Boles v. Filipowski et al

OCR transcription for search; preserved printed pages are authoritative

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UNITED STATES BANKRUPTCY COURT DISTRICT OF MASSACHUSETTS
2
In re
ENIVID. INC., et al.,
Debtors.
Chapter 11
Case No. 03-11472-JNF
~
JAMES B. BOLES, LIQUIDATION TRUST REPRESENTATIVE OF THE LIQUIDATING TRUST OF ENIVID, INC.
Plaintiff,
V.
Adv. P. No. 04-1439-JNF
ANDREW J. FILIPOWSKI, PAUL HUMENANSKY, MICHAEL CULLINANE AND JUDE SULLIVAN,
Defendants.
NNNNNNNNNA
NNNNNNNNNNN
MEMORANDUM OF DECISION
I. INTRODUCTION
The contested matters before the Court are the following: (1) "Defendant Andrew J. Filipowski's Motion to Dismiss Counts I, V-VII, and XII-XIV of the First Amended Complaint" through which defendant Andrew Filipowski ("Filipowski") seeks to dismiss, pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b) (the "Filipowski Motion to Dismiss"), Counts
1
AUTHENTIGATED THEYS. GOVERNMENT
GPO

1, V through VII and XII through XIV of the First Amended Complaint (the “Complaint”)

filed by James B. Boles, the Liquidation Trust Representative (the “Plaintiff”) of the
Liquidation Trust dated December 20, 2004, established pursuant to the enivid, inc.’
“Official Committee of Unsecured Creditors’ Amended Plan of Liquidation Under Chapter
11 of the Bankruptcy Code dated September 30, 2004, as Modified November 23, 2004" (the
“Plan”); (2) the “Motion to Dismiss Claims Against Defendant Paul Humenansky” through
which defendant Paul Humenansky (“Humenansky”) seeks to dismiss Counts il, V
through VIII, and XIII through XV of the Complaint (the “Humenansky Motion to
Dismiss”); (3) “Michael P. Cullinane’s Motion to Dismiss Plaintif f's First Amended
Complaint” through which defendant Michael Cullinane (“Cullinane”) seeks to dismiss

Counts III, V through VII and XII of the Complaint (the “Cullinane Motion to Dismiss”);

' By order dated October 6, 2004, the Court substantively consolidated the
Chapter 11 case of enivid, inc. (f/k/a divine, inc.) with the bankruptcy estates of the
following related entities: Open Market, Inc., enivid Mana ged Services, Inc., enivid DR
Corporation, Viant Corporation, eShare Communications, Inc., Delano Technology
Corp., enivid technology ventures, iCentral, Inc., Inventions, Inc., enivid/emicom, Inc.,
SageMaker, Inc., Waypoint Software Corporation, Preceptual Robotics, Inc., enivid
Global Services, Inc., eprise Corporation, Denalii, Inc., Melita Finance, Inc., SMI Holding
Corp., Retrieval Technologies, Inc., enivid international, Inc., enivid software, inc.,
Opinionwarc.com, Inc., Melita Intellectual Property, Inc., smallwonders softwarel, inc.,
Open Market Securities Corporation, Futuretense Corporation, RWT Corporation,
LOTN, Inc., Eprise Securities Corp,, SageMaker (Europe), Inc., Global Recall, Inc.,
databites, inc., enivid inter Ventures, Inc., enivid Ireland, Inc., Folio Corporation,
Venture Capital Unlimited Acquisition, enivid Synchrony Communications, Inc.,
Softmetric, Inc., Air enivid, Inc., and SM2 Holding Corp.

* Although Humenansky’s Motion to Dismiss makes reference to Count XV, no
basis is asserted in his memoranda for dismissal of that count.

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and (4) “Defendant Jude Sullivan’s Motion to Dismiss the Amended Complaint” through
which defendant Jude Sullivan (“Sullivan”) seeks dismissal of all Counts in the Complaint
against him (the “Sullivan Motion to Dismiss”) (collectively, the “Motions to
Dismiss”) (Filipowski, Humenansky, Cullinane and Sullivan, each a “Defendant” and,
collectively, the “Defendants”).*

Each of the Defendants filed Memoranda of Law in support of their respective
Motions to Dismiss* to which the Plaintiff filed responsive memoranda and each Defendant
filed a reply brief. On November 14, 2005, the Court conducted a hearing after which it
took the Motions to Dismiss under advisement. On December 22, 2005, the Detendants
jointly filed a “Motion for Leave to Supplement Briefing on Defendants’ Motion to
Dismiss" (the “Motion to Supplement”) through which they sought to supplement their

arguments in view of the recent case of (Alberts v. Tuft) In re Greater Southeast

Community Hospital Corp., 333 B.R. 506 (Bankr. D. D.C. 2005). The Court allowed the

Motion to Supplement on December 28, 2005. On January 9, 2006, the Plaintiff filed a

response to the Motion to Supplement, and the Defendants filed a joint reply on January

19, 2006.

* Each Defendant in this Adversary Proceeding has filed a Motion to Dismiss
pursuant to Fed. R. Civ. P. 12(b)(6), made applicable to this proceeding by Fed. R.
Bankr. P. 7012(b), for failure to state claims upon which relief may be granted and
pursuant to Fed. R. Civ. P. 9(b), made applicable to this proceeding by Fed. R. Bankr. P.
7009, for failure to plead fraud with sufficient particularity.

* Defendants Humenansky, Cullinane and Sullivan each adopted and
incorporated by reference all of the applicable arguments in the Memoranda of Law
filed by each of the other Defendants.

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II. THE PLAINTIFF'S COMPLAINT

A. Background

The Court accepts the following facts alleged in the Complaint as true for purposes

of this decision. See Warth v. Seldin, 422 US. 490, 501, 95S. Ct. 2197, 2206, 45 L. Ed. 2d 343

(1975). The following summary represents a statement of facts according to the Plaintiff
and does not constitute findings or a determination of any facts.

enivid, inc., f/k/a divine, inc. (“Divine” or the “Company”), a Delaware
corporation, was founded in 1999 by Filipowski as an internet-holding company, known
as an “incubator” company, engaged in business-to-business e-commerce through a
community of associated companies. Prior to establishing Divine, Filipowski was a
founder of PLATINUM technology, inc. (“Platinum”) which was ultimately sold in 1999
for $3.6 billion. Filipowski had worked with each of the Defendants insome capacity while
at Platinum. Humenansky had served as Platinum’s Chief Operations Officer and
Cullinane had served as its Executive Vice President and Chief Financial Officer. Sullivan
had been Platinum’s outside counsel. While at Divine, the Defendants held the following

offices and positions:

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Name Office Director Status®
Filipowski Chief Executive Officer Board Member from
January 1, 2000 through May 23, 2003° January 1, 2000 until
Effective Date of
Confirmation of the Plan

Humenansky | President and Chief Operating Officer | Board Member from
October 19, 2000 through May 23, 2003 | January 1, 2000 until
Effective Date of
Confirmation of the Plan

Cullinane Chief Financial Officer Board Member from
January 1, 2000 through May 23, 2003 ‘| January 1, 2000 until
Effective Date of
Confirmation of the Plan

Sullivan Secretary and General Counsel Sullivan was not a Director
October 19, 2000 through April 8, 2003

As an incubator company, Divine promoted itself as providing management and
other resources with the goal of taking companies in its portfolio public. Divine raised
over $100 million in its initial public offering (“IPO”) in July, 2000. In that year, Divine

acquired interests in more than 50 associated companies (the “Associated Companies”).

>In addition to Filipowski, Humenansky and Cullinane, the Board of Directors
(the “Board”) consisted of members who are not defendants in this action. See Am.
Compl. at /§ 193-94. The number of directors who served on Divine’s Board at any
given time is unclear from the Complaint. The Plaintiff conceded at the November 14,
2005 hearing that he has not alleged that a majority of the Board breached their
fiduciary duties. Rather, he represented that only “select individuals,” namely
Filipowski, Humenansky and Cullinane, breached their duties as Board members. Tr. at
p. 81-82.

* The employment termination date for each of Filipowski, Humenansky and
Cullinane is subject to dispute.

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The initial public offering market was evaporating in 2000, however, and Divine’s
incubator business failed to produce a single IPO for any of the Associated Companies.

Toward the end of 2000, many members of management believed that the incubator
concept had failed and that Divine should pursue a new business strategy. In February
2001, Divine announced that it would acquire companies engaged in the “Enterprise Web
Solutions” business and then integrate the acquired companies and their products and
services into the portfolio of existing Divine products. Divine planned to reorganize and
integrate the products and services of the Associated Companies into Divine’s
development, marketing, sales and support channels. This strategy presented significant
operational and integrative challenges, in part, because the existing development,
marketing, sales and support channels of Divine were in their beginning stages and also
required significant development and integration efforts.

Divine actively implemented its new strategy in 2001 during which it acquired 20
companies, for which it expended almost $21 million in cash, issued more than 230 million
shares of its common stock and assumed over $85 million in debt. Divine focused on
acquiring financially distressed companies with operational concerns. A significant
number of the acquired companies were in financial distress, While many of Divine’s
acquisitions helped to create the appearance of increased revenues, they failed to move
Divine towards profitability. Through the first three quarters of 2001, Divine continued to
incur operating losses and its cumulative operating losses for the first three quarters of

2001 totaled over $175 million. Filipowski was devoted to Divine’s growth-by-acquisition

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strategy. Many members of management of the Company, however, questioned this
business plan because of the costs, negative effect on cash flow and operational challenges
associated with the acquisitions. Noting the problems facing the Company, members of
management attempted to direct Filipowski’s focus toward operations rather than
acquisitions. With mounting financial challenges, internal dissent began to grow.

One of the companies targeted for acquisition by Divine was RoweCom, Inc.
(“RoweCom”) which managed library orders of large institutions for publications. It
placed orders with publishers and provided customer and ancillary services for libraries.
While RowcCom’s business did not fil within any of Divine’s business spheres, the
addition of RoweCom enhanced the appearance of Divine’s gross revenues. RoweCom,
however, wasa financially distressed company, having operated ata loss for several years.
Moreover, its operations historically resulted in cyclical cash flows throughout the year.
RoweCom typically paid publishers in December or January of each year for subscription
orders placed by its customers. Asa result, RoweCom usually required additional funding
in the fourth quarter when publisher payments were in excess of collections from
customers. Divine’s cash flow problems, as well as the lack of synergy between Divine and
RoweCom’s business, led some within Divine to question the acquisition. Humenansky
and Sullivan, in particular, expressed their doubts about the acquisition through e-mails
to Filipowski. During the due diligence process, Humenansky wrote: “I become less and
less sure of this acquisition every day that goes by, since I just don’t see a lot of benefit

versus a lot of work. All others are right on, but this one I have a really bad feeling about.”

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Am. Compl. at $92. Similarly, on October 31, 2001, Sullivan wrote to Filipowski and other
members of management:
I may not do this justice from the financial modeling perspective, but
the Cliff's Notes version is that RoweCom’s financial position has
deteriorated to a much worse position than I believe any of us were
aware of. . . and we have been trying to get a handle on exactly how

bad the situation is so that a reasonably informative report of the
situation can be presented .. . before we close this deal.

Id. at ¥ 53.

Notwithstanding the misgivings of some managers, the Company completed
the acquisition of RoweCom on November 6, 2001. This transaction placed Divine
in the zone of insolvency as of November 30, 2001. Nevertheless, following the
acquisition of RoweCom, Divine acquired eight additional companies (collectively

the “ Acquisitions”):

Company Name Date of Acquisition
Data Return Corp. January 2002
Northern I.ight Technology January 2002

Real World Technology Corporation February 2002
Perceptual Robotics, Inc. February 2002

Net Unlimited February 2002
Denalii, Inc. April 2002

Delano Technology, Inc. (“Delano”) July 2002

Viant Corporation (“Viant’) September 2002

The completion of these Acquisitions created a number of economic and

operational prob lems for the Cumpany. The Defendants were aware of the

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problems facing the Company and that they repeatedly attempted, to no avail, to
direct Filipowski’s focus toward operating Divine, rather than continuing
acquisitions. Filipowski received numerous e-mails from Divine management about
their concerns, but he dismissed or gave little credence to the opinions of senior
management. In the face of the repeated warnings from management about
Divine’s financial condition, Filipowski expressed his desire to move ahead with the
Acquisitions. None of the Defendants communicated their concerns about the
Acquisitions to the Board which ultimately approved the transactions.

In the first quarter of 2002, Filipuwski presented projections to the Board
showing that the Company would achieve profitability by the end of 2002. The
business plan presented to the Board reflected that the Company would have $83
million in cash at the end of the first quarter of 2002. “[A]ccording to Sullivan,
these projections were dictated by Filipowski over the objections of Humenansky
and other officers to secure the desired Board vote and neither Humenansky nor
any of the other Defendants advised the Board that these numbers reflected revenue
plans that were beyond levels believed achievable.” Id. at {| 90.

By mid-March 2002, the Company’s actual operating results indicated that

the Company would miss the first quarter projections presented to the Board.” This

‘ Divine ultimately reported a cash balance of $78.1 million for the first quarter of
2002, a discrepancy of less than $5 million from the original projection presented to the

Board, Sullivan attributed achievement of this figure to Divine’s withholding of
payments for accounts payable.

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gave rise to disagreements among the Defendants regarding the projections which
would be delivered to the Board at the end of March 2002 for the next quarter. The
Defendants engaged in numerous e-mails about the content of the financial
materials to be included in the Directors’ presentation packets, and many believed
that Filipowski insisted on presenting the Board with overly aggressive revenue
figures which were not achievable. Debates among Filipowski and management
ensued. When Filipowski circulated his ideas for providing the Board with “good
news” and making the overall numbers “look a lot better,” Humenansky initially
replicd: “[The projections] are already ayyressive. It’s not worth the risk to me.”
Id. at 95 and 98. Filipowski concluded the debate, stating: “In the final analysis
it is my call to make,” to which Humenansky replied “. . . it is [Filipowski’s] call to
make...” Id. at {98 and 99. The projections Filipowski insisted on presenting to
the Board were inflated and devoid of support. Despite the debate among
management about the projections, the Defendants failed to pass information about
the faulty projections to the Board.

In January 2002, Humenansky had warned Filipowski that the Company was
running out of cash and that the Company could not continue to acquire other
businesses because of the continuing depletion of cash resources. The Company's
deteriorating cash position forced Filipowski and the Company to switch from
acquisitions which were driven by Divine’s business strategy, to acquisitions to

obtain more cash for Divine’s balance sheet. In February 2002, management

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provided the Board with a detailed presentation regarding Divine’s need to raise
cash. The reasons included a lack of operating history and the marketplace
perception of Divine as a “risky company,” as well as the need to achieve revenue
targets.

Divine was insolvent by the end of the first quarter of 2002, as the fair market
value of its assets did not exceed its liabilities. Despite this fact, Filipowski
remained focused on the acquisition strategy to obtain cash, atone point stating “we
need to acquire cash even at drill bit prices.” Id. at §110. Divine proceeded with
the acquisitions of Viant and Delaniw which Filipowski believed would produce $90
million in cash for Divine. Humenansky’s initial response to the Viant acquisition
was “you must be kidding.” Id. at § 121. Later, he said: “They have zero pipeline
and we are going to terminate almost everyone.” Id. at { 124. Despite the concerns
regarding Viant, on September 27, 2002, the Company completed the acquisition.
The Board minutes reflect that Humenansky did not notify the Board of his concerns
about Viant, and that Filipowski, Humenansky and Cullinane voted in favor of the
Viant acquisition. Although Divine originally pursued Viant to add more than $80
million in cash to its balance sheet, it completed the deal even though it only
resulted in Divine adding $6.9 million in cash to its balance sheet.

The Delano transaction caused similar concerns. Humenansky wrote: “As
we drill down into the Delano revenue numbers, there is a considerable amount that

is bogus.” Id. at § 129. After learning of the potential acquisition of Delano,

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Alekzander Szlam ({“Szlam”), Divine’s Chief Strategy Officer, wrote to Cullinane,
Humenansky and other members of management that he was totally against the
deal and that it would “kill” Divine. On July 9, 2002, Ken Mueller (“Mueller”), the
Company’s controller, stated: “ [Based on Delano’s] update today, I don’t think that
we will net more than [$1-2 million] of cash from this transaction.” He went on to
say “if we are doing this deal for cash, we should call it offnow.” Id. at 9147. On
July 31, 2002, the Company completed the Delano acquisition. The Board minutes
reflect that none of the Defendants notified the Board of their concerns with regard
to Delano and that Fili powski, Humenansky and Cullinane voted in favor of it. The
Delano Acquisition resulted in the addition of only $4.8 million in cash to Divine’s
balance sheet.

In April 2002, Divine began investment discussions with Oak Venture
Partners (“Oak”). Asa result, Oak agreed to provide $61 millionin equily financing
in exchange for more than 30% of Divine’s capital stock. In May 2002, Oak made its
first investment in Divine of $22.9 million, and, in July 2002, it invested an
additional $38.7 million. Despite these investments, Divine remained insolvent and
continued to experience operational problems. The acquisition pace made
integration of operations difficult, if not impossible. Divine had to terminate
numerous employees upon the completion of each of the Acquisitions. Asa result,
it incurred costs for large severance packages, and the acquired companies provided

little value to Divine.

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Beginning with the April 1, 2002 Board meeting, the Board began to consider
fiduciary duties of a board of directors of a corporation which is in the “zone of

insolvency.”®

At this meeting, in response to questions from the Board, F ilipowski,
Cullinane and Humenansky stated that expense and revenue targets presented to
the Board were reasonable and attainable. In light of this information, the Board
determined that “at the present time even under a ‘zone of insolvency’ analysis all
relevant constituencies were best served by Divine continuing to operate under its
current operating plan.” Id. at ¥ 204.

On April 16, 2002, Tlumenaiusky e-mailed Filipowski Stating that he was
“ready to transition out of Divine” because “I just disagree with way too much
anymore to support this going forward.” Id. at § 157. Throughout May 2002,
Humenansky sent additional e-mails to Filipowski voicing his concerns about
customer issues, employee retention and the “general feeling of failure” in the
organization. On May 1, 2002, he wrote to Filipowski: “I feel the company is ina
tailspin, and we need to make major changes,” and, on May 22, 2002, he wrote: “I
can’t run the business going forward. . . I’m at the end of my rope now.” Id. at TJ
162 and 164. Despite the repeated statements of his intention to leave, Humenansky

stayed with Divine until after the bankruptcy filing.

In connection with Divine’s earlier acquisition of Eshare Communications,

* The Plaintiff alleged that the Company actually entered the zone of insolvency

many months before in November of 2001 with the closing of the RoweCom
transaction.

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Inc. (“Eshare”), Eshare’s Chief Executive Officer, Szlam, received options to “put”
a significant number of shares of Divine’s common stock. In April 2002, Szlam
exercised his “put” options at a cost of almost $6.2 million to Divine. The
Defendants did not advise the Board that Szlam exercised his put options until after
Divine’s Audit Committee Meeting on May 1, 2002, a decision which precipitated
the resignation of an outside director of the Company.

On May 23, 2002, Mueller wrote to Filipowski, Humenansky and Cullinane
regarding RoweCom France which had recently incurred more than $12 million in
obligations due to overdrafts. RoweCom France was unable to repay the overdrafts
and, as a result, auditors advised Divine that it should declare RoweCom France
insolvent. Mueller outlined Divine’s resulting financial obligations and the
potential impact of the RoweCom France overdrafts on Divine in the second and
third quarters of 2002. Filipowski responded saying “Less of an issue after Oak and

af

Viant is [sic] done.” Id. at | 196. While the RoweCom France information was
provided by Mueller specifically in advance of the Board Meeting scheduled later
in the day of May 23, 2002, none of the Defendants communicated the information
lo the Board. At that meeting, the Defendants suggested that the Board continue
considering the fiduciary duties of a director of a corporation which is in the zone
of insolvency. Following the Board’s consideration of this issue, it concluded that

“all relevant constituencies were best served by the Corporation continuing to

operate under its current operating plan.” Id. at J 198. The Board reached this

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conclusion without the information that RoweCom France was insolvent.

Discussions about the zone of insolvency were frequent throughout 2002.
The Board meeting minutes reflect that the Board discussed the matter for the first
time on April 1, 2002 and again on May 13, 2002, May 23, 2002 and August 14, 2002.
At these meetings, the Board consensus was the same: “after considering the rights
and interests of Divine’s constituencies, the Board determined ... under a ‘zone of
insolvency’ analysis, all relevant constituencies were best served by Divine
continuing to operate under its current operating plan.” There is no record that any
of the Defendants spoke during Board meetings tu advise the Board of Divine’s true
economic condition.

In July 2002, Divine disbanded its Mergers and Acquisitions unit. During the
summer of 2002, Humenansky repeatedly warned that the Company was going to
miss its third quarter projections and that it faced major cash flow problems for the
fourth quarter. At the close of the third quarter, Divine’s cumulative operating
losses totaled $683.7 million since the Company's initial public offering in July 2000.
In the fourth quarter, the annual RoweCom publisher payments loomed. When
Divine entered the fourth quarter of 2002, it did not have sufficient cash or available
financing to pay publishers for the periodicals RoweCom’s customers had ordered
and for which they had already paid. From and after the RoweCom acquisition,
Divine had used monies from pre-paid subscriptions from RoweCom’s customers

to fund Divine’s operations, not the subscriptions. Through much of the fourth

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quarter ot 2UU2, Divine was engaged in negotiations to sell RoweCom. By mid-
December 2002, the Board determined that Divine was not able to continue to
support RoweCom and was not in a position to finance the RoweCom year-end
publisher payments. By the end of December 2002, Divine publicly announced that
it was no longer willing to financially support RoweCom’s operations. On January
27, 2003, RoweCom filed a Chapter 11 bankruptcy petition.

Once in bankruptcy, RoweCom filed an adversary proceeding against Divine
seeking over $73 million in damages for, among other things, “looting” RoweCom.
Thereafter, the United States Department of Justice and the Securities and Exchange
Commission also began investigating the management of RoweCom and Divine.
Moreover, in mid-November 2002, prior to RoweCom’s decision to file a bankruptcy
petition, Divine’s auditors informed the Company that it would issue a “going
concern” qualification in the absence of a definite operating plan for 2003. Divine
explored several strategic alternatives, including the sale of its entire business or
various divisions, however, the Company could not secure a buyer.

On February 25, 2003 (the “Petition Date”), Divine filed a voluntary petition
under Chapter 11 of the United States Bankruptcy Code (the “Code”), and the
Court subsequently consolidated the case with those of Divine’s subsidiaries.
Filipowski, Humenansky and Cullinane were still employed as officers on the
Petition Date under the terms of their respective employment agreements

(collectively, the “Employment Agreements”), and they continued to serve as

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directors until the effective date of the Plan. The Company sold substantially all of
its assets on May 15, 2003, and on May 22, 2003, it filed a Motion for an Order
Authorizing Rejection of the Executory Employment Agreements. Filipowski,
Humenansky and Cullinane objected to the motion, alleging that the Company had
previously terminated their employment. Each of the Employment Agreements
provided for large payments in the event of employment termination. The Plaintiff
alleges that Filipowski, Humenansky and Cullinane timed the terminations of their
employment agreements in an improper attempt to qualify the termination
payments as administrative expense claims against Divine’s bankruptcy estate at the
expense of the general unsecured creditors. The Defendants filed a number of
proofs of claim in which they asserted, inter alia, damages and administrative
expense claims for termination of the Employment Agreements, indemnification for
legal costs and expenses incurred in connection with their status as officers and
directors of Divine, and general expense reimbursement.

B, The Complaint

The Complaint is 113 pages, contains 411 paragraphs and alleges 16 counts
against the Defendants. The causes of actions are as follows: (1) Count I, captioned
“Breach of the Fiduciary Duty of Loyalty” against Filipowski, in his capacity as an
officer and director of Divine; (2) Count II, captioned “Breach of the Fiduciary Duty
of Loyalty” against Humenansky, in his capacity as an officer and director of Divine;

(3) Count III, captioned “Breach of the Fiduciary Duty of Loyalty” against Cullinane,

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in his capacity as an officer and director of Divine; (4) Count IV, captioned “Breach
of the Fiduciary Duty of Loyalty” against Sullivan, in his capacity as an officer of
Divine,’ (5) Count V, captioned “Breach of the Fiduciary Duty of Care” against all
Defendants, in their capacities as officers of Divine; (6) Count VI, captioned “Breach
ot the Fiduciary Duty of Good Faith” against all Defendants, in their capacities as
officers of Divine; (7) Count VIL, captioned “Deepening Insolvency” against all
Defendants; (8) Count VIII, captioned “Objection to Indemnification Claims Fed. R.
Bankr. P. 3007” against all Defendants; (9) Count IX, captioned “Objection to
Duplicative Claims/ Objection To Administrative Claims 11 U.S.C. § 502; Fed. R.
Bankr. P. 3007” against Cullinane, Humenansky and Filipowski; (10) Count X,
captioned “Objection to Employment Termination Claims 11 U.S.C. § 502; Fed. R.
Bankr. P. 3007” against Filipowski, Cullinane and Humenansky; (11) Count XI,
captioned “Objection to Expense Reimbursement Claims 11 U.S.C. § 502; Fed. R.
Bankr. P. 3007” against Filipowski; (12) Count XII, captioned “Subordination”
against all Defendants; (13) Count XIII, captioned “Avoidance and Recovery of
Fraudulent Transfers 11 U.S.C. §§ 548; 550” against all Defendants; (14) Count XIV,
captioned “ Avoidance and Recovery of Preferential Transfers 11 U.S.C. §§ 547; 550”
against all Defendants;” (15) Count XV, captioned “Objection to Claims filed by

Retainer Defendants 11 U.S.C. § 502; Fed. R. Bankr. P. 3007” against all Defendants;

* As stated above, Sullivan was not a Director of Divine.

© The Plaintiff has pled this Count as an alternative to Count XIII.

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and (16) Count XVI, captioned “Objection to Indemnification Claims Arising from
Third Party Civil Actions 11 U.S.C. § 502; Fed. R. Bankr. P. 3007” against all
Defendants. Counts! through VI shall be referred to herein as the “Fiduciary Duty
Counts.”
YI. THE MOTIONS TO DISMISS

As noted above, the Defendants have each filed a Motion to Dismiss various
counts of the Complaint against them pursuant to Fed. R. Civ. P. 9(b) and 12(b)(6),
made applicable to this proceeding by Fed. R. Bankr. P. 7009 and 7012. Each of the
Defendants adopt and incorporate by reference all applicable arguments in each
other’s briefs.

A. Standard for Dismissal Pursuant to Fed. R. Civ. P. 12(b)(6)

When reviewing a Rule 12(b)(6) motion, the court must accept as true all
material allegations of the complaint and construe the complaint in favor of the

plaintiff. See Warth v. Seldin, 422 U.S. 490, 501, 95 S, Ct. 2197, 2206, 45 L. Ed. 2d 343

(1975). Nevertheless, in determining a Rule 12(b)(6) motion, the Court need not

credit unsupported conclusions. Dartmouth Review v. Dartmouth College, 889 F.2d

13, 16 (1st Cir. 1989), veerruled on other grounds, Educadores Puertorriquenos en

Accion v. Hernandez, 367 F.3d 61 (1st Cir. 2004), The Federal Rules of Civil

Procedure “do not require a claimant to set out in detail the facts upon which he
bases his claim.” Conley v. Gibson, 355 U.S, 41, 47, 78 S. Ct. 99, 103, 2 L. Ed. 2d 80

(1957). “To the contrary, all the Rules require is ‘a short and plain statement of the

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claim’ that will give the defendant fair notice of what the plaintiff's claim is and the
grounds upon which it rests.” Id. (quoting Fed. R. Civ. P. 8(a)(2)). See also Stanziale

v. Nachtomi (In re Tower Air, Inc.), 416 F, 3d 229, 237 (3d Cir. 2005)(under Federal

Rule 8, the plaintiff need only plead the “basic facts” necessary to provide the
defendant with fair notice of the plaintiff's claims and the general factual
background upon which it rests and should not be deprived of the opportunity to

pursue claims on a Rule 12(b)(6) motion for lack of detailed facts.).

Nevertheless, it also is well established that the pleading requirements are

“not entirely. .. toothless,” Dartmouth Review, 889 F.2d at 16. The First Circuit has

required a minimal level of factual particularity rather than mere allegations of

conclusions. See Fleming v. Lind-Waldock & Co., 922 F.2d 20, 24 (1st Cir.

1990)("[T]he necessary factual averments are required with respect to each material

element of the underlying legal theory.”)(citing Gooley v. Mobil Oil Corp., 851 F.2d

513, 515 (1st Cir. 1988)).

B. Standard for Dismissal Pursuant to Fed. R. Civ. P. 9(b)

Although Fed. R. Civ. P. 8(a)(2) requires the Plaintiff to plead a “short and
plain statement of the claim,” claims for fraud are subject to the heightened pleading
requirements of Fed. R. Civ. P. 9b), made applicable to this proceeding by Fed. R.
Bankr. P. 7009. Pursuant to Rule 9b): “In all averments of fraud ... the
circumstances constituting fraud... shall be stated with particularity. Malice,

intent, knowledge and other conditions of mind of a person may be averred

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generally.” Fed. R. Civ. P. 9(b).

The Defendants seek dismissal of certain counts of the Complaint pursuant
to Rule 9(b) because they contend that the Plaintiff has failed to plead fraud and
nondisclosure allegations with sufficient particularity. The Plaintiff counters that
he need not plead any allegations with the specificity required by Rule 9(b) because
he has not alleged causes of action based upon fraud. He adds that the allegations
of misrepresentation and nondisclosure contained in the Complaint are merely
components of his overall legal theory that the Defendants violated their duties by
disregarding their own business judgment. While a number of the counts in the
Complaint involve allegations of misrepresentation and concealment, the essence
of the Complaint is that the Defendants abdicated their responsibilities through a
number of infractions including reckless and irrational decision making, improper
domination and control and failure to engage in debate at Board meetings about the
questionable transactions. The allegations concerning misrepresentation and
nondisclosure represent only examples of the Defendants’ disregard of their
business judgment, and the Defendants cannot recharacterize the Complaint as one

based on fraud and seek to overcome it by reliance on Rule %b).
IV. DISCUSSION

A, The Fiduciary Duty Counts

In evaluating the merits of the Defendants’ Motions to Dismiss to the

Fiduciary Duty Counts, the Court must consider two affirmative defenses, the

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Delaware business judgment rule and the exculpatory clause contained in Divine’s
Certificate of Incorporation. These two defenses are the subject of many decisions
in cases where defendants have sought dismissal of complaints containing

allegations such as those in this adversary proceeding.
1. The Business Judgment Rule

The business judgment rule, “is a presumption that in making a business
decision the directors 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.”

Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds, Brehm

v. Eisner, 746 A.2d 244 (Del. 2000). The rule “operates as both a procedural guide

for litigants and a substantive rule of law” in breach of corporate fiduciary duty

cases. Citron v. Fairchild Camera and Instrument Corp., 569 A.2d 53, 64 (Del. 1989).

“As a general matter, the business judgment rule presumption that a board acted
loyally can be rebutted by alleging facts which, if accepted as true, establish that the
board was either interested in the outcome of the transaction or lacked the
independence to consider objectively whether the transaction was in the best

interest of its company and all of its shareholders.” Orman v. Cullman, 794 A.2d 5,

22 (Del. Ch. 2002)(emphasis in original). With respect to the first element, interest
“,.. means that 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,

as Opposed to a benefit which devolves upon the corporation or all stockholders

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Case 04-01439 Doc Tis Filed 077 £2706 EMeret OTT Tov tet tO ee et
Document Page 23 of 55

generally.” Aronson 473 A.2d at 812 (citations omitted); see also In re GM Class H

S‘holders Litig., 734 A.2d 611, 617-18 (Del. Ch. 1999)(the benefits received must have

been of a sufficiently material importance to the director, in the context of his
economic circumstances, as to have made it improbable that he could perform his
fiduciary dulies to the shareholders without being influenced by his overriding

personal interest).

On the separate question of independence, “]iJndependence means that a
director's decision is based on the corporate merits of the subject before the board
rather than extraneous considerations or influences.” Aronson 473 A.2d at 816.
Independence“... involves an inquiry into whether the director’s decision resulted

from that director being controlled by another.” Orman, 794 A.2d at 25 n.50

(emphasis in original), Control may be demonstrated by a showing that the director
is dontinated by that other party, whether through close personal or familial
relationship or through force of will. Id. (emphasis in original). A director can also
be controlled by another if the challenged director is beholden to the allegedly
controlling entity. Id. (emphasis in original). “A director may be considered
beholden te... another when the allegedly controlling entity has the unilateral
power ... to decide whether the challenged director continues to receive a benefit,

financial or otherwise, upon which the challenged director is so dependent or is of

such subjective material importance to him that the threatened loss of that benefit

might create a reason to question whether the controlled director is able to consider

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the corporate merits of the challenged transaction objectively.” Id.
2, The Exculpatory Clause

Divine’s Third Amended and Restated Certificate of Incorporation (the
“Charter”) contains a clause of the type which typically eliminates or limits the
personal liability of directors for monetary damages for breach of the duty of care
{the “Exculpatory Clause”). Under Section 102(b}(7) of the Delaware General
Corporation Law" corporations can adoptcharter provisions that eliminate or limit
the personal liability of directors for monetary damages for breach of the duty of
due care, but not claims based on breach of the duty of loyalty, intentional

misconduct or knowing violation of the law. Divine’s Charter contains the statutory

11. Del. Code Ann. tit. 8, § 102(b)(7) provides, in pertinent part:

(b) In addition to the matters required lo be set fourth in the certificate of
incorporation by subsection (a) of this section, the certificate of
incorporation may also contain any or all of the following matters:

(7) A provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary
damages for breach of tiduciary duty as a director, provided that
such provision shall not eliminate or limit the liability of a
director: (i) For any breach of the director's duty of loyalty to the
corporation or its stockholders; (ii) for acts or omissions not in
good faith or which involve intentional misconduct ora knowing
violation of law; (iii) under § 174 of this title; or (iv) for any
transaction from which the director derived an improper personal
benefit. No such provision shall eliminate or limit the liability of
a director for any act or omission occurring prior to the date when
such provision becomes effective. . .

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language of Section 102(b)(7), See Am. Compl. at { 326.”

B. Count I-Breach of the Fiduciary Duty of Loyalty against Filipowski

In Count I of the Complaint, the Plaintiff alleges that Filipowski engaged in
five general categories of wrongful conduct which were motivated by his self-
interest: (1) approval of the Acquisitions and approval of the continued operation
of Divine withouta plan to achieve profitability; (2) participation in the manufacture
of a “business judgement defense” in anticipation of litigation; (3) dissemination of
false or inflated financial information to the Board and concealment of material
information about the true condition of the company from the Board, including
Divine’s failure to meet projections, the insolvency of RoweCom France and Szlam’s
exercise of his put options; (4) failure to consider advice provided by other Divine
officers; and (5) misrepresentation of his interest in, and the material personal gain
he received from, Divine’s acquisition of certain companies and properties in which

he had a personal interest.

In seeking dismissal of Count I, Filipowski argues, that the Plaintiff has failed
to sufficiently allege that he had a material self-interest or that he lacked the

independence necessary to overcome the business judgmentrule. Additionally, he

2 Ordinarily, a court may not consider any documents that are outside the
complaint in the context of a Rule 12(b)(6) motion. Documents which are sufficiently
referred to in the complaint, however, become part of the pleading, and thus the
document may be considered ona Rule 12(b)(6) motion. Alternative Energy, Inc. v. St.
Paul Fire and Marine Ins. Co., 267 F.3d 30, 33 (1st Cir. 2001).

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argues that the Plaintiff has failed to plead causation of injury to Divine as a result

of any wrongful conduct on his part, citing In re General Motors (Hughes)

Shareholder Litig., No. Civ. A. 20269, 2005 WL 1089021, at *8 (Del. Ch. May 4,
2005)(“Without allegations to somehow link the accretion ofa material benefit to the
decision to approve the. . transactions, the allegations of pecuniary self-interest are

merely conclusory and not well pled.”); Fleming v. Lind-Waldock & Co., 922 F.2d

20, 24 (Ist Cir. 1990)(“. .. the necessary factual averments are required with respect
to each material element of the underlying legal theory.”). In support of the latter
argument, he asserts that the Plaintiff must allege that a majority of the voting

Board members were self-interested or lacked independence, citing Continuing

Creditors’ Committee of Star Telecomms., Inc. v. Edgecomb, 385 F. Supp. 2d 449,
460 (D. Del. 2004)(“To allege a breach of the duty of loyalty based on actions or
omissions of the Board, the Plaintiff must ‘plead facts demonstrating that a majority

of a board that approved the transaction in dispute was interested and/or lacked

independence.’”(quoting Orman v. Cullman, 794 A2d 9, 23 (Del. Ch.
2002)(emphasis in original)). Otherwise, Filipowski argues, the disabling self-

interest cannot be said to have caused the challenged decision.
1. Self-Interest

The Plaintiff alleges that Filipowski’s wrongful conduct was the product of
the “self-interest of entrenchment” and that he was motivated solely or principally

for the impermissible purpose of retaining office for personal reasons, citing Cede

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i

& Co., v. Technicolor, Inc., 634 A.2d 345, 363 (Del. 1993)(further history omitted); I

re Anderson, Clayton S‘holders Liti -., 519 A 2d 680, 688 (Del. Ch. 1986). Filipowski
asserts that Count I should be dismissed because his interest in maintaining his
salary, position, benefits and stock ownership coincided with the interest of the

Cumpany, citing Roselink Investors, LLC v. Shenkman, 386 F. Supp. 2d 209, 219-220

(S.D. N.Y. 2004)(“[A]ny personal interest [a director] had in keeping [his company]

out of bankruptcy was consistent with the best interests of [the company]. . .”).

The Court finds that the Plaintiff ’s allegations concerning Filipowski’s
employment, stock position and perquisites, which constituted material benefits to
him, coupled with his unwavering personal adhcrence to the acquisition Strategy
in the face of mounting operational and financial problems and warnings, especially
from the Company’s chief Operating officer, permit a reasonable inference of the
self-interest of entrenchment. The Court also finds that the self-interest exhibited
by Filipowski, as detailed in the Complaint, was inconsistent with the interests of
the Company and its creditors. The Plaintiff reproduced numerous e-mails in which
members of Filipowski’s own management team questioned the value of the
acquisition targets, the Company’s ability to absorb the acquired companies and the
direction of the Company in light of its worsening cash position. Filipowski’s
typical response to these communications was a “damn the torpedoes” approach.
His responses included the following statements: “We are going to go down the

course we have set and the two options are it will either kill us or we will succeed.

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-- T will not tolerate a strategy that give us 0 chance of succeeding and just kill us
over a longer period of time.” See Am. Compl. at § 72; “Some of this takes time and
perseverance. Constant vacillation is not the answer. . . This is the gut check time
and we need to get the current strategy to mature and it will.” Id. at]_77. “We
have gut to draw the line and go tor it.” Id. at 9 233. Based upon these averments,
the Court finds that the Complaint contains sufficient facts alleging that Filipowski’s
principal motivation in the performance of his duties was his desire to maintain his
acquisition strategy by maintaining his position and office as the Company’s chief
executive officer. In the process of u laintaining that strategy, Filipowski’s interests

were at odds with the interests of the Company.
2. Causation

The Court must next assess whether the Plaintiff has sufficiently pled that
Filipowski's self-interested conduct caused injury to the Company and its creditors,
The issue of causation is most crucial to the allegations in Count I which involve
Filipowski’s approval of the Acquisitions and the continued operations of Divine.
Although the Plaintiff seeks to attribute responsibility for these decisions and
transactions to Filipowski, they could not have been consummated absent approval
of the majority of the Board. In the absence of facts alleging that a majority of the
Board was either interested in the outcome of the disputed transactions or lacked
the independence to consider the transaction independently, the Court would

ordinarily have to presurme that the Board acted loyally. See Orman v. Cullman, 794

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A.2d 3, 22 (Del. Ch. 2002). The Court may, however, reasonably infer causation if
there are sufficient facts in the Complaint to establish that the Board made the
challenged decisions on the basis of false information provided by, or at the
direction of, F ilipowski or that it would not have made the decisions had it been in

possession of the information concealed by, or at the direction of, Filipowski.

The Complaint contains a number of allegations which tend to undermine
the Plaintiff's theory that the Board reached its ill-fated decisions as a result of
Filipowski’s wrongful conduct: “As Divine pursued yet another flawed strategy, its
officers and board members repeatedly ignored the numerous warning signs.” Am.
Compl. at { 4; “Despite being Presented with overly optimistic projections, the
Board was well aware of Divine’s precarious financial condition.” Id. at { 116;
“[T]he acquisition pace instigated by Filipowski, and approved by the Board, made
integration of uperations impossible.” Id. at | 150; “Despite numerous warning
signals, including continued failure to meet projections, the Board did not question
or investigate the information they received.” Id. at {| 191; and “Rather than simply
taking the necessary action to address Divine’s problems and rein in Filipowski, [the
officers and Board members] attempted tu ‘create’ their own defense to the lawsuits

they knew would be filed.” Id. at § 199.

The Court must weigh these allegations against the numerous allegations in
the Complaint which suggest that the Board reached many of their critical decisions

while in the possession uf misinformation supplied by Filipowski or in the absence

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Case Se cen Pegs s0 oe

of material information which was concealed by him and the other Defendants.

These allegations include the Defendants’ failure to disclose to the Board
information regarding the viability of some of the acquisition targets and the
questionable synergistic value these companies could deliver to Divine; the internal
dissent within management regarding the Company’s acquisition strategy and the
operational and cash flow pressures it created: the Company’s rapidly deteriorating
financial condition while the Board conducted its “zone of insolvency”
deliberations; factors which cast doubt on the achievability of the second quarter
financial projections; Humenansky’s slaleinents to Filipowski that he intended to
leave Divine over disagreements concerning the direction of the Company and the
failure of the Defendants to communicate certain material events at Board meetings

such as the insolvency of RoweCom France and the Szlam put exercise.

T'aced with competing allegations in the Complaint, the Court must resolve

the conflict by construing the Complaint ina light most favorable to the Plaintiff.

see Warth v. Seldin, 422 U.S, 490, 501, 95 S, Ct. 2197, 2206, 45 L. Ed. 2d 343 (1975).
Bound by that standard, the Court concludes that the Plaintiff has pled sufficient
allegations of causation regarding the Acquisitions and continued operation of the
Company in Count I to overcome dismissal. In reaching this conclusion, the Court
notes that it is most troubled by the allegations that Filipowski did not reveal the
internal disagreements concerning Divine’s acquisition strategy and its business

plan to the Board. Had the Board been aware of the dissent among management,

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it is reasonable to infer that the Board may have more closely scrutinized and
reexamined the Company’s strategy. Given the alleged conduct of Filipowski, it is
also reasonable to infer that the Board lacked the ability to consider transactions
objectively because pertinent information was withheld. The Court is currently
constrained by the facts as alleged in the Complaint. This will not be the case at trial
when the Court will require the Plaintiff to present evidence that the Board actually
relied on inaccurate information when it approved each of the disputed transactions
and/or that the Board would not have approved the respective transactions had it
been aware of the information which was withheld by, or at the direction of,

Filipowski.

The remaining allegations in Count I relate principally to Filipowski’s
personal conduct rather than decisions involving the Board. Specifically, the
Plaintiff alleges that Filipowski breached his duty of loyalty to Divine by, inter alia,
participating in the “business judgment defense,” providing false financial |
information to, and concealing material information from, the Board, ignoring
information and advice provided by Divine’s other officers and misrepresenting his

personal interest in certain Divine transactions.” The Court finds that the Plaintiff

" The Complaint alleges that Filipowski owned an interest in Goose Island
(purchased by Divine froma Filipowski affiliate in July 2000 and later sold at a loss by
Divine in July 2002) and that Filipowski owned an interest in and was a director of
Opinionware.com (acquired by Divine in April 2001), iGive.com (no date of transaction
provided in the Complaint), Panthera Productions (no date of transaction provided in
the Complaint), Perceptual Robotics, Inc. (acquired by Divine in February 2002),
Sequoia Software Corporation (no date of transaction provided in the Complaint), and

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has pled sufficient facts to establish Filipowski’s involvement in this conduct, and
for the reasons stated above, as well as because of the obvious injury Ue Divine
creditors have suffered, the Court finds adequate allegations of causation. The
Plaintiff, however, has failed to plead any facts with respect to Filipowski’s alleged
misrepresentation of the Perceptual Robotics, Inc. transaction other than a
conclusory statement that he obtained a “material personal gain” from it. These
facts do not give Filipowski fair notice of the grounds of the Plaintiff's claim against

him. See In re Tower Air, Inc., 416 F. 3d at 237. The Court dismisses all claims in

Count I relating to Filipowski’s alleged misrepresentation of his personal interest
in the companies enumerated in paragraph 267 of the Complaint. The Court denies

Filipowski’s Motion to Dismiss all other claims in Count I of the Complaint.

C. _Count H- Breach of the Fiduciary Duty of Loyalty against Humenansky

The Plaintiff alleges nearly identical misconduct against Humenansky in

Count IT of the Complaint” as is alleged against Filipowski in Count I, except that

the National Transportation Exchange (no date of transaction provided in the
Complaint). Other than with respect to the Perpetual Robotics transaction, the Plaintiff
fails to allege in the Complaint that any of the aforementioned transactions in which
Filipowski is alleged to have had a self-interest occurred during the zone of insolvency.
Accordingly, the Court will only consider the Plaintiff's claim that Filipowski breached
his duty of loyalty by misrepresenting his persunal interest and gain from the
Perceptual Robotics transaction.

‘Count II also contains a clair based upon Humenansky’s misrepresentation of,
and material gain from, the Sequoia Software and National Transportation Exchange
transactions. The Court allows Humenansky’s Motion to Dismiss these claims because
the Plaintiff failed to allege that the transactions involving these companies occurred
during the zone of insolvency and because the allegations are insufficiently pled even

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he asserts that Humenansky’s loyalty to Divine was compromised as a result of his
domination by Filipowski as well as by the self-interest of entrenchment.
Humenansky argues that assertions of personal or business relationships, without
more, are insufficient to rebut the presumption that he acted independently as a

director, citing Beam v. Stewart, 845 A.2d 1040, 1050 (Del. 2004).

The Court agrecs that a plaintiff uust allege more than the existence of a
personal or business relationship to support a breach of loyalty claim. Domination

and control, however, are not tested merely by economics. Inre Oracle Corp. Deriv.

Litig., 824 A.2d 917, 938 (Del. Ch. 2003). A plaintiff must allege some facts showing
a director is beholden to an interested director in order to show lack of

independence, Orman, 794 A.2d at 24. “The critical issue. .. is whether the director

was conflicted in his loyalties with respect to the challenged board actions.” Litt v,
Wycott, No. Civ. A. 19083-NC, 2003 WL 1794724, at *4 (Del. Ch. March 28, 2003).

The quoted e-mails in the Complaint portray Humenansky as an often candid and
objective critic of the Company’s acquisition strategy. Humenansky contends that
the e-mails on their face show the diligent discharge, not abdication, of his duties.
The Court disagrees because the vocal dissent he exhibited when communicating
with management was not apparent at Board meetings. The conduct alleged in the
Complaint indicates a pattern whereby Humenansky issued numerous serious

warnings about the Company’s financial condition and direction and then retreated

under a notice pleading standard.

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to a position of silence or, in some cases, approval at Board meetings at which the
very transactions and strategies he questioned were effectuated. See Am. Compl.
at 7] 78-82, 98-99, 121, 145, 147, 157-58, 209-10. As set forth in the Complaint,
Humenansky’s repeated declarations of loyalty and deference to Filipowski, his
failure to leave Divine after stating his intention to do so over his disagreements
about strategy, and his reluctance to publicly challenge Filipowski’s judgment in
spite of the documented disagreements between the two, indicate that Humenansky
was dominated by Filipowski and succumbed to his will to maintain the Company’s
acquisition strategy. The allegations are more than conclusory statements, and they
permit a sufficient inference that Humenansky lacked independence in the
execution of his duties to withstand dismissal. The Court reiterates its above rulings
with respect to Count I and denies Humenansky’s Motion to Dismiss Count of the
Complaint other than with respect to the claims involving National Transportation

Exchange and Sequoia Software.

D.___Count III- Breach of the Fiduciary Duty of Loyalty against Cullinane

"’ In his brief, Humenansky provides additional portions of Board meeting
minutes which are not contained in the Complaint in an attempt to show that the Board
was well informed when it deliberated over the Acquisitions and accordingly it
adequately considered the merits of those transactions prior to approving them, relying
on Alternative Energy, Inc. v. St. Paul Fire and Marine Ins., Co., 267 F.3d 30, 34 (1* Cir.
2001). Notwithstanding any issue regarding the propriety of the Court's consideration
of documents outside the Complaint in a Rule 12(b)(6) context, the Court finds nothing
in those minutes which contradicts the Plaintiff's allegations that the Defendants
withheld information from the Board or knowingly allowed the Board to consider
misinformation.

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The claims alleged in Count III against Cullinane are nearly identical to those
in Counts I and II."* As the Company’s chief financial officer, Cullinane had a
heightened responsibility for oversight and attention with respect to the Company’s
financial information. Humenansky, Sullivan and other members of management
copied Cullinane on many of the quoted e-mails detailing their concezis about the
Company’s direction and the Acquisitions. Cullinane also authored his owne-mails
to Filipowski about the Company’s cash position and his doubts about some of the
Acquisitions. In particular, Cullinane wrote to Filipowski on October 5, 2001 in
connection with the Company’s acquisition of Data Return, Inc, stating: “68 million
[expletive] shares for a company running out of cash, losing $5 million per month.
..What am I missing?” Id. at | 69. Cullinane did not convey his objections to the
Board, and he later recommended the acquisition of Data Return to the Board. He
likewise voted in favor of a number of the other Acquisitions while aware of the
internal debate surrounding them. Additionally, Cullinane was copied on
Filipowski’s and Humenansky’s e-mails regarding the 2002 second quarter financial
Projections submitted to the Board, and he was also informed of the RoweCom
France insolvency crisis. Despite Cullinane’s possession of all of this information,
the Plaintiff alleges that he never informed the Board of Divine’s true economic

condition or of the inaccurate financial information presented to them at the behest

° Count I contains a claim based upon Cullinane’s alleged misrepresentation of
and material gain from the National Transportation Exchange transaction, As with the
other insider transaction claims in the Complaint, this claim is inadequately pled. The
Court allows Cullinane’s Motion to Dismiss with respect to such claim,

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of Filipowski.

Although Cullinane’s warnings about the Company were typically less
vehement than Humenansky‘s, he was privy to the objections raised by
management about the Company’s strategy and Filipowski’s unwillingness to
change its course. As with Humenansky, the Court can reasonably infer that
Cullinane’s silence in the face of so much negative information was a result of
Filipowski’s dominance. Based upon these averments, the Court finds adequate
allegations in the Complaint to support Cullinane’s domination by Filipowski and
his resulting conflict of loyalty ta the Company. The Court denics Cullinane’s
Motion to Dismiss with respect to Count III other than with respect to the claim set

forth in paragraph 289 of the Complaint.

E___Count IV Breach of the Fiduciary Duty of Loyalty against Sullivan

There are no claims in Count IV against Sullivan based on his approval of the
Acquisitions or the continued operation of Divine,” and there are no allegations that
he misrepresented any interest in or any gain from any entity purchased by Divine.

Otherwise, the claims in Count IV mirror the claims against the other Defendants:
dissemination of false financial information, concealment of material information

from the Board and participation in the “business judgment defense.”

Sullivan argues that the Plaintiff fails to identify any actionable decision or

conduct by Sullivan which gives rise to any claim against him. Although Sullivan

” Sullivan was not a director of the Company.

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is mentioned less frequently than the other Defendants in the Complaint, the
Plaintiff has adequately alleged that Sullivan was privy to the same negative
information possessed by the other Defendants which should have caused him, as
general counsel to the Company, to advise the Board of the reckless course the
Company was pursuing. Days before the completion of the RoaweCom transaction,
Sullivan sent a detailed e-mail to the other Defendants and members of
management which highlighted and predicted all of the problems the acquisition
of RoweCom would create for Divine. Yet he remained silent at a Board meeting
the following day at which the acquisition was approved. Likewise, he had
information about the faulty financial projections which, in a statement attributed
to Sullivan by the Plaintiff, were “dictated by Filipowski over the objections of
Humenansky and other officers to secure the desired Board vote. . .” Id. at J 90.

Sullivan’s position is further compromised by the fact that he was not merely silent
while in the possession of material negative information, but he allegedly led the
efforts to create a business judgment defense while aware of that information. See
Id. at ¢ 200. Although there are fewer references to Sullivan than the other
Defendants in the Complaint, the overall theme is the same: that Filipowski so
dominated the members of his inner circle that each failed to exercise his business
judgment before the Board by keeping their misgivings secret. The Court denies

Sullivan’s Motion to Dismiss with respect to Count IV.

F, Count V-Breach of the Duty of Care against all Defendants

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The same conduct alleged in Counts I through IV forms the basis for a breach
of the duty of care claim in Count V against all Defendants, solely in their capacities
as officers of Divine. Presumably, the Plaintiff asserts these claims against the

Defendants as officers to avoid the Company’s Exculpatory Clause.

The fiduciary duty of care requires that officers and directors of a Delaware
corporation “use the amount of care which ordinarily careful and prudent men

would use in similar circumstances,” Graham v. Allis-Chalmers Mfg. Co., 188 A.2d

125, 130 (Del. Ch. 1963), and “consider all material information reasonably

available” in making business decisions. Brehm v. Bisner, 746 A.2d 244, 259 (Del.

2000). “[C]ompliance with a director’s duty of care can never appropriately be
judicially determined by reference to the content of the board decision that leads toa
corporate loss, apart from consideration of the good faith or rationality of the

process involved.” In re Caremark Int'Hnc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch.

1996)(emphasis in original). Whether a court “considering the matter after the fact,
believes a decision substantively wrong, or... ‘stupid’ [or] ‘egregious’. .. provides
no ground for director liability, so long as the court determines that the process
employed was either rational or employed ina good faith effort ta advance corporate
interests.” Id. (Emphasis in original). When the conduct of a corporate board is
challenged, Delaware courts ordinarily review thatconduct under the presumption

of the business judgment rule.” However, [the rule's] protections can only be

" The rule is “a presumption that in making a business decision the directors of
a corporation acted on an informed basis, in good faith and in the honest belief that the

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claimed by disinterested directors.” Aronsonv Lewis 473 A.2d 805,812 (Del. 1984).

In order to plead around the business judgment rule, a plaintiff must plead “a
simple and brief statement of claims of irrationality or inattention [to give] directors

and officers fair notice of the grounds of those claims.” Tower Air, 416 F. 3d 229 at

239,

The Defendants argue that the breach of care claims should be dismissed
because they are entitled to the full protection of Delaware’s business judgmentrule
and the provisions of the Exculpatory Clause. The Plaintiff responds that neither
the business judgment rule nor the Exculpatory Clause provide protection to
officers whose conduct was, as here, in bad faith. To overcome the presumptions
of the business judgmentrule, the Plaintiff relies heavily on the standard articulated

in In re Walt Disney Co, Deriv. Litig., 825 A.2d 275 (Del. Ch. 2003). In that case, the

plaintiffs alleged that the defendant directors breached their fiduciary duties when
they approved an extravagant employment agreement with the company’s
president which was unilaterally negotiated by the company’s chief executive
officer and then failed to oversee the chief executive officer's dealings with the

president regarding his termination. The plaintiffs alleged that the directors “failed

action taken was in the best interests of the company.” Aronson v. Lewis, 473 A.2d 805,
812 (Del. 1984). Delaware courts have held that the business judgment rule covers
officers and directors in actions involving directors, see e.g. Cinerama, Inc., v.
Technicolor, Inc., 663 A.2d 1156, 1162 (Del. 1995)(further history omitted), however, it is
unclear whether the rule applies to corporate officers solely in their capacities as officers
which is the context of Count V. The Court will presume for purposes of this opinion
that the Delaware business judgment is available to the Defendants as officers of Divine
as the Plaintiff has not argued otherwise.

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to exercise any business judgment and failed to make any good faith attempt to
fulfill their fiduciary duties” to the corporation. Id. at 278. “In short the...
complaint allege[d] facts implying that the .. . directors failed to ‘act in good faith
and meet minimal proceduralist standards of attention.’” Id.(quoting Gagliardi v,
TriFoods Int’L Inc.. 683 A 3d 1049, 1052 (Del. Ch. 1996)). The Disney Court held that

the business judgment rule did not apply, stating:

“These facts, if true, do more than portray the directors who, in a
negligent or grossly negligent manner, merely failed to inform
themselves or to deliberate adequately about an issue of material
importance to their corporation, Instead, the facts alleged. .. suggest
that the defendant directors conscious! yand intentionally disregarded their
responsibilities, adopting a ‘we don’t care about the risks’ attitude
concerning a material corporate decision.”

Id. at 289 (emphasis in original).

The Court finds that the Plaintiff has sufficiently alleged that Filipowski
consciously and intentionally disregarded his responsibilities to the Company’s
stockholders and creditors under the Disney standard. The facts of Disney are
distinguishable from the instant case as they involved an abdication of oversight by
the director defendants and an “ostrich-like” approach to material decision making.
Here, the facts alleged indicate that Filipowski was actively involved in the
oversight of the Company to the extent that he dominated the other Defendants.
Although the facts of this case differ from those of Disney, this Court has little
trouble characterizing the decision making process employed by Filipowski as

irrational and reflective of a knowing and deliberate indifference to the potential

40

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risk of harm to the Company.” See Am. Compl. at (72, 77 and 110. Because
Filipowski’s actions were either “not in good faith” or involved “intentional
misconduct,” the liability waiver available under the Exculpatory Clause cannot
serve as a basis for dismissal of Count V against him. See Disney at 290. The Court
finds that the Plaintiff has adequately alleged that Filipowski acted in an irrational,
reckless ora grossly negligent manner and that the breach of due care claims against
him are not subject to the defenses afforded by the business judgment rule or the
Exculpatory Clause. Accordingly, the Court denies Filipowski’s Motion to Dismiss

Count V of the Complaint.

With respect to Humenansky, the Court also finds sufficient support in the
Complaint fora determination that he intentionally and consciously disregarded his
responsibilities to the detriment of the Company. The Humenansky e-mails may
reflect the diligent discharge of his duties in some instances, The facts alleged also
depict the disregard of those duties at Board meetings at which the disputed
transaction and strategies were approved. Id. at (§ 78, 145, 147, 158 and 179.
Based upon the facts alleged, the Court finds that the decision making process
employed by Humenansky was not rational and was not employed in good faith.

Accordingly, the Court denies Humenansky’s Motion to Dismiss Count V of the

Complaint.

" The Court reiterates that it will be the Plaintiff's burden at trial to prove that
the Board would not have approved the disputed transactions or the continued
operation of the Company had it been aware of the information which was falsified or
withheld by, or at the direction of, Filipowski.

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With respect to Cullinane and Sullivan, the Court also finde adequate
allegations in the Complaint to overcome the business judgment rule. They shared
the same concerns about the Acquisitions and the Company’s acquisition strategy,
they withheld the same information about the inflated financial projections and they
knowingly and intentionally remained silent before the Board about their concerns.
They were silent regarding the truly crucial issues facing the Company, but were
somehow meticulous in documenting discussions about their duties in light of the
“zone of insolvency” at multiple Board meetings to foster the impression that they
were exercising their business judgment. These actions were intentional and not
merely negligent or grossly negligent. Based on these facts, the Court finds that
Cullinane and Sullivan are not entitled to the presumption that they acted in good
faith or in the best interests of the Company, and the Exculpatory Clause is
unavailable as a defense to them. See Disney at 290. The Court denies Cullinane

and Sullivan’s Motions to Dismiss Count V.

G. Count VI-Breach of the Duty of Good Faith against all Defendants

The Plaintiff charges in Count VI that the Defendants breached their duty of
good faith to Divine and its creditors by approaching the operation of Divine with
a level of indifference or egregiousness that amounted to bad faith. Relying on the
Disney standard, the Plaintiff alleges that the Defendants consciously and
intentionally disregarded their responsibilities by knowingly failing to make

decisions critical to Divine on an informed basis and by ignoring facts they knew to

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Document Page 43 of 55

be true.

Several Delaware cases have examined whether good faithis an independent
fiduciary duty or a component of the traditional fiduciary duties of care and loyalty

under Delaware law. See Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del.

1993)(further history omitted)(referring to the duty of good faith as a separate duty

within the triad of duties of good faith, loyalty and due care); but see In re Gaylord

Container Corp. S‘holder. Litig., 753 A.2d 462, 475-76, n. 41 (Del. Ch. 2000)(referring

to good faith as a subsidiary requirement of the duty of loyalty). In Disney, the
issue of good faith arose out of the hnard’s failure to exercise their responsibilitics,
but the court did not definitively rule on whether an independent or separate duty
of good faith existed. The Defendants assert that the duties of good faith and

loyalty are synonymous, citing Roselink Investors, L.L.C. v. Shenkman, 386 F. Supp.

2d 209, 221 (S.D. N.Y. 2004)(dismissing good faith claim and noting that Delaware
law does not recognize an independent duty of good faith)(citing Orman v.

Cullman, 794 A.2d 5, 14 (Del. Ch, 2002), and Emerald Partners v, Berlin, No. Civ. A

9700, 2001 WL 115340, at “64 n. 63 (Del. Ch. Feb. 7, 2001), vacated by, 787 A.2d 85
(Del. 2001)).” The Defendants argue that the Plaintiff has failed to plead a violation
of the duty of loyalty and, therefore, he cannot assert any violation of good faith.

Alternatively, the Defendants contend that the Plaintiff's Disney-type claim fails

* The Court notes that, on appeal, the Delaware Supreme Court found a “triad
of primary fiduciary duties: due care, loyalty, and good faith.” Emerald Partners v.
Berlin, 787 A.2d 85, 90 (Del. 2001).

43

because the Complaint depicts the Defendants’ efforts ta address, not disregard, the

challenges facing Divine.

Based on the Delaware Supreme Court's holding in Emerald Partners, Count

VI is not redundant to the breach of loyalty claims. For the reasons stated above,
the Court finds sufficient allegations of bad faith with respect to all Defendants. The

Court denies the Defendants’ Motions to Dismiss Count VI of the Complaint.

H. Count VII-Deepening Insolvency Against All Defendants

The Plaintiff advances a claim for “deepening insolvency” against the
Defendants in Count VII. The term refers to the “fraudulent prolongation of a

corporation’s life beyond insolvency.” Baenav. KPMGLLP, 389. Supp. 2d 112,117

(D. Mass. 2005). Deepening insolvency claims are based on the theory that to the
extent that liquidation is not already a certainty, the additional incurrence of debt
or olher actions make a salvageable situation impossible to the detriment of the

corporation and its creditors. See generally Official Comm. of Unsecured Creditors

vy. RF. Lafferty & Co, Inc, 267 F.3d 340, 349-50 (3d Cir. 2001)(construing

Pennsylvania law). Recently, many decisions have examined the theory of
deepening insolvency and whether it should be Tecognized as its own independent

cause of action. See generally Kittay v. Atlantic Bank (In re Global Service Group,

LLC), 316 B.R. 451, 456-57 (Bankr. S.D.N.Y. 2004). This Court need not resolve
whether the claim of deepening insolvency is a separate tort in this case because of

the deficiencies in Count VH and because the tl 1eory is part of the other counts in the

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we : Document Page 45 of 55

Complaint.

As a basis for the deepening insolvency claim, the Plaintiff alleges that
“|s]pecifically, after the Viant and Oak transactions were complete, the Defendants
knew that Divine would not be able to obtain any more cash infusions.
Notwithstanding that fact, the Defendants caused Divine to continue to conduct
business and make acquisitions even after that time. . . with the result of spending
most of Divine’s last remaining cash reserves and increasing its debt load.” Am.
Compl. at | 320. According to the Plaintiff, the second Oak financing was
completed in July 2002. the Company disbanded its mergers and acquisitions unit
in July 2002, and the Viant Acquisition was completed on September 27, 2002. Id.
at J] 140 and 145. The Plaintiff has pled no facts regarding any further acquisitions
after Viant, and the Court must therefore presume that there were none. To the
extent Count VII relates to post-Viant and Oak transactions, it is deficient because
there are no facts which support harm to the creditors. To the extent Count VII is
based upon the Board's decisions to conduct business after those transactions, the
Court finds such claims to be subsumed within Counts | through VI. The Court

allows the Defendants’ Motions to Dismiss Count VII with respect to all Defendants.

L Count VII- Objection to Indemnification Claims under Fed. R. Bankr.
P. 3007 against All Defendants

Each of the Defendants filed provfs of claim against the Company’s

bankruptcy estate seeking, inter alia, indemnification for legal costs and expenses,

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Document Page 46 of 55

including any judgment or settlement obligations which may arise with respect to
litigation against them regarding Divine (the “Indemnification Claims”). Article
XII.A.1 of the Company’s Charter provides that Divine shall indemnify its officers
and directors “if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the Corporation
and, with respect to any criminal action or proceeding, had no reasonable cause to
believe such person's conduct was unlawful.” Additionally, Article XII.B. of the
Charter contains the Exculpatury Clause which protects directors for monetary
damages for breach of the duty of due care, but not claims based on breach of the
duty of loyalty, intentional misconduct or knowing violation of the law. Based on
the allegations set forth in Counts I through VIII, the Plaintiff alleges that the
Defendants breached their duty of loyalty, engaged in intentional misconduct, did
not act in good faith, and/or did not act in a manner the Defendants reasonably
believed to be in the best interests of Divine. Asa result, the Plaintiff argues, the
Defendants are not entitled to indemnification from Divine and the Indemnification
Claims should he disallowed in their entirety. The Defendants respond that Count
VIII is dependent upon a viable breach of fiduciary duty claim which the Plaintiff
does not have. Pursuant to the Court's rulings with respect to Counts I through VI

above, the Court denies the Defendants’ Motions to Dismiss Count VIII.

; Document Page 47 of 55 a

J.___ Count XIJ-Subordination against all Defendants”!

In Count XH, the Plaintiff seeks to equitably subordinate the Defendants’
proofs of claim to the claims of all other general unsecured creditors pursuant to 11
U.S.C. § 510(c) based on their inequitable conduct, as alleged in Counts I through
VIII (the “Subordination Claims”). The Defendants argue that Count XII fails
because the Plaintiff has not adequately pled “inequitable conduct” on the part of

the Defendants or misconduct resulting in injury to creditors.

Section S10(c)(1) of the Code provides in pertinent part that “the court may-
(1) under principles of equitable subordination, subordinate for purposes of

distribution all or part of an allowed claim to all or part of another allowed claim

.-” ILUS.C. § 510(c). Section 510(c) of the Code “adopts the long-standing
judicially developed doctrine of equitable subordination under whicha bankruptcy

court has power to subordinate claims against the debtor's estate to claims it finds

ethically superior under the circumstances.” Allied Eastern States Maint. Corp. v.

Miller (in re Lemco Gypsum, Inc.), 911 F.2d 1553, 1556 (11th Cir. 1990), rehearing

denied, 930 F.2d. 925 (11th Cir. 1991). Courts in Massachusetts have adopted the
widely-accepted test for equitable subordination articulated by the Fifth Circuit in

Fabricators, Inc. v. Technical Fabricators, Inc. (In re Fabricators, Inc.), 926 F.2d 1458

*! The Court will not address Counts [x through XJ as none of the Defendants
asserted grounds for dismissal of those Counts.

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j Document Page 48 of 55

(Sth Cir. 1991). Seee.g. Capitol Bank & Trust Co. v. 604 Columbue Ave. Realty Trust

(In re 604 Columbus Ave. Realty Trust), 968 F.2d 1332, 1353 (1st Cir. 1992); Aquino

v. Black (In re AtlanticRancher, Inc.), 279 B.R. 411, 439 (Bankr. D. Mass. 2002); In re

Beverages Intl. Ltd., 50 B.R. 273 (Bankr. D. Mass. 1985). In Inre Fabricators, the Fifth

Circuit reiterated its three-prong test for equitable subordination first set forth in

Benjamin v. Diamond (In re Mobile Steel Co,), 563 F.2d 692 (Sth Cir. 1977) as follows:

(i) the claimant must have engaged in some type of inequitable conduct; (ii) the
misconduct must have resulted in injury to the creditors or conferred an unfair
advantage on the claimant; and (ili) equitable subordination of the claim must nat
be inconsistent with the provisions of the Bankruptcy Code. 926 F.2d at 1464-65
(citing Mobile Steel at 700). The First Circuit has elaborated on the test as follows:
“Although the remedy of equitable subordination has been applied relatively
infrequently, it is usually directed towards misconduct arising in three situations:
when a fiduciary of the debtor misuses his position to the disadvantage of other
creditors; when a third party dominates or controls the debtor to the disadvantage

of others; or when a third party defrauds the other creditors.” 604 Columbus Ave.

Realty Trust, 968 F.2d at 1359-60 (Ist Cir. 1992),

When analyzing inequitable conduct, “[c]laims arising from dealings between
a debtor and an insider are rigorously scrutinized by the courts...” Id. at 1360.
Harm to creditors is established if“. . the party seeking equitable subordination

demonstrates that the claimant’s conduct harmed the debtor or its other creditors.”

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Document Page 49 of 55

In re Mid-American Waste Systems, 284 B.R. 53, 71 (Bankr. D, Del. 2002). “There is

no requirement that the purported misconduct or the harm it causes be a major
cause of the debtor's bankruptcy. Id. “If the misconduct harmed the entire creditor
class, it is sufficient to show as harm that general creditors will be less likely to

collect their debts as a result of the misconduct.” Liberty Mutual Ins. Co. v. Leroy

Holding Co., Inc. (In re Fort Ann Express, Inc.), 226 B.R. 746, 757 (N.D.N.Y.

1998)(citing 604 Columbus Ave. Realty Trust, 968 F.2d at 1363).

The Court finds adequate facts in the Complaint to state a cause of action for
equitable subordination of the Subordination Claims with respect to all of the
Defendants.” All of the Defendants were officers and/or directors of the Company
and thus were insiders of the Company, see 11 U.S.C. §101 (31)(B)(i) and (ii), whose

claims are subject to rigorous scrutiny. 604 Columbus Ave. Realty Trust, at 1360.

With respect to the first prong of the Mobile Steel test, the Court finds the allegation
of inequitable conduct against the Defendants to be adequately supported in Counts
I through VI of the Complaint. Additionally, the allegations concerning the
attempts of Filipowski, Humenansky and Cullinane to secure administrative
expense claims by terminating their employment contracts prior to the Company’s

rejection of those contracts sufficiently convey the misuse of their position and an

” Although § 510(c) deals with allowed claims, a determination as to whether a
claim is subject to equitable subordination under § 910(c) may be made before the
determination as to the allowance of the claim. U.S. Abatement Corp. v. Mobil
Exploration & Producing U.S., Inc. (In re U.S. Abatement Corp.), 39 F.3d 556, 560 (5th
Cir. 1994).

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Document Page 50 of 55

attempt to achieve unfair advantage over general unsecured creditors. See Am.

Compl. at 7] 255-257, Under the second prong of the Mobile Steel, the Court also

finds sufficient allegations to support the likelihood of injury to creditors as the
Defendants’ conduct may have caused, or substantially contributed to, the
bankruptcy of the Company and a circumstance where general creditors would be
less likely to collect their debts. Finally, the Court finds that the subordination of
the Defendants’ claims would not be inconsistent with the Bankruptcy Code.
Principles of equity would be offended by the allowance of the Defendants’ claims
in the event the Plaintiff prevails in this Adversary Proceeding, and such allowance
would confer an unfair advantage on the Defendants and prejudice unsecured
creditors. The Court denies the Defendants’ Motions to Dismiss Count XII. Should
the Plaintiff prevail at trial on the equitable subordination claims against the
Defendants, they may still assert that subordination should be limited to the extent

necessary to offset any harm suffered by the creditors.

K, Count XIll-Avoidance and Recovery of Fraudulent Transfers against all
Defendants

Count XIV-Avoidance and Recovery of Preferential Transfers against all

Defendants

Each of the Defendants have alleged in their proofs of claim that Divine is
obligated to indemnify them for all legal costs and expenses which arise with
respect to litigation against them regarding Divine. Divine paid a total of
$275,000.00 in retainers (the “Retainers”) on February 14, 2003 to various law firms

for their representation of the Defendants in connection with governmental

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Document Page 51 of 55

investigations and other litigation against them in their capacity as officers and
directors of Divine. The Retainer payments were made eleven days prior the
Petition Date and well after the Company entered the zone of insolvency. The
Plaintiff asserts that the Defendants were not entitled to indemnification from
Divine and seeks to recover the Retainers as fraudulent transfer pursuant to 11
U.S.C. §548(a) or, in the alternative, to avoid them as preferential transfers pursuant

to 11 U.S.C. § 547(b).> The Defendants contend that the Complaint lacks the

* 11 U.S.C. § 548(a), as it was in effect at the commencement of this Adversary
Proceeding, provides in pertinent part:

(a)(1) The trustee may avoid any transfer of an interest of the debtor in property, or
any obligation incurred by the debtor, that was made or incurred on or within one
year before the date of the filing of the petition, if the debtor voluntarily or

involuntarily -

(A) made such transfer or incurred such obligation with actual intent to
hinder, delay, or defraud any entity to which the debtor was or became, on
or after the date that such transfer was made or such obligation was incurred,

indebted; or

(B){i) received less than a reasonably equivalent value in exchange for such

transfer or obligation; and

(ii)(I) was insolvent on the date that such transfer was made or such
obligation was incurred, or became insolvent as a result of such transfer or

obligation. ..
11 U.S.C. § 548.

11 U.S.C. § 547(b), as it was in effect at the commencement of this Adversary
Proceeding, provides:
(b) Except as provided in subsection (c) of this section, the trustee may
avoid any transfer of an interest of the debtor in property-

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor

before such transfer was made;

(3) made while the debtor was insolvent;

(4) made-

(A) on or within 90 days before the date of the filing of the
petition; or

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allegations necessary to set aside Divine’s indemnity obligation under its Charter
and because the Plaintiff fails to plead with particularity that Divine paid the
Retainers “with actual intent to hinder, delay, or defraud” creditors under §
248({a)(1)(A). Notwithstanding questions about the adequacy of the allegations of
“actual intent” for purposes of § 548(a)(1)(A), the Court finds sufficient allegations
to support the elements of § 548(a)(1)(B)(i) and (ii). The quoted provisions of the
Charter contained in the Complaint expressly preclude indemnification in the event
that an officer or director acted in bad faith or in a manner that they did not
reasonably believe to be in the best interests of the Company. As stated above with
respect to Count VII, the Court finds adequate factual support in the Complaint to
establish that the Defendants’ conduct fel! within the bad faith exception to the
indemnification obligation. Asa result, the Company may have had no obligation
to pay the Retainers on the Defendants’ behalf, and it would have received less than

a reasonably equivalent value in exchange for the Retainer payments at a time when

(B) between ninety days and one year before the date of the
filing of the petition, if such creditor at the time of such
transfer was an insider; and
(5) that enables such creditor to receive more than such creditor
would receive if-
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent
provided by the provisions of this title.

11 U.S.C. § 547(b),

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Document Page 53 of 55

it was insolvent. The Court denies the Defendants’ Motions to Dismiss Count XIII

of the Complaint.

In the event the Defendants are entitled to indemnification from the
Company, the Plaintiff alternatively claims that the Retainer payments are
avoidable as preferential transfers in Count XIV. The Defendants argue that the
Retainer payments were not preferential transfers under § 547(b) because the
Plaintiff fails to sufficiently allege that the Company paid the Retainers on account
of an antecedent debt and because they were not creditors. See 11 U.S.C. § 547(b)(1)
and (2). A “claim” is a “right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured,
disputed, undisputed, legal, equitable, secured or unsecured...” 11 USC. §

101(5)(A). See Woburn Assocs. v. Kahn (In re Hemingway Transport, Inc.), 954 F.2d

1, 8-9 (1st Cir. 1992)(indemnification agreement created a right to payment
contingent on a future occurrence and was a “claim” under the Bankruptcy Code).
The Plaintiff’s theory is that, if the Defendants’ actions were not violations of their
fiduciary duties, then they had “claims” against, and were owed “debts” by, Divine
within the meaning of 11 U.S.C. § 101(12). Such debts were antecedent ta the
payments of the Retainers because they arose under Divine’s Charter which was

filed in July of 2000. See In re Mid-American Waste Systems, Inc., 228 B.R. 816, 822

(Bankr. D. Del. 1999)(a corporation’s commitment to indemnify, as provided in the

certificate of incorporation, existed at the time each of the officers and directors

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Document Page 54 of 55

commenced employment).

The Court finds that, if the Defendants are entitled to indemnification from
the Company, such indemnification obligation was a contingent debt owed to the
Defendants and incurred on the date when Divine first became obligated to
indemnify them, namely the date of the filing of the Charter with the State of
Delaware.“ As such, the Retainer payments would have been paid “on account of
an antecedent debt.” The Court finds the other elements of § 947(b) to have been
adequately pled, and the Court denies the Defendants’ Motions to Dismiss Count

XIV of the Complaint.
Vz. CONCLUSION

The Court will not address Counts XV or XVI as none of the Defendants
asserted grounds for dismissal of those Counts. For the above stated reasons, the
Court denies the Molious te Dismiss in their entirety except for Count VII and those
portions of Counts I through III which relate to the alleged misrepresentation by

Filipowski, Humenansky and Cullinane of their interest and gain from the

* Or the date they were first employed by the Company if such date was after
the filing of the Charter.

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Document Page 55 of 55

transactions enumerated in {| 267. 278 and 289 of the Complaint. Upon the filing

of answers by the Defendants, the Court will issue a pre-trial order.

By the Court,

por. Us Fens
/ Joan N. Feeney ~

~~ United States Bankruptcy Judge

Dated: July 1A, 2006

355