MEMORANDUM OF DECISION

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 I. INTRODUCTION

The contested matters before the Court are the following: 

(1) "Defendant Andrew J. Filipowski's Motion to Dismiss Counts I, V-VII, and XII-XIV of the First Amended Complaint" through which defendant Andrew Filipowski ("Filipowski") seeks to dismiss, pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b) (the "Filipowski Motion to Dismiss"), Counts  I, V through VII and XII through XIV of the First Amended Complaint (the "Complaint") filed by James B. Boles, the Liquidation Trust Representative (the "Plaintiff") of the Liquidation Trust dated December 20, 2004, established pursuant to the enivid, inc. "Official Committee of Unsecured Creditors' Amended Plan of Liquidation Under Chapter 11 of the Bankruptcy Code dated September 30, 2004, as Modified November 23, 2004" (the "Plan"); 

(2) the "Motion to Dismiss Claims Against Defendant Paul Humenansky" through which defendant Paul Humenansky ("Humenansky") seeks to dismiss Counts II, V through VIII, and XIII through XV of the Complaint (the "Humenansky Motion to Dismiss"); 

(3) "Michael P. Cullinane's Motion to Dismiss Plaintiff's First Amended Complaint" through which defendant Michael Cullinane ("Cullinane") seeks to dismiss Counts III, V through VIII and XII of the Complaint (the "Cullinane Motion to Dismiss");  and 

(4) "Defendant Jude Sullivan's Motion to Dismiss the Amended Complaint" through which defendant Jude Sullivan ("Sullivan") seeks dismissal of all Counts in the Complaint against him (the "Sullivan Motion to Dismiss") (collectively, the "Motions to Dismiss") (Filipowski, Humenansky,  Cullinane and Sullivan, each a "Defendant" and, collectively, the "Defendants").

By order dated October 6, 2004, the Court substantively consolidated the Chapter 11 case of enivid, inc. (f/k/a divine, inc.) with the bankruptcy estates of the following related entities: 

Open Market, Inc., enivid Managed Services, Inc., enivid DR Corporation, Viant Corporation, eShare Communications, Inc., Delano Technology Corp., enivid technology ventures, iCentral, Inc., Inventions, Inc., enivid/emicom, Inc., SageMaker, Inc., Waypoint Software Corporation, Preceptual Robotics, Inc., enivid Global Services, Inc., eprise Corporation, Denalii, Inc., Melita Finance, Inc., SMI Holding Corp., Retrieval Technologies, Inc., enivid international, Inc., enivid software, inc., Opinionware.com, Inc., Melita Intellectual Property, Inc., smallwonders software!, inc., Open Market Securities Corporation, Futuretense Corporation, RWT Corporation, LOTN, Inc., Eprise Securities Corp., SageMaker (Europe), Inc., Global Recall, Inc., databites, inc., enivid interVentures, Inc., enivid Ireland, Inc., Folio Corporation, Venture Capital Unlimited Acquisition, enivid Synchrony Communications, Inc., Softmetric, Inc., Air enivid, Inc., and SM2 Holding Corp.

Although Humenansky's Motion to Dismiss makes reference to Count XV, no basis is asserted in his memoranda for dismissal of that count.

Each Defendant in this Adversary Proceeding has filed a Motion to Dismiss pursuant to Fed.R.Civ.P. 12(b)(6), made applicable to this proceeding by Fed.R.Bankr.P. 7012(b), for failure to state claims upon which relief may be granted and pursuant to Fed.R.Civ.P. 9(b), made applicable to this proceeding by Fed.R.Bankr.P. 7009, for failure to plead fraud with sufficient particularity.

Each of the Defendants filed Memoranda of Law in support of their respective Motions to Dismiss to which the Plaintiff filed responsive memoranda and each Defendant filed a reply brief. 

On November 14, 2005, the Court conducted a hearing after which it took the Motions to Dismiss under advisement. 

On December 22, 2005, the Defendants jointly filed a "Motion for Leave to Supplement Briefing on Defendants' Motion to Dismiss" (the "Motion to Supplement") through which they sought to supplement their arguments in view of the recent case of (Alberts v. Tuft) In re Greater Southeast Community Hospital Corp., 333 B.R. 506 (Bankr. D.D.C. 2005). 

The Court allowed the Motion to Supplement on December 28, 2005. On January 9, 2006, the Plaintiff filed a response to the Motion to Supplement, and the Defendants filed a joint reply on January 19, 2006.  

II. THE PLAINTIFF'S COMPLAINT 

A. Background

Defendants Humenansky, Cullinane and Sullivan each adopted and incorporated by reference all of the applicable arguments in the Memoranda of Law filed by each of the other Defendants.

The Court accepts the following facts alleged in the Complaint as true for purposes of this decision. See Warth v. Seldin, 422 U.S. 490, 501, 95 S. Ct. 2197, 2206, 45 L.Ed. 2d 343 (1975). 

The following summary represents a statement of facts according to the Plaintiff and does not constitute findings or a determination of any facts.

enivid, inc., f/k/a divine, inc. ("Divine" or the "Company"), a Delaware corporation, was founded in 1999 by Filipowski as an internet-holding company, known as an "incubator" company, engaged in business-to-business e-commerce through a community of associated companies. 

Prior to establishing Divine, Filipowski was a founder of PLATINUM technology, inc. ("Platinum") which was ultimately sold in 1999 for $3.6 billion. 

Filipowski had worked with each of the Defendants in some capacity while at Platinum. 

Humenansky had served as Platinum's Chief Operations Officer and Cullinane had served as its Executive Vice President and Chief Financial Officer. 

Sullivan had been Platinum's outside counsel. 

While at Divine, the Defendants held the following offices and positions:  

Name Office Director Status   

In addition to Filipowski, Humenansky and Cullinane, the Board of Directors (the "Board") consisted of members who are not defendants in this action. See Am. Compl. at ¶¶ 193-94. 

The number of directors who served on Divine's Board at any given time is unclear from the Complaint. 

The Plaintiff conceded at the November 14, 2005 hearing that he has not alleged that a majority of the Board breached their fiduciary duties. 

Rather, he represented that only "select individuals," namely Filipowski, Humenansky and Cullinane, breached their duties as Board members. Tr. at p. 81-82.

The employment termination date for each of Filipowski, Humenansky and Cullinane is subject to dispute.

Filipowski Chief Executive Officer Board Member from January 1, 2000 through May 23, 2003 

January 1, 2000 until Effective Date of Confirmation of the Plan 

Humenansky President and Chief Operating Officer Board Member from October 19, 2000 through May 23, 2003 

January 1, 2000 until Effective Date of Confirmation of the Plan 

Cullinane Chief Financial Officer Board Member from January 1, 2000 through May 23, 2003 

January 1, 2000 until Effective Date of Confirmation of the Plan 

Sullivan Secretary and General Counsel Sullivan was not a Director October 19, 2000 through April 8, 2003 

As an incubator company, Divine promoted itself as providing management and other resources with the goal of taking companies in its portfolio public. 

Divine raised over $100 million in its initial public offering ("IPO") in July, 2000. In that year, Divine acquired interests in more than 50 associated companies (the "Associated Companies").  

The initial public offering market was evaporating in 2000, however, and Divine's incubator business failed to produce a single IPO for any of the Associated Companies.

Toward the end of 2000, many members of management believed that the incubator concept had failed and that Divine should pursue a new business strategy. 

In February 2001, Divine announced that it would acquire companies engaged in the "Enterprise Web Solutions" business and then integrate the acquired companies and their products and services into the portfolio of existing Divine products. 

Divine planned to reorganize and integrate the products and services of the Associated Companies into Divine's development, marketing, sales and support channels. 

This strategy presented significant operational and integrative challenges, in part, because the existing development, marketing, sales and support channels of Divine were in their beginning stages and also required significant development and integration efforts.

Divine actively implemented its new strategy in 2001 during which it acquired 20 companies, for which it expended almost $21 million in cash, issued more than 230 million shares of its common stock and assumed over $85 million in debt. 

Divine focused on acquiring financially distressed companies with operational concerns. A significant number of the acquired companies were in financial distress. 

While many of Divine's acquisitions helped to create the appearance of increased revenues, they failed to move Divine towards profitability. 

Through the first three quarters of 2001, Divine continued to incur operating losses and its cumulative operating losses for the first three quarters of 2001 totaled over $175 million. 

Filipowski was devoted to Divine's growth-by-acquisition  strategy. Many members of management of the Company, however, questioned this business plan because of the costs, negative effect on cash flow and operational challenges associated with the acquisitions. 

Noting the problems facing the Company, members of management attempted to direct Filipowski's focus toward operations rather than acquisitions. With mounting financial challenges, internal dissent began to grow.

One of the companies targeted for acquisition by Divine was RoweCom, Inc.  ("RoweCom") which managed library orders of large institutions for publications. It placed orders with publishers and provided customer and ancillary services for libraries. 

While RoweCom's business did not fit within any of Divine's business spheres, the addition of RoweCom enhanced the appearance of Divine's gross revenues. RoweCom, however, was a financially distressed company, having operated at a loss for several years. 

Moreover, its operations historically resulted in cyclical cash flows throughout the year. 

RoweCom typically paid publishers in December or January of each year for subscription orders placed by its customers. As a result, RoweCom usually required additional funding in the fourth quarter when publisher payments were in excess of collections from customers. 

Divine's cash flow problems, as well as the lack of synergy between Divine and RoweCom's business, led some within Divine to question the acquisition. 

Humenansky and Sullivan, in particular, expressed their doubts about the acquisition through e-mails to Filipowski. During the due diligence process, Humenansky wrote: "I become less and less sure of this acquisition every day that goes by, since I just don't see a lot of benefit versus a lot of work. All others are right on, but this one I have a really bad feeling about."  Am. Compl. at ¶ 52. 

Similarly, on October 31, 2001, Sullivan wrote to Filipowski and other members of management:

I may not do this justice from the financial modeling perspective, but the Cliff's Notes version is that RoweCom's financial position has deteriorated to a much worse position than I believe any of us were aware of . . . and we have been trying to get a handle on exactly how bad the situation is so that a reasonably informative report of the situation can be presented . . . before we close this deal.

Id. at ¶ 53.

Notwithstanding the misgivings of some managers, the Company completed the acquisition of RoweCom on November 6, 2001. 

This transaction placed Divine in the zone of insolvency as of November 30, 2001. 

Nevertheless, following the acquisition of RoweCom, Divine acquired eight additional companies (collectively the "Acquisitions"):

Company Name Date of Acquisition

Data Return Corp. January 2002

Northern Light Technology January 2002

Real World Technology Corporation February 2002

Perceptual Robotics, Inc. February 2002

Net Unlimited February 2002

Denalii, Inc. April 2002

Delano Technology, Inc. ("Delano") July 2002

Viant Corporation ("Viant") September 2002

The completion of these Acquisitions created a number of economic and operational problems for the Company. 

The Defendants were aware of the  problems facing the Company and that they repeatedly attempted, to no avail, to direct Filipowski's focus toward operating Divine, rather than continuing acquisitions. 

Filipowski  received numerous e-mails from Divine management about their concerns, but he dismissed or gave little credence to the opinions of senior management. 

In the face of the repeated warnings from management about Divine's financial condition, Filipowski expressed his desire to move ahead with the Acquisitions. 

None of the Defendants communicated their concerns about the Acquisitions to the Board which ultimately approved the transactions.

In the first quarter of 2002, Filipowski presented projections to the Board showing that the Company would achieve profitability by the end of 2002. 

The business plan presented to the Board reflected that the Company would have $83 million in cash at the end of the first quarter of 2002. 

"[A]ccording to Sullivan, these projections were dictated by Filipowski over the objections of Humenansky and other officers to secure the desired Board vote and neither Humenansky nor any of the other Defendants advised the Board that these numbers reflected revenue plans that were beyond levels believed achievable." Id. at ¶ 90.

By mid-March 2002, the Company's actual operating results indicated that the Company would miss the first quarter projections presented to the Board. 

This  gave rise to disagreements among the Defendants regarding the projections which would be delivered to the Board at the end of March 2002 for the next quarter. 

The Defendants engaged in numerous e-mails about the content of the financial materials to be included in the Directors' presentation packets, and many believed that Filipowski insisted on presenting the Board with overly aggressive revenue figures which were not achievable. 

Debates among Filipowski and management ensued. 

When Filipowski circulated his ideas for providing the Board with "good news" and making the overall numbers "look a lot better," 

Humenansky initially replied: "[The projections] are already aggressive. It's not worth the risk to me." Id. at ¶¶ 95 and 98. Filipowski concluded the debate, stating: "In the final analysis it is my call to make," to which Humenansky replied ". . . it is [Filipowski's] call to make . . ." Id. at ¶¶ 98 and 99. 

The projections Filipowski insisted on presenting to the Board were inflated and devoid of support. 

Despite the debate among management about the projections, the Defendants failed to pass information about the faulty projections to the Board.

Divine ultimately reported a cash balance of $78.1 million for the first quarter of 2002, a discrepancy of less than $5 million from the original projection presented to the Board. Sullivan attributed achievement of this figure to Divine's withholding of payments for accounts payable.

In January 2002, Humenansky had warned Filipowski that the Company was running out of cash and that the Company could not continue to acquire other businesses because of the continuing depletion of cash resources. 

The Company's deteriorating cash position forced Filipowski and the Company to switch from acquisitions which were driven by Divine's business strategy, to acquisitions to obtain more cash for Divine's balance sheet. 

In February 2002, management  provided the Board with a detailed presentation regarding Divine's need to raise cash. 

The reasons included a lack of operating history and the marketplace perception of Divine as a "risky company," as well as the need to achieve revenue targets.

Divine was insolvent by the end of the first quarter of 2002, as the fair market value of its assets did not exceed its liabilities. 

Despite this fact, Filipowski remained focused on the acquisition strategy  to obtain cash, at one point stating "we need to acquire cash even at drill bit prices." Id. at ¶ 110. 

Divine proceeded with the acquisitions of Viant and Delano which Filipowski believed would produce $90 million in cash for Divine. Humenansky's initial response to the Viant acquisition was "you must be kidding." Id. at ¶ 121. 

Later, he said: "They have zero pipeline and we are going to terminate almost everyone." Id. at ¶ 124. 

Despite the concerns regarding Viant, on September 27, 2002, the Company completed the acquisition. 

The Board minutes reflect that Humenansky did not notify the Board of his concerns about Viant, and that Filipowski, Humenansky and Cullinane voted in favor of the Viant acquisition. 

Although Divine originally pursued Viant to add more than $80 million in cash to its balance sheet, it completed the deal even though it only resulted in Divine adding $6.9 million in cash to its balance sheet.

The Delano transaction caused similar concerns. Humenansky wrote: 

"As we drill down into the Delano revenue numbers, there is a considerable amount that is bogus." Id. at ¶ 129. 

After learning of the potential acquisition of Delano,  Alekzander Szlam ("Szlam"), Divine's Chief Strategy Officer, wrote to Cullinane, Humenansky and other members of management that he was totally against the deal and that it would "kill" Divine. 

On July 9, 2002, Ken Mueller ("Mueller"), the Company's controller, stated: "[Based on Delano's] update today, I don't think that we will net more than [$1-2 million] of cash from this transaction.

" He went on to say "if we are doing this deal for cash, we should call it off now." Id. at ¶ 147. On July 31, 2002, the Company completed the Delano acquisition. 

The Board minutes reflect that none of the Defendants notified the Board of their concerns with regard to Delano and that Filipowski, Humenansky and Cullinane voted in favor of it. 

The Delano Acquisition resulted in the addition of only $4.8 million in cash to Divine's balance sheet.

In April 2002, Divine began investment discussions with Oak Venture Partners ("Oak"). As a result, Oak agreed to provide $61 million in equity financing in exchange for more than 30% of Divine's capital stock. 

In May 2002, Oak made its first investment in Divine of $22.9 million, and, in July 2002, it invested an additional $38.7 million. 

Despite these investments, Divine remained insolvent and continued to experience operational problems. The acquisition pace made integration of operations difficult, if not impossible. 

Divine had to terminate numerous employees upon the completion of each of the Acquisitions. As a result, it incurred costs for large severance packages, and the acquired companies provided little value to Divine. 

Beginning with the April 1, 2002 Board meeting, the Board began to consider fiduciary duties of a board of directors of a corporation which is in the "zone of insolvency.

" At this meeting, in response to questions from the Board, Filipowski, Cullinane and Humenansky stated that expense and revenue targets presented to the Board were reasonable and attainable. In light of this information, the Board determined that "at the present time even under a 'zone of insolvency' analysis all relevant constituencies were best served by Divine continuing to operate under its current operating plan." Id. at ¶ 204.

The Plaintiff alleged that the Company actually entered the zone of insolvency many months before in November of 2001 with the closing of the RoweCom transaction.

On April 16, 2002, Humenansky e-mailed Filipowski stating that he was "ready to transition out of Divine" because "I just  disagree with way too much anymore to support this going forward." Id. at ¶ 157. 

Throughout May 2002, Humenansky sent additional e-mails to Filipowski voicing his concerns about customer issues, employee retention and the "general feeling of failure" in the organization. 

On May 1, 2002, he wrote to Filipowski: "I feel the company is in a tailspin, and we need to make major changes," and, on May 22, 2002, he wrote: "I can't run the business going forward . . . I'm at the end of my rope now."Id. at ¶¶ 162 and 164. 

Despite the repeated statements of his intention to leave, Humenansky stayed with Divine until after the bankruptcy filing.

In connection with Divine's earlier acquisition of Eshare Communications,  Inc. ("Eshare"), Eshare's Chief Executive Officer, Szlam, received options to "put" a significant number of shares of Divine's common stock. 

In April 2002, Szlam exercised his "put" options at a cost of almost $6.2 million to Divine. 

The Defendants did not advise the Board that Szlam exercised his put options until after Divine's Audit Committee Meeting on May 1, 2002, a decision which precipitated the resignation of an outside director of the Company.

On May 23, 2002, Mueller wrote to Filipowski, Humenansky and Cullinane regarding RoweCom France which had recently incurred more than $12 million in obligations due to overdrafts. 

RoweCom France was unable to repay the overdrafts and, as a result, auditors advised Divine that it should declare RoweCom France insolvent. 

Mueller outlined Divine's resulting financial obligations and the potential impact of the RoweCom France overdrafts on Divine in the second and third quarters of 2002. 

Filipowski responded saying "Less of an issue after Oak and Viant is [sic] done." Id. at ¶ 196. 

While the RoweCom France information was provided by Mueller specifically in advance of the Board Meeting scheduled later in the day of May 23, 2002, none of the Defendants communicated the information to the Board. 

At that meeting, the Defendants suggested that the Board continue considering the fiduciary duties of a director of a corporation which is in the zone of insolvency. 

Following the Board's consideration of this issue, it concluded that "all relevant constituencies were best served by the Corporation continuing to operate under its current operating plan." Id. at ¶ 198. 

The Board reached this  conclusion without the information that RoweCom France was insolvent.

Discussions about the zone of insolvency were frequent throughout 2002. The Board meeting minutes reflect that the Board discussed the matter for the first time on April 1, 2002 and again on May 13, 2002, May 23, 2002 and August 14, 2002. 

At these meetings, the Board consensus was the same: "after considering the rights and interests of Divine's constituencies, the Board determined . . . under a 'zone of insolvency' analysis, all relevant constituencies were best served by Divine continuing to operate under its current operating plan.

" There is no record that any of the Defendants spoke during Board meetings to advise the Board of Divine's true economic condition.

In July 2002, Divine disbanded its Mergers and Acquisitions unit. During the summer of 2002, Humenansky repeatedly warned that the Company was going to miss its third quarter projections and that it faced major cash flow problems for the fourth quarter. 

At the close of the third quarter, Divine's cumulative operating losses totaled $683.7 million since the Company's initial public offering in July 2000. 

In the fourth quarter, the annual RoweCom publisher payments loomed. 

When Divine entered the fourth quarter of 2002, it did not have sufficient cash or available  financing to pay publishers for the periodicals RoweCom's customers had ordered and for which they had already paid.

 From and after the RoweCom acquisition, Divine had used monies from pre-paid subscriptions from RoweCom's customers to fund Divine's operations, not the subscriptions. 

Through much of the fourth  quarter of 2002, Divine was engaged in negotiations to sell RoweCom. By mid-December 2002, the Board determined that Divine was not able to continue to support RoweCom and was not in a position to finance the RoweCom year-end publisher payments. 

By the end of December 2002, Divine publicly announced that it was no longer willing to financially support RoweCom's operations. On January 27, 2003, RoweCom filed a Chapter 11 bankruptcy petition.

Once in bankruptcy, RoweCom filed an adversary proceeding against Divine seeking over $73 million in damages for, among other things, "looting" RoweCom. 

Thereafter, the United States Department of Justice and the Securities and Exchange Commission also began investigating the management of RoweCom and Divine. 

Moreover, in mid-November 2002, prior to RoweCom's decision to file a bankruptcy petition, Divine's auditors informed the Company that it would issue a "going concern" qualification in the absence of a definite operating plan for 2003. 

Divine explored several strategic alternatives, including the sale of its entire business or various divisions, however, the Company could not secure a buyer.

On February 25, 2003 (the "Petition Date"), Divine filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code (the "Code"), and the Court subsequently consolidated the case with those of Divine's subsidiaries. 

Filipowski, Humenansky and Cullinane were still employed as officers on the Petition Date under the terms of their respective employment agreements (collectively, the "Employment Agreements"), and they continued to serve as  directors until the effective date of the Plan. 

The Company sold substantially all of its assets on May 15, 2003, and on May 22, 2003, it filed a Motion for an Order Authorizing Rejection of the Executory Employment Agreements. Filipowski, Humenansky and Cullinane objected to the motion, alleging that the Company had previously terminated their employment. 

Each of the Employment Agreements provided for large payments in the event of employment termination. 

The Plaintiff alleges that Filipowski, Humenansky and Cullinane timed the terminations of their employment agreements in an improper attempt to qualify the termination payments as administrative expense claims against Divine's bankruptcy estate at the expense of the general unsecured creditors. 

The Defendants filed a number of proofs of claim in which they asserted, inter alia, damages and administrative expense claims for termination of the Employment Agreements, indemnification for legal costs and expenses incurred in connection with their status as officers and directors of Divine, and general expense reimbursement.

B. The Complaint

The Complaint is 113 pages, contains 411 paragraphs and alleges 16 counts against the Defendants. 

The causes of actions are as follows: (1) Count I, captioned "Breach of the Fiduciary Duty of Loyalty" against Filipowski, in his capacity as an officer and director of Divine; 

(2) Count II, captioned "Breach of the Fiduciary Duty of Loyalty" against Humenansky, in his capacity as an officer and director of Divine; 

(3) Count III, captioned "Breach of the Fiduciary Duty of Loyalty" against Cullinane,  in his capacity as an officer and director of Divine; 

(4) Count  IV, captioned "Breach of the Fiduciary Duty of Loyalty" against Sullivan, in his capacity as an officer of Divine; 

(5) Count V, captioned "Breach of the Fiduciary Duty of Care" against all Defendants, in their capacities as officers of Divine; 

(6) Count VI, captioned "Breach of the Fiduciary Duty of Good Faith" against all Defendants, in their capacities as officers of Divine; 

(7) Count VII, captioned "Deepening Insolvency" against all Defendants; 

(8) Count VIII, captioned "Objection to Indemnification Claims Fed.R.Bankr.P. 3007" against all Defendants; 

(9) Count IX, captioned "Objection to Duplicative Claims/Objection To Administrative Claims 11 U.S.C. § 502; Fed.R.Bankr.P. 3007" against Cullinane, Humenansky and Filipowski; 

(10) Count X, captioned "Objection to Employment Termination Claims 11 U.S.C. § 502; Fed.R.Bankr.P. 3007" against Filipowski, Cullinane and Humenansky; 

(11) Count XI, captioned "Objection to Expense Reimbursement Claims 11 U.S.C. § 502; Fed.R.Bankr.P. 3007" against Filipowski; 

(12) Count XII, captioned "Subordination" against all Defendants; 

(13) Count XIII, captioned "Avoidance and Recovery of Fraudulent Transfers 11 U.S.C. §§ 548; 550" against all Defendants; 

(14) Count XIV, captioned "Avoidance and Recovery of Preferential Transfers 11 U.S.C. §§ 547; 550" against all Defendants; 

(15) Count XV, captioned "Objection to Claims filed by Retainer Defendants 11 U.S.C. § 502; Fed.R.Bankr.P. 3007" against all Defendants;  and 

(16) Count XVI, captioned "Objection to Indemnification Claims Arising from Third Party Civil Actions 11 U.S.C. § 502; Fed.R.Bankr.P. 3007" against all Defendants. Counts I through VI shall be referred to herein as the "Fiduciary Duty Counts."

As stated above, Sullivan was not a Director of Divine.

The Plaintiff has pled this Count as an alternative to Count XIII.

As noted above, the Defendants have each filed a Motion to Dismiss various counts of the Complaint against them pursuant to Fed.R.Civ.P. 9(b) and 12(b)(6), made applicable to this proceeding by Fed.R.Bankr.P. 7009 and 7012. Each of the Defendants adopt and incorporate by reference all applicable arguments in each other's briefs.

A. Standard for Dismissal Pursuant to Fed.R.Civ.P. 12(b)(6)

When reviewing a Rule 12(b)(6) motion, the court must accept as true all material allegations of the complaint and construe the complaint in favor of the plaintiff. 

See Warth v. Seldin, 422 U.S. 490, 501, 95 S. Ct. 2197, 2206, 45 L. Ed. 2d 343 (1975). 

Nevertheless, in determining a Rule 12(b)(6) motion, the Court need not credit unsupported conclusions. Dartmouth Review v. Dartmouth College, 889 F.2d 13, 16 (1st Cir. 1989), overruled on other grounds, Educadores Puertorriquenos en Accion v. Hernandez, 367 F.3d 61 (1st Cir. 2004). 

The Federal Rules of Civil Procedure "do not require a claimant to set out in detail the facts upon which he bases his claim." Conley v. Gibson, 355 U.S. 41, 47, 78 S. Ct. 99, 103, 2 L. Ed. 2d 80 (1957). "To the contrary, all the Rules require is 'a short and plain statement of the  claim' that will give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests."Id. (quoting Fed.R.Civ.P. 8(a)(2)). See also Stanziale v. Nachtomi (In re Tower Air, Inc.), 416 F.3d 229, 237 (3d Cir. 2005) (under Federal Rule 8, the plaintiff need only plead the "basic facts" necessary to provide the defendant with fair notice of the plaintiff's claims and the  general factual background upon which it rests and should not be deprived of the opportunity to pursue claims on a Rule 12(b)(6) motion for lack of detailed facts.).

Nevertheless, it also is well established that the pleading requirements are "not entirely . . . toothless," Dartmouth Review, 889 F.2d at 16. The First Circuit has required a minimal level of factual particularity rather than mere allegations of conclusions. See Fleming v. Lind-Waldock Co., 922 F.2d 20, 24 (1st Cir. 1990) ("[T]he necessary factual averments are required with respect to each material element of the underlying legal theory.") (citing Gooley v. Mobil Oil Corp., 851 F.2d 513, 515 (1st Cir. 1988)).

B. Standard for Dismissal Pursuant to Fed.R.Civ.P. 9(b)

Although Fed.R.Civ.P. 8(a)(2) requires the Plaintiff to plead a "short and plain statement of the claim," claims for fraud are subject to the heightened pleading requirements of Fed.R.Civ.P. 9(b), made applicable to this proceeding by Fed.R.Bankr.P. 7009. Pursuant to Rule 9(b): "In all averments of fraud . . . the circumstances constituting fraud . . . shall be stated with particularity. Malice, intent, knowledge and other conditions of mind of a person may be averred  generally." Fed.R.Civ.P. 9(b).

The Defendants seek dismissal of certain counts of the Complaint pursuant to Rule 9(b) because they contend that the Plaintiff has failed to plead fraud and nondisclosure allegations with sufficient particularity. 

The Plaintiff counters that he need not plead any allegations with the specificity required by Rule 9(b) because he has not alleged causes of action based upon fraud. He adds that the allegations of misrepresentation and nondisclosure contained in the Complaint are merely components of his overall legal theory that the Defendants violated their duties by disregarding their own business judgment. 

While a number of the counts in the Complaint involve allegations of misrepresentation and concealment, the essence of the Complaint is that the Defendants abdicated their responsibilities through a number of infractions including reckless and irrational decision making, improper domination and control and failure to engage in debate at Board meetings about the questionable transactions. 

The allegations concerning misrepresentation and nondisclosure represent only examples of the Defendants' disregard of their business judgment, and the Defendants cannot recharacterize the Complaint as one based on fraud and seek to overcome it by reliance on Rule 9(b).

A. The Fiduciary Duty Counts

In evaluating the merits of the Defendants' Motions to Dismiss to the Fiduciary Duty Counts, the Court must consider two affirmative defenses, the  Delaware business judgment rule and the exculpatory clause contained in Divine's Certificate of Incorporation. 

These two defenses are the subject of many decisions in cases where defendants have sought dismissal of complaints containing allegations such as those in this adversary proceeding.

1. The Business Judgment Rule

The business judgment rule, "is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company."Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del. 2000). 

The rule "operates as both a procedural guide for litigants and a substantive rule of law"  in breach of corporate fiduciary duty cases. Citron v. Fairchild Camera and Instrument Corp., 569 A.2d 53, 64 (Del. 1989). 

"As a general matter, the business judgment rule presumption that a board acted loyally can be rebutted by alleging facts which, if accepted as true, establish that the board was either interested in the outcome of the transaction or lacked the independence to consider objectively whether the transaction was in the best interest of its company and all of its shareholders." Orman v. Cullman, 794 A.2d 5, 22 (Del.Ch. 2002) (emphasis in original). 

With respect to the first element, interest ". . . means that directors can neither appear on both sides of a transaction nor expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders  generally." Aronson 473 A.2d at 812 (citations omitted); see also In re GM Class H S'holders Litig., 734 A.2d 611, 617-18 (Del.Ch. 1999) (the benefits received must have been of a sufficiently material importance to the director, in the context of his economic circumstances, as to have made it improbable that he could perform his fiduciary duties to the shareholders without being influenced by his overriding personal interest).

On the separate question of independence, "[i]ndependence means that a director's decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences." Aronson 473 A.2d at 816. Independence". . . involves an inquiry into whether the director's decision resulted from that director being controlled by another." Orman, 794 A.2d at 25 n. 50 (emphasis in original). Control may be demonstrated by a showing that the director is dominated by that other party, whether through close personal or familial relationship or through force of will. Id. (emphasis in original). A director can also be controlled by another if the challenged director is beholden to the allegedly controlling entity. Id. (emphasis in original). 

"A director may be considered beholden to . . . another when the allegedly controlling entity has the unilateral power . . . to decide whether the challenged director continues to receive a benefit, financial or otherwise, upon which the challenged director is so dependent or is of such subjective material importance to him that the threatened loss of that benefit might create a reason to question whether the controlled director is able to consider  the corporate merits of the challenged transaction objectively."Id.

2. The Exculpatory Clause

Divine's Third Amended and Restated Certificate of Incorporation (the "Charter") contains a clause of the type which typically eliminates or limits the personal liability of directors for monetary damages for breach of the duty of care (the "Exculpatory Clause"). 

Under Section 102(b)(7) of the Delaware General Corporation Law corporations can adopt  charter provisions that eliminate or limit the personal liability of directors for monetary damages for breach of the duty of due care, but not claims based on breach of the duty of loyalty, intentional misconduct or knowing violation of the law. 

Divine's Charter contains the statutory  language of Section 102(b)(7). See Am. Compl. at ¶ 326. 

B. Count I-Breach of the Fiduciary Duty of Loyalty against Filipowski

Del. Code Ann. tit. 8, § 102(b)(7) provides, in pertinent part:

(b) In addition to the matters required to be set forth in the certificate of incorporation by subsection (a) of this section, the certificate of incorporation may also contain any or all of the following matters:

(7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: 

(i) For any breach of the director's duty of loyalty to the corporation or its stockholders; 

(ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; 

(iii) under § 174 of this title; or 

(iv) for any transaction from which the director derived an improper personal benefit. 

No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective . . .

Ordinarily, a court may not consider any documents that are outside the complaint in the context of a Rule 12(b)(6) motion. 

Documents which are sufficiently referred to in the complaint, however, become part of the pleading, and thus the document may be considered on a Rule 12(b)(6) motion.Alternative Energy, Inc. v. St. Paul Fire and Marine Ins. Co., 267 F.3d 30, 33 (1st Cir. 2001).

In Count I of the Complaint, the Plaintiff alleges that Filipowski engaged in five general categories of wrongful conduct which were motivated by his self-interest: 

(1) approval of the Acquisitions and approval of the continued operation of Divine without a plan to achieve profitability; 

(2) participation in the manufacture of a "business judgement defense" in anticipation of litigation; 

(3) dissemination of false or inflated financial information to the Board and concealment of material information about the true condition of the company from the Board, including Divine's failure to meet projections, the insolvency of RoweCom France and Szlam's exercise of his put options; 

(4) failure to consider advice provided by other Divine officers; and 

(5) misrepresentation of his interest in, and the material personal gain he received from, Divine's acquisition of certain companies and properties in which he had a personal interest.

In seeking dismissal of Count I, Filipowski argues, that the Plaintiff has failed to sufficiently allege that he had a material self-interest or that he lacked the independence necessary to overcome the business judgment rule. 

Additionally, he  argues that the Plaintiff has failed to plead causation of injury to Divine as a result of any wrongful conduct on his part, citingIn re General Motors (Hughes) Shareholder Litig., No. Civ. A. 20269, 2005 WL 1089021, at *8 (Del.Ch. May 4, 2005) 

("Without allegations to somehow link the accretion of a material benefit to the decision to approve the . . . transactions, the allegations of pecuniary self-interest are merely conclusory and not well pled."); Fleming v. Lind-Waldock Co., 922 F.2d 20, 24 (1st Cir. 1990) (". . . the necessary factual averments are required with respect to each material element of the underlying legal theory."). 

In support of the latter argument, he asserts that the Plaintiff must allege that a majority of the voting Board members were self-interested or lacked independence, citingContinuing Creditors' Committee of Star Telecomms., Inc. v. Edgecomb, 385 F. Supp. 2d 449, 460 (D. Del. 2004) 

("To allege a breach of the duty of loyalty based on actions or omissions of the Board, the Plaintiff must 'plead facts demonstrating that a majority of a board that approved the transaction in dispute was interested and/or lacked independence.'" (quoting Orman v. Cullman, 794 A.2d 5, 23 (Del.Ch. 2002) (emphasis in original)). 

Otherwise, Filipowski argues, the disabling self-interest cannot be said to have caused the challenged decision.

1. Self-Interest

The Plaintiff alleges that Filipowski's wrongful conduct was the product of  the "self-interest of entrenchment" and that he was motivated solely or principally for the impermissible purpose of retaining office for personal reasons, citing Cede  Co., v. Technicolor, Inc., 634 A.2d 345, 363 (Del. 1993) (further history omitted); In re Anderson, Clayton S'holders Litig., 519 A.2d 680, 688 (Del.Ch. 1986). 

Filipowski asserts that Count I should be dismissed because his interest in maintaining his salary, position, benefits and stock ownership coincided with the interest of the Company, citing Roselink Investors, LLC v. Shenkman, 386 F. Supp. 2d 209, 219-220 (S.D.N.Y. 2004) 

("[A]ny personal interest [a director] had in keeping [his company] out of bankruptcy was consistent with the best interests of [the company] . . .").

The Court finds that the Plaintiff's allegations concerning Filipowski's employment, stock position and perquisites, which constituted material benefits to him, coupled with his unwavering personal adherence to the acquisition strategy in the face of mounting operational and financial problems and warnings, especially from the Company's chief operating officer, permit a reasonable inference of the self-interest of entrenchment. 

The Court also finds that the self-interest exhibited by Filipowski, as detailed in the Complaint, was inconsistent with the interests of the Company and its creditors. 

The Plaintiff reproduced numerous e-mails in which members of Filipowski's own management team questioned the value of the acquisition targets, the Company's ability to absorb the acquired companies and the direction of the Company in light of its worsening cash position. 

Filipowski's typical response to these communications was a "damn the torpedoes" approach. 

His responses included the following statements: 

"We are going to go down the course we have set and the two options are it will either kill us or we will succeed . . .  I will not tolerate a strategy that give us 0 chance of succeeding and just kill us over a longer period of time." See Am. Compl. at ¶ 72; 

"Some of this takes time and perseverance. Constant vacillation is not the answer . . . This is the gut check time and we need to get the current strategy to mature and it will." Id. at ¶ 77. 

"We have got to draw the line and go for it." Id. at ¶ 233. Based upon these averments, the Court finds that the Complaint contains sufficient facts alleging that Filipowski's principal motivation in the performance of his duties was his desire to maintain his acquisition strategy by maintaining his position and office as the Company's chief executive officer. In the process of maintaining that strategy, Filipowski's interests were at odds with the interests of the Company.

2. Causation

The Court must next assess whether the Plaintiff has sufficiently pled that Filipowski's self-interested conduct caused injury to the Company and its creditors. 

The issue of causation is most crucial to the allegations in Count I which involve Filipowski's approval of the Acquisitions and the continued operations of Divine. 

Although the Plaintiff seeks to attribute responsibility for these decisions and transactions to Filipowski, they could not have been consummated absent approval of the majority of the Board. 

In the absence of facts alleging that a majority of the Board was either interested in the outcome of the disputed transactions or lacked the independence to consider the transaction independently, the Court would ordinarily have to presume that the Board acted loyally. See Orman v. Cullman,  794 A.2d 5, 22 (Del.Ch. 2002). 

The Court may, however, reasonably infer causation if there are sufficient facts in the Complaint to establish that the Board made the challenged decisions on the basis of false information provided by, or at the  direction of, Filipowski or that it would not have made the decisions had it been in possession of the information concealed