Opinion ID: 3015384
Heading Depth: 2
Heading Rank: 2

Heading: Application of Federal Pleading Standard

Text: In view of the foregoing, the question for this Court is whether Stanziale’s Amended Complaint sets out a simple and brief statement of claims of irrationality or inattention and gives the directors and officers fair notice of the grounds of those claims. “[U]nless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim[s] which would entitle him to relief,” Conley, 355 U.S. at 45-46, we must reverse the District Court. Count One: Irrationality – Directors Even under notice pleading standards, Stanziale’s claim 13 For simplicity’s sake we have characterized this as a method of overcoming the presumption of the business judgment rule. We acknowledge that “technically speaking, [the rule] has no role where directors have either abdicated their functions, or absent a conscious decision, failed to act.” Aronson, 473 A.2d at 813. Therefore, it is more accurate to say that successfully alleging inattention circumvents the business judgment rule. But see In re The Walt Disney Co., 825 A.2d at 286 (“Plaintiffs may rebut the presumption that the board’s decision is entitled to deference [under the business judgment rule] by raising a reason to doubt whether the board’s action was taken on an informed basis . . . .”). -19- that Tower Air’s directors breached their duty to act in good faith by declining to repair Tower Air’s jet engines and instead replacing them with new engines must fail. We consider that an allegation of a classic exercise of business judgment because a reasonable business person could have reached that decision in good faith. See Gagliardi, 683 A.2d at 1053. Certainly, bad faith is not the only possible explanation for the decision. See Parnes, 722 A.2d at 1246. Moreover, the Amended Complaint states that Nachtomi charted this course “because the initial payment was lower than the money needed for repair of the disabled engines which [Tower Air] already owned.” We earlier stressed that we will not dismiss a complaint for lack of detailed facts. The problem here, though, is not the facts that are not pleaded, but the facts that are. It seems to us that a complaint is self-defeating when it states an ostensibly legitimate business purpose for an allegedly egregious decision. Cf. Grobow, 539 A.2d at 190. Given his concession, it appears to us that Stanziale can prove no set of facts consistent with his claim – that buying and leasing engines rather than repairing them was an egregious decision – that would entitle him to relief. We thus will affirm the District Court on this Count. Count Two: Irrationality/Inattention – Officers In Count Two, Stanziale alleges that Tower Air’s officers did nothing when they were told by the corporate Director of Safety of quality assurance problems with aircraft maintenance and of failures to record maintenance and repair work. Whether the officers’ behavior is construed as an egregious decision or as unconsidered inaction, that allegation is troubling. Under no circumstances should aircraft maintenance problems be ignored. Lives are on the line. Yet, the District Court dismissed Count -20- Two on the ground that Stanziale alleged “no facts that would characterize [the officers’] actions as egregious.” We can imagine few things more egregious. The officers’ alleged passivity in the face of negative maintenance reports seems so far beyond the bounds of reasonable business judgment that its only explanation is bad faith. See Parnes, 722 A.2d at 1246. Accordingly, we will reverse the District Court on this Count.14 Count Three: Inattention – Directors We understand Stanziale here to allege two forms of inattention: first, that the directors employed an irrational decisionmaking process in approving multi-million dollar leases of jet engines; and, second, that the board failed in good faith to install a legal compliance and business performance monitoring system. The District Court appeared to wrestle with the first allegation, but we do not think it presents a close question. We conclude that Stanziale plainly states a claim of inattention on the first ground, and therefore we need not reach the second ground. Stanziale argues on appeal that the directors’ alleged rubber-stamping of major capital expenditures is consistent with bad faith. We agree. In re Caremark instructs that a “good faith effort to be informed and exercise judgment” is the core duty of 14 We are less sure whether the officers’ alleged failure to report maintenance problems to the directors, or their alleged failure to advise the directors concerning the long-term financial ramifications of the failure to maintain the engines, constitutes irrationality or inattention. We need not reach this question, however, as we reverse the District Court on Count Two on other grounds. -21- care inquiry. 698 A.2d at 967. Applying this standard, the Court of Chancery recently held that a plaintiff stated a claim by pleading that directors “consciously and intentionally” disregarded their responsibilities and adopted a “we don’t care about the risks” attitude regarding a material corporate decision – hiring a new president. In re The Walt Disney Co., 825 A.2d at 289. Stanziale alleges that the directors’ inattention when writing multi-million dollar checks was “intentional, willful . . . and malicious.” The grounds of his claim are that board minutes reflect that the aircraft engine outlays were made with no discussion. That is enough to survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). The directors are on notice of the claim, which is cognizable in Delaware, and the grounds upon which it rests. We of course offer no opinion on whether a corporate board signing large checks without comment constitutes a “we don’t care attitude,” for that is not our mandate. It appears to us possible that Stanziale may prove a set of facts consistent with his claim of irrational decisionmaking, and so dismissal was unwarranted. We recognize the apparent tension between allowing Stanziale to go forward with this claim while we hold in Count One that the terms of the decision at issue were not irrational, but that is simply Delaware law as we understand it. In Delaware, the merits of a business decision are considered separately from the process used to reach that decision. In Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (en banc), for example, the Delaware Supreme Court emphasized that “[d]ue care in the decisionmaking context is process due care only.” Id. at 264 (emphasis in original). Substantive review of business decisions, the Court explained, instead is effected when decisions are tested for bad faith or waste. Id.; see also id. at -22- 264 n.66 (“directors’ decisions will be respected by courts unless the directors . . . do not act in good faith, act in a manner that cannot be attributed to a rational business purpose or reach their decision by a grossly negligent process that includes the failure to consider all material facts reasonably available.”) (emphasis added).15 We infer from this language that an unsuccessful attack on an allegedly egregious decision does not preclude an attack on the process used to reach that decision. At all events, we believe it would be premature to order dismissal of Count Three on the basis of a connection that the parties have not briefed and that the Supreme Court of Delaware appears to reject. We thus conclude that our decision on this Count accords with our decision on Count One. We hold that the District Court erred in ruling that Stanziale did not allege facts in Count Three showing conscious disregard “with sufficient particularity,” and we will reverse.16 15 See also Crescent/Mach I Partners L.P., 846 A.2d at 986 (“I conclude that the director defendants met their duty of care by informing themselves adequately and that the real focus of this case is scrutiny of their actions in terms of an alleged lack of good faith . . . .”). 16 Stanziale’s second allegation, that the board breached its duty to install a corporate monitoring and reporting system to signal the officers and directors regarding the corporation’s legal compliance and its business performance, poses an important question that will have to wait for another day. The question revolves around In re Caremark, which states that directors will be liable for ignorance of “liability creating activities” only where the board’s failure to exercise oversight is “sustained or systemic.” 698 A.2d at 971. The parties vigorously dispute whether “liability creating activities” refers to lack of directorial due care, or the corporation’s breach of external law. The -23- Count Four: Irrational Action/Inaction – Officers Taking together Stanziale’s list in this Count of allegedly egregious managerial decisions, we conclude that he states a claim.17 Especially troubling is the allegation that the officers failed to process used airline tickets worth one million dollars. If proved, that might constitute gross negligence – but then, by definition, the only explanation for the failure is not bad faith. See Parnes, 722 A.2d at 1246. The allegation that Tower Air’s Santo Domingo Route was established and maintained “purely to please” Nachtomi’s family, however, seems explicable only by bad faith. We rely here on Parnes, wherein the Court of Chancery held that a plaintiff stated a claim under Chancery Rule 12(b)(6) when he alleged that a corporate chairman and CEO premised his consent for a merger on a bribe. Parnes, 722 A.3d at 1246-47. The Court concluded that independent directors could not have approved such a deal in good faith. Id. We think no reasonable business person acting in good faith could possibly authorize creating and maintaining an District Court ultimately avoided that question, holding that no “sustained or systemic” inattention was alleged. As we hold that Stanziale has stated a claim of inattention on other grounds, we need not resolve this dispute, although we wonder how, given the extent of the allegations in Count Four, Stanziale could be said to have failed to allege “sustained or systemic” inattention on the part of the directors. 17 Some items on this list admittedly seem to constitute garden variety business judgments. Cutting fares unprofitably and expanding international routes in the midst of a business downturn would seem to fall into that category. We leave to the District Court the appropriate characterization of such items, recognizing that factual development may aid the inquiry. -24- unprofitable airline route for years solely to keep his daughter happy. A desire for familial harmony is not synonymous with reasoned business judgment. It appears in light of the Santo Domingo allegation that Stanziale may be able to prove a set of facts consistent with his claim that Tower Air’s officers acted irrationally. As the District Court incorrectly dismissed this Count as factually deficient, we will reverse.18 Count Five: Gross Negligence and Mismanagement – Officers Gross negligence in Delaware appears to be synonymous with engaging in an irrational decisionmaking process. See Brehm, 746 A.2d at 264 (“[D]irectors must consider all material information reasonably available, and [their] process is actionable only if grossly negligent.”); see also McMullin v. Beran, 765 A.2d 910, 922 (Del. 2000) (citing, inter alia, Aronson, 473 A.2d at 812).19 Gross negligence is not a theory 18 Stanziale may also allege inattention in Count Four. He seems to maintain that the officers’ failure to process used airline tickets, failure to oversee Tower Air’s Tel Aviv operations, ceding of all management responsibilities to Nachtomi, and failing to maintain jet engines were products of an irrational decision-making process. The District Court noted that Stanziale cited no authority for holding officers liable for inattention. While Stanziale has cited no such authority on appeal, either, we do not reach this question as we reverse the District Court on Count Four on other grounds. 19 We acknowledge that on remand in Brehm the Court of Chancery appeared to require the plaintiffs in that case to plead more than gross negligence. In re The Walt Disney Co., 825 A.2d at 278 (noting that “[i]t is rare when a court imposes -25- of liability applicable to the merits of business decisions. See Brehm, 746 A.2d at 264. Accordingly, it seems to us that by alleging gross negligence Stanziale restates in Count Five the identical theory of liability – an irrational decisionmaking process – on which he at least partially predicated Counts Two, Three, and Four. It is tempting to affirm the District Court’s dismissal of this Count to excise this apparent redundancy. Nevertheless, we think Stanziale deserves the opportunity to refine his theories of liability on remand with the aid of discovery. It is still early in this litigation. It may be that the adversarial process in its later stages elicits refinements in the concepts of gross negligence in Delaware that the parties have not yet uncovered, focused as they have been on pleading standards. Having determined that Stanziale successfully stated claims in Counts Two, Three, and Four, we now hold that Stanziale has stated a claim in Count Five. We will reverse the District Court on this Count.