Commercial Division Blog

Posted: May 27, 2022 / Written by: Jeffrey M. Eilender, Samuel L. Butt, Christopher R. Dyess, Joshua Wurtzel, Hillary S. Zilz / Categories Derivative Actions, Fiduciary Duties

Breach of Fiduciary Duty Claim Upheld Where Plaintiff Adequately Pled Demand Futility

In an Opinion, dated May 10, 2022, in Jones v. CareandWear II, Inc., 2022 N.Y. Slip. Op. 50383(U), Justice Robert R. Reed rejected defendant’s argument that plaintiff’s direct and derivative claims for breach of fiduciary duty should be dismissed for failure to adequately plead demand futility.  The Court explained: 

Defendants argue that the derivative claim against Razdan should be dismissed because plaintiff failed to adequately plead futility. To demonstrate demand futility, plaintiff need only allege particularized facts that create a reasonable doubt that C & W's directors at the time of the complaint can be disinterested with respect to a demand to bring the derivative claims on behalf of C & W (see Rales v Blasband, 634 A2d 927, 934 [Del 1993]). Where a board has only two directors at the time of the complaint, demand futility is established where at least one of the directors is interested (see Beneville v York, 769 A2d 80, 84-87 [Del Ch 2000]). Directorial interest exists where a complaint demonstrates that a director defendant faces a substantial likelihood of personal liability in connection with the acts at issue (id.). To demonstrate a substantial likelihood of personal liability, a plaintiff need only make a threshold showing that the claims have some merit (Rales, 634 A2d at 934).

Plaintiff argues that Razdan faces a substantial likelihood of personal liability because it is reasonably conceivable that Razdan breached his fiduciary duty in his capacity as CEO for C & W. Under Delaware law, officers may be held liable for breaching their fiduciary duty of care when they act in a grossly negligent manner (see In re Rural Metro Corp. Stockholders Litig., 88 A3d 54, 86-87 [Del Ch 2014]). The complaint alleges Razdan withheld information from the board, misled the board, and sought to enrich his friends and himself by using C & W money to purchase PPE in bulk and then resell it at an extreme markup. These allegations, taken as true, could reasonably make out a claim for breach of fiduciary duty. The motion to dismiss the fourth cause of action, the derivative claim for breach of fiduciary duty against Razdan, is denied.

Plaintiff, in her individual capacity, brings a breach of fiduciary duty claim against Razdan. Because plaintiff adequately pleads demand futility, the complaint for a breach of fiduciary duty survives a motion to dismiss (see Ryan v Gifford, 918 A2d 341, 357 [Del Ch 2007] ["where plaintiff alleges particularized facts sufficient to prove demand futility . . . that plaintiff a fortiori rebuts the business judgment rule for the purposes of surviving a motion to dismiss"]). The direct breach of fiduciary duty claim against Razdan is not dismissed.

The attorneys at Schlam Stone & Dolan frequently litigate breach of fiduciary duty claims.   Please contact the Commercial Division Blog editors at commercialdivisionblog@schlamstone.com if you or a client have questions concerning such issues.