Stanziale v. Nachtomi

• Decision Date: 20 April 2004
• Docket Number: No. Civ.A.01-403 KAJ.,Civ.A.01-403 KAJ.
• Citation: 330 B.R. 56
• Parties: Charles STANZIALE, Plaintiff, v. Morris NACHTOMI, et al., Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

330 B.R. 56

Charles STANZIALE, Plaintiff, v. Morris NACHTOMI, et al., Defendants.

No. Civ.A.01-403 KAJ.

United States Bankruptcy Court, D. Delaware.

April 20, 2004.

COPYRIGHT MATERIAL OMITTED

John L. Reed, Duane Morris LLP, Wilmington, Delaware, for Plaintiff.

Bruce E. Jameson, Prickett Jones & Elliott, Wilmington, Delaware (James E. Tolan, Rodney M. Zerbe, Dechert Price & Rhoads, New York, New York, P. Gregory Schwed, Loeb & Loeb LLP, New York, New York, Robert M. Kaplan, Robson Ferber Frost Chan & Eisner, New York, New York, of counsel), for Defendants.

MEMORANDUM OPINION

JORDAN, District Judge.

I. Introduction

Presently before the court is a motion (Docket Item ["D.I."] 22; the "Motion") filed by defendants Morris K. Nachtomi ("Nachtomi"), Stephen L. Gelband ("Gelband"), Stephen A. Osborn ("Osborn"), Henry P. Baer ("Baer"), Leo-Arthur Kelmenso ("Kelmenso"), Eli J. Segal ("Segal"), and Terry v. Hallcom ("Hallcom") (collectively the "Defendants"), seeking to dismiss this action pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief may be granted.

The Complaint filed by Charles A. Stanziale, Jr. (the "Plaintiff"), in his capacity as Chapter 7 Trustee of Tower Air, Inc. (the "Debtor"), alleges that the Defendants, as directors and officers of the Debtor, breached their fiduciary duties of loyalty, care, and good faith, and that their acts or omissions to act constituted gross negligence, mismanagement and corporate waste. (D.I.19.) The Plaintiff seeks compensatory damages, consequential damages, punitive damages, interest, and costs. (Id.)

The court has jurisdiction over this case pursuant to 28 U.S.C. § 1334. For the reasons set forth herein, the Motion will be granted.

II. Background¹

Nachtomi founded the Debtor in 1982. (D.I.¶ 18.) The Debtor began operations primarily as a charter airline offering chartered international flights for private, government, and military customers. (Id. at ¶ 19.) Eventually, the Debtor offered scheduled passenger service, and by 1998, scheduled passenger service accounted for approximately two-thirds of the Debtor's total revenue. (Id. at ¶ 20.) By 1999, the Debtor maintained and operated a fleet of jet airliners consisting of 14 passenger aircraft and three cargo aircraft, and had more than 1,700 employees worldwide. (Id. at ¶¶ 23-24.)

On February 29, 2000, the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq., in the Bankruptcy Court for the District of Delaware. (Id. at ¶ 7.) Plaintiff was appointed as the Chapter 11 Trustee for the Debtor's bankruptcy estate on or about May 5, 2000. (Id. at ¶ 10.) On December 20, 2000, the case was converted to a proceeding under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 701 et seq. (Id. at ¶ 7), and the Plaintiff was appointed as Chapter 7 Trustee for the Debtor's bankruptcy estate.

Nachtomi has been a director of the Debtor since 1982, the Debtor's President from 1986 until January 1998 and again since July 1998, and Chairman of the Board of Directors and Chief Executive Officer of the Debtor since 1989. (Id. at ¶ 11.)² Nachtomi and members of his family owned a majority of the outstanding common stock and a controlling interest in the Debtor at all times relevant to Plaintiff's Complaint. (Id.) Defendants Osborn, Baer, Kelmenson, and Segal were at all times directors of the Debtor. (Id. at ¶¶ 13-16.) Osborn was a director from May 1993 until the bankruptcy; Baer was a director from 1997 until the bankruptcy; Kelmenson was a director from 1997 until the bankruptcy; and Segal was a director from 1998 until the bankruptcy. (Id.) Gelband was a director of the Debtor from 1985 until bankruptcy, as well as the Debtor's Secretary and General Counsel from 1988 until bankruptcy. (Id. at ¶ 12.) Hallcom was the Debtor's President and Executive Vice President for Operations and a director from January through July 1998. (Id. at ¶ 17.)

Plaintiff "brings this action in his capacity as the representative of the Debtor and of its estate and for the benefit of creditors of the Debtor and any other parties in interest." (Id. at ¶ 10.) In Count I, Plaintiff alleges that the Defendants, as directors of the debtor (collectively the "Directors"), breached their "fiduciary duties of loyalty, good faith and due care" by "leasing and/or financing the purchase of new jet engines rather than repairing and properly maintaining the Debtor's older engines." (Id. at ¶ 75.) In Count II, Plaintiff alleges that Nachtomi, Gelband, and Hallcom, as officers of the Debtor (collectively "the Officers"), breached their "fiduciary duties of loyalty, good faith and due care" by failing to fully inform the Board of Directors concerning the condition of the engines, the long-term financial ramifications of the failure to properly maintain the Debtor's older engines, the decision to lease and/or finance the purchase of new jet engines, and the problems with the Debtor's maintenance division, and by failing to maintain the engines and physical assets in good repair and condition. (Id. at ¶ 87.)

In Count III, Plaintiff claims that the Directors breached their "fiduciary duties of loyalty, good faith, and due care" by failing to adequately oversee and control the management and by failing to keep themselves informed. (Id. at ¶ 97.) In Count IV, Plaintiff contends that the Officers breached their fiduciary duties of "loyalty, good faith, and due care" by, among other things, failing to process used airline tickets for payment, failing to implement and maintain the proper oversight and control of ticket processing and operations, reducing fairs to unprofitable levels, expanding the Debtor's international routes during financial hardships, and ceding all management responsibility to Nachtomi. (Id. at ¶ 107.) In Count V, Plaintiff asserts that the Officers' acts and omissions caused "significant losses," and constitute "gross mismanagement of the Debtor's business, gross negligence, and a gross violation of Defendants' duties of due care to the Debtor." (Id. at ¶¶ 117-118.) In Counts VI and VII, Plaintiff alleges that the Directors and Officers "wasted corporate assets to the financial loss and detriment of the Debtor's estate." (Id. at ¶¶ 125-132.)³

III. Standard of Review

In analyzing a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), the court must accept as true all material allegations of the complaint and it must construe the complaint in favor of the plaintiff. See Trump Hotels & Casino Resorts, Inc. v. Mirage Resorts, Inc., 140 F.3d 478, 483 (3d Cir.1998). "A complaint should be dismissed only if, after accepting as true all of the facts alleged in the complaint, and drawing all reasonable inferences in the plaintiff's favor, no relief could be granted under any set of facts consistent with the allegations of the complaint." Id. The moving party has the burden of persuasion. See Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1409 (3d Cir.1991).

IV. Discussion

The Defendants argue that the Plaintiff's claims should be dismissed pursuant to Fed.R.Civ.P. 12(b)(6) because "Plaintiff has failed to plead any basis for overcoming the protections" of the business judgment rule. (D.I. 23 at 18.) Under Delaware law, the business judgment rule operates as a presumption "that directors making a business decision, not involving self-interest, act on an informed basis, in good faith and in the honest belief that their actions are in the corporation's best interest." Grobow v. Perot, 539 A.2d 180, 187 (Del.1988). "[A] Plaintiff[ ] may prevent the application of the business judgment rule within well-pleaded facts establishing that the directors acted out of self-interest." In re General Motors Class E Stock Buyout Sec. Litig., 694 F.Supp. 1119, 1132 (D.Del.1988) (citing Aronson v Lewis, 473 A.2d 805, 812 (Del.1984)). Directors act in self-interest if they appear on "both sides of the transaction, or ... [derive] any personal financial benefit from it which did not devolve upon the corporation and the shareholders generally." In re General Motors, 694 F.Supp. at 1132.

In the Amended Complaint, Plaintiff alleges that the Defendants have acted in self-interest and engaged in self-dealing (D.I. 19 at ¶¶ 97, 108), but has not alleged any facts to support this assertion. "Given that self-interest was not sufficiently alleged, in order to overcome the presumption of the business judgment rule, plaintiffs must allege with particularity facts which establish that the contested decision was not a product of valid business judgment." In re General Motors, 694 F.Supp. at 1132. See also Brehm v. Eisner, 746 A.2d 244, 255 (Del.2000) (stating that "[t]he issue is whether plaintiffs have alleged particularized facts creating a reasonable doubt that the actions of the defendants were protected by the business judgment rule").

A. Count I

In Count I of the Amended Complaint, Plaintiff has alleged that the business judgment rule is inapplicable because the Directors breached their fiduciary duties of loyalty, good faith, and due care by causing significant losses to the Debtor and to its estate through the decision to lease or purchase new jet engines rather than repair and properly maintain the Debtor's older jet engines. (D.I. 19 at ¶¶ 75, 78-79). "[I]n the absence of facts showing self-dealing or improper motive, a corporate officer or director is not legally responsible... for losses that may be suffered as a result of a decision that an officer made or that directors authorized in good faith." Gagliardi v. TriFoods Int'l, Inc., 683 A.2d 1049, 1051 (Del.Ch.1996). As previously mentioned, Plaintiff does not sufficiently allege that the directors' decision was the product of self dealing or improper motive. A "theoretical exception" to the above-mention rule "holds that some decisions may be so `egregious' that liability for losses they cause may follow even in the absence of proof...