Opinion
10-P-2012
12-06-2011
ANTHONY HORBAL v. MICAHEL N. CANNIZZARO & others.
NOTICE: Decisions issued by the Appeals Court pursuant to its rule 1:28 are primarily addressed to the parties and, therefore, may not fully address the facts of the case or the panel's decisional rationale. Moreover, rule 1:28 decisions are not circulated to the entire court and, therefore, represent only the views of the panel that decided the case. A summary decision pursuant to rule 1:28, issued after February 25, 2008, may be cited for its persuasive value but, because of the limitations noted above, not as binding precedent.
MEMORANDUM AND ORDER PURSUANT TO RULE 1:28
The plaintiff Anthony Horbal appeals from a Superior Court separate and final judgment dismissing Horbal's individual and derivative claims in his second and third amended complaints against J.W. Childs Equity Partners III, L.P. (JWC), and several named directors of ion Health Holdings, Inc. (iHH) (the director-defendants). Horbal contends the motion judges erred in (1) applying Delaware's 'business judgment rule' rather than its 'entire fairness standard' to Horbal's allegations of breach of fiduciary duty of loyalty, (2) dismissing Horbal's claim of breach of duty of loyalty for failure to act in 'good faith,' (3) denying such claims with prejudice, and (4) dismissing the related claims for a breach of contract. We affirm.
Counterclaims against Horbal remain unresolved.
This court will review the allowance of a motion to dismiss de novo. Curtis v. Herb Chambers I-95, Inc., 458 Mass. 674, 676 (2011), citing Harhen v. Brown, 431 Mass. 838, 845 (2000). We review the allegations of the complaint as well as inferences reasonably drawn therefrom in the light most favorable to the plaintiff. See Chokel v. Genzyme Corp., 449 Mass. 272, 273 (2007).
I. Breach of fiduciary duty. Horbal contends that the second motion judge erred in dismissing his claims based on the director-defendants' alleged breach of their fiduciary duty of loyalty to iHH. In doing so, Horbal asserts a two-pronged argument: (1) the judge erroneously applied the business judgment rule in lieu of the entire fairness standard and, in the alternative, (2) the director-defendants breached their duty of good faith. Each contention will be addressed in turn.
Turning to the first argument, Delaware courts apply the business judgment rule as a default standard of review to complaints arising from derivative lawsuits against a corporation. Reis v. Hazelett Strip-Casting Corp.(C.A. No. 3552- VCL), 28 A.3d 442, , (Del. Ch. corrected Feb. 1, 2011) [slip op. At 15-16]. A director is entitled to the protection of a valid exculpatory clause under Del. Code Ann. tit. 8, § 102(b)(7) (rev. 1974), such as exists here, and all claims for monetary damages based solely on breaches of the duty of care are thereby dismissed. Emerald Partners v. Berlin, 787 A.2d 85, 90-92 (Del. 2001). Properly to receive strict scrutiny under the entire fairness standard, the plaintiff must allege facts as to the interest and lack of independence of the individual board members, that a majority of the director defendants have a personal financial interest in the transaction or stand on both sides of it. Orman v. Cullman, 794 A.2d 5, 22-23 (Del. Ch. 2002).
The parties agree that Delaware substantive law applies. Delaware maintains three standards of review for director decision-making: the business judgment rule, enhanced scrutiny, and entire fairness. Reis, supra. Courts apply the business judgment rule as the default standard of review, which presumes business decisions were both informed and in the best interest of the company. Ibid.
Viewed in a light most favorable to Horbal, the third amended complaint lacks any factual allegations that the director-defendants held an economic interest at odds with the best interests of iHH. Despite Horbal's assertion that the director-defendants were beholden to JWC as their main source of income, '[t]he shorthand shibboleth of 'dominated and controlled directors' is insufficient.' Id. at 24, quoting from Aronson v. Lewis, 473 A.2d 805, 816 (Del. 1984). Even if the mere fact that JWC absorbed a $20 million loss of its investment does not ipso facto preclude a finding of conflicting economic interests, the complaint fails to identify any facts suggesting that JWC stood to benefit financially from the winding down of iHH. As such, the business judgment standard was properly applied below.
Moreover, Horbal cannot avail himself of the entire fairness standard by asserting a claim that the director-defendants failed to act in good faith. An allegation of a failure to act in good faith, alone, is not a breach of fiduciary duty. See Stone v. Ritter, 911 A.2d 362, 369 (Del. 2006). The obligation to act in good faith may result in a breach of fiduciary duty, but only indirectly; it 'does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty.' Id. at 370. '[W]here the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties . . . these . . . are the most salient' examples of a breach of good faith. Id. at 369.
While Horbal contends that the third amended complaint presents sufficient facts showing that the director-defendants took action in 'bad faith,' such allegations fail to meet the threshold prescribed by the Delaware courts. As discussed above, Horbal has failed to sufficiently plead such a claim.
II. Dismissal with prejudice. Horbal asserts that the second motion judge erred in dismissing the third amended complaint with prejudice, relying on Mass.R.Civ.P. 15(a), 365 Mass. 761 (1974), to argue that his proposed further amendment of the complaint was in the interest of justice. To determine whether the trial court acted properly in granting a motion to dismiss a complaint with prejudice, this court will determine whether the trial court abused its discretion. See Friedman v. Globe Newspaper Co., 38 Mass. App. Ct. 923, 924-925 (1995).
The rule reserves to motion judges the right to deny leave to amend the proceedings for a variety of reasons, including but not limited to undue delay, bad faith of the movant, undue prejudice to the opposing party by virtue of allowing the motion to amend, and futility of the amendment. See Manfrates v. Lawrence Plaza Ltd. Partnership, 41 Mass. App. Ct. 409, 413 (1996), citing Castellucci v. United States Fid. & Guar. Co., 372 Mass. 288, 290 (1977). The judge properly found Horbal's complaint to fall within these parameters, denying further opportunity to amend 'after four years of litigation and four attempts at pleading a cognizable claim.' It does not appear that Horbal could assert any additional facts or new meritorious legal arguments. Thus, the judge did not abuse her discretion.
III. Breach of contract. Horbal alleges that JWC was in breach of contract by failing to provide $180 million in additional funding to iHH, pursuant to Section 1.5 of the Stock Purchase Agreement (SPA) signed by both parties. The court is to 'construe the contract as a whole, in a reasonable and practical way, consistent with its language, background, and purpose.' Gross v. Prudential Ins. Co. of Am., Inc., 48 Mass. App. Ct. 115, 118 (1999), quoting from USM Corp. v. Arthur D. Little Sys., Inc., 28 Mass. App. Ct. 108, 116 (1989). The clear and unambiguous language of the SPA states that the additional purchase commitment made by JWC is subject to 'the following terms and conditions,' including JWC's right of refusal 'for any reason or for no reason.' As the plain language does not unconditionally obligate JWC to provide additional funding to iHH, the first motion judge did not err in dismissing Horbal's claims based on breach of contract.
Separate and final judgment dated April 20, 2010, affirmed.
By the Court (Grainger, Fecteau & Agnes, JJ.),