Directors & Officers (D&O) Litigation

Michael Temin writes:

Fiber optical network cableWhen deciding a motion to dismiss a complaint pursuant to Federal R. Bankr. 7008, which incorporates Rule 12(b)(6), a court must accept all factual allegations in the complaint as true and construe all inferences from those allegations in favor of a plaintiff.  It was, therefore, unusual when a Michigan bankruptcy court dismissed a complaint alleging breach of fiduciary duty against a director based upon an affirmative defense.  The case is In re Great Lakes Comnet, Inc., 586 B.R. 718 (Bankr. W.D. Mich. 2018).

The debtor provided fiber optic telecommunication services to third party carriers.  The officers of the debtor schemed to charge national exchange carriers with illegal tariffs.  Six years after the scheme began the debtor filed for bankruptcy under chapter 11.  The liquidation trust formed pursuant to the plan of liquidation sued the officers and directors for breach of their fiduciary duties to the debtor.

One director moved to dismiss the breach of fiduciary duty claim as to him, arguing, inter alia, that the officers’ conduct as alleged in the complaint and supplemented by certain board meeting minutes, provided a defense to the claim.  The director attached to his motion, and relied on, minutes from board meetings and an annual shareholder meeting.  The bankruptcy court took the substance of the minutes under consideration, explaining:

The Complaint specifically refers to board meeting minutes and information provided by the officers to the board during those meetings.  All of the meeting minutes directly relate to the cause of action against [the director] for breach of fiduciary duty and are integral to the allegations in the Complaint.  Given the lack of objection and both parties’ reliance on these documents at the hearing, the court shall consider them in connection with the Motion.

The bankruptcy court further acknowledged:

Because a defendant has the burden of proof of demonstrating an affirmative defense, it is generally more appropriately considered after the pleadings stage. [citations omitted]. However, the Sixth Circuit has explained that a motion to dismiss may be granted on the basis of a meritorious affirmative defense if the facts in the complaint conclusively establish the existence of the defense as a matter of law.

The court held that the Trustee’s allegations in the complaint, as supplemented by the meeting minutes, demonstrate the affirmative defense of reasonable reliance under Michigan law.  Based upon the foregoing, the bankruptcy court granted the motion to dismiss as to the moving defendant.

Read the full opinion here.


Michael L. Temin is senior counsel in Fox’s Financial Restructuring & Bankruptcy Department, based in its Philadelphia office.