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Thus, as the Washington Supreme Court has held, a “failure to adequately investigate” would remove an officer or director “from the rule’s insulating effect.” Riss, 934 P.2d at 681. As another example, an actionable complaint might allege “that a board undertook a major acquisition without conducting due diligence, without retaining experienced advisors, and after holding a single meeting at which management made a cursory presentation.” Trenwick Am. Litig. Trust v. Ernst & Young L.L.P., 906 A.2d 168, 194 (Del. Ch. 2006), aff’d, 931 A.3d 438 (Del. 2007).
And the rule would not protect an officer or director “who has wholly abdicated his corporate responsibility, closing his or her eyes to corporate affairs.” Castetter, 184 F.3d at 1046. But a plaintiff cannot state a claim by alleging that management “undertook a business strategy that was ‘all consuming and foolhardy’ and that turned out badly,” Trenwick, 906 A.2d at 194 (citation and footnote omitted); the business judgment rule shields from liability those who are “honestly mistaken” in their business judgment. Castetter, 184 F.3d at 1046; see also In re Student Loan Corp. Deriv. Litig., 2002 WL 75479, at *4 (Del. Ch. Jan. 8, 2002) (dismissing due care claim because the “complaint is utterly devoid of any pled facts regarding the informedness of the board’s deliberations, or the lack thereof”).
The compelling policy arguments underlying the business judgment rule’s protection of business decisions made on a good faith and informed basis are well-established. As the Washington Supreme Court has observed, the rule “allows the corporation to function effectively by allowing those having management responsibility the freedom to make in good faith the many necessary decisions quickly and finally without the impairment of having to be liable for an honest error in judgment.” Hines v. Data Line Sys., Inc., 787 P.2d 8, 18 (Wash. 1990) (en banc); see also Castetter, 184 F.3d at 1044 (“The general purpose of the business judgment rule is to afford directors broad discretion in making corporate decisions and to allow these decisions to be made without judicial second-guessing in hindsight.”).
Similarly, the Delaware Court of Chancery, the “nation’s leading authority on corporate law issues,” Simmonds v. Credit Suisse Secs. (USA) LLC, 638 F.3d 1072, 1089 (9th Cir. 2011), cert. granted, 79 U.S.L.W. 3610 (U.S. June 27, 2011) (Nos. 10-1218, 10-1261), has grounded the business judgment rule in a court’s inadequacy to evaluate, after the fact, “whether corporate decision-makers made a‘right’ or ‘wrong’ decision,” particularly within the context of risk-taking. In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d at 124. “Business decision-makers must operate in the real world, with imperfect information, limited resources, and an uncertain future.” Id. at 126. “To impose liability on directors for making a ‘wrong’ business decision would cripple their ability to earn returns for investors by taking business risks.” Id.
The Second Circuit has likewise recognized that “because potential profit often corresponds to the potential risk, it is very much in the interest of shareholders that the law not create incentives for overly cautious corporate decisions.” Joy v. North, 692 F.2d 880, 886 (2d Cir. 1982). The corporate director or officer’s function “is to encounter risks and to confront uncertainty, and a reasoned decision at the time made may seem a wild hunch viewed years later against a background of perfect knowledge.” Id. The “circumstances surrounding a corporate decision are not easily reconstructed in a courtroom years later,” and thus “a corporate officer who makes a mistake in judgment as to economic conditions” will “rarely, if ever, be found liable for damages suffered by the corporation.” Id. at 885-86.
2. The Complaint Attacks Management’s Historical Business Decisions.
The facts alleged in the Complaint trigger application of the business judgment rule. Indeed, the theory of liability upon which both negligence claims are based is the paradigmatic context in which courts have recognized the propriety of the business judgment rule.
At bottom, the Receiver challenges the substantive merit of management’s historical business decisions, accusing Mr. Killinger of “gross mismanagement,” Compl. ¶ 11, because the alleged decisions to devise, implement, and maintain a business strategy intended to increase WaMu’s returns supposedly led to “extreme” risks and to substantial losses, id. ¶ 1.
The business decisions targeted by the Complaint allegedly were reflected in a series of annual “Strategic Direction” memoranda that set forth WaMu’s “Higher Risk Lending Strategy.” Recognizing the trade-off between risk and reward, Mr. Killinger allegedly stated in the 2004 Strategic Direction memo that “[a]bove average creation of shareholder value requires significant risk taking.” Id. ¶ 25.
The memo allegedly set forth various financial goals, including achieving an average return on equity of at least 18% and average earnings per share growth of at least 13%, and proposed taking on “more credit risk” to achieve those goals. Id. ¶ 22. Mr. Killinger allegedly stated in the 2006 Strategic Direction memo that the business plan included “reducing interest-rate risk and replacing that risk with greater credit risk.” Id. ¶ 53. Mr. Killinger allegedly advocated for this strategy because “Wall Street appears to assign higher P/Es to companies embracing credit risk and penalizes companies with higher interestrate and operating risks.” Id. He recognized that it was “important to adjust our culture from credit-risk avoidance to intelligent credit-risk taking and pricing discipline.” Id. In the 2007 Strategic Direction memo, Mr. Killinger allegedly continued to emphasize “higher risk-adjusted return products.” Id. ¶ 65.
WaMu allegedly suffered substantial losses as a result of the challenged business decisions. Id. ¶ 86.
Such allegations form the prototypical example of risk-return decision-making that courts have long recognized are the appropriate domain of corporate directors and officers, and not a factfinder’s own notions of sound business judgment, many years after the fact, aided by perfect information and the benefit of hindsight. “The business judgment rule exists precisely to ensure that directors and managers acting in good faith may pursue risky strategies that seem to promise great profit.” Trenwick Am. Litig. Trust, 906 A.2d at 193. “The essence of the business judgment of managers and directors is deciding how the company will evaluate the trade-off between risk and return. Businesses—and particularly financial institutions—make returns by taking on risk; a company or investor that is willing to take on more risk can make a higher return.
Thus, in almost any business transaction, the parties go into the deal with the knowledge that, even if they have evaluated the situation correctly, the return could be different than they expected.” In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d at 126. The business judgment rule is “designed to allow corporate managers and directors to pursue risky transactions without the specter of being held personally liable if those decisions turn out poorly.” Id. at 125.
Yet such personal liability is precisely what the Receiver seeks in this case. The business judgment rule applies with full force here.
3. The Complaint Does Not Allege Bad Faith and Alleges that the Business Decisions Were Made With Knowledge of the Competing Risks.
To remove this case from the purview of the business judgment rule, the Receiver must allege that Mr. Killinger made the challenged decisions in bad faith or that he was uninformed. See, e.g., Schwarzmann, 655 P.2d at 1181 (“Absent a showing of fraud, dishonesty, or incompetence, it is not the court’s job to second-guess the actions of directors.”). In determining whether the Receiver has so alleged, the Court employs the “plausibility” standard the Supreme Court articulated in Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). See Labadie v. United States, 2011 WL 1376235, at *2 (W.D. Wash. Apr. 12, 2011) (Pechman, J.). A review of the allegations in the Complaint confirms that the Receiver has not done so, and that the business judgment rule therefore shields Mr. Killinger from liability.
The Complaint does not allege that Mr. Killinger acted in bad faith (or acted in a manner that was in any way dishonest or fraudulent).
Nor does the Complaint allege that Mr. Killinger was incompetent, i.e., that he was inadequately “informed” when he supposedly participated in devising and implementing the “Higher Risk Lending Strategy.” In fact, the Complaint alleges the opposite—that WaMu’s credit risk managers provided input and informed Mr. Killinger about the risks associated with the business strategy, and that he and his colleagues elected to employ the strategy despite the risks, in hopes of earning a greater return for shareholders.
According to the Complaint, the “first phase of WaMu’s Higher Risk Lending Strategy” was approved at a meeting on January 18, 2005 attended by WaMu’s credit risk managers. Compl. ¶¶ 26-27.
The Complaint alleges that at this meeting, and frequently thereafter, the credit risk managers advised Mr. Killinger regarding the various risks associated with the business strategy. See, e.g., id. ¶¶ 27-30, 39, 44-45, 47, 51, 58, 85. The Complaint further alleges that Mr. Killinger and the manager defendants continued with the business strategy despite the known risks. Compl.,
Factual Background I.A-E. It supposedly was Mr. Killinger’s judgment to proceed with the strategy because “[a]bove average creation of shareholder value requires significant risk taking.” Id. ¶ 25; see also id. ¶ 22 (alleging that Mr. Killinger proposed taking on “more credit risk” and setting forth various goals, including achieving an average return on equity of at least 18% and average earnings per share growth of at least 13%); id. ¶ 53 (alleging that Mr. Killinger reasoned that “Wall Street appears to assign higher P/Es to companies embracing credit risk and penalizes companies with higher interest-rate and operating risks”); id. ¶ 65 (alleging that Mr. Killinger emphasized “higher risk-adjusted return products”). And even then, the Complaint alleges that Mr. Killinger implemented measures to mitigate the risks associated with the business strategy. See, e.g., id. ¶ 27 (alleging that “limits were placed on allowable delinquencies on . . . riskier loans”).
There is no allegation that Mr. Killinger acted in bad faith or without knowledge of the competing risks in reaching his decisions. “[T]o allege that a corporation has suffered a loss as a result of a lawful transaction, within the corporation’s powers, authorized by a corporate fiduciary acting in a good faith pursuit of corporate purposes, does not state a claim for relief against that fiduciary no matter how foolish the investment may appear in retrospect.” Gagliardi, 683 A.2d at 1052. Accordingly, the negligence-based claims must be dismissed.
B. The Breach of Fiduciary Duty Claim Is Duplicative of the Negligence Claims.
The breach of fiduciary duty claim (Count III) simply incorporates the allegations that precede it, alleges that Mr. Killinger owed “fiduciary duties” to WaMu, and contends that Mr. Killinger breached those fiduciary duties, causing damages to WaMu. Compl. ¶¶ 192-196. Because this claim is duplicative of the claims for gross and ordinary negligence, the Court should dismiss it. The Receiver cannot avoid operation of the business judgment rule by labeling a negligence-based claim a breach of fiduciary duty claim.
Under Washington law, “fiduciary duty comprises three sub-duties: the duty of loyalty, the duty of care, and the duty to act in good faith.” Grassmueck v. Barnett, 281 F. Supp. 2d 1227, 1232 (W.D. Wash. 2003) (Pechman, J.).
The Complaint is premised entirely on Mr. Killinger’s supposed breach of the duty of care—the same duty at issue in the negligence-based claims. See Compl. ¶¶ 184-185 (gross negligence); id. ¶¶ 189-190 (negligence); id. ¶¶ 194-195 (breach of fiduciary duty). The Complaint does not suggest, much less plausibly allege, that Mr. Killinger violated the duty of loyalty or the duty to act in good faith.
Moreover, the structure of the Complaint underscores the overlap between the negligence-based claims and the fiduciary duty claim. The gross negligence claim alleges that “Killinger, Rotella and Schneider owed WaMu a duty of care to carry out their responsibilities by exercising the degree of care skill, and diligence that ordinarily prudent persons in like positions would use under similar circumstances.” Id. ¶ 184. It then alleges that “[t]his duty of care, included, but was not limited to” an eleven-item list of duties. Id. The gross negligence claim further alleges that “Killinger, Rotella and Schneider, through their gross negligence, breached their duties of care by, among other things, acting with reckless disregard for or failing to exercise slight care in” fifteen different ways. Id. ¶ 185. The negligence claim and the breach of fiduciary duty claim incorporate by reference, and base liability entirely upon, the same eleven-item duty of care list and the same fifteenitem breach of care list. See id. ¶¶ 189-190 (negligence claim incorporating Compl. ¶¶ 184-185); id. ¶¶ 194-195 (breach of fiduciary duty claim incorporating Compl. ¶¶ 184-185).
Because Count III is wholly duplicative of Counts I and II, the appropriate course of action is to dismiss it. See Swartz v. KPMG LLP, 476 F.3d 756, 766 (9th Cir. 2007) (per curiam) (holding that claim that was “merely duplicative” was “properly dismissed”); Hua v. Boeing Corp., 2009 WL 1044587, at *5 (W.D. Wash. Apr. 17, 2009) (“Plaintiff’s negligent supervision claim is based on the same facts that support his claim against Boeing for unlawful discrimination.
It is therefore duplicative, and, under Washington law, must be dismissed.”);
Jacobson v. Wash. State Univ., 2007 WL 26765, at *11 (E.D. Wash. Jan. 3, 2007) (“A claim is duplicative and must be dismissed under Washington law when the plaintiff asserts the same factual basis for two claims.”); Beringer v. Standard Parking O’Hare Joint Venture, 2008 WL 4890501, at *4 (N.D. Ill. Nov. 12, 2008) (dismissing negligence and breach of fiduciary duty claims because “both counts involve the same operative facts, the same injury, and require proof of essentially the same elements” as breach of contract claim); CMMF, LLC v. J.P. Morgan Inv. Mgmt. Inc., 915 N.Y.S.2d 2, 6 (App. Div. 2010) (affirming dismissal of negligence and breach of fiduciary duty claims as duplicative of breach of contract claim); Awai v. Kotin, 872 P.2d 1332, 1337 (Colo. App. 1993) (affirming dismissal of breach of fiduciary duty claim where “[t]he factual allegations in support of this claim are the same as those in support of the claim of negligence” and the “claim for breach of fiduciary duty is therefore duplicative”).
Dismissal of Count III is consistent not only with the authority cited above but also with decisions by courts addressing similar receivership cases brought by the FDIC or its predecessor, the RTC. In Resolution Trust Corp. v. Hess, 820 F. Supp. 1359 (D. Utah 1993), for example, the court dismissed the RTC’s claim for breach of fiduciary duty because it was “tantamount to a claim of negligent mismanagement,” which the RTC had also alleged. Id. at 1366. In Resolution Trust Corp. v. Vanderweele, 833 F. Supp. 1383 (N.D. Ind. 1993), the court dismissed the breach of fiduciary duty claim because it “amount[ed] to nothing more than a reformulation of the negligence claim.” Id. at 1386; see also FDIC v. Appling, 992 F.2d 1109, 1114 (10th Cir. 1993) (holding that proposed jury instruction explicitly regarding a “fiduciary duty” was the same as a negligence instruction and thus superfluous); FDIC v. Gonzalez-Gorrondona, 833 F. Supp. 1545, 1560 (S.D. Fla. 1993) (striking breach of fiduciary duty claim that “merely restate[d]” prior negligence claim). For these reasons, Count III should be dismissed.
C. The Remedial Claims Should Be Dismissed Because The Substantive Claims Fail.
Count IV of the Complaint alleges that Mr. and Mrs. Killinger fraudulently transferred certain properties, and it seeks an order voiding these transfers or a money judgment equal to the value of the properties.
Count VI of the Complaint seeks to freeze the assets of Mr. and Mrs. Killinger, including but not limited to the properties described in Count IV. The Killingers deny that the routine estate-planning transactions alleged in the Complaint constitute fraudulent transfers; in any event, these unfounded remedial counts fail because the Receiver’s substantive claims in Counts I-III fail.
Count IV is asserted pursuant to the Washington Uniform Fraudulent Transfer Act, Wash. Rev. Code §§ 19.40.011 et seq., which provides remedies to creditors in the event of fraudulent transfers by debtors. Id. §§ 19.40.041, 19.40.071.
But where the purported creditor has no underlying “enforceable claim, the UFTA does not provide the Plaintiff with a remedy.” Nat’l Ctr. for Emp’t of Disabled v. Ross, 2006 WL 778647, at *8 (D. Ariz. Mar. 27, 2006).
Only one who “has a valid claim and right to payment” may “attack a conveyance as fraudulent.” Id. Because the Receiver has no enforceable claims under Counts I, II, and III, it cannot seek relief under the fraudulent transfer statute.
As to Count VI, the Receiver cannot obtain a preliminary injunction freezing the assets of Mr. and Mrs. Killinger without establishing that it is to some degree “likely to succeed on the merits.”
Winter v. Natural Res. Def. Council, Inc., 129 S. Ct. 365, 374 (2008); see also Alliance for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1131 (9th Cir. 2011); Mideast Awareness Campaign v. King Cnty., ___ F. Supp. 2d ___, 2011 WL 649488, at *3 (W.D. Wash. Feb. 18, 2011). Because dismissal of Counts I, II, and III establishes the lack of merit as to any of the Receiver’s substantive claims, the Receiver is not entitled to a preliminary injunction.
Accordingly, Counts IV and VI should be dismissed.
III. CONCLUSION
The business judgment rule shields officers and directors from personal liability for business decisions made in good faith, on an informed basis, and absent fraud or dishonesty, regardless of whether a plaintiff or factfinder agrees with the wisdom of those decisions in retrospect. The allegations in the Complaint demonstrate that in this case, at bottom, the Receiver takes issue with the correctness of business decisions allegedly made by Mr. Killinger and his colleagues—decisions that at the time were made allegedly with awareness of the risks involved and without semblance of bad faith, dishonesty, or any other factor that precludes application of the business judgment rule. As such, the Receiver cannot proceed with its negligence-based claims.
The Receiver’s claim for breach of fiduciary duty likewise fails since the Complaint does not plausibly allege that Mr. Killinger violated any fiduciary duty besides the duty of due care, which the negligence-based claims encompass. Because the Receiver cannot state a claim against Mr. Killinger on any of its substantive counts, its remedial counts against Mr. Killinger and his wife seeking avoidance of purported fraudulent transfers and an asset Freeze fail as well.
Accordingly, the Complaint should be dismissed.
Respectfully submitted,
BARRY M. KAPLAN (WSBA
#8661)
WILSON SONSINI GOODRICH & ROSATI
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