Rafield v. Leap Tide Capital Management, LLC
3:18-cv-04002
N.D. Cal.Jul 29, 2019Background
- Diadexus, a Delaware corporation, ran a liquidity crisis after a $15M loan from Oxford; Oxford issued a default notice and ultimately swept company cash in June 2016; Diadexus filed Chapter 7 and sold assets for $4.75M.
- Leap Tide (purchaser of the bankruptcy estate) sues former CEO/chair Lori Rafield, former CFO Leone Patterson, and five former directors for breaches of fiduciary duty and gross negligence relating to pre-bankruptcy decisions and the sale/marketing process.
- Key alleged conduct: board was told by late 2015/early 2016 that cash would run out in 2016; Oxford offered a forbearance contingent on Alvarez & Marsal diligence and participation; Rafield allegedly blocked Alvarez, closed the data room, stymied potential buyers, and made statements prioritizing her personal interests.
- Diadexus’s certificate of incorporation contains a §102(b)(7) exculpatory clause shielding directors from monetary liability for duty-of-care breaches; that clause does not protect against loyalty breaches, bad faith, intentional misconduct, or knowing legal violations.
- Defendants moved to dismiss the second amended complaint under Rule 12(b)(6); the Court took judicial notice of the Certificate of Incorporation but declined other documents.
- Court disposition on pleading: dismissed claims against the director defendants and Patterson (no leave to amend); denied dismissal as to Rafield for fiduciary breach and gross negligence (claims against Rafield survive).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether director claims survive despite §102(b)(7) exculpation | Directors breached loyalty/bad faith by failing to file Chapter 11 or obtain forbearance and by permitting Rafield to dominate process | Directors shielded by business judgment rule and §102(b)(7); plaintiff must plead non-exculpated loyalty/bad‑faith facts | Dismissed claims I and V as to directors; plaintiff failed to plead particularized bad‑faith/self‑interest facts; no leave to amend |
| Whether business judgment rule/exculpatory defenses may be considered at pleading stage | Business judgment rule shouldn’t be applied at pleading; plaintiff need not plead to overcome it now | Under Delaware law and Ninth Circuit precedent, the business judgment rule and §102(b)(7) may be considered on 12(b)(6) where obvious from complaint | Court holds the business judgment rule and §102(b)(7) are applicable at pleading stage and may bar claims when facially apparent |
| Sufficiency of claims against CFO Patterson (breach/gross negligence) | Patterson, as CFO, failed to act to protect cash or cause timely bankruptcy/forbearance | Patterson was not alleged to have acted with gross negligence or breached any particular fiduciary duty; officer conduct alone insufficiently pleaded | Dismissed Claims I and II as to Patterson without leave to amend for lack of particularized allegations of gross negligence or breach |
| Sufficiency of claims against CEO Rafield (breach and gross negligence) | Rafield acted out of self‑interest, blocked forbearance/marketing and prevented bidders, thereby breaching loyalty and acting with gross negligence | Defendants contend plaintiff’s facts are incomplete, other explanations possible, and business judgment rule applies | Claims I–IV against Rafield survive: complaint sufficiently alleges self‑interest/bad‑faith and gross negligence to plausibly state fiduciary‑breach and gross‑negligence claims |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (setting federal pleading standard for plausibility)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (establishing plausibility pleading framework)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (articulating business judgment rule presumption)
- Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53 (Del. 1989) (explaining burden to rebut business judgment rule)
- Lyondell Chem. Co. v. Ryan, 970 A.2d 235 (Del. 2009) (discussing §102(b)(7) director exculpation)
- Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362 (Del. 2006) (describing bad‑faith duty of loyalty principles)
- Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993) (identifying directors’ triad of fiduciary duties)