applicable to Plaintiffs’ Claims for 

Relief.........................................................................................27

2. The Complaint Alleges Claims for Gross 

Mismanagement and Abuse of Control ....................................30

3. The Complaint Alleges a Claim for Waste...............................31

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4. The Complaint Alleges a Claim for Unjust Enrichment ..........32

C. The Company’s Certificate of Incorporation Cannot Exculpate 

Defendants from Liability ...................................................................33

IV. CONCLUSION..............................................................................................35

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TABLE OF AUTHORITIES 

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CASES 

Aronson v. Lewis, 

473 A.2d 805 (Del. 1984) .............................................................................10, 17 

Beam v. Stewart, 

845 A.2d 1040 (Del. 2004).................................................................................14 

Bell Atl. Corp. v. Twombly, 

550 U.S. 544 (2007)............................................................................................28 

Bodell v. Gen. Gas. & Electric Corp., 

140 A. 264 (Del. 1927).......................................................................................30 

Cincinnati Bell Cellular Sys. Co. v. Ameritech Mobile Phone Serv., 

No. 13389, 1996 Del. Ch. LEXIS 116 

(Del. Ch. Sept. 3, 1996), aff’d, 1997 Del. LEXIS 58 

(Del. Feb. 11, 1997) ............................................................................................30 

Daloisio v. Peninsula Land Co., 

43 N.J. Super. 79 (App. Div. 1956)..............................................................25, 26 

Desimone v. Barrows, 

924 A.2d 908 (Del. Ch. 2007) ................................................................16, 23, 24 

Emerald Partners v. Berlin, 

726 A.2d 1215 (Del. 1999).................................................................................26 

Emerald Partners v. Berlin, 

787 A.2d 85 (Del. 2001) .....................................................................................34 

Evancho v. Fisher, 

423 F.3d 347 (3d Cir. 2005) ...............................................................................27 

Francis v. United Jersey Bank, 

87 N.J. 15 (1981) ..........................................................................................17, 18 

Green Party v. Hartz Mt. Indus., 

164 N.J. 127 (2000) ............................................................................................12 

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Grimes v. Donald, 

673 A.2d 1207 (Del. 1996).................................................................................11 

Guttman v. Jen-Hsun Huang, 

823 A.2d 492 (Del. Ch. 2003) ............................................................................16 

Havens v. Attar, 

No. 15134, 1997 Del. Ch. LEXIS 12 

(Del. Ch. Jan. 30, 1997)......................................................................................30 

Hendry v. Hendry, 

No. CIV. A. 12236, 2006 WL 1565254 

(Del. Ch. May 26, 2006).....................................................................................30 

In re Abbott Labs. Deriv. S’holders Litig., 

325 F.3d 795 (7th Cir. 2003) ..............................................................................34 

In re Caremark Int’l, 

698 A.2d 959 (Del. Ch. 1996) ........................................................................3, 15 

In re Cendant Corp. Derivative Action Litig., 

189 F.R.D. 117 (D.N.J. 1999).......................................................................10, 13 

In re Cooper Cos. S’holders Derivative Litig., 

No. 12584, 2000 Del. Ch. LEXIS 158 

(Del. Ch. Oct. 31, 2000)......................................................................................22 

In re FirstEnergy S’holder Derivative Litig., 

320 F. Supp. 2d 621 (N.D. Ohio 2004) ..............................................................28 

In re HealthSouth Corp. S’holders Litig., 

845 A.2d 1096 (Del. Ch. 2003) ..........................................................................33 

In re infoUSA, Inc. S’holders Litig., 

953 A.2d 963 (Del. Ch. 2007) ............................................................................25 

In re Massey Energy Co., 

No. 5430-VCS, 2011 WL 2176479 

(Del. Ch. May 31, 2011).....................................................................................11 

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In re Midlantic Corp. S’holder Litig., 

758 F. Supp. 226 (D.N.J. 1990)..........................................................................15 

In re MRV Commc’ns, Inc. Deriv. Litig., 

No. CV 08-03800 GAF RCX, 2010 WL 5313442 

(C.D. Cal. Dec. 27, 2010) ...................................................................................32 

In re Netsmart Techs., Inc. S’holders Litig., 

924 A.2d 171 (Del. Ch. 2007) ............................................................................25 

In re PSE&G S’holder Litig., 

173 N.J. 258 (2002) ........................................................................................3, 10 

In re Pure Res., Inc., S’holders Litig., 

808 A.2d 421 (Del. Ch. 2002) ............................................................................25 

In re SFBC Int’l, Inc. Sec. & Derivative Litig., 

495 F. Supp. 2d 477 (D.N.J. 2007)...........................................................4, 11, 22 

In re Tower Air, Inc., 

416 F.3d 229 (3d Cir. 2005) ...............................................................................29 

In re Tyson Foods, Inc. Consol. S’holder Litig., 

No. 1106-CC, 2007 Del. Ch. LEXIS 120 

(Del. Ch. Aug. 15, 2007) ....................................................................................18 

In re Veeco Instruments, Inc. Sec. Litig., 

434 F. Supp. 2d 267 (S.D.N.Y. 2006) ................................................................14 

In re Walt Disney Co. Derivative Litig., 

825 A.2d 275 (Del. Ch. 2003) ............................................................................28 

In re Zoran Corp. Derivative Litig., 

511 F. Supp. 2d 986 (N.D. Cal. 2007)................................................................33 

Jackson Nat’l Life Ins. Co. v. Kennedy, 

741 A.2d 377 (Del. Ch. 1999) ............................................................................32 

Kahn ex rel. DeKalb Genetics Corp. v. Roberts, 

679 A.2d 460 (Del. 1996) ...................................................................................12 

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Kamen v. Kemper Fin. Servs., 

500 U.S. 90 (1991)..............................................................................................10 

Kanter v. Barella, 

489 F.3d 170 (3rd Cir. 2007)........................................................................24, 27 

King v. Baldino, 

648 F. Supp. 2d 609 (D. Del. 2009), 

aff’d, 409 Fed. Appx. 535 (3d Cir. 2010)...........................................................16 

Landy v. D’Alessandro, 

316 F. Supp. 2d 49 (D. Mass. 2004)...................................................................28 

Lewis v. Curtis, 

671 F.2d 779 (3d. Cir. 1982) ..............................................................................14 

Lewis v. Vogelstein, 

699 A.2d 327 (Del. Ch. 1997) ............................................................................31 

Malone v. Brincat, 

722 A.2d 5 (Del. 1998) .................................................................................25, 26 

Matrixx Initiatives, Inc. v. Siracusano, 

__ U.S. __, 131 S. Ct. 1309 (2011)...............................................................13, 20 

Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 

854 A.2d 121 (Del. Ch. 2004) ......................................................................12, 17 

Mizel v. Connelly, 

No. 16638, 1999 Del. Ch. LEXIS 157 

(Del. Ch. Aug. 2, 1999) ......................................................................................23 

Perkins ex rel. Bradley Pharms. Inc. v. Daniel, 

No. 06CV01518 (PGS), 2007 WL 4322596 

(D.N.J. Dec. 6, 2007)..........................................................................................24 

Pfeiffer v. Toll, 

989 A.2d 683 (Del. Ch. 2010) ......................................................................12, 24 

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Phillips v. County of Allegheny, 

515 F.3d 224 (3d Cir. 2008) ...............................................................................28 

Rabkin v. Philip A. Hunt Chem. Corp., 

547 A.2d 963 (Del. Ch. 1986) ............................................................................30 

Rales v. Blasband, 

634 A.2d 927 (Del. 1993) .......................................................................10, 11, 22 

Ret. Sys. v. Chubb Corp., 

394 F.3d 126 (3d Cir. 2004) ...............................................................................10 

Ryan v. Gifford, 

918 A.2d 341 (Del. Ch. 2007) ..................................................................4, 11, 14 

Ryan v. Lyondell Chem. Co., 

No. 3176-VCN, 2008 Del. Ch. LEXIS 125 

(Del. Ch. Aug. 29, 2008) ....................................................................................33 

Sanders v. Wang, 

No. 16640, 1999 Del. Ch. LEXIS 203 

(Del. Ch. Nov. 8, 1999) ......................................................................................34 

Schock v. Nash, 

732 A.2d 217 (Del. 1999) ...................................................................................33 

Seidman v. Clifton Sav. Bank, S.L.A., 

No. A-4033-07T2, 2009 WL 2513797 

(N.J. Super. Ct. App. Div. Aug. 19, 2009), 

aff’d, 14 A.3d 36 (N.J. 2011)................................................................................3 

Solomon v. Pathe Commc’ns Corp., 

672 A.2d 35 (Del. 1996) .....................................................................................27 

Stone v. Ritter, 

911 A.2d 362 (Del. 2006) .......................................................................... passim 

Telxon Corp. v. Bogomolny, 

792 A.2d 964 (Del. 2001) ...................................................................................28 

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Weiss v. Swanson, 

948 A.2d 433 (Del. Ch. 2008) ............................................................................32 

STATUTES, RULES AND REGULATIONS 

15 U.S.C. 

§72.........................................................................................................................2 

N.J. Stat. Ann. 

§14A:2-7(3) ........................................................................................................33 

§14A:6-14 .....................................................................................................11, 17 

Federal Rule of Civil Procedure 

Rule 8 ...........................................................................................................28, 29 

Rule 8(a)(2).........................................................................................................27 

Rule 12(b)(6)............................................................................................... passim

Rule 12 ................................................................................................................28 

Rule 23.1 .......................................................................................................10, 28 

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Plaintiff City of Roseville Employees’ Retirement System (“plaintiff”) hereby 

submits its omnibus opposition to the motions to dismiss of defendants Bruce G. 

Crain, Raphael Benaroya, Mario Ciampi, Frederick J. Horowitz, Hugh R. Rovit, 

Salvatore M. Salibello, John Schaefer and Michael Zimmerman (the “KBI Board of 

Directors” or “KBI Board”) and Marc S. Goldfarb and Guy A. Paglinco (collectively, 

“defendants”) and Nominal Defendant Kid Brands, Inc. (“KBI” or the “Company”). 

I. INTRODUCTION 

As the directors and top officers of a publicly traded international corporation, 

defendants each had a duty to implement an internal controls system to ensure that 

KBI met its customs duties payment obligations under U.S. Customs rules and 

regulations, and under the local foreign laws in the jurisdictions where the Company 

operates. Despite this reasonable mandate, defendants failed to implement and 

maintain the required controls. Defendants’ failure to implement these controls 

caused the Company to admit that it violated “anti-dumping regulations” in relation to 

its China operations and “civil laws and potentially [] criminal laws” in Hong Kong, 

China, Vietnam and Thailand. The rampant violations at KBI’s international 

operations and the Company’s admissions highlight the fact that KBI lacked the 

necessary internal controls to prevent and/or detect violations from occurring at its 

four wholly-owned subsidiaries, and its LaJobi, Inc. (“LaJobi”) subsidiary in 

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particular.1 As a result of defendants’ failure to implement these controls in 

dereliction of their fiduciary duty of loyalty, KBI, by and through its wholly-owned 

subsidiaries, substantially underpaid customs duties due on products imported into the 

United States in violation of the Anti-Dumping Act. See Anti-Dumping Act of 1916. 

15 U.S.C. §72. 

KBI’s once valuable corporate franchise has been severely damaged by 

defendants’ fiduciary breaches. In fact, defendants’ failure to implement the controls 

required for compliance with the Anti-Dumping Act has caused the Company to suffer 

nearly $10 million in aggregate customs duties charges to U.S. Customs and Border 

Protection (“U.S. Customs”), and could lead to an additional penalty of up to 100% of 

that amount. The damage to KBI is compounded by the fact that KBI now faces 

expensive on-going internal investigations, investigations by federal and overseas 

authorities, millions of dollars in additional fines and disgorgement arising from 

violations of federal securities laws and/or foreign local laws, a costly-to-defend class 

action lawsuit for alleged violations of the federal securities laws, and a tainted global 

corporate image. 

 

1

 KBI’s operations consist of LaJobi, Kids Line, LLC (“Kids Line”), Sassy, Inc. 

(“Sassy”) and CoCaLo, Inc. (“CoCaLo”), each a direct or indirect wholly-owned 

subsidiary of KBI. 

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Defendants’ liability here is articulated by the decision in Stone v. Ritter, 911 

A.2d 362 (Del. 2006) (“AmSouth”).2

 Under AmSouth, plaintiff need only plead that 

defendants: (1) had a known legal duty to implement internal controls to ensure 

compliance with U.S. Customs rules and regulations and local foreign laws; and (2) in 

the face of that duty, they “utterly failed” to put the controls in place, which is 

precisely the case here. Id. at 370. Specifically, the AmSouth Court, sitting en banc, 

unanimously held: 

We hold that Caremark articulates the necessary conditions 

predicate for director oversight liability: (a) the directors utterly failed to 

implement any reporting or information system or controls; or

(b) having implemented such a system or controls, consciously failed to 

monitor or oversee its operations thus disabling themselves from being 

informed of risks or problems requiring their attention. In either case, 

imposition of liability requires a showing that the directors knew that 

they were not discharging their fiduciary obligations. Where directors 

fail to act in the face of a known duty to act, thereby demonstrating a 

conscious disregard for their responsibilities, they breach their duty of 

loyalty by failing to discharge that fiduciary obligation in good faith.

Id.

3

 (some emphasis in original). As KBI’s directors and top officers, defendants bore 

primary responsibility for causing the Company to implement internal controls to 

 

2

 New Jersey courts typically “follow Delaware’s pronouncements on corporate 

law” and should do so here. Seidman v. Clifton Sav. Bank, S.L.A., No. A-4033-07T2, 

2009 WL 2513797, at *9 n.5 (N.J. Super. Ct. App. Div. Aug. 19, 2009), aff’d, 14 A.3d 

36 (N.J. 2011); In re PSE&G S’holder Litig., 173 N.J. 258, 282-83 (2002). 

3

 For purposes of clarity, and to distinguish director liability based on the 

director’s own actions as opposed to director liability for the actions of others, we 

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ensure compliance with federal anti-dumping provisions and foreign laws. ¶26. Each 

defendant, however, failed to cause KBI to implement the necessary controls at KBI’s 

international operations and thus they each are liable for their fiduciary failures under 

AmSouth. ¶¶11-20.4

Moreover, for these same reasons, defendants’ defense of claiming that plaintiff 

failed to allege futility of demanding action by the KBI Board of Directors fails. 

Demand is excused as futile where the majority of a company’s board of directors 

faces a substantial likelihood of liability. In re SFBC Int’l, Inc. Sec. & Derivative 

Litig., 495 F. Supp. 2d 477, 486 (D.N.J. 2007) (demand excused because “the 

directors have exposed themselves to liability by allegedly ignoring particularly 

flagrant and reprehensible wrongdoing”); Ryan v. Gifford, 918 A.2d 341, 355 (Del. 

Ch. 2007). As the Complaint sets forth, after LaJobi was selected by U.S. Customs 

for a focused assessment (the “Focused Assessment”) in December 2010, KBI 

initiated an internal investigation into LaJobi’s import practices and procedures that 

 

refer to the theory of liability set forth in subparagraph (a) of the AmSouth decision as 

an “AmSouth claim.” 

 Unless otherwise noted, all emphasis is added and all internal citations are 

omitted. 

4

 “¶_” and “¶¶_” references are to the Verified Shareholder Derivative Complaint 

for Breach of Fiduciary Duty, Gross Mismanagement, Abuse of Control, Corporate 

Waste and Unjust Enrichment (“Complaint”); unless otherwise stated, all emphasis is 

added and citations omitted. 

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revealed violations of federal and foreign law. ¶17. As a result, on March 15, 2011, 

defendants caused KBI to publicly admit that, while under their control, the Company 

violated “anti-dumping regulations” with regard to LaJobi’s operations in China. ¶27. 

On March 31, 2011, KBI further admitted that the Company’s “payment and other 

practices with respect to quality control, compliance and certain other services in 

Hong Kong, China, Vietnam and Thailand violated civil laws and potentially violated 

criminal laws . . . .” ¶32. Following its discovery of violations at LaJobi, KBI 

authorized an additional internal investigation into the Company’s three non-LaJobi 

subsidiaries (the “Customs Review”). The Customs Review revealed additional U.S. 

Customs violations dating back several years, thus indicating that defendants’ failure 

to implement controls was far reaching and not limited to its LaJobi operations. Since 

the entire KBI Board faces a substantial likelihood of liability for an AmSouth breach 

of loyalty arising from its failure to implement internal controls on a Company-wide 

basis, demand on the KBI Board is excused as futile. 

A pre-suit demand on the KBI Board is also excused because a majority of the 

KBI Board members breached their fiduciary duty of loyalty by making false and 

misleading statements in KBI’s SEC filings about KBI’s related-party transactions 

with the former owners of LaJobi, or causing such statements to be made, despite an 

obligation to communicate honestly. As KBI admitted on March 31, 2011 in its 2010 

SEC Form 10-K, “the Company incorrectly described certain payments as being made 

by LaJobi entirely to L&J Industries. . . . However, while the reported amounts were 

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correct, during such periods, all or a portion of such payments were actually made by 

LaJobi to individuals in Hong Kong, China, Vietnam and Thailand. . . .” ¶31. This 

admission raises a reasonable doubt that the KBI Board would (and could) 

independently and objectively consider a demand. 

Because the KBI Board cannot impartially consider a demand, demand must be 

excused as futile and defendants’ motion to dismiss the Complaint based on demand 

futility should be denied. Furthermore, because plaintiff has satisfied the higher 

burden of pleading demand futility, defendants’ attempts to dismiss the Complaint for 

failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) also fail. 

II. THE COMPLAINT’S FACTUAL ALLEGATIONS 

Based in New Jersey, KBI designs, imports, markets and distributes branded 

infant and children’s consumer products through four wholly-owned subsidiaries. 

¶¶10, 24. For example, through its LaJobi subsidiary, KBI sells cribs, mattresses and 

nursery furniture imported from China, Hong Kong, Vietnam and Thailand. ¶¶1, 24. 

As an issuer of securities registered under the U.S. federal securities laws and an 

importer of a significant volume of products from overseas, KBI’s operations are 

subject to extensive regulation by U.S. authorities, including the U.S. Securities and 

Exchange Commission, the U.S. Department of Justice, and U.S. Customs. ¶25. 

KBI’s business and operations are also subject to federal statutes, such as the antidumping laws, as well as the local laws of the jurisdictions in which it operates. ¶25. 

Pursuant to these regulations, KBI is required to pay customs duties on goods 

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imported into the United States from China and elsewhere. ¶¶11-20. To ensure that 

KBI meets its payment obligations under U.S. Customs rules and regulations and 

under the local foreign laws in the jurisdictions in which it operates, KBI needed an 

internal control system in China, Hong Kong, Vietnam, Thailand and elsewhere. 

¶¶11-20. Without such a system in place, defendants allowed KBI to substantially 

underpay customs duties in violation of these laws and regulations. ¶¶11-20, 29. 

On March 15, 2011, KBI shocked its shareholders by disclosing that it violated 

the U.S. anti-dumping laws by underpaying the customs duties due on products that 

LaJobi had imported into the United States. ¶¶2, 27. The Company acknowledged 

that there were “instances at LaJobi in which incorrect import duties were applied on 

certain wooden furniture imported from vendors in China, resulting in a violation of 

anti-dumping regulations.” Id. Thereafter, on March 31, 2011, KBI further revealed 

that its “payment and other practices with respect to quality control, compliance and 

certain other services in Hong Kong, China, Vietnam and Thailand violated civil laws 

and potentially violated criminal laws in these jurisdictions.” ¶¶3, 27-32. As a result 

of the Company’s admitted failures at LaJobi, KBI recently revealed that an internal 

investigation into the customs compliance practices at KBI’s three non-LaJobi 

subsidiaries was also initiated (the “Customs Review”). See Kid Brands, Inc. 2011 

SEC Form 10-Q, dated August 15, 2011, at 21, 30, attached as Ex. A to the 

Declaration of Travis E. Downs III (“Downs Decl.”) in Support of Plaintiff’s Omnibus 

Opposition to Defendants’ and Nominal Defendant Kid Brands, Inc.’s Motions to 

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Dismiss filed concurrently herewith. The Customs Review “identified instances in 

which [Kids Line, LLC, CoCaLo, Inc. and Sassy, Inc.] filed incorrect entries and 

invoices with U.S. Customs as a result of, in the case of Kids Line, incorrect 

descriptions, classifications and valuations of certain products imported by Kids Line 

and, in the case of CoCaLo, incorrect classifications of certain products imported by 

CoCaLo.” Id. 

Despite defendants’ knowledge as to customs issues plaguing the Company, 

defendants failed to accurately report these issues in their SEC filings. In fact, KBI 

acknowledged that its 2010 annual report filed with the SEC on Form 10-K and first 

through third quarter 2010 Quarterly Reports on SEC Form 10-Q contained false 

statements about KBI’s related-party transactions with the former owners of the 

LaJobi subsidiary. ¶¶11-20, 31, 34-40. Specifically, KBI’s March 31, 2011 SEC 

Form 10-K provided: 

“[T]he Company incorrectly described certain payments as being made 

by LaJobi entirely to L&J Industries . . . in its quarterly reports during 

2010. . . . [W]hile the reported amounts were correct, during such 

periods, all or a portion of such payments were actually made by LaJobi 

to individuals in Hong Kong, China, Vietnam and Thailand providing 

such services, including through an individual based in Hong Kong, 

rather than to L&J Industries. 

¶31. 

The damages KBI has suffered as a result of defendants’ failure to implement 

the necessary internal controls are substantial, and are likely to grow worse. ¶¶29-30, 

33, 41-42. KBI has already incurred millions of dollars in expenses related to its 

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ongoing internal investigations. The Company has also revealed that it anticipates 

incurring aggregate costs of approximately $7 million for customs duties related to its 

LaJobi operations, and an additional $2.4 million relating to customs duties for its 

three non-LaJobi subsidiaries “for the years ended 2006 through 2010 and the six 

months ended June 30, 2011,” and may be assessed a penalty of up to 100% of any 

customs duty owed. ¶¶3, 29, 41-42; Downs Decl., Ex. A (August 15, 2011 10-Q at 

21, 30). KBI is also likely to incur additional expenses resulting from investigations 

by U.S. and/or foreign authorities, damages arising from its potential violations of the 

federal securities laws, other U.S. federal laws, and the local laws of the jurisdictions 

in which KBI operates, and costs associated with a complex and expensive-to-defend 

federal securities class action lawsuit filed against the Company. ¶¶33, 41-42. 

Finally, KBI will suffer the costs of modifying its business practices and 

implementing a comprehensive and global anti-dumping compliant importation 

program as well as any remedial actions resulting from settlements arising from the 

failure to institute controls at the Company. ¶42. 

III. DEFENDANTS’ MOTIONS TO DISMISS SHOULD BE 

DENIED 

A. Plaintiff Adequately Alleges Demand Futility 

1. Standards for Demand Futility 

In deciding a motion to dismiss, “the court is required to accept as true all 

allegations in the complaint, and all reasonable inferences that can be drawn 

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therefrom, and to view them in the light most favorable to the non-moving party.” In 

re Cendant Corp. Derivative Action Litig., 189 F.R.D. 117, 127 (D.N.J. 1999); Cal. 

Pub. Emps.’ Ret. Sys. v. Chubb Corp., 394 F.3d 126, 134 (3d Cir. 2004). Rather than 

dissecting the Complaint into component parts, the Court must review plaintiff’s 

allegations as a whole and examine the totality of the circumstances. Cendant, 189 

F.R.D. at 128-29. 

Federal Rule of Civil Procedure 23.1 requires that a shareholder bringing a 

derivative suit on behalf of a corporation allege that he or she has made a demand on 

the corporation’s board to pursue a corporate claim, or set forth specific factual 

allegations delineating why such demand would be futile. Cendant, 189 F.R.D. at 

127; Rales v. Blasband, 634 A.2d 927, 931-33 (Del. 1993). To assess futility of 

demand, federal courts look to the substantive law of the applicable state of 

incorporation. Kamen v. Kemper Fin. Servs., 500 U.S. 90, 96 (1991).5

 Under New 

Jersey law, a court “must decide ‘whether, under the particularized facts alleged, a 

reasonable doubt is created that: (1) the directors are disinterested and independent 

and (2) the challenged transaction was otherwise the product of a valid exercise of 

business judgment.’” PSE&G, 173 N.J. at 279, 282; accord Aronson v. Lewis, 473 

A.2d 805 (Del. 1984). If either prong is satisfied, demand is excused. Id. 

 

5

 KBI is a New Jersey corporation and therefore New Jersey law governs its 

internal affairs. 

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In cases alleging failure to act, however, demand is excused when the complaint 

raises a reasonable doubt that a majority of the directors are either disinterested or 

independent. Rales, 634 A.2d at 930, 934. Thus, plaintiff need only allege with 

particularity facts that would give a reasonable shareholder reason to doubt that a 

majority of KBI’s Board members, at the time this lawsuit was initiated, could 

consider a demand disinterestedly. Grimes v. Donald, 673 A.2d 1207, 1217 n.17 

(Del. 1996) (reasonable doubt “is akin to the concept that the stockholder has a 

‘reasonable belief’ that the board lacks independence”). This standard is particularly 

appropriate in derivative suits because plaintiffs typically have not had the benefit of 

discovery. Rales, 634 A.2d at 934. 

Here, plaintiff has raised a reasonable doubt regarding the disinterestedness of 

the KBI Board members by demonstrating that they are subject to a “substantial 

likelihood of liability” for breaching their duty of loyalty to KBI. Ryan, 918 A.2d at 

355 (explaining that directors “have a disabling interest for pre-suit demand purposes 

when ‘the potential for liability is not a mere threat but instead may rise to a 

substantial likelihood’”); SFBC, 495 F. Supp. 2d at 486-87. Indeed, as KBI’s 

fiduciaries, KBI Board members were each required to “act in good faith to ensure” 

that KBI complied with all of its legal obligations. N.J.S.A §14A:6-14 (directors of a 

New Jersey corporation are required to “discharge their duties in good faith”); see also 

In re Massey Energy Co., No. 5430-VCS, 2011 WL 2176479, at *21 (Del. Ch. 

May 31, 2011) (fiduciaries “must act in good faith to ensure that the corporation tries 

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to comply with its legal duties”); Pfeiffer v. Toll, 989 A.2d 683, 693 (Del. Ch. 2010) 

(“directors have the statutory power and responsibility to direct and oversee the 

business and affairs of the corporation”) (emphasis in original).6

 “Where directors fail 

to act in the face of a known duty to act, thereby demonstrating a conscious disregard 

for their responsibilities, they breach their duty of loyalty by failing to discharge that 

fiduciary obligation in good faith.” AmSouth, 911 A.2d at 370. In other words, 

where, as here, the plaintiff pleads: (1) that defendants had a known duty to institute 

controls to ensure that KBI met its payment obligations under U.S. Customs rules and 

regulations, and KBI’s obligations under the local foreign laws in the jurisdictions 

where it operates; and (2) in the face of that duty they “utterly failed” to institute such 

controls, the complaint states an actionable AmSouth breach of loyalty claim. Id. 

Because the Complaint alleges sufficient facts supporting a substantial likelihood of 

defendants’ liability and the allegations are far from conclusory, demand on the KBI 

Board is rendered futile. 

 

6

 See also Green Party v. Hartz Mt. Indus., 164 N.J. 127, 147 (2000) (explaining 

that the business judgment rule protects business decisions when “made in good faith 

based on reasonable business knowledge”); Metro Commc’n Corp. BVI v. Advanced 

Mobilecomm Techs. Inc., 854 A.2d 121, 131 (Del. Ch. 2004) (explaining that “a 

fiduciary may not choose to manage an entity in an illegal fashion, even if the 

fiduciary believes that the illegal activity will result in profits for the entity”); Kahn ex 

rel. DeKalb Genetics Corp. v. Roberts, 679 A.2d 460, 465 (Del. 1996) (“The business 

judgment rule normally protects all lawful actions of a board of directors, provided 

they were taken in good faith . . . .”). 

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In the end, when all the facts alleged in the Complaint are viewed collectively 

as they must be on a motion to dismiss, a plausible inference can be drawn that no 

U.S. Customs or local foreign law compliant controls were in place at KBI under 

defendants’ watch. Cendant, 189 F.R.D. at 127; see also Matrixx Initiatives, Inc. v. 

Siracusano, __ U.S. __, 131 S. Ct. 1309, 1324 (2011) (in deciding a motion to dismiss 

under a particularity pleading standard, the court must “review ‘all the allegations 

holistically’”). As the United States Supreme Court held in Matrixx, “to survive a 

motion to dismiss, [plaintiff] need only allege ‘enough facts to state a claim to relief 

that is plausible on its face,’” which is what plaintiff has done here. 131 S. Ct. at 1332 

n.12. Defendants’ belabored claims that the Complaint lacks particularity does not 

change this conclusion because KBI admitted to “violation[s] of anti-dumping 

regulations” and admittedly “violated civil laws and potentially violated criminal laws 

in [foreign] jurisdictions.” ¶¶27, 32. Thus, even if the Court could consider this 

argument at the pleading stage, the facts alleged here are at least, if not more, 

compelling than “‘any opposing inference one could draw from the facts alleged.’” 

Matrixx, 131 S. Ct. at 1324. Here, taking the allegations in the Complaint as true, as 

well as the reasonable inferences drawn from those facts, demand on KBI’s Board 

would be futile. 

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In sum, the Complaint contains detailed facts which, if proven at trial, 

demonstrate that defendants each face a substantial likelihood of liability for 

breaching their fiduciary duties. ¶¶11-20.7

 Under these circumstances, there was not 

a majority of the KBI Board members who could take disinterested action on behalf of 

KBI at the time this action was commenced.8

 Rather, plaintiff has alleged that at least 

four, and most likely all, the members of the KBI Board were disabled from 

exercising disinterested business judgment in responding to a demand to bring this 

action against themselves. See, e.g., Lewis v. Curtis, 671 F.2d 779, 784 (3d. Cir. 

 

7

 Defendants wrongly argue that plaintiff engages in impermissible “group” 

pleading. KBI Motion at 17; Ind. Defs’ Motion at 1, 3. The Complaint’s allegations 

are against all defendants, as KBI’s directors and top officers, for each failing to 

comply with anti-dumping regulations. Plaintiff is not required to add pages upon 

pages to the Complaint to essentially repeat the same allegations that are applicable to 

all defendants, describing how they each failed to institute internal controls and acted 

with the same conscious disregard for their fiduciary duties. Ryan, 918 A.2d at 354-

55 (finding demand futile against compensation committee upon considering 

allegations applicable to the committee members as a group); In re Veeco Instruments, 

Inc. Sec. Litig., 434 F. Supp. 2d 267, 275-78 (S.D.N.Y. 2006) (finding demand futile 

against audit committee upon considering allegations applicable to the committee 

members as a collective body). Furthermore, when allegations may apply differently 

to certain defendants, plaintiff identifies the affected defendants. See, e.g., ¶48. 

8

 At the time this action was commenced, the KBI Board consisted of the 

following defendants: Bruce G. Crain, Raphael Benaroya, Mario Ciampi, Frederick J. 

Horowitz, Hugh R. Rovit, Salvatore M. Salibello and Michael Zimmerman. Thus, 

plaintiff must demonstrate that a majority of the KBI Board, or at least four out of the 

seven directors, are unable to disinterestedly consider a pre-suit demand. See Beam v. 

Stewart, 845 A.2d 1040, 1046 n.8 (Del. 2004) (dismissing demand where “three 

directors of a six person board are not independent”). 

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1982) (excusing demand where “a majority of the directors have participated in the 

underlying wrongdoing”); In re Midlantic Corp. S’holder Litig., 758 F. Supp. 226, 

238 (D.N.J. 1990) (excusing demand where directors made false statements in 

violation of the law). As a result, and as further demonstrated below, demand must be 

excused as futile. 

2. The Complaint States a Claim for Breach of Loyalty 

Under AmSouth

This case arises out of defendants’ failure to act in the face of known legal 

obligations to act under anti-dumping statutes, which ultimately has caused, and will 

cause, KBI to suffer millions of dollars in damages. By mischaracterizing plaintiff’s 

claims in an attempt to convince the Court that the claims are based on an alleged 

negligent failure to monitor or oversee others (referred to as Caremark claims), 

defendants miss the boat. See In re Caremark Int’l, 698 A.2d 959 (Del. Ch. 1996). 

The Complaint alleges that each defendants’ own personal acts, i.e., failing to 

implement internal controls to ensure that KBI met its payment obligations, breached 

the duty of loyalty they each owed to the Company and thus they each face a 

substantial likelihood of liability. ¶¶11-20; see AmSouth, 911 A.2d at 370-71. 

Plaintiffs’ claims are based on AmSouth which confirmed directors who “utterly 

fail[]” to “act in the face of a known duty to act,” “breach their duty of loyalty by 

failing to discharge that fiduciary obligation in good faith.” Id. at 370. Under 

AmSouth, plaintiff need only plead that: (1) defendants had a known legal duty to 

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implement internal controls to ensure KBI met its payment obligations under U.S. 

Customs rules and local foreign laws, and (2) in the face of that duty, defendants 

“utterly failed” to put the necessary controls in place. Id. (“Where directors fail to act 

in the face of a known duty to act, thereby demonstrating a conscious disregard for 

their responsibilities, they breach their duty of loyalty by failing to discharge that 

fiduciary obligation in good faith.”). This is exactly what plaintiff has pled. See, e.g., 

¶¶50-53. 

Ultimately, defendants rely heavily on a number of cases involving passive 

failures to monitor that are not applicable to defendants’ own failure to act as alleged 

here. See, e.g., King v. Baldino, 648 F. Supp. 2d 609, 626 (D. Del. 2009), aff’d, 409 

Fed. Appx. 535 (3d Cir. 2010) (dismissed for failure to make demand where “plaintiff 

fail[ed] to plead particularized facts demonstrating that the Board was aware of the 

action of the alleged ‘principal wrongdoers’ and consciously failed to act in light of 

that knowledge”); Guttman v. Jen-Hsun Huang, 823 A.2d 492, 505 (Del. Ch. 2003) 

(alleging defendants “failed to oversee the process by which NVIDIA prepared its 

financial statements”); Desimone v. Barrows, 924 A.2d 908, 939 (Del. Ch. 2007) 

(allegations that internal controls were deficient and directors “‘fail[ed] to adequately 

monitor’” operations). Unlike here, none of these cases involve: (1) defendants’ 

failure to discharge their own fiduciary obligations to act in the face of a known duty 

to act under applicable anti-dumping laws (as opposed to failing to monitor the 

activities of others); (2) KBI’s admissions that that it violated “anti-dumping 

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regulations” and “civil laws and potentially [] criminal laws” in foreign local 

jurisdictions; or (3) allegations of a complete absence of legally mandated controls to 

ensure KBI met is payment obligations. See, e.g., ¶¶27, 32. 

As discussed below, because the Complaint provides particularized facts which 

support defendants’ substantial likelihood of liability and demand futility under the 

AmSouth pleading standards, defendants’ motions should be denied. 

a. Defendants Had a Known Duty to Implement 

Internal Controls to Ensure KBI Met Its 

Payment Obligations Under U.S. Customs 

Rules and Local Foreign Laws 

Defendants do not – and cannot – contest that as fiduciaries of KBI they were 

required to operate the Company in a lawful manner, including following the 

mandates of the anti-dumping statutes to detect the underpayment of custom’s duties. 

¶26; N.J.S.A. §14A:6-14 (directors are required to “discharge their duties in good 

faith”); see also BVI, 854 A.2d at 131(explaining that “a fiduciary may not choose to 

manage an entity in an illegal fashion, even if the fiduciary believes that the illegal 

activity will result in profits for the entity”). Further, as KBI’s directors and top 

officers, defendants are presumed to understand their obligations and ensure the 

corporation’s lawful operation. Francis v. United Jersey Bank, 87 N.J. 15, 20 (1981) 

(“As a general rule, a director should acquire at least a rudimentary understanding of 

the business of the corporation.”); Aronson, 473 A.2d at 812 (directors are presumed 

to “act[] on an informed basis, in good faith and in the honest belief that the action 

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taken was in the best interests of the company”); In re Tyson Foods, Inc. Consol. 

S’holder Litig., No. 1106-CC, 2007 Del. Ch. LEXIS 120, at *10-*11 (Del. Ch. Aug. 

15, 2007) (“Loyalty. Good faith. Independence. Candor. These are words pregnant 

with obligation. The Supreme Court did not adorn them with half-hearted adjectives. 

Directors should not take a seat at the board table prepared to offer only conditional 

loyalty, tolerable good faith, reasonable disinterest or formalistic candor.”). 

As a publically traded company with a business model that heavily relies on the 

importation of foreign goods, it was readily apparent that the nearly 100-year-old antidumping provisions applied to KBI and its subsidiaries. Francis, 87 N.J. at 20 (“[A] 

director should become familiar with the fundamentals of the business in which the 

corporation is engaged.”). Indeed, KBI’s Board consisted of experienced international 

business professionals. ¶¶11, 14-20.9

 As defendants admit, each of the six “outside” 

 

9

 For example, defendant Crain previously served in various executive capacities 

for Blyth, Inc., a NYSE-listed multi-channel designer and marketer of home décor and 

gift products; defendant Benaroya serves or served on the board of directors of 

Biltmore Capital, United Retail Group, Inc., and Redcats USA; defendant Ciampi has 

held various executive positions with The Children’s Place and additionally serves as 

a director for Bluefly, Inc. and Delia’s, Inc.; defendant Horowitz serves or served as 

Chairman and CEO of A.P. Deauville and is also a managing partner in American 

Brand Holdings, LLC, which is the owner of the “Hang Ten” brands; defendant Rovit 

serves or served as an executive and/or director of Sure Fit Inc., Best Manufacturing, 

Inc., Royce Hosiery Mills, Inc., Atkins Nutritionals, Inc. and Spectrum Brands 

Holdings, Inc.; defendant Salibello is the managing partner of Salibello & Broder 

LLP, a certified public accounting firm, and sits on the board of directors of three 

closed-end mutual funds; and defendant Zimmerman serves or served as an executive 

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directors “has impressive credentials independent of the Company,” and thus would 

be expected to know about commonplace international regulations. See KBI Motion 

at 8. Furthermore, KBI imports primarily from countries presenting significant antidumping risk factors such as China, Hong Kong, Vietnam and Thailand. ¶¶1, 10, 24. 

Finally, the Company used third-party agents for quality control and other services at 

its overseas operations, another factor that necessitated a strong level of controls to 

ensure proper import duties were paid as required by anti-dumping regulations. ¶¶27, 

31. 

Considering these allegations in totality, it was obvious that internal controls to 

ensure that KBI met its payment obligations under U.S. Customs rules and local 

foreign laws were required at KBI. 

b. Defendants Failed to Implement Internal 

Controls at KBI 

In March 2011, KBI finally revealed that its business and staffing practices in 

Asia were insufficient. ¶¶27-32. For example, the Company’s March 31, 2011 Form 

10-K stated: 

Our LaJobi subsidiary has been selected by U.S. Customs for a 

“Focused Assessment” of its import practices and procedures, which 

“Focused Assessment” commenced January 19, 2011. In preparing for 

the Focused Assessment, which is ongoing, we found certain potential 

 

and/or director of Prentice, Delia’s, Inc. and The Wetseal, Inc. See Downs Decl., Ex. 

B (KBI Definitive Proxy Statement on SEC Form 14a at 9-12). 

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issues with respect to LaJobi’s import practices. As a result, our Board 

of Directors initiated an investigation . . . . 

¶27. As a result of their investigation, defendants revealed that KBI violated “antidumping regulations” as well as local foreign “civil laws and potentially violated 

criminal laws in [foreign] jurisdictions.” ¶¶27, 32. This damaging admission supports 

a plausible inference, if not demonstrates, that KBI lacked the necessary internal 

controls required to ensure that its LaJobi subsidiary met its payment obligations, the 

same internal controls that defendants’ fiduciary duties obligated them to implement. 

See AmSouth, 911 A.2d at 369 (“‘A failure to act in good faith may be 

shown . . . where the fiduciary intentionally fails to act in the face of a known duty to 

act, demonstrating a conscious disregard for his duties.’”); see also Matrixx, 131 S. Ct. 

at 1322 n.12 (“[plaintiff] need only allege ‘enough facts to state a claim to relief this is 

plausible on its face’”). 

Tellingly, upon discovering its LaJobi violations, the Company terminated the 

employment of LaJobi’s President, Lawrence Bivona, and LaJobi’s Managing 

Director of Operations, who KBI claims were responsible for making improper 

payments to individuals in Hong Kong, China, Vietnam and Thailand, and failing to 

pay customs duties. ¶¶27-32. KBI also “discontinued the practices that resulted in the 

charge for anticipated anti-dumping duty.” Downs Decl., Ex. A (KBI SEC Form 

10-Q, dated August 15, 2011 at 16, 20). Furthermore, the Company initiated an 

additional investigation into customs compliance practices at KBI’s non-LaJobi 

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subsidiaries. Id. at 21, 30. Although ongoing, this investigation “has identified 

instances in which these subsidiaries filed incorrect entries and invoices with U.S. 

Customs as a result of, in the case of Kids Line, incorrect descriptions, classifications 

and valuations of certain products imported by Kids Line and, in the case of CoCaLo, 

incorrect classifications of certain products imported by CoCaLo,” providing further 

evidence as to the controls issues permeating the Company. Id. 

These allegations support a strong inference that KBI failed to implement 

controls to detect and deter U.S. Customs violations. They also highlight the 

fundamental disconnect between defendants’ claims that controls existed and the 

reality behind their admissions that they violated the anti-dumping provisions of 

federal law. In fact, the violations at issue were repeated and massive, regular 

occurrences that even a rudimentary system of internal controls would have detected 

and/or prevented. See ¶29; see also Downs Decl., Ex. C (KBI SEC Form 10-Q filed 

May 10, 2011 at 19) (“the Company has recorded charges: (i) of approximately 

$382,000 (which includes approximately $55,000 of interest) for the quarter ended 

March 31, 2011; and (ii) of approximately $6,860,000 (which includes approximately 

$340,000 of interest) for the fourth quarter and year ended December 31, 2010”); 

Downs Decl., Ex. A (KBI SEC Form 10-Q, filed August 15, 2011 at 21, 30) (“the 

Company currently estimates that it will incur aggregate costs of approximately $2.4 

million (pretax) relating to customs duty for the years ended 2006 through 2010 and 

the six months ended June 30, 2011”). The complete lack of such a controls system 

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resulted in KBI’s failure to pay approximately $10 million in customs duties to U.S. 

Customs over a period of at least five years. ¶29. 

Ultimately, the most plausible inference that can be drawn is that KBI failed to 

implement controls at its overseas operations to ensure that KBI met its payment 

obligations under U.S. Customs rules and local foreign laws. Otherwise, KBI would 

not have been forced to admit to violating anti-dumping provisions and foreign laws 

to the tune of nearly $10 million in customs duties, possible penalties of another $10 

million, and other damages. ¶29. Taken as true, these particularized allegations 

satisfy the second requirement for pleading an AmSouth claim that defendants 

breached their duty of loyalty. 

3. Demand Is Futile Because Each KBI Board Member 

Faces a Substantial Likelihood of Liability Resulting 

from Their Breach of Loyalty 

Demand on the KBI Board would be a useless and futile act because each KBI 

Board member faces a “substantial likelihood” of liability for breaching his fiduciary 

duty of loyalty.10 SFBC, 495 F. Supp. 2d at 487; Rales, 634 A.2d at 936; ¶¶11-20. 

 

10 Demand is further excused as to defendant Crain since he cannot claim 

disinterest due to his primary employment as President and Chief Executive Officer of 

KBI. ¶11; see, e.g., Rales, 634 A.2d at 937 (considering the substantial financial stake 

President and CEO had in maintaining his current offices, the Board had considerable 

influence over him sufficient to create reasonable doubt that he could be expected to 

act independently); In re Cooper Cos. S’holders Derivative Litig., No. 12584, 2000 

Del. Ch. LEXIS 158, at *17-*21 (Del. Ch. Oct. 31, 2000) (directors who also served 

as CFO/Treasurer and Vic President/General Counsel could not respond impartially to 

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Here, the entire KBI Board is liable for a breach of loyalty for failing to implement 

and maintain the internal controls needed to ensure that KBI met its payment 

obligations under U.S. Customs rules and local foreign law. ¶¶11-20. As a result of 

their fiduciary breaches, the entire KBI Board faces a substantial likelihood of 

personable liability, thereby excusing a pre-suit demand by plaintiff. 

The Complaint provides “facts specific to each director” sufficient to 

demonstrate that “at least half of them could not have exercised disinterested business 

judgment in responding to a demand.” Desimone, 924 A.2d at 943 (emphasis in 

original). Each of the KBI Board members served on KBI’s Board when the antidumping violations occurred with no internal controls in place, and except for 

defendant Schaefer, each remained on the Board when this case was filed.11 ¶¶11-20. 

In addition, during their tenure on the KBI Board, each KBI Board member failed to 

 

a demand); Mizel v. Connelly, No. 16638, 1999 Del. Ch. LEXIS 157, at *9 (Del. Ch. 

Aug. 2, 1999). 

11 Specifically, defendant Crain joined the Board in 2007 (¶11); defendant 

Benoroya joined the Board in 1993 (¶14); defendant Ciampi joined the Board in 

2007(¶15); defendant Horowitz joined the Board in 2006 (¶16); defendant Rovit 

joined the Board in 2010 (¶17); defendant Salibello joined the Board in 2006 (¶18); 

defendant Zimmerman joined the Board in 2006 (¶20); and defendant Schaefer served 

on the Board from 2008 through July 2010 (¶19). Thus, plaintiff must show that at 

least four of the seven directors (not including Schaefer) could not impartially 

consider a demand. 

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act to adopt the necessary internal controls required to ensure compliance with U.S. 

Customs rules and local foreign laws. Id. 

When faced with a known duty to act, directors may be held liable for damages 

arising from their failure to act. AmSouth, 911 A.2d at 370. Defendants do not – and 

cannot – contest that they were aware of the anti-dumping provisions and related U.S. 

Customs and foreign local laws or understood their applicability to KBI’s importation 

activities. ¶¶11-20, 25-26. Nor can they reasonably contest that KBI lacked internal 

controls when it admittedly violated the anti-dumping provisions and foreign local 

laws. ¶¶27, 32. Under these circumstances, the KBI Board members each face a 

substantial likelihood of liability resulting from their breaches of the fiduciary duty of 

loyalty. Defendants’ motions to dismiss therefore cannot be sustained.12 See Pfeiffer, 

 

12 Defendants reliance on Kanter v. Barella, 489 F.3d 170 (3rd Cir. 2007) is 

misplaced. KBI Motion at 17-18. In Kanter, despite the plaintiff’s “assertions of 

misfeasance or non-feasance, the only board actions cited in [plaintiff’s] complaint 

[were] those detailing the board of directors’ response when it was informed of the 

allegedly improper billing scheme.” 489 F.3d at 179. The Kanter plaintiff also failed 

to assert that the directors had “knowledge of alleged wrongdoings.” Id. at 180-81. 

Kanter is distinctly different than here, where plaintiff has alleged that the directors 

knew that KBI was required to comply with customs regulations but failed to cause 

the Company to implement and maintain the required controls to ensure KBI complied 

with these regulations. As a result, the directors here face a substantial likelihood of 

liability for failing to discharge their fiduciary obligations to the corporation under the 

theory set forth in AmSouth, and demand is therefore futile. Similarly, defendants 

reliance on Perkins ex rel. Bradley Pharms. Inc. v. Daniel, No. 06CV01518 (PGS), 

2007 WL 4322596 (D.N.J. Dec. 6, 2007), fares no better as the plaintiff in Perkins

again failed to allege a known duty to act and an associated failure to act in the face of 

the known duty. 

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989 A.2d at 690 (excusing demand where the board of directors faces prima facie 

liability for violating the securities laws). 

4. Demand Is Further Excused Because the Entire KBI 

Board Breached Its Fiduciary Duty of Loyalty by 

Making False Statements to Shareholders 

Directors also breach their fiduciary duty of loyalty when they disseminate 

information to shareholders through public statements that they know are false or 

incomplete. See Daloisio v. Peninsula Land Co., 43 N.J. Super. 79, 88 (App. Div. 

1956) (“New Jersey law has characterized the directors of a corporation as fiduciaries 

and has demanded of them the utmost fidelity in their dealings with the corporation 

and its stockholders.”); In re infoUSA, Inc. S’holders Litig., 953 A.2d 963, 990 (Del. 

Ch. 2007)) (“even in the absence of a request for shareholder action, shareholders are 

entitled to honest communication from directors, given with complete candor and in 

good faith”); Malone v. Brincat, 722 A.2d 5, 9 (Del. 1998) (holding that “directors 

who knowingly disseminate false information that results in corporate injury or 

damage” violate their fiduciary duties); In re Netsmart Techs., Inc. S’holders Litig., 

924 A.2d 171, 203 (Del. Ch. 2007) (“Once a board broaches a topic in its disclosures, 

a duty attaches to provide information that is ‘materially complete and unbiased by the 

omission of material facts.’”) (citing In re Pure Res., Inc., S’holders Litig., 808 A.2d 

421, 448 (Del. Ch. 2002)). Here, plaintiff has alleged particularized facts establishing 

that defendants Crain, Paglinco, Benaroya, Ciampi, Horowitz, Rovit, Salibello, 

Schaefer and Zimmerman each issued, reviewed and approved false and misleading 

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statements found in KBI’s SEC filings which concealed from the public the true 

nature of LaJobi’s business practices. See ¶¶11-20, 31, 34-40. Specifically, the 

Complaint alleges, and defendants admit (see ¶¶31-32), that KBI’s Annual Report on 

SEC Form 10-K and the first, second and third quarter 2010 Quarterly Reports on 

SEC Form 10-Q, contained incorrect information related to certain related-party 

transactions involving KBI and L&J Industries and failed to disclose the adverse, 

material non-public facts that they were not in compliance with the Anti-Dumping 

Act. ¶¶11-20, 31, 34-40. 

More troubling, even after defendants claimed to have discovered that it was 

likely that LaJobi was engaging in illegal conduct, they still failed to disclose the 

extent of the problem. According to KBI’s public filings, the Company discovered 

issues related to its import practices while preparing for the U.S. Customs’ focused 

assessment which began January 19, 2011. ¶27. KBI, however, did not disclose this 

information until March 15, 2011 when it filed an SEC Form 8-K, and did not provide 

detail into the events until the Company filed its March 31, 2011 SEC Form 10-K. 

¶¶27-32. 

Such behavior is an egregious breach of defendants’ fiduciary duties. ¶¶23, 54-

57. Daloisio, 43 N.J. Super. at 88; see also Malone, 722 A.2d at 10 (“It follows a 

fortiori that when directors communicate publicly or directly with shareholders about 

corporate matters, the sine qua non of directors’ fiduciary duty to shareholders is 

honesty.”); Emerald Partners v. Berlin, 726 A.2d 1215, 1223 (Del. 1999) (directors 

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are obligated “‘to provide a balanced, truthful account of all matters disclosed 

in . . . communications with shareholders’”). It also raises a reasonable doubt that a 

majority of the KBI Board would (and could) independently and objectively consider 

any pre-suit demand to prosecute these claims. Demand on the KBI Board is, 

therefore, excused. 

B. Plaintiff’s Claims for Relief Are Adequately Pled 

Defendants additionally complain that the Complaint fails to state a claim and 

should be dismissed pursuant to Fed. R. Civ. P. 12(b)(6). Defendants, however, are 

incorrect as a matter of law and fact. Plaintiff has pled viable and detailed claims 

concerning the defendants’ misconduct and improper activity which has caused 

significant and longstanding damage to KBI and its shareholders. 

1. Pleading Standard Applicable to Plaintiffs’ Claims 

for Relief

Defendants’ attempt to dismiss the Complaint for failure to state a claim under 

Rule 12(b)(6) also fails. Unlike the particularity requirement for demand futility, 

notice pleading is all that is required on a motion to dismiss for failure to state a claim. 

Solomon v. Pathe Commc’ns Corp., 672 A.2d 35, 39 (Del. 1996).13 The standard for 

 

13 It is well settled that when evaluating a motion to dismiss under Rule 12(b)(6), 

the Court must “‘accept as true all [factual] allegations in the complaint and all 

reasonable inferences that can be drawn therefrom, and view them in the light most 

favorable to the plaintiff.’” Kanter, 489 F.3d at 177 (quoting Evancho v. Fisher, 423 

F.3d 347, 350 (3d Cir. 2005)). Under Fed. R. Civ. P. 8(a)(2), a complaint must 

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failure to state a claim is “notably lower than is true in the context of motions to 

dismiss for failure to make a presuit demand.” Telxon Corp. v. Bogomolny, 792 A.2d 

964, 974 (Del. 2001). 

Where, as here, a plaintiff has satisfied the demand futility requirement, an 

attack on the factual sufficiency of the underlying allegations is generally disregarded. 

See In re Walt Disney Co. Derivative Litig., 825 A.2d 275, 285 (Del. Ch. 2003) 

(“Since the standard under Rule 12(b)(6) is less stringent than the standard under Rule 

23.1, a complaint that survives a Rule 23.1 motion to dismiss generally will also 

survive a Rule 12(b)(6) motion to dismiss, assuming that it otherwise contains 

sufficient facts to state a cognizable claim.”). Federal courts are in accord. See, e.g., 

Landy v. D’Alessandro, 316 F. Supp. 2d 49, 72, 75-76 (D. Mass. 2004) (after finding 

plaintiff adequately pled demand futility, discussing the much more lenient notice 

pleading standards under Federal Rules 12 and 8 applicable to plaintiff’s claims and 

stating, “I will not dismiss under Rule 12(b)(6) the claims that survived Rule 23.1”); 

In re FirstEnergy S’holder Derivative Litig., 320 F. Supp. 2d 621, 627 (N.D. Ohio 

 

include only “a short and plain statement of the claim showing that the pleader is 

entitled to relief.” Federal notice and pleading rules require a complaint provide “‘the 

defendant fair notice of what the . . . claim is and the grounds upon which it rests.’” 

Phillips v. County of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008) (quoting Bell Atl. 

Corp. v. Twombly, 550 U.S. 544, 555 (2007)). Thus, courts should not dismiss a 

complaint for failure to state a claim if it contains “‘enough factual matter (taken as 

true) to suggest’ the required element.” Phillips, 515 F.3d at 234 (quoting Twombly, 

550 U.S. at 556). 

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2004) (sustaining cause of action on motion to dismiss for failure to state a claim after 

finding plaintiffs had adequately alleged demand futility). 

The Third Circuit’s decision in Tower Air is particularly instructive here. In 

Tower Air, the Third Circuit was called upon to determine the relevant federal 

pleading standards for breach of fiduciary duty claims against the officers and 

directors of a Delaware corporation. In re Tower Air, Inc., 416 F.3d 229, 232 (3d Cir. 

2005). The district court dismissed plaintiff’s claims based on defendants’ argument 

that a “heightened factual pleading standard” applied to plaintiff’s state law claims. 

Id. at 235. On appeal, the Third Circuit flatly rejected this argument and reversed the 

district court, holding that “a plaintiff will not be thrown out of court on a Rule 

12(b)(6) motion for lack of detailed facts. . . . To hold otherwise would be effectively 

to transform Rule 12(b)(6) motions into multi-purpose summary judgment vehicles. 

That we will not do.” Id. at 237-39. 

Accordingly, to survive a 12(b)(6) motion for failing to adequately allege their 

claims, plaintiffs need only satisfy Rule 8. Id. at 238. Thus, under the applicable 

pleading standards, plaintiff’s claims for breach of fiduciary duty (see §III.A.2.-4, 

supra), gross mismanagement, abuse of control, corporate waste and unjust 

enrichment are adequately alleged and must be sustained. 

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2. The Complaint Alleges Claims for Gross 

Mismanagement and Abuse of Control 

Plaintiff has properly asserted causes of action for gross mismanagement and 

abuse of control against defendants related to their breaches of fiduciary duty. ¶¶22, 

58-63. It is well settled that separate causes of action lie for gross mismanagement 

and abuse of control. See, e.g., Bodell v. Gen. Gas. & Electric Corp., 140 A. 264, 267 

(Del. 1927); Cincinnati Bell Cellular Sys. Co. v. Ameritech Mobile Phone Serv., No. 

13389, 1996 Del. Ch. LEXIS 116, at *42-*43 (Del. Ch. Sept. 3, 1996), aff’d, 1997 

Del. LEXIS 58 (Del. Feb. 11, 1997); Havens v. Attar, No. 15134, 1997 Del. Ch. 

LEXIS 12, at *33 (Del. Ch. Jan. 30, 1997); Hendry v. Hendry, No. CIV. A. 12236, 

2006 WL 1565254, at *10 (Del. Ch. May 26, 2006). Accordingly, by establishing 

breach of fiduciary duty, these claims are also plead. 

Under relevant authority, gross mismanagement means “‘reckless indifference 

to or a deliberate disregard of the stockholders.’” Rabkin v. Philip A. Hunt Chem. 

Corp., 547 A.2d 963, 970 (Del. Ch. 1986); see also Cincinnati Bell, 1996 Del. Ch. 

LEXIS 116, at *42 (equating “gross mismanagement” with “gross negligence”). 

Here, plaintiff has alleged facts showing that defendants caused KBI to operate 

without the internal control systems necessary for compliance with U.S. Customs and 

local foreign laws. See, e.g., ¶¶27-33, 59. Such actions represent gross 

mismanagement of the Company. Plaintiff has, therefore, adequately pleaded this 

cause of action. 

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In addition, as corporate fiduciaries, defendants have control over the affairs of 

KBI. ¶21. Here, plaintiff alleges that defendants abused that control by ignoring the 

Company’s obligations under U.S. Customs laws and local foreign laws applicable to 

KBI’s business. See, e.g., ¶¶27-33, 62. Therefore, plaintiff has sufficiently pleaded 

that defendants’ conduct represents an abuse of their ability to control and influence 

KBI. 

Defendants’ motions to dismiss plaintiff’s gross mismanagement and abuse of 

control claims should therefore be denied. 

3. The Complaint Alleges a Claim for Waste 

Plaintiff has also properly asserted a cause of action for corporate waste against 

defendants for causing millions of dollars worth of damages to KBI by underpaying 

customs duties and failing to cause KBI to implement internal controls for compliance 

with the laws applicable to its business. See, e.g., ¶¶22, 27-33, 64-66. To state a 

claim for corporate waste, the plaintiff must allege “an exchange of corporate assets 

for consideration so disproportionately small as to lie beyond the range at which any 

reasonable person might be willing to trade.” Lewis v. Vogelstein, 699 A.2d 327, 336 

(Del. Ch. 1997). “Most often the claim is associated with a transfer of corporate 

assets that serves no corporate purpose; or for which no consideration at all is 

received. Such a transfer is in effect a gift.” Id. 

Accordingly, because plaintiff has alleged that KBI received insufficient 

temporary consideration for harm done to the Company based on defendants’ actions, 

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they have alleged a prima facie waste claim. Consequently, defendants’ motion to 

dismiss plaintiff’s corporate waste claim fails and must be denied.

4. The Complaint Alleges a Claim for Unjust 

Enrichment 

Plaintiff additionally adequately sets forth a claim for unjust enrichment against 

each defendant. ¶¶67-68. Here, as demonstrated supra, the KBI Board breached its 

fiduciary duty, see §III.A.2.-4, a fact that is alone sufficient at this stage to support a 

claim for unjust enrichment. See Jackson Nat’l Life Ins. Co. v. Kennedy, 741 A.2d 

377, 394 (Del. Ch. 1999) (stating that once the facts alleged were sufficient to allege a 

breach of fiduciary duty, “it [was] axiomatic” that plaintiffs had also sufficiently 

pleaded a claim for unjust enrichment); Weiss v. Swanson, 948 A.2d 433, 443-44 (Del. 

Ch. 2008) (finding specific facts as to the alleged timing of option grants given to 

defendants unnecessary at the motion to dismiss stage). While in breach of their 

fiduciary duties, each defendant received salaries, incentive compensation and/or 

other benefits. These benefits, however, were unwarranted in light of the fact that had 

defendants disclosed their failure to implement internal controls at KBI’s subsidiaries, 

they most likely would not have retained their positions and continued to receive those 

benefits. In re MRV Commc’ns, Inc. Deriv. Litig., No. CV 08-03800 GAF RCX, 2010 

WL 5313442, at *11 (C.D. Cal. Dec. 27, 2010) (for §14(a) claim, finding false proxy 

statements permitted directors to retain their directorships and “perpetuate the[ir] 

scheme”). As a result, “‘“the fundamental principles of justice[,] or equity and good 

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conscience’’’” compel restitution, Schock v. Nash, 732 A.2d 217, 232 (Del. 1999), 

because defendants “benefit[ed] at the expense of the [Company] when [defendants’] 

efforts were insufficient.” In re HealthSouth Corp. S’holders Litig., 845 A.2d 1096, 

1105-06 (Del. Ch. 2003). 

C. The Company’s Certificate of Incorporation Cannot 

Exculpate Defendants from Liability 

KBI’s exculpation clause and applicable New Jersey law pose no barrier to 

liability because plaintiff has pled a breach of the duty of loyalty, which defendants 

correctly admit is an un-exculpable claim. KBI Motion at 24-26; Ind. Defs’ Motion at 

9-10; KBI Ex. D; N.J.S.A. §14A:2-7(3) (2011). Here, defendants’ conscious refusal 

to implement an internal controls system for compliance with U.S. Customs rules and 

regulations constitutes an “intentional dereliction of duty” and “a conscious disregard 

of one’s responsibilities,” each of which is “‘properly treated as a non-exculpable, 

non-indemnifiable violation of the fiduciary duty to act in good faith.’” Ryan v. 

Lyondell Chem. Co., No. 3176-VCN, 2008 Del. Ch. LEXIS 125, at *16, *23 (Del. Ch. 

Aug. 29, 2008); see also N.J.S.A. §14A:2-7(3) (2011) (directors cannot seek 

protection for “any breach of duty . . . of loyalty to the corporation or its shareholders” 

or “act or omission . . . not in good faith or involving a knowing violation of law”). 

Because defendants’ breach of their duty of loyalty is a non-exculpable claim, they 

face a substantial likelihood of liability for their misconduct and thus demand is futile. 

In re Zoran Corp. Derivative Litig., 511 F. Supp. 2d 986, 1017 (N.D. Cal. 2007) (a 

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breach of the duty of loyalty is an un-exculpable claim); In re Abbott Labs. Deriv. 

S’holders Litig., 325 F.3d 795, 809 (7th Cir. 2003) (“[w]ith respect to demand futility 

based on the directors’ conscious inaction, we find that the plaintiffs have sufficiently 

pleaded allegations, if true, of a breach of the [fiduciary] duty of good faith”). 

Additionally, the exculpatory provision is an affirmative defense and thus 

inappropriate to raise on a motion to dismiss. Emerald Partners v. Berlin, 787 A.2d 

85, 92 n.41 (Del. 2001) (“‘If the plaintiff were to establish by proof at trial a prima 

facie case of a loyalty violation, defendants would then have the burden to establish 

entire fairness.’”); see also Sanders v. Wang, No. 16640, 1999 Del. Ch. LEXIS 203, at 

*35 (Del. Ch. Nov. 8, 1999) (the “use of exculpatory provisions to shield fiduciaries 

from personal liability presents an affirmative defense not amenable to pre-trial 

disposition”). It would be improper to conclude as a matter of law that defendants 

acted in good faith where plaintiff clearly pled acts of bad faith in the Complaint. 

Therefore, this case should not be dismissed on an alleged exculpatory charter 

provision. 

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IV. CONCLUSION 

Accordingly, defendants’ motions to dismiss should be denied. Alternatively, 

plaintiff should be granted leave to amend. 

DATED: September 14, 2011 Respectfully submitted, 

BRICKFIELD & DONAHUE 

PAUL B. BRICKFIELD 

s/ Paul B. Brickfield 

PAUL B. BRICKFIELD 

70 Grand Avenue, Suite 102 

River Edge, NJ 07661 

Telephone: 201/488-7707 

201/488-9559 (fax) 

ROBBINS GELLER RUDMAN 

 & DOWD LLP 

TRAVIS E. DOWNS III 

BENNY C. GOODMAN III 

655 West Broadway, Suite 1900 

San Diego, CA 92101 

Telephone: 619/231-1058 

619/231-7423 (fax) 

VANOVERBEKE MICHAUD & 

 TIMMONY, P.C. 

MICHAEL J. VANOVERBEKE 

THOMAS C. MICHAUD 

79 Alfred Street 

Detroit, MI 48201 

Telephone: 313/578-1200 

313/578-1201 (fax) 

Attorneys for Plaintiff 

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CERTIFICATE OF SERVICE

I hereby certify that on September 14, 2011, I authorized the electronic filing of 

the foregoing with the Clerk of the Court using the CM/ECF system which will send 

notification of such filing to the e-mail addresses denoted on the attached Electronic 

Mail Notice List, and I hereby certify that I caused to be mailed the foregoing 

document or paper via the United States Postal Service to the non-CM/ECF 

participants indicated on the attached Manual Notice List. 

I certify under penalty of perjury under the laws of the United States of America 

that the foregoing is true and correct. Executed on September 14, 2011. 

 s/ Paul B. Brickfield 

 PAUL B. BRICKFIELD 

BRICKFIELD & DONAHUE 

70 Grand Avenue, Suite 102 

River Edge, NJ 07661 

Telephone: 201/488-7707 

201/488-9559 (fax) 

E-mail: pbrickfield@brickdonlaw.com

Case 2:11-cv-02919-JLL -MAH Document 19 Filed 09/14/11 Page 45 of 46 PageID: 274
Mailing Information for a Case 2:11-cv-02919-JLL -MAH 

Electronic Mail Notice List 

The following are those who are currently on the list to receive e-mail notices for this case. 

 PAUL B. BRICKFIELD 

pbrickfield@brickdonlaw.com 

 ROBERT J. DEL TUFO 

rdeltufo@skadden.com,jason.skorupka@skadden.com 

 JAY B. KASNER

jkasner@skadden.com 

 EDWARD T. KOLE 

ekole@wilentz.com,etkole68@aol.com,sleandro@wilentz.com 

 JAMES E. TONREY , JR

jtonrey@wilentz.com 

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therefore require manual noticing). You may wish to use your mouse to select and copy this list into 

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