In a recent post here, Francis G.X. Pileggi of the Delaware Corporate and Commercial Litigation Blog highlights the District of Delaware's decision in Miller v. Mcdonald, et al., Adv. Proc. No. 07-51350 (In re World Health Alternatives, Inc., Bankr. Case No. 06-10166) (April 9, 2008). I highly recommend a visit to Francis' blog as he has a link to the actual opinion there. He also does a superb job on the blog on a day-to-day basis and one visit will likely get you to subscribe for his RSS feed.
In any event, Miller stands for what always seems to me as a rather unremarkable proposition: officers share the same duties as directors of a Delaware corporation. In Miller, the specific breach of duty was the a gross breach of the duty of oversight, more commonly referred to as a Caremark violation. The bankruptcy trustee plaintiff in Miller alleged that the corporate officers of World Health breached their duties "by failing to implement an adequate monitoring system and/or the failure to utilize such system to safeguard against corporate wrongdoing." Miller Op. at 24 (citing In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959, 967-71 (Del. Ch. 1996). The Miller court imposed the Caremark duty on the general counsel of World Health because Sarbanes-Oxley imposes an affirmative duty on counsel to inspect the truthfulness of SEC filings and to report evidence of a material violation of securities laws or breaches of fiduciary duties "up-the-ladder within the company." Id. at 26.
In what I view as a desperate effort to avoid liability, the general counsel argued that Delaware does not recognize expanding Caremark duties beyond the board of directors and to corporate officers. After about four pages of citations to Delaware and Florida law noting that officers share the same duties as directors (can you say, "duh?"), the Court denied the general counsel's motion to dismiss for failure to state a breach of fiduciary duty claim. But at least the opinion now makes even more clear what the state of Delaware law is for corporate officers and their fiduciary obligations.
In addition, the Miller opinion, applying Florida law, upholds an "aiding and abetting breach of fiduciary duty" count. The court described the elements of such a claim as follows: "(1) a fiduciary duty; (2) a breach of this duty; (3) knowledge of the breach by the alleged aider and abetter; (4) the aider and abettor's substantial assistance or encouragement of the wrongdoing." In finding that the bankruptcy trustee's claim against the general counsel survived the Rule 12(b)(6) motion, the Court relied on the SEC's final rule pursuant to Sec. 307 of the Sarbanes-Oxley Act, which provides a duty to inspect the truthfulness of SEC filings for general counsels. This duty, coupled with the allegations that all of the defendants failed to "implement financial controls and proper check and balances," was sufficient to satisfy the claim. The Court also noted that the general counsel both participated in misrepresentations and "provided substantial assistance to [the President and Chief Accounting Officer] by failing to properly report misrepresentations that were knowingly false." Miller Op. at 35.
The last ruling raises an interesting point: does the failure to have or establish adequate internal controls at the officer level of a corporation establish "substantial assistance or encouragement" to maintain an aiding and abetting theory of liability against officers not otherwise involved in more egregious breaches of fiduciary duty? Here, there were other instances of fraud that made it easier for the Court to deny the 12(b)(6) motion, but what if the complaint rested entirely on a lack of oversight and internal controls. Does the failure to implement controls provide "substantial assistance" or is it the breach of duty itself or does it even matter because you can have both direct and vicarious liability for the same action to capture separate wrongdoing defendants?
