The District Court sustained claims of breach of fiduciary duty, fraud and deepening insolvency asserted by the successor-in-interest to the Committee of Unsecured Creditors of DVI, a defunct company, against DVI’s former officers and directors. The complaint alleged, among other things, that, to maintain operations and the appearance of solvency, the defendants caused DVI to repurchase delinquent loans and leases without receiving commensurate value, to transfer funds within DVI’s subsidiaries and among select borrowers to disguise underperforming accounts and to invest substantial amounts of money in ill-performing markets and non-core businesses. The complaint further alleged that the defendants misrepresented DVI’s creditworthiness to lenders and disregarded numerous warnings and “red flags” from DVI’s outside auditor and the Securities and Exchange Commission.
The Court denied defendants’ motion to dismiss the plaintiff’s claims and, in so doing, rejected multiple arguments raised by the defendants including that their actions were valid and protected exercises of business judgment. After noting that the business judgment rule creates a rebuttable presumption that actions of the Board of Directors are entitled to deference, the Court ruled that the presumption is overcome at the pleading stage if the complaint “pleads particularized facts sufficient to raise a reason to doubt that the [challenged] action was taken in good faith or on an informed basis.” Here, the Court found the numerous specific allegations of wrongdoing by the defendants to readily suffice in raising doubts as to whether the defendants had acted in good faith when engaging in the various actions that preceded DVI’s inability to repay its creditors and its filing for bankruptcy. (Buckley v. O’Hanlon, 2007 WL 956947 (D. Del. Mar. 28, 2007))