Alberts, Trustee v. Tuft et al

1 The affiliated debtors are Greater Southeast Hospital
Corporation-I (“Greater Southeast Corp.”), PACIN Healthcare-
Hadley Memorial Hospital Corporation (“Hadley Corp.”), Michael
Reese Medical Center Corporation (“Michael Reese Corp.”), Pine
Grove Hospital Corporation (“Pine Grove Corp.”), and Pacifica of
the Valley Corporation (“Pacifica Corp.”).
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
GREATER SOUTHEAST COMMUNITY
HOSPITAL CORP., I, et al.,
Debtors.
____________________________
SAM J. ALBERTS, TRUSTEE FOR
THE DCHC LIQUIDATING TRUST,
Plaintiff,
v.
PAUL TUFT, et al.,
Defendants.
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
Case No. 02-02250
(Chapter 11)
(Jointly Administered)
Adversary Proceeding No.
04-10459
DECISION REGARDING MOTIONS TO DISMISS SECOND AMENDED COMPLAINT
This proceeding relates to the bankruptcy cases of Doctors
Community Healthcare Corporation (“DCHC”) and affiliated debtors
who were its subsidiary hospital corporations.1 Sam J. Alberts,
The decision below is hereby signed. Dated:
September 21, 2006.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 1 of 91

2 Even though Melvin Redman was sued in the Second Amended
Complaint, the references in this decision to the “defendants”
and the “D & O Defendants” do not include Redman. This
proceeding has been stayed as to Redman as explained in n.4,
infra, and the decision accordingly does not address the claims
against him.
3 All of the D & O Defendants except Parrett and Krauss are
protected by a partial release provided in the debtors’ joint
plan of reorganization. The plan caps the liability for the
former defendants at $10 million. The court will refer to these
defendants as the “Partially Released Defendants” where necessary
to distinguish them from Parrett and Krauss.
2
the trustee for the DCHC Liquidating Trust, seeks to recover $242
million from Paul Tuft, Steve Dietlin, Erich Mounce, Donna
Talbot, Susan Engelhard, Rebecca Parrett, and George Krauss,
former directors and officers of DCHC (collectively the “D & O
Defendants”),2 and Epstein Becker & Green P.C. (“Epstein Becker”)
and Kutak Rock LLP (“Kutak Rock”), who served as former counsel
to DCHC and its subsidiary hospital corporations. Alberts
alleges that the D & O Defendants worked in tandem with Epstein
Becker and Kutak Rock (collectively the “Law Firm Defendants”) to
further a Ponzi scheme perpetrated by National Century Financial
Enterprises (“NCFE”), who, along with its subsidiary entities
(the “NCFE Entities”), provided virtually all of the financing
for DCHC’s acquisitions and the debtors’ operations.3
In a lengthy opinion reported as Alberts v. Tuft (In re
Greater Southeast Cmty. Hosp. Corp. I), 333 B.R. 506 (Bankr.
D.D.C. 2005), and accompanying order, the court granted in part
and denied in part various motions to dismiss Alberts’s First
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 2 of 91

3
Amended Complaint, but granted Alberts leave to amend his
complaint to correct certain technical pleading defects.
Alberts’s Second Amended Complaint has once again prompted
multiple motions to dismiss raising numerous (and occasionally
overlapping) arguments concerning a labyrinthine complaint.
I
The court described the pertinent background facts in this
case in some detail in its previous opinion regarding the
defendants’ earlier motions, and will not recapitulate them here.
See In re Greater Southeast Cmty. Hosp. Corp. I, 333 B.R. at 514-
15. Suffice to say, Alberts is the trustee of the DCHC
Liquidating Trust, an entity created pursuant to the debtor’s
plan of reorganization and charged with prosecuting all causes of
action formerly belonging to DCHC or its affiliated debtors.
In the instant proceeding, Alberts alleges that the D & O
Defendants breached their fiduciary duties of care and loyalty by
allowing DCHC and its subsidiary hospitals to undertake
additional debt in a fiscally irresponsible manner and by
misusing corporate assets. He further alleges that the Law Firm
Defendants either aided and abetted some of these fiduciary
breaches or committed malpractice by signing off on various
opinion letters that contained factual statements the Law Firm
Defendants knew or should have known to be false and that allowed
the debtors and the NCFE Entities to close on their transactions.
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 3 of 91

4 Count II also survived as to Redman, id. at 527 n.24, but
this decision does not address the claims against Redman. Redman
and his wife filed for bankruptcy relief in the District of
Arizona, forcing Alberts to file a separate adversary proceeding
in that court. Alberts v. Redman (In re Redman), Adv. Pro. No.
05-00313 (Bankr. D. Ariz.). By a twist of fate, that adversary
proceeding has been transferred to this court so that it can
resolve a motion to approve a settlement agreement reached by the
Redmans and Alberts. Alberts v. Redman (In re Redman), Adv. Pro.
No. 06-10040 (Bankr. D.D.C.). The court’s determination of the
reasonableness of that agreement will almost certainly turn at
least in part on the conclusions reached in the instant decision
because the allegations made against Redman in the complaint
against him mirror those made against the D & O Defendants in
this proceeding. Nonetheless, the fact remains that Redman is
protected by the automatic stay arising from his own bankruptcy
case unless and until Alberts successfully moves for relief from
the stay in the Arizona bankruptcy court.
4
In its prior opinion, the court dismissed almost all of the
counts alleged in the First Amended Complaint against the D & O
Defendants because the complaint did not connect those defendants
to the decisions made by DCHC’s subsidiaries or the allegedly
wasteful decisions made by DCHC itself. Id. at 522-27. Only
Count II of the First Amended Complaint, in which Alberts alleged
that the D & O Defendants breached their fiduciary duties of care
and loyalty by allowing Tuft and Redman to use corporate charter
jets instead of commercial air lines, survived the defendants’
motions to dismiss, and that count survived only with respect to
Tuft in his capacity as an officer. Id. at 527.4 The court also
dismissed all of Alberts’s claims against DCHC’s former directors
because those claims alleged breaches of the fiduciary duty of
care and DCHC’s directors were shielded from liability for
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 4 of 91

5 The court pondered whether the Law Firm Defendants’
failure to warn DCHC of the breaches of fiduciary duty allegedly
committed by its officers and directors could itself be construed
as malpractice, but held that the question was moot because
Alberts did not allege properly that the D & O Defendants
breached any fiduciary duties relating to the financing provided
by the NCFE Entities. In re Greater Southeast Cmty. Hosp. Corp.
I, 333 B.R. at 530. The court dismissed Alberts’s “aiding and
abetting” count for the same reason. Id. at 529.
6 In reaching these conclusions, the court rejected the Law
Firm Defendants’ affirmative defenses of res judicata and
judicial estoppel, In re Greater Southeast Cmty. Hosp. Corp. I,
333 B.R. at 532-34, held that Alberts could invoke the
protections of 11 U.S.C. § 108(a) to extend the deadline to raise
his claims of breach of fiduciary duty and malpractice, id. at
534-38, and declined to consider whether Alberts was barred from
asserting malpractice claims against the Law Firm Defendants
under the doctrine of in pari delicto. Id. at 538-39.
5
fiduciary breaches of that nature under the terms of the articles
of incorporation of DCHC’s predecessor. Id. at 527-28.
With respect to the Law Firm Defendants, the court held that
Alberts could pursue a cause of action for malpractice based on
the Law Firm Defendants’ allegedly negligent preparation of
opinion letters used by DCHC to secure additional financing from
the NCFE Entities, but concluded that he could not pursue a claim
against those defendants based on business advice given by the
Law Firm Defendants because attorneys owe no special duty of care
with respect to financial advice. Id. at 528-31.5 Finally, the
court preserved Alberts’s fraudulent conveyance claims, which are
premised on the same underlying facts as his malpractice claim.
Id. at 531-32.6
Because Alberts filed his First Amended Complaint prior to
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 5 of 91

6
the filing of the D & O Defendants’ motions to dismiss, the court
granted him leave to amend his complaint with respect to those
defendants. The court also invited the Law Firm Defendants to
file a motion for a more definite statement pursuant to Fed. R.
Civ. P. 12(e) (as incorporated by Fed. R. Civ. P. 7012)--an
invitation the Law Firm Defendants eventually accepted.
Following the filing of the Second Amended Complaint, which
included Alberts’s response to the Law Firm Defendants’ Rule
12(e) motions, the defendants filed the instant motions.
II
The legal standard governing the defendants’ motions is the
same as that in the last go-round. Under Fed. R. Civ. P.
12(b)(6) (as incorporated by Fed. R. Bankr. P. 7012), the court
must dismiss the Second Amended Complaint if it “fail[s] to state
a claim upon which relief can be granted,” but the “complaint
need only set forth ‘a short and plain statement of the claim,’
Fed. R. Civ. P. 8(a)(2), giving the defendant fair notice of the
claim and the grounds upon which it rests.” Kingman Park Civic
Ass’n v. Williams, 348 F.3d 1033, 1040 (D.C. Cir. 2003).
“However, the court need not accept inferences drawn by
plaintiffs if such inferences are unsupported by the facts set
out in the complaint.” Kowal v. MCI Communications Corp., 16
F.3d 1271, 1276 (D.C. Cir. 1994). Finally, affirmative defenses
“may be raised by pre-answer motion under Rule 12(b) when the
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 6 of 91

7
facts that give rise to the defense are clear from the face of
the complaint.” Smith-Haynie v. District of Columbia, 155 F.3d
575, 578 (D.C. Cir. 1998).
Because the claims alleged by Alberts against the Law Firm
Defendants depend in part on the viability of his claims against
the D & O Defendants, the court will look to the propriety of the
latter claims before assessing the sufficiency of his claims
against Epstein Becker and Kutak Rock. Before proceeding any
further, however, the court must address the theory of harm
espoused by Alberts (i.e., that the defendants increased the
debtors’ insolvency) in light of the Third Circuit’s recent
decision in Seitz v. Detweiler, Hershey & Associates, P.C. (In re
CitX Corp.), 448 F.3d 672 (3d Cir. 2006).
A. Deepening Insolvency Revisited
Many of the claims raised by Alberts assume that DCHC and
its subsidiary companies were harmed by the progressive increase
in the companies’ debt during the tenure of the D & O Defendants.
Because the debtors were insolvent for much of this time
(according to Alberts, some of them were never solvent), the main
victim of the defendants’ conduct was not DCHC, but its
creditors, whose chances of recovering on their claims lessened
with each new debt. Alberts lacks standing to pursue causes of
action held by the debtors’ individual creditors. See In re
Greater Southeast Cmty. Hosp. Corp. I, 333 B.R. at 517-21. Thus,
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 7 of 91

7 The harm occurs only where the corporation lacks the
assets or income to pay off the loan. As at least one
commentator has noted, a company’s acquisition of debt, by
itself, is a “balance sheet neutral” transaction for the company
because the company receives cash or other assets equal to the
debt incurred (not accounting for interest). See generally Sabin
Willett, The Shallows of Deepening Insolvency, 60 Bus. Law. 549
(2005). The harm to the corporation comes from the artificial
prolongation of the defective business model employed by the
company, which ultimately causes the company to go further “into
the red” rather than dissolve or reorganize itself to be a
productive, profitable business. Where the corporation is
capable of paying off the loan, there is no undue prolongation of
the company’s current business model at the expense of its future
potential and therefore no real “deepening” of the company’s
insolvency. See In re Greater Southeast Cmty. Hosp. Corp. I, 333
B.R. at 523 n.17.
8
he must articulate an injury separate and apart from the mere
existence of the debtors’ debt to pursue the instant proceeding.
Alberts attempts to resolve this dilemma by resorting to the
theory of damages known as “deepening insolvency.” This theory
holds that the acquisition of debt by an insolvent corporation
can harm the corporation as well as its creditors by making it
more difficult for the corporation to run a profitable business
without resorting to bankruptcy. See Official Comm. of Unsecured
Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 349-50 (3d Cir.
2001) (“Lafferty”).7 It also forces companies to expend their
resources in the repayment of debt, thereby heightening the risk
of corporate dissolution through a chapter 7 or so-called
“liquidating chapter 11” bankruptcy case. Id.
The parties argued at length in the previous round of
briefing about the validity and nature of the deepening
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 8 of 91

9
insolvency theory. Ultimately, this court, relying heavily on
the Lafferty decision as well as Chief Judge Bernstein’s decision
in Kittay v. Atlantic Bank of New York (In re Global Serv. Group,
LLC), 316 B.R. 451 (Bankr. S.D.N.Y. 2004), and District Judge
Kaplan’s decision in Bondi v. Bank of America Corp. (In re
Parmalat), 383 F. Supp. 2d 587 (S.D.N.Y. 2005), held that the
deepening of an insolvent corporation’s debt could be harmful to
the corporation as well as its creditors, but declined to
recognize a separate tort to address this harm when other, pre-
existing causes of action work just as well. In re Greater
Southeast Cmty. Hosp. Corp. I, 333 B.R. at 516-17.
Since the court issued its opinion in October, the Third
Circuit has had occasion to reflect on its ruling in Lafferty.
In CitX, the Third Circuit considered whether an accountant for
an internet company could be held liable for the deepening
insolvency of the company where the accountant was allegedly
negligent in his review of the company’s finances. 448 F.3d at
674. The Third Circuit clarified that, notwithstanding its
descriptions of deepening insolvency as a “type” or “theory” of
injury in Lafferty, id. at 677 (quoting Lafferty, 267 F.3d at
349), it had never held that deepening insolvency was “a valid
theory of damages for an independent cause of action.” Id. at
677. The court also concluded that “a claim of negligence cannot
sustain a deepening[]insolvency cause of action.” Id. at 681.
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 9 of 91

8 Epstein Becker filed a line attaching the CitX decision
on May 31, 2006, but neither it nor any other defendant has moved
for reconsideration of the court’s prior opinion. The court’s
consideration of the CitX decision is made out of an abundance of
caution and a desire to ensure that the court reaches the right
result and provides the parties with a sufficient understanding
of its views regarding the vexatious topic of deepening
insolvency.
9 In CitX, the debtor company’s accountant supposedly
deepened the debtor’s insolvency by approving financial
statements that allowed the debtor to solicit funds from
investors despite its financial distress, which allowed the
struggling company to continue operating and, through the
subsequent machinations of its management, acquire more debt.
The Third Circuit found this theory of harm too attenuated to
state a claim for negligence, concluding that “[a]ny increase in
insolvency (i.e., the several million dollars of debt incurred
after the $1,000,000 investment) was wrought by CitX’s
management, not by [the defendant].” CitX, 448 F.3d at 677. In
contrast, Alberts alleges that the D & O Defendants, with the
assistance of the Law Firm Defendants, directly increased the
debt load of the debtors.
10
These conclusions give the court serious pause.8 Although
CitX involved different facts,9 and although the decision is not
binding on this court, the Third Circuit’s reinterpretation of
Lafferty contradicts the conclusions reached by this court in its
earlier opinion, thereby calling into question the court’s
reliance on that case in that opinion. The court has therefore
been especially careful in its review of the CitX decision.
Having conducted this review, the court remains convinced
that it reached the right result in its prior opinion. There is
no way to make sense of Lafferty without concluding that the
deepening of a company’s insolvency can be harmful; otherwise,
the Lafferty court could not have concluded that fraudulent
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 10 of 91

10 If a third party gives advice that encourages corporate
management to deepen the corporation’s insolvency, the third
party ought to be held responsible for an independent tort of
deepening the corporation’s insolvency only if that third party
knows that her advice will further a tort. See Restatement
(Second) of Torts § 876(b) and comment d. To the extent that the
court suggested in Latin Investment that knowledge of a
fraudulent (versus negligent) tortious act is required, it went
too far. 168 B.R. 1 at 4-5.
11
conduct leading to the deepening of a company’s insolvency
constitutes tortious activity. Nor is this court aware of any
common law principle holding that an injury sustained as a result
of one tort (fraud) is somehow not an injury when it is caused by
a different tort (negligence), as the CitX court seems to
suggest. The cause of an injury might determine whether a tort
occurred, but it does not determine whether the injured person
suffered an injury in the first place.
The court is equally unmoved by the Third Circuit’s decision
to restrict recoveries for deepening insolvency to actions
involving fraud. If deepening insolvency were treated as a
separate cause of action rather than as a theory of harm, it
would make sense to require a higher threshold of scienter than
mere negligence lest the tort expose directors and third parties
to a standard of care that they otherwise would never have owed
in the first place. Cf. Drabkin v. L & L Constr. Associates,
Inc. (In re Latin Inv. Corp.), 168 B.R. 1, 4-5 (Bankr. D.D.C.
1993).10 CitX attempted to resolve this inherent problem (i.e.,
the danger that the scienter requirement for the “tort” of
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 11 of 91

11 The Lafferty court described this harm as follows:
[T]he incurrence of debt can force an
insolvent corporation into bankruptcy, thus
inflicting legal and administrative costs on
the corporation. . . . When brought on by
unwieldy debt, bankruptcy also creates
operational limitations which hurt a
corporation’s ability to run its business in
a profitable manner. . . . In addition,
prolonging an insolvent corporation’s life
through bad debt may simply cause the
dissipation of corporate assets.
Lafferty, 267 F.3d at 349-50 (citations omitted).
12
deepening insolvency would be unduly broad) by imposing a
fraudulent intent requirement instead.
The Lafferty court, however, did not fix its star upon the
notion that deepening insolvency was a tort. Instead, it
concluded that the accumulation of debt by an insolvent entity
could, in certain circumstances, be harmful to the corporation.
Lafferty, 267 F.3d at 349-50.11 These injuries can occur as a
result of management’s negligence just as easily as they can due
to management’s fraud, and management (unlike a third party with
no special relationship to the company) owes a duty of care to
its corporate client. The link made by the CitX court between
deepening insolvency and fraudulent intent is therefore an
arbitrary one unless one makes the equally arbitrary
determination that deepening insolvency is a (hitherto unknown)
tort of its own, in which case officers and directors who,
without engaging in fraud, breach--even grossly breach--their
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 12 of 91

13
duty of care in a harmful manner would be insulated from their
wrongdoing.
Rather than attempt to “discover” a separate common law tort
which must then be neutered, this court prefers to treat
deepening insolvency as the theory of harm that it was always
meant to be, and will rely on other, more established (not to
mention less convoluted) common law causes of action to ascertain
whether the defendants in this case have engaged in a legal wrong
for which Alberts is entitled to recover. Unless and until this
court is told differently by a higher court in its own circuit,
deepening insolvency will remain a viable theory of damages in
this jurisdiction regardless of whether the injury occurred as a
result of negligence or fraud.
This is not to suggest that the damages sought by Alberts
are an accurate gauge of the injuries suffered by the debtors due
to their alleged deepening insolvency. Alberts seeks to recover
for “the increased amount of insolvency suffered by the
[d]ebtors” (Compl. ¶ 370). This calculation might have
represented a fair valuation of the harm caused to the creditors
of DCHC (assuming that the debt was never repaid), but Alberts
has no standing to protect creditors’ interests. Instead, he
will need to prove that DCHC and its subsidiary corporations were
actually harmed by the defendants’ allegedly excessive borrowing
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 13 of 91

12 Put another way, Alberts will need to quantify the
impact of the debt accumulated by the debtors due to the
defendants’ actions on the debtors’ business operations, not the
amount of debt incurred. Specifically, he will need to show that
the debtors’ chances of falling into bankruptcy increased due to
the defendants’ actions (and then quantify the costs of
bankruptcy for the debtors), that the defendants’ conduct
prevented the debtors from performing in a profitable manner (and
then quantify the cost to the debtors caused by that impairment),
or that the defendants’ actions forced the debtors to dissipate
corporate assets that would have been retained otherwise (and
then quantify the value of those assets). As the court noted in
Latin Investment, these calculations “pose serious problems” for
a plaintiff like Alberts, 168 B.R. at 5, “but should not in
[themselves] affect the decision as to dismissal.” Id. Although
Alberts does not spell out the specific harms caused by the
debtors’ excessive deepening insolvency (see, e.g., Compl.
¶¶ 240-292 (referring only to proximate injury); id. at ¶ 319
(“injury this significant debt would cause”)), the court can
infer such harms for purposes of the defendants’ motions from the
alleged fact that the debtor filed bankruptcy only after its
debts reached massive levels.
13 If the evidence shows that the debtors would have been a
failure no matter how well DCHC’s management behaved (an
admittedly unlikely prospect given that all but one of the
debtors have successfully reorganized), Alberts may not be able
to recover anything at all.
14
habits, and then quantify that harm.12 The damages arising from
these injuries (if proven) may be larger or smaller than the
amount of excess debt acquired by the debtors, but they will
almost certainly not be the same.13
B. Claims Against the D & O Defendants
Having resolved the question of harm, the court now turns to
the allegations of wrongdoing against the D & O Defendants.
Unlike the First Amended Complaint, where Alberts attempted to
hold each and every D & O Defendant liable for any and all of the
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 14 of 91

15
wrongs allegedly done to any of the debtors, the Second Amended
Complaint is much more precise. Nevertheless, the D & O
Defendants’ arguments, if completely successful, would result in
the dismissal of all counts against them with the exception of
Count II as it applies to Tuft, which this court has already
concluded is a valid claim.
1. Claims relating to the debtors’ deepening
insolvency
Count I of the Second Amended Complaint seeks to impose
liability on various D & O Defendants for their alleged breaches
of their duty of care in driving DCHC and its subsidiary
hospitals deeper into debt to the NCFE Entities, but is limited
to those D & O Defendants who allegedly breached their fiduciary
duties as officers of the various debtors. Count III, alleging
breach of the fiduciary duty of loyalty, also relates to the
funding provided by the NCFE Entities, but includes Parrett and
Krauss, who served only as directors for DCHC, as well as other
D & O Defendants in their capacities as officers and as
directors. The D & O Defendants move to dismiss both counts with
respect to every named defendant.
(a) Breach of the fiduciary duty of care
(Count I)
“The directors of Delaware corporations have a triad of
primary fiduciary duties: due care, loyalty, and good faith.”
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 15 of 91

14 Because DCHC was incorporated in Delaware, the fiduciary
duties of its officers and directors are defined by the laws of
that jurisdiction. See Pagonis v. Donnelly, 929 F. Supp. 459,
460 (D.D.C. 1995).
16
Emerald Partners v. Berlin, 787 A.2d 85, 90 (Del. 2001).14 “With
respect to the obligation of officers to their own corporation
and its stockholders, there is nothing in any Delaware case which
suggests that the fiduciary duty owed is different in the
slightest from that owed by directors.” David A. Drexler et al.,
Del. Corp. Law and Practice § 14.02 (Rel. No. 16, 2003) (quoted
in In re Walt Disney Co., 2004 WL 2050138, *3 (Del. Ch. Sept. 10,
2004)). Thus, officers as well as directors may be liable for
harms suffered by a corporation if the harm was caused by an
officer’s breach of fiduciary duty. See, e.g., Stanziale v.
Nachtomi (In re Tower Air, Inc.), 416 F.3d 229, 239-41 (3d Cir.
2005) (holding that complaint properly alleged claims for breach
of fiduciary duty by corporation’s officers as well as its
directors).
“[G]ross negligence is the applicable legal standard for a
corporate director’s breach of the duty of care under Delaware
law.” Official Comm. of Unsecured Creditors of Teu Holdings,
Inc. v. Kemeny (In re Teu Holdings, Inc.), 287 B.R. 26, 32
(Bankr. D. Del. 2002) (citing Brehm v. Eisner, 746 A.2d 244, 259
(Del. 2000)). This standard “appears to be synonymous with
engaging in an irrational decisionmaking process.” In re Tower
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 16 of 91

17
Air, Inc., 416 F.3d at 241. It “signifies more than ordinary
inadvertence or inattention[,]” Jardel Co. v. Hughes, 523 A.2d
518, 530 (Del. 1987), but “is nevertheless a degree of
negligence, while recklessness connotes a different type of
conduct akin to the intentional infliction of harm.” Id.
“In Delaware, the merits of a business decision are
considered separately from the process used to reach that
decision.” In re Tower Air, Inc., 416 F.3d at 240. “Due care in
the decisionmaking context is process due care only.” Brehm, 746
A.2d at 264 (emphasis in original). “The [threshold] question is
whether the process employed [in making the decision] was ‘either
rational or employed in a good faith effort to advance corporate
interests.’” In re Teu Holdings, Inc., 287 B.R. at 33 (quoting
In re Caremark Int’l, Inc., 698 A.2d 959, 967 (Del. Ch. 1996))
(emphasis in original).
Alberts repeatedly alleges that Tuft, Talbot, and Mounce
signed documents in their capacity as officers of the various
debtors without fully informing themselves of the consequences of
those actions and at a time when the defendants knew or should
have known that their actions would harm the companies they
purported to represent (Compl. ¶¶ 239-62, 264-67, 269-73, 275-
91). Viewed in isolation, these allegations are perhaps too
conclusory to support a cause of action for breach of fiduciary
duty. But there is plenty of detail in earlier paragraphs, which
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 17 of 91

18
describe at length the circumstances surrounding and consequences
of the actions taken by these defendants.
For example, paragraphs 42 through 74 of the complaint
describe the incurring of debt by DCHC subsidiary Hadley Corp.,
under the aegis of Tuft and Talbot, resulting in a negative net
equity position for Hadley Corp. of $46 million by July of 2001
(Compl. ¶ 72) compared to a purchase price of $8.8 million in
1992 (Compl. ¶ 42). First, Hadley Corp. allegedly decided to
sell certain equipment and then lease that equipment back from
NCFE at a cost of $6,980,475.00 in required payments over 60
months as a means of repaying $3,300,000.00 due to NCFE--an
arrangement that required Hadley Corp. to pay over time
$3,680,475.00 more than the $3,300,000.00 in debt originally owed
(Compl. ¶¶ 46-47). After all but 8 months were left on the first
equipment lease (that is, after all but $930,730.00 of the
$6,980,475 in monthly payments had come due), Hadley Corp.
extended the lease at a cost of $3,206,522.40 in required
payments over 60 months, a net additional cost of $2,275,792.40
(that is, $3,206,522.40 less $930,730.00) (Compl. ¶ 48). In sum,
Hadley Corp. incurred $5,956,267.40 more debt through its two
lease agreements with NCFE than it owed prior to the signing of
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 18 of 91

15 Hadley Corp. entered into a separate lease agreement
with an NCFE subsidiary at a cost of $130,403.28 (Compl. ¶ 59).
This agreement was also amended for an additional cost of
$169,596.72 (Compl. ¶ 60).
16 For example, the first lease back arrangement’s required
payments equate to $3.3 million required to be repaid over 5
years with interest at a rate exceeding 34.6% per annum. By
March 31, 1999, the amount of principal owed, assuming lease
payments had been kept current, would have stood at roughly
$820,250.00. The required payments under the second lease back
arrangement equate to $820,250.00 repaid over 5 years with
interest at a rate exceeding 76% per annum.
17 Alberts alleges that the NCFE Entities charged on 12% of
their purchase commitments per annum in “Program Costs” and
another 1% per annum in “commitment fees” (Compl. ¶ 52).
19
those agreements.15 Even without taking into account that the
effective interest rates that the lease-back payments represented
appear to have been exceedingly high,16 the complaint can be read
as alleging that the increased debt obligations, when combined
with other debts incurred, served artificially to prolong an
unprofitable operation well past the point of insolvency, and to
drive Hadley Corp. deeper and deeper into insolvency.
Second, Hadley Corp. allegedly sold its accounts receivables
to an NCFE subsidiary in exchange for advances on those
receivables (Compl. ¶ 50). The NCFE subsidiary charged “Program
Costs” as well as incidental fees relating to its administration
of the funding program.17 Rather than pay off the difference
between the amounts advanced by the NCFE subsidiary and the
amounts collected on the receivables (which could never totally
satisfy the debt owed to the NCFE subsidiary due to the Program
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 19 of 91

18 Bearing in mind that Hadley Corp. was not repaying its
debt, and assuming an aggregate purchase of $209.7 million by the
NCFE Entities, the 13% per annum in fees owed would have
resulted, in a one-year period, in an additional $27,261,000
being owed to the NCFE Entities, more than three times the $8.8
million purchase price of Hadley Hospital.
19 However, the complaint might be read as alleging that
three separate loans aggregating $20,153,650.00 were made.
20
Costs and incidental fees), Hadley Corp. sat by while successive
NCFE Entities assumed Hadley Corp.’s debt and then entered new
agreements with the successor entities to continue the funding
program (Compl. ¶¶ 57-58, 61). Indeed, Alberts alleges that the
agreements were extended and expanded from an initial purchase
commitment of $2.5 million to a final commitment of $209.7
million, more than forty times the balance of Hadley Corp.’s
accounts receivable and more than ten times its yearly net
revenues (Compl. ¶¶ 63-64).18
Third, between October 14, 1999, and July 16, 2001, Hadley
Corp. allegedly borrowed funds from NCFE Entities on three
occasions, and the most plausible reading of the complaint is
that these loans started at $7,585,986.00, with each loan rolled
over into the next loan, and with the loan balance standing at
$7,503,332.60 in July of 2001 when the last loan was made (Compl.
¶¶ 68-69, 71).19 The first loan from NCFE was secured by Hadley
Corp. and DCHC common stock; the second note included a cross-
obligation clause making all of Hadley Corp.’s affiliates liable
for Hadley Corp.’s debts (Compl. ¶ 70). These loans were
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 20 of 91

20 The $19,800,000 figure is composed of the $16.3 million
and $3.5 million figures derived from, respectively, paragraphs
80 and 81 of the Second Amended Complaint.
21 Pine Grove Corp. allegedly purchased Pine Grove Hospital
for only $4.9 million (Compl. ¶ 88). The direct loans made by
NCFE alone would have consumed approximately 78% of the
hospital’s total value.
22 Alberts alleges that Michael Reese Corp. borrowed $4
million from one of NCFE’s subsidiaries outright, then issued a
cognovit promissory note in the amount of approximately $1.2
million to the same subsidiary that was amended less than seven
months later to increase the liability on the note to $50 million
(Compl. ¶¶ 117, 122-23). Alberts also alleges that Michael Reese
Corp. obtained a $2,765,000.00 letter of credit through the
machinations of NCFE and obtained a $12 million loan and $2
million line of credit from third party lenders in exchange for a
subordination of claims held by one of the NCFE Entities (Compl.
¶¶ 124 and 125).
21
undersecured because all of the debtors, including Hadley Corp.,
were insolvent by this point in time.
Alberts alleges similar and, in some instances, more
egregious conduct with respect to the other debtors. He alleges
that all of DCHC’s subsidiaries entered into accounts receivables
funding agreements with the NCFE Entities like the ones entered
into by Hadley Corp., only that, with respect to Pacifica Corp.,
the NCFE Entities extended at least $19,800,000.00 more than the
accounts receivables provided in available collateral.20 He
alleges that Pine Grove Corp. borrowed $3,806,663.89 directly
from the NCFE Entities,21 that Michael Reese Corp. borrowed
upwards of $50 million from the NCFE Entities (when the hospital
itself was worth less than $40 million),22 that Greater Southeast
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 21 of 91

23 The equipment lease represents $10.8 million required to
be repaid over 60 months at an interest rate of 11.9% per annum.
Although that may not have been an excessive interest rate, the
amount of debt payments must be considered in light of the
additional debt that management was causing Michael Reese Corp.
to incur. Alberts alleges that Michael Reese Corp. also executed
separate “leaseback” agreements with the NCFE Entities totaling
$1,891,312.10, but he does not list the value of the equipment,
leaving the court to guess as to whether and to what extent
Michael Reese Corp. might have suffered a loss through these
agreements (Compl. ¶¶ 119, 126).
22
Corp. borrowed $26 million from the NCFE Entities, and that DCHC
itself borrowed $5 million directly from NCFE and entered into a
$75 million revolving promissory note with one of the NCFE
Entities (Compl. ¶¶ 93, 96, 101, 104, 117, 122-23, 134, 141, 143-
45). Finally, he alleges that all of the debtors except for Pine
Grove Corp. executed equipment leases similar to the leases
executed by Hadley Corp. For example, in the case of Michael
Reese Corp., equipment was sold for $10.8 million and leased back
for 60 monthly payments aggregating $14,381,677.00--a net loss of
$3,581,677.00 (Compl. ¶ 115)--around the same time that Tuft
executed a cross-default agreement in favor of NCFE Entities
making Michael Reese Corp. liable for the debts of all of its
affiliates (Compl. ¶ 116).23
According to Alberts, the NCFE Entities advanced
approximately $216 million to the debtors pursuant to accounts
receivables funding agreements when the value of the debtors’
accounts receivables was approximately $42 million at the time of
the Greater Southeast Community Hospital (“Greater Southeast”)
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 22 of 91

23
purchase, made fraudulent payments to the debtors of almost $280
million based on intentionally erroneous valuations of the
debtors’ accounts receivables, and overfunded DCHC and its
subsidiaries with uncollateralized advances totaling $486 million
by July of 2002 (Compl. ¶¶ 138, 147, 149). The debtors’ joint
insolvency allegedly ballooned from a net deficit of $205 million
on December 1, 1999, to a staggering $460 million as of December
31, 2002 (Compl. ¶¶ 151-54). Because many of the notes executed
by individual debtors made those debtors liable for the debts of
all the DCHC subsidiaries, the deepening insolvency of the
debtors as a whole increased the liability of each individual
debtor.
Any reasonable businessperson worth her salt would have
carefully considered the obvious negative consequences of
incurring additional debt of the magnitude acquired by each and
every one of the debtors, yet this is precisely what Tuft,
Talbot, and Mounce allegedly failed to do when they signed the
agreements and notes--some of which required the issuance of
patently false “solvency certificates” (Compl. ¶¶ 62, 78, 81, 83,
100, 133, 241, 249-50, 257)--that plunged the debtors deeper and
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 23 of 91

24 Ordinarily, the fiduciary duties of the director or
officer of a wholly-owned subsidiary corporation run to the
parent corporation, not the subsidiary itself. Trenwick America
Litig. Trust v. Ernst & Young LLP, 2006 WL 2333201, *27 (Del. Ch.
Aug. 10, 2006) (“Trenwick”). Once the subsidiary corporation is
insolvent, however, those duties transfer to the subsidiary and
its creditors. Claybrook v. Morris (In re Scott Acquisition
Corp.), 344 B.R. 283, 286-88 (Bankr. D. Del. 2006); accord
Trenwick, 2006 WL at *28 & n.96.
25 The D & O Defendants argue that a corporation’s
directors and officers are under no affirmative obligation to
force a company into bankruptcy and liquidate. The court agrees
that directors and officers have no “blanket duty to liquidate
upon insolvency[] untempered by the business judgment rule,”
Official Comm. of Unsecured Creditors of RSL Com Primecall, Inc.
v. Beckoff (In re RSL Com Primecall, Inc.), 2003 WL 22989669, *8
(Bankr. S.D.N.Y. Dec. 11, 2003), but a director or officer who
behaves so irresponsibly as to breach a fiduciary duty is not
protected by the business judgment rule. Emerald Partners, 787
A.2d at 91. Under those circumstances, the court has an
obligation to ascertain whether the transactions entered into by
the defendants were fair to the debtors, and, if not, hold the
defendants responsible for the damages arising from their
misconduct.
24
deeper into insolvency.24 Moreover, many of these alleged
actions were taken at a time when the debtors’ relationship with
NCFE was described by others associated with the debtors as
“incestuous” and “a black hole” (Compl. ¶ 161).
Such conduct, if it actually occurred, cannot be excused as
“ordinary inadvertence or inattention,” Jardel Co., 523 A.2d at
530, but rather constitutes gross negligence of the highest
order.25 Alberts alleges facts sufficient to state a claim for
breach of the fiduciary duty of care by Tuft, Talbot, and Mounce.
Because Alberts has stated a claim for breach of the
fiduciary duty of care with respect to Tuft, Talbot, and Mounce,
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 24 of 91

26 “The business judgment rule is a presumption that ‘in
making a business decision the directors [and officers] of a
corporation acted on an informed basis, in good faith and in the
honest belief that the action taken was in the best interests of
the company [and its shareholders]’.” Emerald Partners, 787 A.2d
at 90 (quoting Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)).
“The rule posits a powerful presumption in favor of actions taken
by the directors [and officers] in that a decision made by a
loyal and informed board [and the corporation’s officers] will
not be overturned by the courts unless it cannot be ‘attributed
to any rational business purpose.’” Cede & Co. v. Technicolor,
Inc., 634 A.2d 345, 361 (Del. 1993).
25
the business judgment rule does not apply, at least at this stage
of the proceeding. Emerald Partners, 787 A.2d at 91.26 Assuming
that Alberts can produce evidence in support of his allegations,
the burden will rest with these three defendants to show that the
transactions caused by their actions were “entirely fair” to the
respective debtors. Id.; accord Williams v. Geier, 671 A.2d
1368, 1384 (Del. 1996); Cede & Co., 634 A.2d at 361.
Susan Engelhard presents a more complicated situation.
Unlike the other defendants named in Count I, Engelhard is not
alleged to have violated any fiduciary duties by “failing to
inform herself” of the consequences of the debtors’ deepening
insolvency, nor does Alberts allege that she failed to stop these
transactions due to some oversight on her part or out of any
self-interest (which would have stated a claim for breach of the
fiduciary duty of loyalty). Instead, Alberts finds fault in
Engelhard’s failure to stop the transactions causing the debtors’
deepening insolvency from occurring after reviewing the documents
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 25 of 91

27 Engelhard may be dismissed on an alternative ground as
well. Other than making the conclusory allegation that Engelhard
failed to stop the transactions, Alberts fails to allege facts
establishing that Engelhard’s powers and duties as an officer
gave her control of the transaction, thereby enabling her to
prevent the transaction. As discussed in part II.B.2, infra
(“Other claims of breach of fiduciary duty”), this court already
held that with respect to Counts II and IV a breach of fiduciary
duty does not lie unless the officer had the power to prevent the
transaction. In re Greater Southeast Cmty. Hosp. Corp. I, 333
B.R. at 526.
26
consummating those transactions (Compl. ¶¶ 274, 292), without
alleging that she failed to inform herself of the consequences of
her decision or overlooked critical aspects of that decision.
This amounts to a challenge to the substance of her decision not
to prevent the company from acquiring more debt--a challenge that
the business judgment rule does not permit.27
It might seem counterintuitive to conclude that Tuft,
Talbot, and Mounce, who are alleged to have failed to consider
the consequences of the debtors’ accumulation of debt while
insolvent, are not protected by the business judgment rule, while
Engelhard, who is alleged to have considered these consequences
and permitted the transactions anyway, would be protected. But
this just underscores how narrow Alberts’s claim truly is.
Alberts does not allege that Tuft, Talbot, and Mounce breached
their fiduciary duties by causing the debtors to acquire
additional debt while insolvent; he alleges that they breached
their fiduciary duties by engaging in this conduct without fully
considering the impact of their actions. It is their alleged
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 26 of 91

28 One question that cannot be resolved at this stage in
the proceeding is whether any of the named defendants could have
actually prevented these transactions from occurring in their
capacity as officers. If the documents allegedly signed by Tuft,
Talbot, and Mounce were done at the behest of the board of
directors for their respective companies, it could be argued that
the actions of these defendants in their capacity as officers
were not the cause of the harm suffered by the debtors. For now,
the court must take Alberts at his word when he alleges that each
of the named defendants could have stopped the transactions
consummated by their signatures had that been their desire.
27
procedural shortcomings, not the wisdom of their substantive
decisions, that make out a claim for breach of the fiduciary duty
of care.
If Alberts cannot produce any evidence after the close of
discovery that Tuft, Talbot, and Mounce failed to inform
themselves adequately of the consequences of their decisions to
sign the various instruments that allegedly deepened the debtors’
insolvency, his claims against them for breach of the fiduciary
duty of care will be susceptible to a motion for summary judgment
because the business judgment rule will apply. For today, his
allegations are sufficient. The court will dismiss Count I with
respect to Susan Engelhard, but not with respect to Paul Tuft,
Donna Talbot, or Erich Mounce.28
(b) Breach of the fiduciary duty of loyalty
(Count III)
“Corporate officers and directors are not permitted to use
their position of trust and confidence to further their private
interests.” Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939).
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 27 of 91

28
Instead, “the best interest of the corporation and its
shareholders [must] take precedence over any interest possessed
by a director, officer[,] or controlling shareholder and not
shared by the shareholders generally.” Cede & Co., 634 A.2d at
361. For that reason, “Delaware law distinguishes between the
duty of loyalty and the duty of care.” Graham v. Taylor Capital
Group. Inc. (In re Reliance Sec. Litig.), 91 F. Supp. 2d 706, 732
(D. Del. 2000).
“A breach of loyalty claim requires some form of self-
dealing or misuse of corporate office for personal gain.” Id.
“The classic example . . . is when a fiduciary either appears on
both sides of a transaction or receives a personal benefit not
shared by all shareholders.” In re Walt Disney Co. Derivative
Litig., 2005 WL 2056651, *33 (Del. Ch. Aug. 9, 2005). In
addition, consciously making a decision that is not in the
corporation’s best interests--abdicating one’s directorial
duties--is a breach of the fiduciary duty to act in good faith,
see In re Walt Disney Co. Derivative Litig., 2006 WL 1562466,
**26-27 (Del. June 8, 2006), which is just another permutation of
the fiduciary’s duty of loyalty. Cede & Co., 634 A.2d at 363.
In this case, Alberts alleges that the D & O Defendants engaged
in self-dealing in their capacities as officers and directors of
various debtors.
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 28 of 91

29
(i) Breach of duty of loyalty by officers
In Count III of the Second Amended Complaint, Alberts
alleges essentially the same bad acts by Tuft, Talbot, and Mounce
in their capacity as officers for the various debtors that he
alleged in Count I, but adds the new allegation that these
defendants intentionally abdicated their fiduciary duties to the
debtors in favor of the NCFE Entities. The D & O Defendants
argue that Count III should be dismissed in its entirety because
Alberts fails to plead the necessary element of self-dealing.
They argue that Count III seeks to hold the named defendants
responsible for their failure to inform themselves of necessary
information, which states a claim for negligence rather than
disloyalty. See part II.B.1.a, supra.
The court finds this reading of the Second Amended Complaint
unduly narrow. Earlier in the complaint, Alberts alleges that
“DCHC and the [s]ubsidiaries operated through a centralized cash
management system whereby receivables collected at the operating
affiliate level were immediately swept up to DCHC,” where they
were used to “pay [DCHC’s] management expenses” (Compl. ¶ 39).
He then alleges that “these funds also went to pay[] the undue
loans and other improper consideration” received by some of the
D & O Defendants (Compl. ¶ 39), which meant that “[w]ithout NCFE,
the D & O Defendants could not have received such excessive
salaries, bonuses[,] and gift loans” (Compl. ¶ 40). In other
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 29 of 91

30
words, the debtors’ management benefitted personally from the
very same loans that harmed the debtors themselves.
Viewed against the backdrop of these earlier allegations,
Alberts’s refrain that the defendant officers named in Count III
“abdicat[ed] [their] responsibilities in favor of NCFE” (Compl.
¶ 315) suggests that the officers acted intentionally and for
their own financial benefit: the act of prioritization itself
requires intent. And while Alberts’s description of the officer
defendants’ failures to inform themselves is typically associated
with breach of care allegations, the description as a whole could
be read to allege that the officer defendants refused to consider
the effects of their actions on the debtors because of their own
selfish interests, a conscious act of disloyalty that amounts to
an abdication of directorial duties. Whether framed as a breach
of the duty of loyalty or the duty of good faith, count III
states a cause of action with respect to Tuft, Talbot, and Mounce
in their role as officers of the various debtors.
(ii) Breach of duty of loyalty by directors
“When a board of directors’s loyalty is questioned, Delaware
courts determine whether a conflict has deprived stockholders of
a ‘neutral decision-making body.’” Cinerama, Inc. v. Technicolor,
Inc., 663 A.2d 1156, 1170 (Del. 1995) (quoting Oberly v. Kirby,
592 A.2d 445, 467 (Del. 1991)). Consequently, “the [p]laintiff
must ‘plead facts demonstrating that a majority of a board that
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 30 of 91

29 Alberts takes issue with this rule, citing Walt Disney
for the proposition that “[w]here a director consciously ignores
his or her duties to the corporation, thereby causing economic
injury to its stockholders, the director’s actions are either
‘not in good faith’ or involve ‘intentional misconduct.’” In re
Walt Disney Co. Derivative Litig., 825 A.2d at 290. The quoted
language actually refers to the duties of a hypothetical director
in general, and does not imply that the rule set forth in
Edgecomb is wrong. Nor is this rule some random bit of Delaware
arcanum. It is an extension of the basic principle of tort law
that an alleged tortfeasor must be the proximate cause of the
harm alleged for liability to attach.
It is of course conceivable that a single director could,
under the right circumstances, breach her fiduciary duty of
loyalty (e.g., if an interested director concealed pertinent
information from disinterested members of the board prior to a
vote). But most of the time, the only way that a director can
breach one of her fiduciary duties is by voting in a disloyal or
grossly negligent manner. If one director votes in such a
manner, but the other directors vote in the same way without
compromising their fiduciary duties, then the one interested
director’s vote is not the proximate cause of the harm caused by
the board’s collective vote because the other, disinterested
directors would have voted the same way even if the interested
director had not voted at all.
31
approved the transaction in dispute was interested and/or lacked
independence’” to state a claim for breach of the fiduciary duty
of loyalty by a board member. Continuing Creditors Comm. of Star
Telecomm. Inc. v. Edgecomb, 385 F. Supp. 2d 449, 460 (D. Del.
2004) (“Edgecomb”) (emphasis in original).29 “[I]t is usually
necessary to show that the director was on both sides of a
transaction or received a benefit not received by the
shareholders” for a particular director to be considered
“interested.” Id.
Alberts does not allege that a majority of the directors for
the various subsidiaries of DCHC were interested parties (or
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 31 of 91

30 Alberts provides a list of directors and officers for
each debtor in his opposition to the Law Firm Defendants’ motion
to dismiss, but the list is obviously either incomplete or wrong,
as it does not include Krauss, and in any event was not
incorporated by reference in the Second Amended Complaint.
31 Alberts tried to avoid similar pleading deficiencies in
his First Amended Complaint by arguing that DCHC “dominated” its
subsidiaries and that the court should pierce the corporate veil
of these subsidiaries. See In re Greater Southeast Cmty. Hosp.
Corp. I, 333 B.R. at 522. The court rejected that argument
because the “facts” supporting the argument were presented in
Alberts’s opposition to the D & O Defendants’ motion to dismiss
the First Amended Complaint rather than in the complaint itself.
Id. at 523. Notwithstanding this ruling, Alberts has once again
omitted the factual allegations necessary to warrant a piercing
of the corporate veil.
32
consciously abdicated their fiduciary duties), nor does he
provide a list of those directors.30 Thus, his allegations
against Tuft in his capacity as a director for Hadley Corp.,
Pacifica Corp., Pine Grove Corp., Michael Reese Corp., and
Greater Southeast Corp. must fail (Compl. ¶¶ 315-19).31 Alberts
does allege, however, that “Krauss and Tuft, who were both
interested and lacked independence with respect to Kutak Rock and
NCFE respectively, always constituted a majority of the Board of
Directors of DCHC” (Compl. ¶ 312). These allegations appear to
satisfy the Edgecomb requirement that a majority of a board be
interested.
Appearances can be deceiving. It is true that Alberts
alleges that a majority of the DCHC board was “always”
interested; however, the interests of the various directors and,
more importantly, the actions allegedly taken in pursuit of those
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 32 of 91

33
interests are not entirely the same as between Tuft and Krauss.
Alberts alleges that Krauss violated his fiduciary duty of
loyalty, first, “by sending legal transactional work to Kutak
Rock . . . only because of his affiliation with that firm”
(Compl. ¶ 334). Because Alberts does not allege that a
controlling majority of DCHC’s board of directors held a self-
serving interest in contracting with Kutak Rock for the
performance of legal work, this aspect of Count III must be
dismissed as to Krauss.
Alberts further alleges that “Krauss approved NCFE-financing
agreement after financing agreement while a board member of DCHC,
creating substantial business for Kutak Rock, but without
considering the consequences that those agreements had on DCHC.”
(Compl. ¶ 226) (emphasis added). These facts suffice to permit
an inference that Krauss was an interested party with respect to
the NCFE Entities’ lending practices. Alberts alleges that Tuft
violated his fiduciary duty of loyalty by executing various notes
securing loans from NCFE in favor of his own financial interests
in seeing NCFE’s wishes satisfied (Compl. ¶ 320). Accordingly,
both Tuft and Krauss were interested parties regarding the NCFE
loans such that the board’s decisions regarding those loans were
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 33 of 91

32 Parrett and Krauss dispute Alberts’s allegation that
Tuft and Krauss together constituted a majority of DCHC’s board,
but that is a factual argument better left for resolution at the
summary judgment stage.
34
not by a disinterested majority.32
The allegation against Krauss regarding his approval of NCFE
financing fails to state that Krauss knowingly or intentionally
disregarded the consequences of his conduct out of his own self-
interest. The closest Alberts comes to making this latter
allegation is in Count III, where he alleges that Krauss
“abdicated his responsibilities to DCHC in favor of Kutak Rock”
(Compl. ¶ 334), but this “abdication” concerns Krauss’s decision
to “send[] legal transactional work to Kutak Rock” (Compl. ¶ 334)
(emphasis added), not his decision to vote in favor of “financing
agreement after financing agreement” so that he could generate
legal work.
Nevertheless, it suffices that Krauss had a self-interest
even though he is not alleged to have consciously acted on that
self-interest in voting to approve NCFE financings:
[W]here a self-interested corporate fiduciary
has set the terms of a transaction and caused
its effectuation, it will be required to
establish the entire fairness of the
transaction to a reviewing court’s
satisfaction.
Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1279
n.27 (Del. 1989) (quoting AC Acquisitions v. Anderson, Clayton &
Co., 519 A.2d 103, 111 (Del. Ch. 1986) (internal citations
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 34 of 91

33 Although much of the Delaware case law on breach of the
fiduciary duty of loyalty by directors arises in the context of
actions to set aside mergers or other transactions, breaches of
fiduciary duty are addressed in equity even when damages are the
ultimate appropriate form of relief, Harman v. Masoneilan Int’l,
Inc., 442 A.2d 487, 499-500 (Del. 1982), and the rules regarding
application of the “entire fairness” requirement do not appear to
vary depending on the form of relief ultimately imposed.
35
omitted)).33 As the Delaware Supreme Court explained in
Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983):
When directors of a Delaware corporation are
on both sides of a transaction, they are
required to demonstrate their utmost good
faith and the most scrupulous inherent
fairness of the bargain. . . . The
requirement of fairness is unflinching in its
demand that where one stands on both sides of
a transaction, he has the burden of
establishing its entire fairness, sufficient
to pass the test of careful scrutiny by the
courts.
Id. at 710 (citations omitted). “In such circumstances, a
director cannot be expected to exercise his or her independent
business judgment without being influenced by the [favorable or]
adverse personal consequences resulting from the decision.”
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 35 of 91

34 See also Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984),
overruled on other grounds by Brehm, 746 A.2d at 253 (for
business judgment rule to apply “directors can neither appear on
both sides of a transaction nor expect to derive any personal
financial benefit from it in the sense of self-dealing”); Guth v.
Loft, Inc., 5 A.2d 503, 510 (Del. 1939) (“The rule that requires
an undivided and unselfish loyalty to the corporation demands
that there shall be no conflict between duty and self-
interest.”); cf. Harman v. Masoneilan Int’l, Inc., 442 A.2d at
500 n.25 (in contrast to a claim of deceit or fraud, a claim for
breach of fiduciary duty does not require an actual intent to
deceive when one is placed in an advantageous position to
another).
36
Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993).34 All that is
necessary is that the director is aware of his self-interest, and
that is fairly inferred from the complaint in the case of Krauss.
There are other problems with the allegations made against
Tuft in his capacity as a director at DCHC. Alberts refers only
to supposedly burdensome lending arrangements executed by Tuft in
his capacity as president of DCHC (Compl. ¶ 320), and alleges
elsewhere in the Second Amended Complaint that Tuft was
authorized by the DCHC corporate bylaws to execute at least one
of these agreements without board approval (Compl. ¶ 144).
Nevertheless, it is possible to construe the allegations against
Tuft as stating that he violated both his duties as a director
and as an officer or violated one or the other in the
alternative. Count III will not be dismissed against Tuft.
That leaves Rebecca Parrett, the final ex-DCHC director
named in Count III. At the relevant times, Parrett was a
director of NCFE (Compl. ¶ 228). Alberts alleges that she was
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 36 of 91

37
appointed to DCHC’s board of directors “to ensure that the DCHC
Board of Directors complied with the demands and concerns of
NCFE, whether or not those demands and concerns were consistent
with the best interests of DCHC” (Compl. ¶ 227). This falls
short of alleging that Parrett viewed that as the purpose and
acted pursuant to that purpose, but as a director of both
corporations, she had a duty to act in the best interests of both
corporations. Alberts further alleges that Parrett harmed DCHC
by (1) approving the purchase of Greater Southeast Community
Hospital “through its subsidiary, Greater Southeast Corp,
including various NCFE-financing agreements related thereto,” (2)
approving the sale of real property from DCHC to NCFE, and (3)
“approving a limited cognovit guaranty for the debts of a DCHC
affiliate to an NCFE Entity” (Compl. ¶ 228).
This is the second time that Alberts has found fault in
Parrett’s alleged vote in favor of the purchase of Greater
Southeast Community Hospital. The court dismissed this claim in
the First Amended Complaint because the purchase of Greater
Southeast Community Hospital, by itself, could not have harmed
any of the debtors unless Alberts alleged that the hospital was
not worth its purchase price. In re Greater Southeast Cmty.
Hosp. Corp. I, 333 B.R. at 523 n.17. Despite giving Alberts the
opportunity to amend his complaint, this crucial detail is still
missing.
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 37 of 91

35 It may be inferred that execution of those instruments
was a predicate to the purchase being financed by NCFE, and
presumably it is in that sense that Alberts alleges (Compl. ¶
228) that Parrett approved the purchase as a director of DCHC.
38
Instead, Alberts now alleges that the “asset purchase
agreement” for the Greater Southeast purchase “included onerous
terms and unreasonable fees” (Compl. ¶ 330). The only agreements
described earlier in the complaint regarding the purchase are the
agreements with NCFE regarding the financing of the purchase.
The primary financing agreement was between Greater Southeast
Corp. and NCFE, not DCHC and NCFE (Compl. ¶ 134). As the court
has noted on several occasions now, the directors of DCHC cannot
be held responsible for the actions of DCHC’s subsidiaries absent
factual allegations that would allow the court to pierce the
corporate veil. See n.31, supra. Allegations concerning
decisions made by Greater Southeast Corp. about the purchase
cannot give rise to a claim against Parrett for breaching her
duty of loyalty to DCHC, the only debtor of which she was a
director.
However, DCHC was involved in the Greater Southeast purchase
by way of its collateralized guaranty and stock pledge agreement
(Compl. ¶ 135).35 Alberts further alleges that the D & O
Defendants (including Parrett) “could have stopped the NCFE
Entities from loaning money to DCHC and the Subsidiaries” and
that they “knew or should have known that further loans would
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 38 of 91

36 Alberts does not need to allege facts establishing a
lack of entire fairness. See part II.B.1.c, infra. It is thus
premature to address whether lack of knowledge of the adverse
consequences of a transaction is relevant to the “entire
fairness” inquiry or to the nature of damages to be awarded if
the transactions was not entirely fair.
39
harm DCHC through, among other things, the cross
collateralization of debts” (Compl. ¶ 236).
While those allegations do not go so far as to allege that
Parrett knew (as opposed to merely should have known) that the
loans would harm DCHC, and thus does not establish that Parrett
knowingly favored NCFE to the detriment of DCHC, Parrett’s self-
interest (as a board member of NCFE) requires that she show the
entire fairness of any DCHC transaction with NCFE that she voted
to approve (and that a disinterested majority of the DCHC board
did not approve).36 Accordingly, Alberts has established a
breach of loyalty with respect to Parrett’s votes as a DCHC
director regarding decisions relating to NCFE.
Parrett claims that pursuant to the settlement agreement
executed by the debtors and the NCFE Entities (and their
respective creditors’ committees) incident to the confirmation of
the plan in the debtors’ bankruptcy cases (the “Settlement
Agreement”), the debtors and their creditors released her from
the claims now asserted against her. Alberts contends that the
Settlement Agreement released Parrett only from claims asserted
against her in her capacity as a director of NCFE. Paragraph 8
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 39 of 91

40
of the Settlement Agreement, provided in relevant part:
The DCHC Debtors . . . hereby release . . .
(y) the NCFE Debtors and each of their
former . . . directors, . . . parent
corporation(s), subsidiary corporation(s),
any affiliate corporation(s), and any
division(s), and each of their respective
successors and assigns (but only in such
respective capacities) and (z) [certain
others]. . . of and from all . . . causes of
action whatsoever of every name, nature, and
description . . . .
(Emphasis added).
The use of “and” twice in the opening part of the clause (y)
list of released entities requires as a matter of plain meaning
that there are two sets of released entities: first,
“former . . . directors, . . . parent corporation(s), subsidiary
corporation(s), any affiliate corporation(s), and any
division(s),” and, second, each of the first set’s “respective
successors and assigns (but only in such respective capacities).”
In other words, as a matter of grammar, the clause “only in such
respective capacities” modifies only the second set of released
entities–-the successors and assigns of the first set of released
entities. Accordingly, the language is plain and unambiguous.
See United States v. Ron Pair Enterprises, Inc., 489 U.S. 235,
242-43 (1989) (interpreting the effect of a comma on whether a
statutory provision was plain and unambiguous). Beyond that, the
second use of the word “respective” (in the phrase “but only in
such respective capacities”) can be read as referring to the
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 40 of 91

41
first use of the word “respective (in the phrase “respective
successors and assigns”), thus reinforcing the plain and
unambiguous meaning of the limitation. The Settlement Agreement
elsewhere used limiting parentheticals that were more explicit in
specifying who was excluded from prior language. For example,
clause (z) of paragraph 8 listed as released entities:
the NCFE Committees and their attorneys,
advisors and agents and each of the members
of the NCFE Committees (but only in their
capacity as members of the NCFE
Committees)[.]
However, that does not suffice to surmount the plain meaning of
clause (y), arising from ordinary principles of grammar, as
restricting the critical clause “but only in such respective
capacities” to successors and assigns. Indeed, the limiting
parenthetical in clause (z) applies only to the preceding
subgroup, thus reinforcing the interpretation of the limiting
parenthetical in clause (z) as applying only to successors and
assigns. Furthermore, the limiting paragraph in clause (y) only
serves to reinforce the notion that the parties were aware of the
need to limit their releases to the capacity by which a released
entity was described if the release was to be limited to that
capacity.
The natural reading of clause (y) is thus that the
successors and assigns of the first set of released entities were
to be released only in their capacities as successors and
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 41 of 91

42
assigns, but that the release of the first set of released
entities (the NCFE Entities and former directors of the NCFE
Entities) was not so limited, and thus applied to whatever
capacity in which such entities might be sued. The limitation of
the release in the case of the second set of released entities
was necessary to make clear that such an entity (for example, a
company acquiring the assets of NCFE) would not escape DCHC
claims that existed against such a successor or assign
independent of the entity’s status of being a successor or
assign. Moreover, the phrase “but only in such respective
capacities” would not make sense when applied to a “subsidiary
corporation” or a “division” (which are both part of the first
set of entities listed in clause (y)).
Furthermore, when it came to NCFE Entities releasing DCHC
debtors and their former directors, paragraph 11 of the
Settlement Agreement included language identical in pertinent
part to paragraph 8, but added a proviso that “the foregoing does
not release . . . claims . . . against any
former . . . directors . . . of the NCFE Debtors.” That proviso
would have been unnecessary had the language “but only in such
respective capacities” been applicable to the release of DCHC
debtors and their former directors as well as to the release of
their successors and assigns.
The parties, in other words, viewed the language “but only
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 42 of 91

43
in such respective capacities” in paragraph 11 as inapplicable to
released directors, with the consequence that, in the absence of
a proviso to the contrary, the NCFE debtors’ release of a DCHC
director released the director even if he was sued as an NCFE
director (a director of a debtor granting the release). The
mirror-image language in paragraph 8 must be construed the same
way: the DCHC debtors’ release of a former director of NCFE
released the director even if the director was sued as a DCHC
director (a director of a debtor granting the release). This
interpretation of paragraph 8 is particularly required because
paragraph 10 of the Settlement Agreement acknowledged that the
DCHC debtors had consulted with legal counsel and “execute[d]
this Agreement[] with the intent of effectuating the
extinguishment of the [released claims] and of having this
release be interpreted as broadly as possible” (emphasis added).
Finally, Alberts does not dispute that if Parrett is held
liable for her acts as a DCHC director, NCFE would be required to
indemnify Parrett. Because NCFE was entitled to a release “as
broad[] as possible,” it is doubtful that the parties intended
that NCFE be exposed to indemnification claims arising from DCHC
claims against Parrett as a DCHC director that would indirectly
expose it to a DCHC claim. The intention that there was to be no
such potential for indemnification claims is demonstrated by the
inclusion in paragraph 11 of the proviso that NCFE retained the
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 43 of 91

37 Additionally, interpreting the Settlement Agreement as
fully releasing Parrett is consistent, at least in the case of
the disloyalty claim, with the spirit of the release of Parrett
as a director of NCFE. The disloyalty claim against Parrett
arises from her simultaneously being a director of NCFE, the very
capacity for which even Alberts concedes there was a release, and
for which there was no carve-out when Parrett might be sued as a
director of DCHC.
44
right to sue a released director of DCHC to the extent it sued
him as a director of NCFE as contrasted with paragraph 8, which
did not include a similar provision preserving a right in DCHC to
sue a released NCFE director if it sued the director as a
director of DCHC. NCFE naturally would have viewed paragraph 8
as releasing Parrett fully such that there were no longer any
claims against Parrett that could impose an indemnification
obligation on NCFE.37 For all of the foregoing reasons, the
Settlement Agreement released Parrett from any claims against
her.
(c) Statute of limitations
The Partially Released Defendants argue that most if not all
of the wrongdoing allegedly committed by Tuft, Talbot, and Mounce
in Counts I and III fall outside the three-year statute of
limitations for breach of fiduciary duty actions in the District
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 44 of 91

38 Alberts suggests that other states’ statutes of
limitations might apply to some of the conduct alleged in his
complaint, but “[b]ecause the District of Columbia choice-of-law
rules treat statutes of limitations as procedural, the rules
require application of the District of Columbia statute of
limitations.” Jin v. Ministry of State Security, 254 F. Supp. 2d
61, 68 (D.D.C. 2003) (citing A.I. Trade Fin., Inc. v. Petra Int’l
Banking Corp., 62 F.3d 1454, 1458 (D.C. Cir. 1995)); see also
DiCello v. Jenkins (In re Int’l Loan Network, Inc.), 160 B.R. 1,
17 (Bankr. D.D.C. 1993) (applying forum state’s choice-of-law
rules). Even if the rules were considered substantive, the
applicable statute of limitations would be that of Delaware,
which also bars filings more than three years after an alleged
breach of fiduciary duty occurs. Pagonis, 929 F. Supp. at 460;
10 Del. Code § 8106.
39 Alberts also argues that the statute of limitations in
this case was tolled by the so-called “continuing tort” doctrine.
The court does not need to address this argument because of its
ruling on Alberts’s adverse domination argument.
45
of Columbia. D.C. Code § 12-301(8) (2001).38 Alberts tries to
get around this obstacle to liability by relying on the so-called
“adverse domination” doctrine.39 “Under the doctrine, a cause of
action will be tolled during the period that a plaintiff
corporation is controlled by wrongdoers.” Resolution Trust Corp.
v. Gardner, 798 F. Supp. 790, 795 (D.D.C. 1992) (“Gardner”).
Gardner applied the adverse domination rule using federal
common law rules of accrual and tolling to resolve a federal
question case. Id. at 794 n.4. Although a subsequent district
court decision relied on Gardner in applying the rule to an
action arising under District of Columbia law, see BCCI Holdings
(Luxembourg), S.A. v. Clifford, 964 F. Supp. 468, 480-81 & n.9
(D.D.C. 1997) (“BCCI Holdings”), it is unknown whether D.C.
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 45 of 91

40 See also, e.g., In re American Cont’l Corp./Lincoln
Savings and Loan Sec. Litig., 794 F. Supp. 1424, 1453 (D. Ariz.
1992); Loranger Mfg. Corp. and the Comm. of Unsecured Creditors
of Loranger Mfg. Corp. v. PNC Bank (In re Loranger Mfg. Corp.),
324 B.R. 575, 581-82 (Bankr. W.D. Pa. 2005); Resolution Trust Co.
v. Scaletty, 891 P.2d 1110, 1112 (Kan. 1995); Resolution Trust
Co. v. Grant, 901 P.2d 807, 814 (Okla. 1995); Clark v. Milam, 452
S.E.2d 714, 718 (W. Va. 1994).
46
courts would recognize the doctrine as an exception to the
running of the statute of limitations. The court concludes that
they would for two reasons.
First, the theory of adverse domination has been accepted in
an impressive number of jurisdictions. See Gardner, 798 F. Supp.
at 794-95 (collecting cases).40 This list includes Maryland,
which shares its common law with the District of Columbia. West
v. United States, 866 A.2d 74, 79 n.1 (D.C. 2005). In Hecht v.
Resolution Trust Corp., 635 A.2d 394 (Md. 1994), the Maryland
Court of Appeals held that “the doctrine of adverse domination is
not inconsistent with Maryland legislation or with the previous
decisions of this [c]ourt” in applying the rule to the facts
before it. Id. at 406. The court based its conclusion in part
by looking at “Maryland agency law,” id. at 405, and cited
Lohmuller Bldg. Co. v. Gamble, 154 A. 41 (1931), a case decided
before the D.C. Court of Appeals was a twinkle in Congress’s eye.
Hecht, 635 A.2d at 405. This suggests that the principles
informing the court’s decision in Hecht have the same force in
the District of Columbia.
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 46 of 91

47
Second, the court finds the rationale behind the adverse
domination rule, particularly as set forth by the Maryland Court
in Appeals in Hecht, to be persuasive. As the Hecht court
explained:
A corporation can act only through its
agents. . . . And notice to an officer or
agent is notice to the corporation “where the
officer or agent in the line of his duty
‘ought, and could reasonably be expected, to
act upon or communicate the knowledge to the
corporation.’” . . . In an adverse domination
situation the agent cannot reasonably be
expected to act upon or communicate knowledge
of his own wrongdoing to the corporation.
Therefore, in most cases, corporate board
members and officers control the corporation
and constitute an insuperable barrier to a
corporation’s ability to acquire the
knowledge and resources necessary to bring
suit against the directors and officers.
Id. (quoting Int’l Bankers Life Ins. Co. v. Holloway, 368 S.W.2d
567, 580 (Tex. 1963) (quoting 3 William M. Fletcher, Fletcher
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 47 of 91

41 There is some authority for the proposition that the
imputation of an agent’s knowledge is an irrebuttable presumption
under D.C. common law, which “cannot be avoided by showing that
the agent did not in fact communicate his knowledge.” Bowen v.
Mount Vernon Sav. Bank, 105 F.2d 796, 799 (D.C. Cir. 1939);
accord Kramer-Tolson Motors, Inc. v. Horowitz, 157 A.2d 625, 626
(D.C. 1960). This rule undercuts the notion that the same common
law would recognize a presumption against imputation based on the
theory that a majority of a corporation’s board of directors
would not give actual notice of their wrongdoing to the
corporation. Nonetheless, even courts construing the imputation
principle to be “irrebuttable” refuse to apply it when the agent
acts outside the scope of her authority. See Bowen, 195 F.2d at
799 (“Where an agent common to two parties betrays one in favor
of the other the second, of course, cannot charge the first with
the agent’s knowledge.”); NB Specialty Products, Inc. v. BMR,
Inc., 1987 WL 13963, *8 n.3 (D.D.C. July 6, 1987) (agent acting
outside scope of authority “is not irrebuttably presumed to know
what its purported agent was doing”). Wrongdoing for personal
gain unquestionably falls outside the scope of an agent’s
authority.
Whether described in terms of the likelihood of actual
notice to the corporate principal or in terms of the agent’s
scope of authority, the general rule of imputation in the
District of Columbia, as in Maryland, is that knowledge is not
imputed if the agent is acting in a manner adverse to the
interests of the principle. Therefore, the same reasons that
argue in favor of a presumption of adverse interest when a
majority of the company’s board engages in wrongdoing should
apply regardless of the rationale underlying the general
imputation doctrine.
48
Cyclopedia of Corporate Law § 793 (Perm. Ed. 1986))).41
In other words, the doctrine serves as a practical extension
of long-established principles of agency law. “Because, in most
cases, the defendants’ control of the corporation will make it
impossible for the corporate plaintiff independently to acquire
the knowledge and resources necessary to bring suit,” the adverse
domination rule “presumes that actual notice will not be
available until the corporate plaintiff is no longer under the
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 48 of 91

49
control of the erring directors.” Id. “This prevents the
culpable directors from benefitting from their lack of action on
behalf of the corporation.” Id. at 408.
The Partially Released Defendants fall back on the argument
that the doctrine of adverse domination should not be applied in
this case regardless of its general validity. They may be right
eventually, though not for the reasons advanced. The Partially
Released Defendants argue that Alberts fails to allege that the
D & O Defendants “have been active participants in wrongdoing or
fraud, rather than simply negligent,” FDIC v. Dawson, 4 F.3d
1303, 1312 (5th Cir. 1993) (“Dawson”), when in fact Count III of
the Second Amended Complaint describes “active . . . wrongdoing”
in some detail. It is not clear from the Second Amended
Complaint, however, that Alberts can prevail on this point
because he fails to name all of the necessary parties in
describing this “wrongdoing.”
Under Hecht, the adverse domination presumption cannot be
invoked unless a majority of the board of directors is interested
in concealing the directors’ and officers’ harmful conduct. See
Hecht, 635 A.2d at 408 (adopting the “disinterested majority”
version of the adverse domination doctrine). This is because
“actual notice of a claim will not be possible until the
corporate plaintiff is no longer under the control of the
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 49 of 91

42 Correspondingly, the board as a whole will continue to
act outside the scope of its agency so long as a majority of the
board is adversely interested to the corporate principal.
50
[interested] board members.” Id. at 405.42 Once a disinterested
majority of directors arrive on the scene, normal laws of agency
apply, and the directors’ knowledge is imputed to their corporate
principal. Id. at 408.
Alberts does not allege that most of the directors for
DCHC’s subsidiary companies were a party to the D & O Defendants’
alleged wrongdoing. Instead, he conflates the separate corporate
identities of the various debtors as though they were a single
corporation under DCHC’s control and argues that a majority of
DCHC’s directors were “interested” (Compl. ¶ 312). But without
any allegations that would permit the court to pierce the
debtors’ corporate veils, there is no basis for the court to
treat these actions as occurring against one defendant. See
Trenwick, 2006 WL at *22 (holding that a “[l]itigation [t]rust
may not assert claims on behalf of [subsidiary corporation]
against [the parent corporation’s] board of directors without
piercing [the parent corporation’s] veil in some manner”).
If the instant proceeding were at the summary judgment
stage, Alberts’s failure to adduce these facts would foreclose
his use of the adverse domination rule. Fortunately for him, the
case is not yet at that point, and Alberts is not required by the
Federal Rules of Civil Procedure or their bankruptcy analog to
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 50 of 91

43 Count II also names Redman as a defendant, but the
automatic stay in place in Redman’s own bankruptcy case
forecloses any consideration of it at this time. See n.4, supra.
51
plead exceptions to affirmative defenses raised by defendants in
a motion to dismiss. Deckard v. Gen. Motors Corp., 307 F.3d 556,
550 (7th Cir. 2002); Dawson, 4 F.3d at 1308. The court will
defer ruling on the validity of the statute of limitations
defense at least until Alberts has a chance to provide affidavit
and documentary evidence in support of his adverse domination
theory.
2. Other claims of breach of fiduciary duty
Counts II and IV of the Second Amended Complaint are breach
of duty and waste claims specific to Tuft and Dietlin.43 Count
II alleges that these defendants violated their fiduciary duties
of care by allowing DCHC to enter into contracts with a private
air line created by Tuft and Redman (the eponymous Tuft-Redman
Enterprises) to provide on-demand chartered transportation, and
(in the case of Dietlin) by failing to enforce the loan agreement
between DCHC and Tuft-Redman Enterprises. Count IV alleges that
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 51 of 91

44 As set forth in the court’s prior opinion:
This theory of fiduciary breach refers to “an
exchange of corporate assets for
consideration so disproportionately small as
to lie beyond the range at which any
reasonable person might be willing to
trade.’” White v. Panic, 783 A.2d 543, 554
(Del. 2001) (quoting Brehm v. Eisner, 746
A.2d 244, 263 (Del. Ch. 2000)). “To prevail
on a waste claim . . . , the plaintiff must
overcome the general presumption of good
faith by showing that the board’s decision
was so egregious or irrational that it could
not have been based on a valid assessment of
the corporation’s best interests.” Id. at
554 n.36. “[T]he decision must go so far
beyond the bounds of reasonable business
judgment that its only explanation is bad
faith.” Stanziale v. Nachtomi (In re Tower
Air, Inc.), 416 F.3d 229, 238 (3d Cir. 2005).
In re Greater Southeast Cmty. Hosp. Corp. I, 333 B.R. at 524.
52
DCHC engaged in “corporate waste”44 by forgiving millions of
dollars in loans to various DCHC officers, and seeks to hold Tuft
and Dietlin responsible for this waste. The Partially Released
Defendants argue that these counts should be dismissed with
respect to Dietlin because (in their view) he is not alleged to
have been responsible for either of these decisions.
The court attempted to make clear in its prior opinion what
allegations must be made to state a claim against Tuft and
Dietlin for breach of fiduciary duty and waste:
Unless a specific defendant officer had the
power to prevent DCHC from contracting with
Tuft-Redman Enterprises or forgiving millions
of dollars in loans to corporate executives,
that officer cannot be held responsible for
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 52 of 91

53
those actions. Simply being an officer of
the company is not enough.
. . .
[T]here is nothing in the [First Amended]
Complaint specifying that either [Tuft or
Dietlin] issued or could have issued the
challenged loans . . . . More importantly,
there is nothing in the [First Amended]
Complaint indicating that Mr. Tuft or Mr.
Dietlin authorized the forgiveness of their
own loans or that they had the authority to
do so. Without these allegations, [Alberts’s
corporate waste claim] must be dismissed with
respect to Mr. Dietlin and Mr. Tuft . . . .
In re Greater Southeast Cmty. Hosp. Corp. I, 333 B.R. at 526.
The court went on to conclude that Count II of the First
Amended Complaint stated a claim for breach of fiduciary duty
against Tuft because it alleged that Tuft “made the decision to
use Tuft-Redman Enterprises rather than travel on commercial
carriers even though he knew commercial flights were cheaper and
without obtaining approval from the board of directors.” Id. at
527. It dismissed Count II with respect to Dietlin for the same
reason that it dismissed the corporate waste count in totum:
Alberts did not allege proximate cause.
The court addresses Count IV of the Second Amended Complaint
first. This count is more specific in its description of Tuft’s
and Dietlin’s wrongdoing than its analog in the First Amended
Complaint. As to Tuft, Alberts repeatedly alleges that the DCHC
president issued and forgave loans to himself and other D & O
Defendants totaling millions of dollars for no consideration
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 53 of 91

45 Alberts does not allege that Tuft issued loans without
regard to whether they could be repaid. Instead, he alleges that
the approved loans “were not supported by valid consideration”
(Compl. ¶¶ 207-08). The court gives no credence to these
conclusory legal assertions, particularly given the elementary
principle of contract law that a borrower’s promise of repayment
is itself valid consideration for a loan. Restatement (Second)
of Contracts § 71 and comment c. Tuft can only be held
responsible for the forgiveness of loans, not their mere
issuance, although the damages caused by the wasteful act of
forgiveness may amount to the total amount of the loan itself.
Thus, allegations that Tuft approved loans to his stepdaughter
and older brother do not state a claim for corporate waste
because there is no good faith allegation that the loans were
forgiven (Compl. ¶ 212).
Another deficient aspect of Alberts’s waste allegations,
though not one flagged by the D & O Defendants, is that many of
the allegations made by Alberts refer vaguely to the fact that
certain loans “were forgiven” without ever specifying who forgave
the loans. It is the court’s job to adjudicate the D & O
Defendants’ motion, not write it, so the allegations will stand
for now, but if Alberts cannot produce any evidence demonstrating
that Tuft was responsible for the forgiveness of the loans that
he issued after the completion of the discovery process, he will
be susceptible to summary judgment for the amounts listed in
connection with such allegations.
54
whatsoever (Compl. ¶¶ 202-12).45 These new allegations in Count
IV suffice to state a claim against Tuft for corporate waste.
Contrary to the Partially Released Defendants’ contentions,
Alberts does not need to take the extra step of spelling out the
obvious implication of his allegation that these loans were
forgiven--the term “forgiven” itself implies that the loans were
released gratis, and Alberts describes the forgiven loans
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 54 of 91

46 The Partially Released Defendants cite White and In re
Walt Disney Co. Derivative Litig., 2005 WL 2056651 (Del. Ch. Aug.
9, 2005), for the proposition that loans issued or payments made
to corporate officers do not suffice to state a claim for waste
unless the claimant can allege specific facts demonstrating that
no consideration was received for these transactions. Neither
White nor Walt Disney involved the forgiveness of multi-million
dollar loans: in White, the alleged corporate waste was the
issuance of a loan to a corporate officer, not its forgiveness,
see White, 783 A.2d at 554-55, while Walt Disney did not involve
corporate loans to officers at all. See In re Walt Disney Co.
Derivative Litig., 2005 WL at **38-39 (holding that payment of
non-fault termination package was not wasteful where directors
believed it to be in company’s best interest to terminate
president but grounds did not exist to terminate the CEO for
cause). It is the (alleged) fact that certain loans were
forgiven by Tuft that is tantamount to a transfer of property for
no consideration and therefore wasteful. See n.45, supra.
55
elsewhere as “gifts” (Compl. ¶ 344).46 A decision to simply wash
away a multi-million dollar debt is about as “exceptionally one-
sided” as a business decision can get. White, 783 A.2d at 554.
As regards Dietlin’s liability under Count IV, paragraph 213
of the Second Amended Complaint states in pertinent part:
Steve Dietlin, as DCHC CFO, was in charge of
providing the paperwork for these “officer
loans,” including the promissory note, the
check, the loan payment schedule[,] and,
ultimately, the loan forgiveness schedule.
As CFO, he was also responsible for ensuring
that the required payments under the
promissory notes were made, and, if they were
not, Mr. Dietlin was responsible for
enforcing the default provisions of the
promissory notes, including late payment
charges and default interest rate provisions.
Steve Dietlin ignored those responsibilities.
Upon information and belief, he did not
enforce these notes against any of the
borrowing parties. Mr. Dietlin created
promissory note after promissory note, with
the full knowledge that many, if not all of
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 55 of 91

47 That Dietlin had no oversight and enforcement
responsibility if a loan was forgiven does not relieve him of the
duty to oversee and enforce the loan before it was forgiven.
56
them, would never be repaid. CFO Deitlin
recognized that this lending practice was
wrong, yet he continued to do it.
These allegations suffice to state a claim against Dietlin
for breach of his fiduciary duty of care, albeit not as to all
aspects of the loan transactions. Alberts does not set forth a
claim for corporate waste against Dietlin because he fails once
again to allege that Dietlin authorized the forgiveness of these
loans. Further, Alberts has not alleged sufficient facts to
establish a viable claim that Dietlin is liable for executing the
loan papers and failing to object to the continued making of
loans. Alberts’s allegations fail to establish that in so acting
Dietlin was not simply implementing decisions of superiors that
he lacked responsibility or authority to decline to follow or to
question. Nothing in the complaint, therefore, establishes that
Dietlin’s duties and powers required him not to execute the loan
papers or required him to object to the continued making of
loans.
However, Alberts’s allegations concerning Dietlin’s
delinquent oversight and pursuit of those loans sets forth a
claim for breach of the fiduciary duty of care.47 Alberts may
have applied the wrong legal theory in describing Dietlin’s
conduct, but he has alleged facts that, if true, are worthy of
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 56 of 91

48 Alberts alleges that the chartering of flights from
Tuft-Redman Enterprises “was often made by Mr. Tuft” (Compl.
¶ 219), but he never alleges that Dietlin chartered those
flights. Although Alberts alleges that Dietlin oversaw the
financial side of DCHC, he does not allege sufficient facts to
establish that this placed a duty to inquire as to the
wastefulness of Tuft’s decision to Tuft-Redman Enterprises upon
Dietlin.
57
legal recourse. Similarly, in Count II of the Second Amended
Complaint, Alberts alleges that Dietlin “oversaw the financial
side of DCHC” (Compl. ¶ 343), but never attempted to collect on
the loan between DCHC and Tuft-Redman Enterprises, breaching his
duty to consider the best interests of DCHC (Compl. ¶ 305). That
states a viable claim against Dietlin.
On the other hand, Alberts’s inclusion of Dietlin in the
remainder of Count II (alleging breach of the fiduciary duty of
care in entering into an airline contract with Tuft-Redman
Enterprises and utilizing its expensive on-demand chartered
transportation) is woefully unsupported by the facts alleged
therein. Alberts alleges only that Dietlin “negotiated the loan
for DCHC” and “draft[ed] the loan agreement between DCHC and
Tuft-Redman Enterprises” (Compl. ¶¶ 215, 305).48 This
allegation, by itself, does not state a claim for breach of the
fiduciary duty of care. To do that, Alberts would need to allege
in good faith that Dietlin failed to fully inform himself of the
consequences of his decision to negotiate or draft such a loan or
otherwise carried out his duties as CFO in a grossly negligent or
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 57 of 91

49 In Count VII, entitled “Breach [o]f Fiduciary Duty--
Violation [o]f D.C. Rules [o]f Professional Conduct and the
Nebraska Code of Professional Responsibility,” Alberts alleges
that the Law Firm Defendants violated the D.C. and Nebraska rules
of professional conduct. This is really just argument in support
of Alberts’s malpractice count (Count VI), and will be treated as
such. To the extent that the count sets forth allegations that
could serve as a basis for a separate cause of action, the court
will dismiss the count because Alberts did not obtain leave from
the court to amend his complaint in this fashion. Fed. R. Bankr.
P. 7015(a); Williams v. Spring/United Mgmt. Co., 232 F.R.D. 388,
391 (D. Kan. 2005)
50 Alberts does not state that Count V is pled in the
alternative, but that is the only sensible interpretation of his
complaint. The aiding and abetting count is largely duplicative
of the malpractice count(s). It is useless unless the Law Firm
Defendants are found not to owe a duty of care to the debtors to
prevent the alleged misconduct of the D & O Defendants, in which
case they might still be liable for knowingly assisting the D & O
Defendants in the latter defendants’ breach of their fiduciary
duties.
58
disloyal way. Alberts has already had one chance to amend his
complaint to correct this error and has chosen not to do so.
Further, Alberts does not allege that Dietlin made the decision
for DCHC to enter into the transaction with Tuft-Redman, and he
has once again failed to establish that Dietlin was not simply
implementing the instructions of superior officers who decided to
enter into the transaction between DCHC and Tuft-Redman.
C. Claims Against the Law Firm Defendants
Alberts asserts essentially four causes of action against
the Law Firm Defendants based on the same conduct: legal
malpractice (Counts VI and VII),49 a claim in the alternative for
aiding and abetting breach of fiduciary duties (Count V),50 a
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 58 of 91

59
claim for the recovery of fraudulent transfers under 11 U.S.C.
§§ 544, 548, and 550 (Counts VIII-XIII), and separate requests
for disallowance or equitable subordination of claims filed by
the Law Firm Defendants (Counts XIV and XV). All of the claims
turn on the Law Firm Defendants’ allegedly negligent preparation
of opinion letters used to obtain financing from the NCFE
Entities and alleged failure to adequately warn the debtors of
the consequences of their deepening insolvency. The Law Firm
Defendants dispute each and every claim, including a few that
survived their last round of motions to dismiss.
1. Legal malpractice claims (Counts VI and VII)
(a) Legal advice
Alberts alleged in his First Amended Complaint that the Law
Firm Defendants were negligent in their representation of the
debtors in part because they failed to advise the debtors of the
consequences of their deepening insolvency. The court held that
these allegations did not state a claim for malpractice because
law firms owe no duty to their clients to provide sound business
advice and because Alberts did not plead facts that would allow
the court to infer that DCHC’s officers and directors breached
their fiduciary duties with respect to overfunding by the NCFE
Entities. In re Greater Southeast Cmty. Hosp. Corp. I, 333 B.R.
at 529-30. Such allegations might have supported an inference
that the Law Firm Defendants committed malpractice by failing to
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 59 of 91

60
inform the debtors of those breaches of fiduciary duty. Id.
Alberts now alleges facts that state a claim for breach of
fiduciary duty by at least some of the D & O Defendants with
respect to the debtors’ deepening insolvency. See part II.B.1,
supra. Alberts does not, however, state that the Law Firm
Defendants knew or should have known that certain D & O
Defendants breached their fiduciary duties when they approved
allegedly harmful transactions with the NCFE Entities. Instead,
he alleges only that the Law Firm Defendants knew or should have
known of the effects of the debtors’ deepening insolvency. As
the court explained in its prior opinion, “a company’s
acquisition of additional debt, by itself, is not a legal
wrong . . . .” In re Greater Southeast Cmty. Hosp. Corp. I, 333
B.R. at 530. Deepening insolvency is not a tort, and a law
firm’s knowledge that a corporate transaction is going to deepen
the corporation’s insolvency does not mean that the law firm
knows that the corporation’s fiduciaries are breaching their
duties of care or loyalty in approving such transactions. Ergo,
the failure to advise the debtors of the consequences of
acquiring excess debt is not malpractice.
(b) Opinion letters
The bulk of the allegations made by Alberts against the Law
Firm Defendants concerns opinion letters allegedly prepared by
the defendants that were necessary for the debtors to close on
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 60 of 91

61
various lending arrangements reached between them and the NCFE
Entities. The allegations as re-stated in the Second Amended
Complaint are a far cry from the sensational accusations made in
the First Amended Complaint that the letters were basically
written by the NCFE Entities, see In re Greater Southeast Cmty.
Hosp. Corp. I, 333 B.R. at 530, which this court held to state a
claim for malpractice in its prior decision. Id.
While Alberts relies upon the ruling of the court in its
prior decision to justify his malpractice claim, the Law Firm
Defendants look to the reasoning of that decision in arguing for
dismissal. They urge the court to view the alleged errors in the
opinion letters as errors relating to business advice, which does
not fall within the scope of the attorney-client relationship.
See id. at 529. They also argue that the errors in the opinion
letters provided by the Law Firm Defendants could not have been
the proximate cause of the debtors’ deepening insolvency.
The letters in question fall into three categories. First,
there are three letters prepared by Kutak Rock that, according to
Alberts, should not have been prepared without prior notification
to the corporate clients for each letter of the harms arising
from the decisions of the corporations’ respective fiduciaries to
deepen the insolvency of the companies (Compl. ¶¶ 194-96). The
court has said it before and will say it again: lawyers are not
responsible for the business decisions of their clients. See
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 61 of 91

62
Kan. Public Employees Ret. Sys. v. Kutak Rock, 44 P.3d 407, 416-
18 (Kan. 2002). They may have a duty to inform corporate clients
of any fiduciary breaches committed by the company’s officers and
directors, but they are neither obligated nor expected to second-
guess the business judgments made by those fiduciaries, and it
bears repeating that deepening insolvency itself does not
constitute a tort.
Second, there are two letters prepared by Epstein Becker
that purport to rely on factual assumptions that Epstein Becker
allegedly knew or should have known were wrong, which Alberts
characterizes as a breach of Epstein Becker’s duty of care
(Compl. ¶¶ 168, 172). The court disagrees. When a lawyer
prepares legal opinions on the basis of assumed or hypothesized
facts, she puts her client and anyone else reading the opinion on
notice that she is not vouching for the veracity or accuracy of
those facts. That is the point of warning the reader that the
facts are assumed in the first place. No reasonable person could
rely on such “facts.”
Finally, Alberts alleges that there are several letters
stating that the opinion’s author had no reason to suspect that
the information contained in the various certificates and
agreements underlying each loan was inaccurate when the author
knew or should have known that the information in those documents
was false (Compl. ¶ 174 (relating to one letter prepared by
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 62 of 91

51 Epstein Becker contends that the debtors could not have
relied upon its opinion letters because the letters were written
for NCFE or one of its subsidiaries. The letters may have been
written for NCFE, but Epstein Becker was acting as counsel for
the debtors when it wrote them, and both sides allegedly relied
upon them to close the transactions that deepened the debtors’
insolvency. Epstein Becker’s suggestion that the debtors could
not have relied upon the facts certified in these letters because
the debtors themselves knew that this certification was in error
is virtually indistinguishable from its in pari delicto argument,
which the court addresses below.
52 To be sure, if the malpractice claim were to survive
the affirmative defenses discussed later, Alberts would have a
tough row to hoe. He would need to show that the Law Firm
Defendants did not exercise a reasonable standard of care in
reviewing the documents described in the supposedly erroneous
opinion letters, that the debtors relied on this specific
guarantee to close their deals with NCFE and its subsidiaries
(i.e., that the deals could not have closed had these
certifications not been there), and that these transactions
actually impaired the business operations of the debtors to some
degree. This task might or might not prove to be possible in the
long run, but the court’s duty under Rule 12(b)(6) is to
determine whether Alberts could succeed at trial, not
prognosticate whether he will succeed.
63
Epstein Becker), id. at ¶¶ 192, 197 (relating to several letters
prepared by Kutak Rock)). These allegations have more bite to
them. If an attorney certifies that certain facts are accurate
to the best of the attorney’s knowledge when the attorney knew or
should have known that the facts were wrong, and her client
subsequently relies upon those facts to the client’s detriment,51
the attorney is responsible for that harm. In this respect, and
in this respect alone, the opinion letter “prong” of Alberts’s
malpractice claim survives the Law Firm Defendants’ motions to
dismiss unless an affirmative defense mandates dismissal.52
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 63 of 91

53 Alberts also alleges that Epstein Becker employed
Francis Smith, the former executive director of the D.C. Control
Board, at DCHC’s direction, and that DCHC actually paid Smith’s
salary (Compl. ¶ 181). Although the court finds this alleged
arrangement puzzling, the necessary allegations of harm arising
from the relationship are missing.
64
(c) Other conduct
Finally, Alberts alleges that Epstein Becker “sponsored” the
“misleading and false” testimony of NCFE CEO Lance Poulsen at a
hearing before this court on November 11, 1999, and that Epstein
Becker “assist[ed]” the D & O Defendants in their pursuit of a
contract with the District of Columbia for millions of dollars
that inured to the benefit of the D & O Defendants through their
self-serving use of those funds (Compl. ¶¶ 175-80, 182-83).53
There are no allegations that Epstein Becker knew that Poulsen’s
testimony was false or that it knew that the D & O Defendants
were wasting their fiduciary’s money, and therefore no
allegations of wrongdoing.
In sum, Count VI survives the Law Firm Defendants’ motions
to dismiss (unless barred by one of the affirmative defenses
discussed below) but only with respect to allegations concerning
the preparation of those select opinion letters described above.
All other allegations relating to the Law Firm Defendants’
supposed malpractice will be dismissed.
2. Aiding and abetting breach of fiduciary duty
(Count V)
In Count V of the Second Amended Complaint, Alberts alleges
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 64 of 91

65
that the Law Firm Defendants aided the D & O Defendants in the
breach of the latter defendants’ duties of care and loyalty to
the debtors. “Aiding and abetting the breach of fiduciary duty
occurs when the defendant ‘knows that the other’s conduct
constitutes a breach of duty and gives substantial assistance or
encouragement to the other’ nonetheless.” Ehlen v. Lewis, 984 F.
Supp. 5, 10 (D.D.C. 1997) (quoting Halberstam v. Welch, 705 F.2d
472, 477 (D.C. Cir. 1983)). When the underlying tort is breach
of fiduciary duty, the third party must have “knowingly
participated in and substantially assisted the fiduciary’s breach
of trust” through “affirmative conduct.” Overseas Private Inv.
Corp. v. Industrial de Pesca, N.A., Inc., 920 F. Supp. 207, 210
(D.D.C. 1996). “‘[A]ssisting[] and failure to prevent[] are not
the same thing.’” Id. (quoting EEOC v. Illinois, 69 F.3d 167,
170 (7th Cir. 1995)); see also Ivanhoe Partners v. Newmont Mining
Corp., 535 A.2d 1334, 1344 (Del. 1987) (knowing participation in
breach of fiduciary duty required).
Although paragraph 353 of the Second Amended Complaint
alleges that the Law Firm Defendants “knowingly assisted and
participated in the[] breaches [of fiduciary duty] through their
representation of and action taken on behalf of DCHC and the
other Debtors whom they represented,” that allegation falls short
of alleging that the Law Firm Defendants knew that the D & O
Defendants were breaching their fiduciary duties. The court has
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 65 of 91

66
already noted that while Alberts alleges repeatedly that the Law
Firm Defendants “knew or should have known” about the debtors’
insolvency and the effects of the NCFE Entities’ lending
practices on that insolvency--which does not equate to knowledge
of the commission of a tort because deepening insolvency alone is
not a tort--he never alleges that the Law Firm Defendants knew
that the D & O Defendants were breaching their fiduciary duties
(or engaged in any other tortious activity) when they decided to
sign off on the allegedly harmful loans and agreements. See part
II.C.1.a, supra (holding that such lack of knowledge bars a
malpractice claim for failure to advise the debtors regarding
their deepening insolvency). Without that necessary element,
Count V must be dismissed.
3. Fraudulent conveyance and disallowance claims
(Counts VIII-XV)
Counts VIII-XV of the Second Amended Complaint are based on
the same factual allegations that underpin Alberts’s malpractice
and aiding and abetting claims. The counts state a claim only
insofar as they refer to the third category of opinion letters
referenced above, but not with respect to the first category,
which involved only a failure to advise the client of the
insolvency effects of transactions, or the second category,
which, the court concluded, could not support a claim for
malpractice because no reasonable person could have relied upon
the allegedly erroneous assumptions of fact contained therein,
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 66 of 91

54 Because Alberts only alleges a breach of a duty of care
in the preparation of certain opinion letters, those same letters
are the only possible basis for the recovery of attorneys’ fees
under § 544 and § 548. Consequently, the only fees that could be
recovered pursuant to those statutes would be those fees deriving
from the generation of the contested letters.
55 Epstein Becker requests a more definite statement from
Alberts with respect to Count XIV. In light of the instant
decision, which winnows the allegations against Epstein Becker
significantly, it should be easier for Epstein Becker to
understand what allegations are made against it. The court will
deny the request at this time.
67
and which contained no erroneous opinion of law.54
By and large, the Law Firm Defendants move to dismiss these
counts only to the extent that the court dismisses Alberts’s
malpractice claim.55 The only novel argument is Kutak Rock’s
contention that Count XV should be dismissed to the extent that
it seeks equitable subordination of Kutak Rock’s claim against
the debtors pursuant to 11 U.S.C. § 510(c).
“Under 11 U.S.C. § 510(c)(1), the court may apply principles
of equitable subordination to ‘subordinate for purposes of
distribution all or part of an allowed claim to all or part of
another allowed claim.’” In re Garfinckels, Inc., 203 B.R. 814,
825 (Bankr. D.D.C. 1996). Alberts must plead three elements to
warrant relief under § 510(c):
(1) the claimant must have engaged in some
type of inequitable conduct;
(2) the misconduct must have resulted in
injury to the creditors or conferred an
unfair advantage on the claimant; and
(3) equitable subordination of the claim must
not be inconsistent with the provisions of
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 67 of 91

56 Accordingly, the equitable subordination remedy may
apply to a larger amount of fees than the fees that would be
disallowed based on malpractice.
57 Counts XIV and XV were not a part of the First Amended
Complaint, nor were they added by leave of the court. The court
would be within its rights to strike them. See note 46, supra.
But as there is no time limit on Alberts’s right to request
disallowance or subordination of the Law Firm Defendants’ claims,
the court sees no benefit in dismissing the counts given that
Alberts would then need to either amend his complaint yet again
or commence another adversary proceeding, further entangling the
court and the parties in procedural red tape.
68
the Bankruptcy Code.
Id.
Alberts pleads each of these elements. Assuming arguendo
that Kutak Rock breached its duty of care and caused the debtors
to increase their debt load in a manner disproportionate to the
assets and income available for repayment of that debt, Kutak
Rock injured the debtors’ other creditors by increasing the
likelihood that they would never be repaid while at the same time
expanding the size of its own claim against the debtors through
the creation of additional legal work.56 Alberts may not be
entitled to sue on behalf of the estate’s creditors, but that
does not mean that these creditors are not victims of Kutak
Rock’s alleged wrongdoing as well. The court will not dismiss
the request for equitable subordination to the extent that it is
based on allegations establishing malpractice.57
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 68 of 91

58 Although the court did not address the substance of the
Law Firm Defendants’ in pari delicto arguments, it did conclude
that the D & O Defendants could not invoke the in pari delicto
under Delaware state law because they were corporate insiders at
the time of their wrongdoing. In re Greater Southeast Cmty.
Hosp. Corp. I, 333 B.R. at 538-39. The court also noted that
courts have held that causes of action arising under § 544 or
§ 548 of the Bankruptcy Code are not subject to the in pari
delicto defense because these causes of action are created in the
first instance by federal bankruptcy law and are not assumed by
the estate representative pursuant to 11 U.S.C. § 541. Id. at
531. The defense is inapplicable to Alberts’s request for
equitable subordination of the Law Firm Defendants’ claims for
the same reason, but its applicability to Alberts’ malpractice
claims (and objections seeking disallowance of the Law Firm
Defendants’ claims based on malpractice) remains an issue.
69
4. Law Firm Defendants’ affirmative defenses
The court did not decide whether the affirmative defenses of
timeliness and in pari delicto barred Alberts’s claims against
the Law Firm Defendants in whole or in part in its last opinion
because those issues were not ripe for review.58 They are now,
and the court is duty-bound to consider them, even at this
(procedurally) early stage in the case.
(a) In pari delicto
“[T]he legal principle of in pari delicto . . . holds that
if the parties are in equal fault, the law will help neither of
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 69 of 91

59 Only the malpractice claims (and the objections to the
Law Firm Defendants’ claims based on malpractice) remain at issue
with respect to the in pari delicto defense, and Alberts has not
disputed that District of Columbia law governs the defense in
that regard. Although Wager is not binding authority on the
local courts of the District of Columbia, its formulation of the
in pari delicto doctrine comes from Hunter v. Wheate, 289 F. 604
(1923), which is controlling precedent for both federal and local
D.C. courts. Hunter v. Bortolussi, 667 A.2d 1362, 1364 (D.C.
1995).
70
them.” Wager v. Pro, 575 F.2d 882, 884 (D.C. Cir. 1976).59 The
defense is “limited to situations where the plaintiff bore at
least substantially equal responsibility for his injury, and
where the parties’ culpability arose out of the same illegal
act.” Pinter v. Dahl, 486 U.S. 622, 632 (1988) (internal
quotation omitted). In the corporate context, the wrongful
actions of an officer or director are imputed to the corporate
principal unless “the wrongdoing is done primarily for personal
benefit of the officer and is ‘adverse’ to the interest of the
company.” Baena v. KPMG LLP, 2006 WL 1703822, *5 (1st Cir. June
22, 2006) (interpreting Massachusetts law); accord BCCI Holdings,
964 F. Supp. at 478.
(i) “Innocent successor” exception
Alberts argues that he should not be subject to the defense
of in pari delicto because he is an innocent successor to the
debtors and his claim is on behalf of the debtors’ creditors, not
the debtors themselves. Virtually every circuit court that has
considered this argument has rejected it as contrary to 11 U.S.C.
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 70 of 91

60 While it did not rule specifically on the § 541(a)
issue, the Second Circuit has applied the in pari delicto defense
to a bankruptcy trustee. Official Comm. of Unsecured Creditors
of Color Tile v. Coopers & Lybrand, LLP, 322 F.3d 147, 158-66 (2d
Cir. 2003).
71
§ 541(a)(2), which vests in the representative of the estate
“[a]ll interests of the debtor . . . as of the commencement of
the case,” thereby ensuring that the estate representative has no
greater rights than those of the debtor pre-petition. See Baena,
2006 WL at **7-8; Official Comm. of Unsecured Creditors of PSA,
Inc. v. Edwards, 437 F.3d 1145, 1150-52 (11th Cir. 2006)
(“Edwards”); Grassmueck v. American Shorthorn Ass’n, 402 F.3d
833, 837 (8th Cir. 2005); Lafferty, 267 F.3d at 356-57; Terlecky
v. Hurd (In re Dublin Sec.), 133 F.3d 377, 381 (6th Cir. 1997);
Sender v. Buchanan (In re Hedged-Inv. Associates), 84 F.3d 1281,
1285 (10th Cir. 1996).60 These decisions accord with this
court’s own precedent. See In re Psychotherapy and Counseling
Center, Inc., 195 B.R. 522, 531-32 (Bankr. D.D.C. 1996) (“[T]he
bankruptcy estate’s rights are limited to those had by the debtor
at petition, which are determined by reference to state and
federal law.”); In re Latin Inv. Corp., 168 B.R. at 5 (“Because
the principals were stealing for the benefit of the debtor, their
conduct would be imputed to the debtor, which would be estopped
from suing other participants in the fraud.”).
Alberts attempts to rebut this veritable mountain of
precedent by relying on Tolz v. Proskauer Rose LLP (In re Fuzion
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 71 of 91

61 See Edwards, 437 F.3d at 1152 (noting the “flawed
arguments about legislative history” raised by Professor Davis in
his article); Hill v. Gibson, Dunn & Crutcher, LLP (In re MS55,
Inc.), 338 B.R. 883, 893 n.4 (Bankr. D. Colo. 2006) (noting that
Professor Davis’s analysis of § 541 “has been expressly rejected
by the Tenth Circuit” and that “[t]he Tenth Circuit is joined by
the Second, Third, Sixth, and Eleventh Circuits”).
72
Technologies Group, Inc.), 332 B.R. 225 (Bankr. S.D. Fla. 2005),
which held that the in pari delicto doctrine should not apply to
bankruptcy trustees, see id. at 232-34, and a recent article
condemning the application of the in pari delicto rule in the
bankruptcy context. See generally Jeffrey Davis, Ending the
Nonsense: The In Pari Delicto Doctrine Has Nothing to Do with
What Is § 541 Property of the Bankruptcy Estate, 21 Emory Bankr.
Dev. J. 519 (2004-2005). Fuzion Technologies was effectively
overruled by the Eleventh Circuit in Edwards, and Professor
Davis’s article has been rejected by every court that has
considered it.61 Nonetheless, the court will consider the merits
of their respective positions.
In Fuzion Technologies, the bankruptcy court relied on Perma
Life Mufflers, Inc. v. Int’l Parts Corp., 392 U.S. 134 (1968),
for the proposition that the in pari delicto doctrine was subject
to a public policy exception. In re Fuzion Technologies Group,
Inc., 332 B.R. at 233-34. In the bankruptcy court’s view, “to
raise the in pari delicto defense as a barrier to relief by
bankruptcy trustees would thwart the important public purpose
served by the framework of the bankruptcy code.” Id. at 234.
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 72 of 91

62 Professor Davis also advances a policy argument, though
he justifies it in a different way. He argues that “what is
property of the estate remains a matter of federal law to be
resolved in light of bankruptcy policy.” Davis, 21 Emory Bankr.
Dev. J. at 537. The court has no quarrel with the observation
that the issue of whether rights created under non-bankruptcy law
rise to the level of property of the estate under 11 U.S.C. § 541
is a federal question, see In re Guardian Realty Group, L.L.C.,
205 B.R. 1, 4 (Bankr. D.D.C. 1997), but it does not follow that
“courts are then empowered to view the in pari delicto defense in
light of its effect on federal bankruptcy policy.” Davis, 21
Emory Bankr. Dev. J. at 538. To the contrary, bankruptcy courts
have an obligation to analyze the property interests of the
estate, including causes of action, by reference to state law
unless the Bankruptcy Code explicitly preempts it. Nobelman v.
Am. Sav. Bank, 508 U.S. 324, 329 (1993) (“In the absence of a
controlling federal rule, we generally assume that Congress has
left the determination of property rights in the assets of a
bankruptcy’s estate to state law.”); Butner v. United States, 440
U.S. 48, 54 (1979) (stating “the basic federal rule . . . that
state law governs” the analysis of the property interests held by
the estate).
73
The court held that as a consequence the doctrine should not
apply under the rule announced in Perma Life.62
The bankruptcy court’s application of Perma Life in Fuzion
Technologies turns the public policy exception on its head. In
Perma Life, the Supreme Court crafted an exception to the common
law defense of in pari delicto to ensure that federal securities
laws were upheld. In other words, the Supreme Court held that
federal priorities trumped common law doctrines. In Fuzion
Technologies, the court decided not to apply federal law
(§ 541(a) of the Bankruptcy Code) based on its interpretation of
general bankruptcy “policy.” This strikes the court as more of
an effort to re-write the Code than to protect it from contrary
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 73 of 91

63 As its title implies, BAPCPA was enacted primarily to
stem perceived abuses of the bankruptcy process by consumer
debtors, but the approach adopted by the court in Fuzion
Technologies and advanced by Alberts here would presumably apply
with equal force to consumer debtors in chapter 7 (or, for that
matter, chapter 11).
74
common law doctrines.
The court also takes issue with the notion that applying the
in pari delicto doctrine in a bankruptcy case somehow damages the
public interest. Enforcement of the securities laws at issue in
Perma Life benefitted the public at large as well as the
plaintiff because those laws discourage specific types of conduct
harmful to large segments of the population. The malpractice and
related causes of action asserted by Alberts benefit the estate’s
creditors, who already have the ability to sue a third party
defendant on their own or together by using the class action
procedures set forth in Fed. R. Civ. P. 23.
If anything, overlooking the requirements of § 541(a) would
only provide an incentive for companies that would otherwise
stand in pari delicto with respect to third parties to file for
bankruptcy. Congress has made clear, particularly through its
enactment of the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005, Pub. L. 109-8 (generally effective Oct.
17, 2005) (“BAPCPA”),63 that bankruptcy should be an option of
last resort. See H.R. Rep. No. 109-31 at 2 n.1 (2005), as
reprinted in 2005 U.S.C.C.A.N. 88, 89 n.1 (“Bankruptcy is a moral
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 74 of 91

64 Although BAPCPA went into effect after this adversary
proceeding commenced, and therefore does not apply to the instant
dispute, it is helpful to the court in ascertaining Congress’s
understanding of the goals and priorities of the Bankruptcy Code.
65 For example, a person with a large but potentially
manageable secured debt load and a potential action against a
third party subject to the defense of in pari delicto might very
well choose to file for bankruptcy relief to allow the trustee to
pursue the otherwise barred cause of action (at no cost to the
debtor), use the recovery from that action to pay off a portion
of the claims against the estate, and exit bankruptcy with a
lighter secured credit load than when she began. Similarly, a
corporate debtor-in-possession could use the availability of an
otherwise barred cause of action to leverage the acquiescence of
creditors to a plan of reorganization, making it easier for the
debtor-in-possession to emerge fully reorganized on favorable
terms. The point is that permitting an estate representative to
do what the debtor could not prior to filing for bankruptcy may
very well benefit the wrongdoing debtor as well as the estate’s
creditors. The court fails to see any public good in permitting
what amounts to a perversion of the in pari delicto doctrine for
the sake of creditor expediency.
75
as well as an economic act. . . . It is a decision not to
reciprocate a benefit received, a good deed done on the promise
that you will reciprocate.” (quoting Bankruptcy Reform: Joint
Hearing Before the Subcomm. on Commercial and Administrative Law
of the House Comm. on the Judiciary and the Subcomm. on
Administrative Oversight and the Courts of the Senate Comm. on
the Judiciary, 106th Cong. 98 (1999) (statement of Prof. Todd
Zywicki))).64 Any reading of the Bankruptcy Code that makes
bankruptcy more appetizing to a potential debtor than what the
text of the Code explicitly permits should be viewed with
skepticism.65
This court will not turn a blind eye to the laws actually
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 75 of 91

66 Professor Davis argues that “[t]wo important federal
policies are furthered” by the abolition of the in pari delicto
defense in bankruptcy cases: “fair treatment to creditors and
investors and the promotion of a high standard of business ethics
among the professionals who serve and participate in the affairs
of corporate managers.” Davis, 21 Emory Bankr. Dev. J. at 542.
As the court noted above, creditors and shareholders have the
ability to enforce their own rights against a third party who
harms the estate, so there are no fairness concerns there unless
one considers Fed. R. Civ. P. 23 to be unfair. The value of
creditor expediency is a policy decision for Congress, not the
courts, to decide--a point this court made emphatically in its
prior opinion when it held that Alberts could not sue on behalf
of the estate’s creditors due to the Supreme Court’s ruling in
Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 (1972).
The latter “polic[y]” (good corporate governance) is a
potential reason not to impose the in pari delicto defense
against corporations at all, but it has nothing to do with
federal bankruptcy law. Contrary to Professor Davis’s
suppositions, the Bankruptcy Code was not written to protect
investors or creditors from the wrongdoing of their corporate
fiduciaries. Such protections already exist at common law
through the “adverse interest” exception to corporate imputation,
which the court discusses at length below.
76
written by Congress out of misguided fealty to the imagined
policies informing it. Just as “[t]he executor stands in the
shoes of the deceased and can have no greater rights than the
deceased himself,” In re Hanson, 210 F. Supp. 377, 385 (D.D.C.
1962), so too is a representative of the estate bound by the same
defenses that would have succeeded against the debtor prior to
the “civil death” of bankruptcy. The court knows of no federal
policy contravening this venerable common law rule, and declines
to invent one based on the ruminations of a single court or
commentator.66
In addition to his public policy argument, Professor Davis
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 76 of 91

77
argues that courts construing § 541(a) to bar the “innocent
successor” defense by estate representatives do not effectuate
the intent of Congress as revealed by the legislative record.
This court agrees with the courts in Edwards and Lafferty that
the plain language of § 541(a) obviates the need for any inquiry
into the congressional record. See Edwards, 437 F.3d at 1150-51;
Lafferty, 267 F.3d at 356. The phrase “all legal or equitable
interests of the debtor in property” in § 541(a) embraces rights
only as they exist under non-bankruptcy law and subject to
limitations that non-bankruptcy law imposes on such rights, see
n.62, supra, including state law affirmative defenses to the
assertion of such rights.
Even if the court were to consider the legislative history
of § 541(a), it would conclude that the record as a whole
supports the plain language interpretation of that provision.
The Senate Report to the Bankruptcy Reform Act of 1978 is clear
on this point:
Though [section 541] will include choses in
action and claims by the debtors against
others, it is not intended to expand the
debtor’s rights against others more than they
exist at the commencement of the case. For
example, if the debtor had a claim that is
barred at the time of the commencement of the
case by the statute of limitations, then the
trustee would not be able to pursue that
claim, because he too would be barred. He
could take no greater rights than the debtor
himself had.
S. Rep. No. 95-989 at 82 (1978), as reprinted in 1978
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 77 of 91

78
U.S.C.C.A.N. 5787, 5868 (emphasis added); see also H.R. Rep. No.
95-595 at 367-68 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963,
6323 (same).
Professor Davis suggests that this passage was not meant to
apply to personal affirmative defenses. He relies upon the
following floor remarks from Congressman Edwards:
[A]s section 541(a)(1) clearly states, the
estate is comprised of all legal or equitable
interests of the debtor in property as of the
commencement of the case. To the extent such
an interest is limited in the hands of the
debtor, it is equally limited in the hands of
the estate except to the extent that defenses
which are personal against the debtor are not
effective against the estate.
124 Cong. Rec. H11096 (daily ed. Sept. 28, 1978) (emphasis
added); see also id. at S17413 (daily ed. Oct. 6, 1978) (remarks
of Sen. DeConcini) (same).
Upon closer inspection, the remarks transcribed above do not
sustain their usage by Professor Davis. They were made in the
context of an explanation of § 541(d) of the Bankruptcy Code,
which provides that property to which the debtor held legal but
not equitable title pre-petition becomes property of the estate
only to the extent of the debtor’s pre-petition title. The floor
statements clarified that “[t]o the extent such an interest is
limited in the hands of the debtor;” i.e., is a legal interest
only, the estate is not bound by any defenses that could have
been asserted against the debtor’s person.
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 78 of 91

79
These statements make sense when restricted to § 541(d).
That sub-section was written specifically to maintain the status
quo of bona fide secondary mortgage market transactions, where
the initial mortgagee would often retain title to the note and
the purchaser of the mortgage would record its interest in the
mortgage. S. Rep. No. 95-989 at 83-84; as reprinted in 1978
U.S.C.C.A.N. at 5879-80. As the Edwards court explained, “[i]n
the law of commercial paper, personal defenses are affirmative
defenses that may not be asserted against a holder-in-due
course.” 437 F.3d at 1150. The floor statements made by
Congressman Edwards and Senator DeConcini merely reflect this
principle of commercial law.
In contrast, Professor Davis’s reading of these floor
statements as somehow applying to property of the estate in
general makes no sense at all. Setting aside the fact that these
statements were made in reference to a different part of § 541,
the speakers articulate no rationale for distinguishing
“personal” affirmative defenses from “real” defenses outside the
commercial paper context. They do not explain why the Senate and
House Judicial Committees felt it necessary to explain that a
representative of an estate in bankruptcy takes the debtor’s
causes of action subject to all of the defenses thereto, yet
failed to mention that this rule only applied to certain
defenses. They do not explain why Congress would set forth a
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 79 of 91

80
scheme different from that of common law inheritance and
assignment rights. They are, in short, totally inapplicable to
§ 541(a).
Finally, Alberts asks the court to analogize the role of the
estate representative to that of a receiver appointed pursuant to
state law. In Scholes v. Lehman, 56 F.3d 750 (7th Cir. 1995),
the Seventh Circuit held that the defense of in pari delicto
should not be applied to such an entity because “the appointment
of the receiver removed the wrongdoer from the scene.” Id. at
754. Writing for the majority, Judge Posner explained this
reasoning further in memorable fashion:
[T]he wrongdoer must not be allowed to profit
from his wrong by recovering property that he
had parted with in order to thwart his
creditors. That reason falls out now that
[the wrongdoing agent] has been ousted from
control of and beneficial interest in the
corporations. . . . The appointment of the
receiver removed the wrongdoer from the
scene. The corporations were no more [the
agent’s] evil zombies. Freed from his spell
they became entitled to the return of the
moneys--for the benefit not of [the agent]
but of innocent investors--that [the agent]
had made the corporations divert to
unauthorized purposes. Put differently, the
defense of in pari delicto loses its sting
when the person who is in pari delicto is
eliminated.
Id.
Scholes is easily distinguishable from the instant case
because a receiver is not subject to the restrictions of
§ 541(a). Edwards, 437 F.3d at 1151; In re Hedged-Inv.
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 80 of 91

67 Unlike a state’s statute of limitations, the in pari
delicto defense is a type of “substantive” law subject to the
District of Columbia’s choice-of-law rules. As neither party
disputes the application of D.C. law, however, the court will
apply that jurisdiction’s common law. ABB Daimler-Benz Transp.
(North America) v. Nat’l R.R. Passenger Corp., 14 F. Supp. 75, 88
(D.D.C. 1998).
81
Associates, 84 F.3d at 1285 & n.5. But the court is far from
convinced that the “evil zombie” theory of in pari delicto holds
water even with respect to court-appointed receivers. To the
extent that the theory applies only where the agent uses
corporate resources for “unauthorized purposes,” it is really
just a colorful repackaging of the so-called “adverse interest”
exception, not a “new” exception to the in pari delicto doctrine.
See part II.C.4.a.ii, infra. If the wayward agent does not hold
interests adverse to the corporate principal, then her wrongdoing
by definition benefits the supposedly “innocent” investors in the
corporation as well. In other words, the “evil zombie” approach
of Scholes only makes sense insofar as it echoes the imputation
rules already provided at common law. It is either redundant or
just plain wrong.
(ii) Adverse interest exception
“As a general rule, knowledge acquired by a corporation’s
officers or agents is properly attributable to the corporation
itself.” BCCI Holdings, 964 F. Supp. at 478.67 “No such
presumption can arise, however, where the agent is dealing with
the principal in the agent’s own interest . . . and in such a
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 81 of 91

68 The diligent reader might wonder why the court does not
simply apply the “adverse domination” doctrine invoked with
respect to the D & O Defendants’ statute of limitations argument.
See part II.B.1.c, supra. The short answer is that the adverse
domination rule is used solely for the purpose of determining
when a claim against a company’s directors and officers accrue,
not for determining whether the company stands in pari delicto
with respect to a third party. See Martin Marietta Corp. v.
Gould, Inc., 70 F.3d 768, 772 (4th Cir. 1995).
The long answer is that the doctrines concern two different
relationships and two different types of injury. In determining
when a corporation first discovered its own injuries suffered at
the hands of its controlling fiduciaries, the court presumes that
the fiduciaries failed to actually inform their corporate
principal of the injury during their tenure because they have an
obvious (self-)interest in concealing the harm. In determining
when a corporation knew of its own wrongdoing against a third
party, a presumption of concealment makes no sense because the
wrongdoing may have benefitted the company in some sense. It
therefore falls upon the court to determine whether the company
did in fact receive some benefit from its own wrongdoing.
82
case the doctrine does not apply.” Fletcher, supra at § 819. At
the same time, “this presumption . . . should not be carried so
far as to enable the corporation to become a means of fraud or a
means to evade its responsibilities.” Id. at § 821.68
This court is not the first to wrestle with the application
of the adverse interest exception to third-party actions where
the harm alleged is the deepening of a company’s insolvency. In
Baena, the First Circuit considered the exact same issue in the
context of a litigation trustee’s suit against the debtor’s
accounting firm for unfair trade practices. 2006 WL at **1-2.
The court concluded that the exception did not apply:
A fraud by top management to overstate
earnings, and so facilitate stock sales or
acquisitions, is not in the long-term
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 82 of 91

83
interest of the company; but, like price-
fixing, it profits the company in the first
instance and the company is still civilly and
criminally liable[.] . . . Nor does it matter
that the implicated managers also may have
seen benefits to themselves--that alone does
not make their interests adverse.
Id. at *5 (emphasis in original).
Baena involved slightly different facts than those alleged
by Alberts. In that case, the management of the debtor misstated
the debtor’s earnings, thereby raising revenues from unknowing
investors and artificially preserving the company’s existence.
Id. The complaint did not allege that the debtor’s management
acted out of self-interest, but rather “attempt[ed] primarily to
benefit . . . the company through their behavior.” Id. at *6.
In contrast, Alberts alleges that NCFE, not the debtors,
defrauded investors, and he alleges that the D & O Defendants
acted solely out of self-interest.
Nonetheless, the court finds the rationale advanced by the
court in Baena to be both applicable and persuasive in this case.
The crux of the First Circuit’s ruling is that the bad acts
perpetrated by the debtor’s management, while ultimately
injurious to the debtor itself, provided an immediate benefit to
the debtor at the expense of innocent third parties. Id. at *5.
The harm suffered by the debtor was like the “harm” suffered by a
robber who is later caught and imprisoned for his criminal
misconduct: painfully real, but simply the price of having
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 83 of 91

84
enjoyed the temporary benefit of his ill-gotten gains. By
accepting the benefits of its wrongdoing, the debtor (and its
shareholders, and its creditors) put itself on the hook for that
wrongdoing as well.
The same principle applies to this case. The debtors
received hundreds of millions of dollars in financing from the
NCFE Entities at the expense of those entities’ innocent
investors. By Alberts’s own admission, these infusions of cash
kept the debtors going long after they should have been dissolved
or reorganized. They may have injured the debtors in the long
run, but the infusions provided a short-term benefit that the
debtors (and their shareholders, and their creditors) eagerly
accepted. As Professor Fletcher explains in his treatise on
corporate law:
When the act of an officer of a corporation
constitutes a fraud upon a third person, or
upon another corporation of which he or she
is also an officer, the first-mentioned
corporation is chargeable with notice of the
nature of the transaction, although the fraud
is perpetrated for the officer’s own benefit,
where the officer also represents the
corporation in the transaction. Fraud on
behalf of a corporation is not the same thing
as fraud against it. Fraud against the
corporation usually just hurts the
corporation; the shareholders are the
principal if not the only victims. But the
shareholders of a corporation whose officers
commit fraud for the benefit of the
corporation are beneficiaries of the fraud.
The primary costs of a fraud on the
corporation’s behalf are borne not by the
shareholders but by outsiders to the
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 84 of 91

69 As the First Circuit noted properly, the adverse
interest exception might apply where the corporate principal’s
agent loots the corporation of all its assets, thereby depriving
the corporation of any benefit from the fraud perpetrated against
innocent investors. Baena, 2006 WL at *6. But this is not a
looting case, and Alberts cannot show that the debtors received
no benefit from their dealings with the NCFE Entities.
85
corporation.
Fletcher, supra at § 829 (footnotes omitted).
This principle forecloses application of the adverse
interest exception where the only harm alleged by the corporate
plaintiff is the deepening of that company’s insolvency. No
matter how much evidence of wrongdoing Alberts produces, there
simply are no set of facts under which a company that is harmed
by the artificial prolongation of its existence does not also
benefit to some degree by that same prolongation at the expense
of innocent third parties.69 The adverse interest exception does
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 85 of 91

70 Appearances notwithstanding, this conclusion is
consistent with the court’s application of the adverse domination
presumption to the statute of limitations defense raised by the
Partially Released Defendants. While the debtors’ collusion with
the NCFE Entities to defraud those entities’ investors provided
immediate benefits to the debtors, the (alleged) failure of Paul
Tuft, Donna Talbot, and Erich Mounce to adequately inform
themselves of the long-term consequences of that fraud or put the
debtors’ interests above their own did the debtors no favors. It
is this latter wrongdoing that is at stake where the statute of
limitations is concerned, whereas the in pari delicto defense
concerns harms against third parties. It is this same difference
in harms that has led courts to conclude that corporate insiders
cannot invoke the in pari delicto defense with respect to their
own wrongdoings. See In re HealthSouth Corp. Shareholders
Litig., 845 A.2d 1096, 1107-08 & n.20 (Del. Ch. 2003) (“The
reality that [the corporate debtor] itself might be liable to
third-parties due to the failure of its managers . . . does not
mean that [the debtor] has no right to seek recompense from those
managers for the harm they caused it.”).
86
not and cannot apply in this case.70
(iii) Other arguments
Alberts makes other, less colorable arguments against the
imposition of the in pari delicto defense in this case. He
argues that the doctrine only applies where the parties are at
equal fault and that the Law Firm Defendants were somehow more at
fault for the debtors’ injuries than the D & O Defendants. But
the only alleged wrongdoing of the Law Firm Defendants was their
facilitation of the misconduct of the debtors, who well knew that
they were insolvent. Based on the allegations in the Second
Amended Complaint, the fault of the Law Firm Defendants could not
have been greater than the fault of the debtors. In re Dublin
Sec., Inc., 133 F.3d at 380.
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 86 of 91

87
Alberts also suggests that the Law Firm Defendants ought not
be allowed to invoke the in pari delicto defense because lawyers
owe a special duty of care to their clients. Whatever one thinks
of this notion as a policy argument, it is clearly not good law.
See id. (rejecting public policy argument in holding that legal
malpractice claim was barred because the plaintiff was in pari
delicto); accord Quick v. Samp, 697 N.W.2d 741, 745-48 (S.D.
2005); Evans v. Cameron, 360 N.W.2d 25, 29 (Wis. 1985); Tillman
v. Shoffner, 90 P.3d 582, 584-86 (Okla. Ct. Civ. App. 2004).
Finally, Alberts points out that the defense of in pari
delicto is factually intensive and cannot be resolved on a motion
to dismiss. Ordinarily, the court would agree, but in this case
there are no set of facts under which the debtors would not be
subject to the defense because the very harm that they allegedly
suffered at the hands of the Law Firm Defendants (i.e., the
deepening of the debtors’ insolvency) presupposes imputable
wrongdoing by the debtors’ management. The court will dismiss
the remaining portions of Counts VI and VII (the malpractice
claims) by applying the defense of in pari delicto. Any
objection by Alberts in Counts XIV and XV to the Law Firm
Defendants’ claims that is based solely on malpractice is
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 87 of 91

71 Like his affirmative malpractice claim held pursuant to
11 U.S.C. § 541, Alberts’s state law defenses available to him
pursuant to 11 U.S.C. § 558, including the defense of
malpractice, are limited by the in pari delicto defense.
However, Counts XIV and XV survive as disallowance claims to the
extent that they are based on a ground not turning solely on
malpractice (namely, an implicit objection under 11 U.S.C.
§ 502(d) for failure to disgorge a conveyance avoidable under §§
544 or 548 based on inadequate value having been given for the
conveyance because of malpractice). Counts XIV and XV also
survive as equitable subordination claims notwithstanding the
court’s ruling with regards to Alberts’s malpractice claim
because equitable subordination, unlike disallowance of a claim,
depends on bankruptcy rather than state law.
88
similarly barred by the defense of in pari delicto.71
(b) Timeliness
At this point, aside from Counts XIV and XV (seeking
disallowance or subordination of claims) as limited by the
court’s discussion above, the only claims in the Second Amended
Complaint that remain are Counts VIII-XIII, which seek to avoid
and recover payments of attorneys’ fees to the Law Firm
Defendants for their allegedly negligent preparation of opinion
letters under federal and state fraudulent conveyance laws. See
11 U.S.C. §§ 544, 548, 550. These claims may not be subject to
the defense of in pari delicto, see McNamara v. PFS (In re
Personal & Bus. Ins. Agency), 334 F.3d 239, 245-47 (3d Cir.
2003), but they are bound by special restrictions of their own,
most notably a statute of limitations not subject to the
continuous misrepresentation doctrine.
Section 548 of the Bankruptcy Code allows a representative
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 88 of 91

72 As part of BAPCPA, Congress amended § 548 to permit an
estate representative to pursue transfers made within two years
of the petition date, but this case pre-dates the effective date
of that amendment.
89
of a debtor’s estate (in this case, Alberts) to avoid certain
transfers of interests by the debtor if those transfers were
“made or incurred on or within one year before the filing of the
date of the petition . . . .” 11 U.S.C. § 548(a)(1).72 Section
544 of the Bankruptcy Code allows an estate representative to
invoke the fraudulent conveyance laws of any state available to
any creditor of the estate. Alberts invokes Arizona’s Fraudulent
Transfer Act, which extinguishes any claim for relief not raised
“within four years after the transfer was made or the obligation
was incurred.” Ariz. Rev. St. § 44-1009. This latter time
limitation is a separate statute of limitations, whereas the one-
year period set forth in § 548 is an element of the claim that
must be pled by Alberts.
Alberts does not allege that the debtors paid the Law Firm
Defendants for their allegedly defective letters within one year
of the petition date. Consequently, his cause of action under
§ 548 must be dismissed. The timeliness of Alberts’s claims
under Arizona’s Fraudulent Transfer Act (as incorporated by
§ 544) will require disposition at a later stage because they are
an affirmative defense that need not be addressed in the Second
Amended Complaint. The two counts involving § 548, Counts XII-
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 89 of 91

73 Count XIII is not limited to conveyances avoided under
§ 548, but Counts IX and XI already seek recovery of conveyances
avoided under § 544. Accordingly, Count XIII will be dismissed
as surplusage to the extent it addresses conveyances avoided
under § 544.
74 Similarly, Alberts’s claims for equitable subordination
and disallowance under § 502(d) are unaffected by the affirmative
defense of in pari delicto; however, objections to claims in
Counts XIV and XV based solely on the Law Firm Defendants’
alleged malpractice will be dismissed.
90
XIII,73 and the objections in Counts XIV and XV based on § 502(d)
in conjunction with § 548 will be dismissed in their entirety,
but counts VIII-XI (seeking avoidance and recovery under 11
U.S.C. §§ 544 and 550) will not be dismissed. Counts XIV-XV will
not be dismissed to the extent that Alberts’s equitable
subordination claims and § 502(d) objections to claims based on
avoidability under § 544.74
III
In light of the foregoing analysis, the court will grant in
part and deny in part the defendants’ motions to dismiss. As
Count I is the only count levied against Susan Engelhard and the
court has concluded that it fails to state a claim against her,
the court will dismiss the Second Amended Complaint in its
entirety with respect to her. Finally, the court will stay Count
II with respect to Melvin Redman unless and until Alberts
successfully moves for relief from the automatic stay in Redman’s
bankruptcy case.
An order follows.
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 90 of 91

91	O:\Andrew Fausett Temp Docs\Decisions with Related Orders\Alberts v. Tuft (In re Greater Southeast Community Hospital Corp., I)\GSCH_Alberts v. Tuft_motion to dismiss_SAC_decision_v14.wpd
[Signed and dated above.]
Copies to: All counsel of record.
Case 04-10459 Doc 251 Filed 09/21/06 Entered 09/21/06 15:58:01 Desc Main
Document Page 91 of 91