Miller v. McDonald (In re World Health Alternatives, Inc.) —- B.R. —-, 2008 WL 1002035 (Bkrtcy D.Del. April 2008)
Issue: Do corporate officers owe a fiduciary duty to a corporation? Do they breach this duty by “failing to implement an adequate monitoring system and/or the failure to utilize such system to safeguard against corporate wrongdoing”?
Holding: Yes – Yes
The trustee sued numerous former executives of this debtor including Brian Licastro, in house counsel and vice-president of operations, for breach of fiduciary duties, aiding and abetting breaches, corporate waste, and numerous other causes of action. This is the ruling on Licastro’s Motion to Dismiss under FRCP 12(b)(6). The Motion was denied in part and granted in part.
When World Heath became a public corporation in early 2003, apparently through the promoting efforts of one Richard E. McDonald, it had $245,000 in assets and negative equity of some $90,000. It had sustained a $400,000 loss in the previous quarter. During the next year, it raised some $40 million to buy eight different businesses in the health care staffing industry. The accounting systems were bad however and made worse by the misrepresentations of McDonald. The SEC were reports were fraudulent (according to the trustee and accepted as true for 12(b)(6) purposes), and huge amounts of liabilities went unreported. “The Trustee claims that these reports were false and misleading because World Health lacked adequate internal controls and was, therefore, unable to ascertain its true financial condition.” The company filed chapter 11 in 2006 and that was converted to chapter 7 the same year.
“The basis for the Trustee’s claim is that Licastro breached his duty of care by failing to implement an adequate monitoring system and/or the failure to utilize such system to safeguard against corporate wrongdoing.” Judge Walsh concluded, “[T]he Trustee appropriately asserts that Licastro as the in-house general counsel and the only lawyer in top management of World Health during the relevant period, had a duty to know or should have known of these corporate wrong doings and reported such breaches of fiduciary duties by the management.” Licastro argued that these are proper obligations of directors but he was only an officer. The court confirmed that duty of officers saying “It is correct that Delaware law does not impose fiduciary duty on ‘employees’ generally, but it is incorrect that it does not impose failure of oversight (fiduciary duty) as to officers. Of course, Licastro was not just an ‘employee’; he was an officer in two respects, vice president of operations and general counsel.”