586 B.R. 718
Bankr. W.D. Mich.2018Background
- Great Lakes Comnet provided fiber-optic services; officers ran schemes (2010–2015) that resulted in carriers withholding large payments, severe cash-flow problems, and an eventual bankruptcy filing (Jan. 2016).
- David LaRocca served on the Debtor’s board until May 1, 2014; board minutes and meetings in March–April 2014 disclosed informal FCC complaints and growing receivables/reserves ($25M, then $50–60M) but officers downplayed risks.
- Trustee (GLC Liquidation Trust) sued former officers and directors, alleging among other things that LaRocca breached fiduciary duties by failing to investigate/oversee; claim is asserted under Michigan law and vested in the Trust after the confirmed liquidation plan.
- LaRocca moved to dismiss under Fed. R. Civ. P. 12(b)(6), arguing the Trustee failed to plead a breach of duty (business judgment rule, lack of red flags) and that officer misrepresentations shield him per Mich. Comp. Laws § 450.1541a(2)(a).
- Court found the claim is non-core but related to the bankruptcy, applied Michigan law (MBCA), and rejected Delaware’s stricter Caremark/gross-negligence standard as inapplicable; Michigan uses an ordinary-negligence standard for duty of care.
- The Complaint plausibly alleged duty, breach (failure to investigate after disclosure of FCC complaints and cash problems), and causation, but the board-minute-supported factual allegations on their face established LaRocca’s affirmative statutory defense of reasonable reliance on officers’ reports.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Trustee plausibly pleaded breach of duty of care under Michigan law | Trustee: alleged LaRocca learned of FCC complaints, material reserves and cash-flow problems and failed to investigate before leaving board | LaRocca: allegations insufficient (no red flags); business judgment rule protects him | Court: Complaint plausibly pleads duty, breach and causation under Michigan ordinary-negligence standard, so claim is facially plausible |
| Whether Delaware/Caremark red-flag standard controls pleading | Trustee: Michigan law applies; need only plausibility under Rule 12(b)(6) | LaRocca: Caremark/gross-negligence standard should apply (borrowing Delaware law) | Court: Delaware/Caremark not controlling; Michigan MBCA imposes ordinary negligence standard and no heightened derivative pleading here |
| Whether business judgment rule defeats pleading | LaRocca: presumption protects board decisions absent facts showing breach | Trustee: alleged facts rebut the presumption | Court: Trustee pleaded enough to rebut business judgment rule, but that does not resolve affirmative defenses |
| Whether Mich. Comp. Laws § 450.1541a(2)(a) (reasonable reliance on officers) bars claim on the face of the complaint | Trustee: reliance defense is fact question; dismissal inappropriate | LaRocca: meeting minutes and complaint show he reasonably relied on officers and counsel, so defense applies | Court: On the face of the complaint (and incorporated board minutes) LaRocca established the statutory reasonable-reliance defense; dismissal of Trustee’s claim against LaRocca warranted, but leave to amend granted |
Key Cases Cited
- In re Wolverine Radio Co., 930 F.2d 1132 (6th Cir. 1991) (related-to-bankruptcy test citation)
- Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir. 1984) (test for related-to bankruptcy jurisdiction)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (Sup. Ct. 2007) (plausibility standard for pleadings)
- Ashcroft v. Iqbal, 556 U.S. 662 (Sup. Ct. 2009) (pleading standard and inference principles)
- F5 Capital v. Pappas, 856 F.3d 61 (2d Cir. 2017) (discussion of business judgment presumption)
- In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996) (seminal Delaware decision on director oversight/red flags)
- Martin v. Hardy, 232 N.W. 197 (Mich. 1930) (Michigan Supreme Court decision on director oversight and reasonable reliance)