611 B.R. 169
Bankr. S.D.N.Y.2020Background
- WonderWork, Inc. (WW) was a Delaware 501(c)(3) charity led by founder/CEO Brian Mullaney; board included multiple independent directors and CFO Hana Fuchs.
- Mullaney received a $475,000 salary plus large annual bonuses and perquisites; Pearl Meyer advised the board his pay was at the high end and declined to opine on IRC §4958 reasonableness.
- WW reimbursed substantial personal/excess expenses and used a separate “limbo pay” ledger to defer and offset bonus payments (allegedly to avoid taxes); board awareness is disputed.
- WW took on ~ $10M in “impact loans,” faced an $8.34M arbitration award to Help Me See (HMS), and filed chapter 11; an Examiner’s Report recommended referral and led to resignations and a trustee.
- The Litigation Trustee sued former officers/directors (13 claims) for breach of fiduciary duty, fraudulent/contructive transfers, preferences, unauthorized post-petition transfers, unjust enrichment, and disallowance of Mullaney’s claim.
- Court: granted in part and denied in part defendants’ motions to dismiss, dismissed many director claims for group-pleading defects (with limited exception), sustained several claims against Mullaney and Fuchs (notably relating to the limbo-pay and excessive reimbursements), and granted leave to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Adequacy of Caremark/oversight claims against directors (First–Third Claims) | Directors systematically failed to monitor/oversaw excessive compensation, limbo-pay, restricted-fund misuse and impact loans | Business judgment rule, Delaware volunteer-immunity, improper group pleading, statute of limitations | First–Third Claims largely dismissed for impermissible group pleading; limited Count 3 claim (directors who signed declarations opposing trustee motion) survives; leave to replead allowed |
| Fiduciary breach re "limbo pay" and improper reimbursements (Mullaney & Fuchs) | Limbo-pay scheme and reimbursement of personal/excess expenses were unlawful, breached loyalty and caused harm to WW | Board knew/acquiesced; compensation approved; business judgment protection | Claims survive as to Mullaney and Fuchs: limbo-pay (tax avoidance/undisclosed deferred comp) and many reimbursements plausibly allege disloyalty/bad faith; some allegations (restricted funds accounting by Fuchs) dismissed as mere negligence |
| Constructive fraudulent transfer claims re salary, bonuses, perquisites (NYDCL & §548) | Salary, bonuses and perqs were transfers without fair consideration while debtor insolvent or rendered insolvent | Salary is presumptively fair consideration; Pearl Meyer support; lack of pleaded insolvency/good-faith | Salary payments (base $475k) dismissed as reasonably equivalent/fair consideration; bonus/perquisite and many non-salary payments survive under NYDCL §§273/274 and §548; claim under NYDCL §275 (subjective intent to incur unpaid debt) dismissed |
| Preference (§547), post-petition transfers (§549) and claim disallowance (§502) | Payments to Mullaney within one year (and certain post-petition payments) were avoidable and he should be required to disgorge; claim should be disallowed under §502(d) | Payments were for ordinary-course post-petition services or otherwise not avoidable; offsets or springing §502(h) claims reduce liability | Preference claim (§547) against Mullaney survives (plausible insolvency and hypothetical chapter 7 shortfall); one post-petition salary payment ($237,550) held ordinary-course and dismissed under §549, but other post-petition transfers survive; §502(d) disallowance claim survives as to avoidable transfers |
| Breach of Employment Agreement, unjust enrichment, and disallowance of Mullaney’s scheduled claim | Employment breaches and fraudulent solicitations caused debtor damages; unjust enrichment for amounts lacking contractual basis; disallow claim entirely | No pleading of specific contract damages; written contract governs (bars quasi-contract); many payments Board-approved | Breach of contract claim (Count 10) dismissed for lack of pleaded damages/rescission basis; unjust enrichment (Count 11) dismissed as duplicative/contractual; Count 12 (disallowance/offset) survives in part to permit recovery/offsets against certain avoidable pre-petition payments; leave to amend granted |
Key Cases Cited
- In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996) (standard for board oversight/Caremark liability requires sustained or systematic failure to monitor).
- Stone v. Ritter, 911 A.2d 362 (Del. 2006) (oversight liability requires directors knew they were not discharging duties or conscious disregard).
- In re Walt Disney Co. Derivative Litig., 906 A.2d 27 (Del. 2006) (good-faith/duty-of-loyalty standards; categories of bad-faith conduct).
- Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (irrationality as outer limit of business judgment rule and waste standard).
- Oberly v. Kirby, 592 A.2d 445 (Del. 1991) (fiduciary duties of charitable corporation directors to beneficiaries and special duty to advance charitable purpose).
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (presumption under business judgment rule and burden to rebut).