MEMORANDUM
James L. Miller, former President, Chief Executive Officer, and Chairman to United States Foodservice, Inc. (“USF”), and director to its parent company, Koninklijke Ahold N.V. (“Royal Ahold”), sued his former employers, including three individual officers of Royal Ahold and the wholly-owned subsidiary Ahold U.S.A., Inc., for failing to provide him with the post-termination benefits he claims he is entitled to under his employment agreement. 1 Miller’s complaint contains claims for breach of contract, including anticipatory breach of contract, fraudulent inducement, negligent misrepresentation, and promissory estoppel. He is seeking a declaratory judgment as to whether and to what extent he is entitled to benefits, as well as compensatory damages in the amount of at least $ 10 million, and a temporary restraining order and preliminary injunction ordering the companies to pay his benefits pending the outcome of this litigation. 2 Royal Ahold and USF (“the companies”) countersued, 3 claiming, among other causes of action, that Miller violated the fiduciary duties of due care, good faith, and loyalty, and therefore they are not obligated to provide him with the benefits conferred by the contract. The companies also are suing under the theory of corporate waste, and are bringing contract claims for mutual mistake and unjust enrichment. They are seeking forfeiture, disgorgement, and restitution to Royal Ahold and USF of compensation, incentive-based bonuses, and other benefits, as well as rescission of the employment agreement if its enforcement would result in ill-gotten gains. Miller has moved for dismissal, or in the alternative, for summary judgment, on the grounds that Royal Ahold and USF have failed to state a claim because he is protected by the business judgment rule, or the indemnification provisions of the USF by-laws. The issues regarding Royal Ahold and USF’s counterclaim have been fully briefed and no hear *473 ing is necessary. See Local Rule 105.6. For the reasons set forth below, Miller’s motion to dismiss will be denied in part and granted in part.
BACKGROUND
James Miller joined USF, a Delaware corporation engaged in the food distribution business and headquartered in Columbia, Maryland, in 1983 and rose to the position of CEO in 1994. Miller also served as USF’s Chairman of the Board of Directors, President, and CEO since 1997. After Royal Ahold, an international food provider based in the Netherlands, acquired USF in 2000, Miller became a member of Royal Ahold’s Executive Board (also known as its Managing Board or “RVB”) on or about September 1, 2001. He served in this dual capacity as officer and director for USF and director for Royal Ahold until May 13, 2003, the day he resigned from his positions.
Miller’s resignation was precipitated by an accounting scandal involving USF’s income from promotional allowances, which are payments made by vendors to the company to promote their goods. In 2003, internal investigations revealed that USF “accounting irregularities” had resulted in an overstatement of USF’s income by nearly $900 million for fiscal years 2000 and 2001, and during fiscal year 2002. (Countered 6.) Consequently, Royal Ahold restated its earnings in October 2003 in the 2002 Form 20-F filed with the SEC. (Countered 7.) The 2002 Form 20-F reported that Royal Ahold “determined that certain senior officers and other USF employees had violated generally accepted accounting principles by improperly and prematurely recognizing promotional allowances” and that “material weaknesses in USF’s accounting procedures and internal controls had permitted this improper revenue recognition over the preceding three years.” (Countercl-¶ 9.) Miller avers that he had “absolutely no involvement in the purported wrongful conduct” and that the companies have treated him as a “scapegoat” for the problem (Compilé 11, 12.) The companies contend that as President, CEO, and Chairman of USF during the relevant years, Miller had “supervisory, managerial, and oversight responsibility]” for USF’s operations and accounting practices, that he knew by July 2000 of material weaknesses in USF’s internal controls, and that he failed to oversee correction of the known accounting deficiencies for almost three years. (Counterchiffl 10-24.) The counterclaimants assert that Miller was alerted to the internal control problems by a July 24, 2000 letter from De-loitte & Touche, the company’s external auditor, which stated that “deficiencies in the design and operation of [USF’s] internal controls ... could adversely affect the Company’s ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial statements.” (Countered 15.) In addition, the companies assert that Miller intentionally misrepresented that corrective measures were being implemented several times during USF Audit Committee meetings in 2000 through 2002. (See Countercl. ¶¶ 17-21, referring to meetings on November 29, 2000, April 5, 2001, October 29, 2001, April 8, 2002, and in October and November 2002.) The companies contend they later learned that, contrary to Miller’s positive assertions, “no significant progress had been made on implementing the necessary changes.” (Countered 19.)
At the request of senior Royal Ahold executives, Miller resigned from his USF and Royal Ahold positions on May 13, 2003. (Compl.U 13.) According to Miller, in exchange for his resignation, he was promised he would receive post-termi *474 nation benefits as specified by his employment agreement with USF, a severance payment in consideration for his service with the Royal Ahold Executive Board (“RVB”), and all rights and benefits through his Ahold USA retirement plan vested through December 31, 2003. (CompU 12.) On September 29, 2003 Miller received a letter from USF (see Compl. ¶ 21, Ex. 7) stating that his employment would officially terminate October 1, 2003 and at that time all benefits, other than those expressly addressed in his initial employment terms letter from October 4, 2001 and the addenda attached thereto (Compl., Ex. 1), as well as the February 2, 2001 letter regarding post-termination benefits (Compl., Ex. 6), would also cease. On January 28, 2004, Miller received a letter from Royal Ahold stating that the company would terminate his post-termination benefits on February 29, 2004. (ComplJ 22, Ex. 8.) On February 17, 2004, Miller received a letter from Royal Ahold and USF explaining that they would continue to provide some, but not all, post-termination benefits on a voluntary basis, subject to modification for any reason that the companies deem appropriate. (Comply 22, Ex. 9.) Miller contends that Royal Ahold and USF fraudulently induced him to resign by promising these benefits, and that they materially breached their agreement when they unilaterally ceased providing him with post-termination benefits. The companies argue that Miller materially breached his employment agreement by violating the fiduciary duties of due care, good faith, and loyalty, and therefore they are discharged from their obligations under the employment and severance agreements.
ANALYSIS
I. Choice of Law
Generally, the law of a corporation’s state of incorporation applies to claims arising from the company’s internal affairs.
Gonzalez v. Fairgale Props. Co., N.V.,
II. Standard of Review
Miller has moved to dismiss the companies’ counterclaim or, in the alternative, for summary judgment. Miller urges the court to consider documents outside the pleadings, namely, the indemnification provisions of the USF by-laws, to dispose of *475 Royal Abold and USF’s claims on summary judgment. He contends that the indemnification provisions negate the companies’ claims because they establish that he cannot be personally liable for acts undertaken while serving as an officer and director. Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment
shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
See Bouchat v. Baltimore Ravens Football Club, Inc.,
First, it is possible to consider the bylaws without converting a motion to dismiss into a motion for summary judgment.
See In re Baxter Int’l Inc. Shareholders’ Litig.,
Second, while Delaware courts have allowed dismissal of a complaint for failure to make a pre-suit demand when the pleadings alleged
solely
a violation of the fiduciary duty of care on the grounds that the claim was barred by the corporation’s exculpatory provision in its charter,
see, e.g., Malpiede,
For these reasons, Miller’s motion will be treated as a Rule 12(b)(6) motion rather than one for summary judgment. When ruling on such a motion, the court must “accept the well-pled allegations of the complaint as true,” and “construe the facts and reasonable inferences derived therefrom in the light most favorable to the plaintiff.”
Ibarra v. United States,
III. Standing
Miller initially challenged Royal Ahold and Ahold USA’s standing to sue, arguing that Royal Ahold was only a shareholder of USF (and that Ahold USA was not even a shareholder) and that Royal Ahold had not followed the proper procedure to bring a derivative shareholder suit on behalf of USF.
8
Miller abandoned this argument in his reply. The defendants correctly indicate that as a director of both USF and its parent Royal Ahold, Miller owed separate fiduciary duties to each company, and therefore Royal Ahold has standing to sue for Miller’s alleged breaches that directly caused Royal Ahold harm.
In re Digex,
IV. Corporate Claims
A. Duties of care and good faith
Miller argues that Royal Ahold and USF’s corporate claims fail because as an officer and director of USF (and director of Royal Ahold), his actions are protected by the business judgment rule and the indemnification provisions of the USF bylaws. 9 While it may be a close issue, it would be premature to dismiss the companies’ counterclaims based on either of Miller’s defenses.
Under Delaware law, corporate officers and directors owe their corporation the fiduciary duties of due care, good faith, and loyalty.
Malone v. Brincat,
While generally courts do not second-guess corporate decision-making and directors and officers enjoy the presumption of the business judgment rule, the rule can be overcome- by allegations of gross negligence.
See Aronson,
the business judgment rule operates only in the context of director action. Technically speaking, it has no role where directors have either abdicated their functions, or absent a conscious decision, failed to act. But it also follows that under applicable principles, a conscious decision to refrain from acting may nonetheless be a valid exercise of business judgment and enjoy the protections of the rule.
More recently, in
In re Caremark Inti,
the principal case relied upon by the coun-terclaimants, the Delaware Court of Chancery articulated a standard for liability based on a director’s failure to act. At the outset, the court noted that director liability premised on a theory of failure to act “is possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,” particularly when there are no allegations involving conflict of interest or suspect motivation.
Id.
at 967. In
Caremark,
the court relied on
Graham v. Allis-Chalmers Mfg. Co.,
assuring themselves that information and reporting systems exist in the organization that are reasonably designed to provide to senior management and to the board itself timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning both the corporation’s compliance with law and its business performance.
Id. at 970. The court explained that “it is important that the board exercise a good faith judgment” as to whether its reporting systems are “adequate” to assure that the board could satisfy its responsibility. Id.
In
McCall v. Scott,
The allegations in this case do not include red flags as significant as in McCall. Here, the companies allege that Miller knew in July 2000 of internal control problems, and that despite his awareness of the pressing nature of the problem he failed over a period of almost three years to implement corrective measures. (Countered ¶ 13-24.) The counterclaim-ants assert that this failure was particularly egregious because Mark Kaiser, the officer responsible for promotional allowance tracking and internal auditing, reported directly to Miller. The companies allege further that Miller breached his duty of good faith by intentionally misrepresenting during several USF Audit Committee meetings that stronger controls were being implemented, though later these assurances -proved false. (Coun-terel^ ¶ 17-24.) They claim that Miller knew ineffective tracking of promotional allowances “had the potential to cause USF to overstate its income and thus to show phantom profits” and that “Miller’s incentive-based compensation depended on the net profitability of USF, and Miller in fact received incentive-based bonus compensation equal to or exceeding his annual salary.” (Counterchf 16.) The companies claim that the gravity of Miller’s offense is compounded by his dual role as President and CEO for USF and director for Royal Ahold.
While the companies’ allegations do not directly suggest that Miller should have suspected wrongdoing, as the
Graham
decision requires, the
Caremark
court made it clear that the
Graham
decision should not be interpreted so broadly as to supplant the requirement that corporate directors and officers ensure an adequate information and reporting system exists.
Perhaps the most critical support for the companies’ claims that Miller breached fiduciary duties of care and good faith, however, is the allegation that Miller, for a period of almost three years, intentionally misrepresented to the USF Audit Committee (and consequently to the parent company, Royal Ahold) that the internal controls were being corrected. The counterclaim details representations made by Miller at several USF Audit Committee meetings during 2000 through 2002 that indicated corrective measures were being implemented and that strengthening the company’s internal controls was a top priority. The companies describe a scenario where Miller repeatedly misled the USF Audit Committee and the parent company, Royal Ahold. For example, according to the counterclaimants, at an April 8, 2002 Audit Committee meeting, Miller “stated that USF was abandoning its prior plans to use a particular type of tracking system because it ‘was not as robust as first anticipated.’ In fact, this tracking system had never been implemented at all.” (Countered 20.) If these allegations are true, they may constitute persuasive evidence that Miller acted in bad faith, thereby violating duties of both care and good faith. Additionally, Miller’s dual role as director and officer (President, Chairman, and CEO of USF, director to Royal Ahold) magnifies the importance of the duties he owed and allegedly violated. Construing the allegations in the light most favorable to the counterclaimants, I find that the companies have stated claims against Miller for breach of the fiduciary duties of care and good faith. As a defendant seeking protection of the exculpatory provision in USF’s by-laws, Miller bears the burden of demonstrating good faith.
McCall,
B. Duty of Loyalty
The companies also have alleged that Miller violated his fiduciary duty of loyalty. Miller argues that the duty of loyalty claim fails as a matter of law because the coun-terclaimants have not asserted that he usurped a corporate opportunity. Miller contends that “the duty of loyalty is implicated only where there are competing economic interests,” or “where there is a transaction between the corporation and one of its officers or directors... that is not substantively fair to the corporation.” (Miller Reply at 5) (citing
Jackson Nat. Life Ins. Co. v. Kennedy,
Here, the companies rely principally on their allegation that Miller intentionally misrepresented the status of efforts to correct USF’s internal controls to establish their duty of loyalty claim. They further allege that Miller’s conscious disregard of known risks concerning USF’s promotional allowance tracking system, and his failure to address the problem, resulted in damage to the companies when they were forced to restate USF’s earnings by $900 million, and to undergo significant accounting and legal fees. These allegations, coupled with the companies’ assertions that Miller knew that the promotional allowance tracking deficiencies could potentially cause USF to overstate its earnings, and that Miller in fact received incentive-based compensation equal to or exceeding his annual salary of $750,000 because of USF’s overstated income, are sufficient to state a claim for breach of the fiduciary duty of loyalty. The companies’ allegations suggest that Miller put his own pecuniary interests, received in the form of bonus compensation based on false profits, above those of the corporation.
See, e.g., Cede & Co. v. Technicolor, Inc.,
C. Corporate Waste
In addition to seeking recovery of salary and bonus compensation paid to Miller, the companies have brought a corporate waste claim against Miller to recover money for personal expenses he charged to USF. In particular, they cite $130,000 for personal expenses not covered by the employment agreement, forty-five percent of which were submitted and reimbursed without receipts; membership fees and expenses for four country clubs when his employment agreement only specified two; another $236,000 in benefits including home improvement expenses, security services, and a Mercedes S class sedan, which they also *482 assert were not covered by his employment agreement. (Countered 50.)
Directors are only liable for corporate waste claims when they “ ‘authorize an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.’ ”
In re Walt Disney Co. Deriv. Litig.,
There is some limited case law suggesting that a corporate officer is not entitled to reimbursements for money spent without authority, or where the expenditure in no way benefited the corporation.
11
The corporation, however, may not be able to recover unauthorized payments where other officers and directors reviewed the payments and acquiesced in them.
See, e.g., Mechler v. Consol. Pipe & Supply Co.,
The facts in this case argue for a similar outcome. Despite the companies’ protests, Miller’s employment agreement appears to be sufficiently broad to cover many of the complained of expenses, and USF apparently reimbursed the expenses without question.
12
Given these circum
*483
stances, it would be inappropriate to intervene when the companies themselves could have better managed their own agreement with Miller. Simply put, the facts alleged do not state a claim for corporate waste. The companies knowingly agreed to Miller’s perquisites and it is not the role of the court to attempt to evaluate “the wisdom of the bargain or the adequacy of the consideration.”
Glazer,
V. Contract Claims
In addition to the corporate claims, Royal Ahold and USF have sued Miller under several contract theories, including breach of the employment agreement, mutual mistake, and unjust enrichment. The counterclaimaints are seeking forfeiture, disgorgement, and restitution of any compensation, including bonus payments and benefits paid to Miller during the relevant time, as well as rescission of the employment agreement if its enforcement would leave Miller with ill-gotten gains. To the extent that the counterclaimants have stated a claim for violation of the fiduciary duties of care, good faith, and loyalty, they also have stated a claim for breach of contract. The mutual mistake and unjust enrichment claims, however, must be dismissed for failure to state a claim.
If the companies succeed in showing that Miller breached the fiduciary duties of care, loyalty or good faith, then Miller may be liable for breach of his employment agreement.
See, e.g., Regal Savings Bank v. Sachs,
The companies also argue that they should be able to recover compensation paid to Miller on a theory of unjust enrichment, or in the alternative, mutual mistake. For different reasons, these claims are not sufficient, and will be dismissed.
13
In Maryland, unjust enrichment claims are viable only when an express contract does not exist between the parties.
County Com’rs of Caroline County v. J. Roland Dashiell & Sons, Inc.,
VI. Conclusion
Consistent with the analysis set forth above, Royal Ahold and USF have stated counterclaims for breach of the fiduciary duties of care, good faith, and loyalty, as well as breach of contract. Miller’s motion to dismiss will be denied as to those claims but granted as to the mutual mistake, unjust enrichment, and corporate waste claims.
A separate Order follows.
ORDER
For the reasons stated in the accompanying Memorandum, it is hereby Ordered that:
1. the plaintiffs Motion to Dismiss the Counterclaim (docket entry no. 20) is Denied as to the claims for breach of fiduciary duties of care, good faith, and loyalty, as well as breach of contract (Counts 1, 2, and 3);
2. the plaintiffs Motion to Dismiss the Counterclaim is Granted as to the unjust enrichment, mutual mistake, and corporate waste claims (Counts 4, 5, and 6); and
3. copies of this Order and the accompanying Memorandum shall be sent to counsel of record; and
4. counsel shall confer and submit by April 5, 2005, a proposed schedule for discovery and any further motions in this case.
Notes
. Miller originally filed suit in the Circuit Court for Baltimore County. The defendants removed the matter to the U.S. District Court for the District of Maryland, and the court denied Miller’s motion to remand, holding that the Employment Retirement Income Security Act ("ERISA") preempts certain of Miller’s claims.
See
. Miller's complaint included a motion for a temporary restraining order and preliminary injunction seeking reinstatement of his benefits pending outcome of this litigation. The parties reached an interim agreement and the motion for injunctive relief was terminated on November 29, 2004.
. Ahold U.S.A., Inc., has voluntarily dismissed without prejudice its counterclaims against Miller. (See docket entry no. 23.)
. The counterclaimants suggest that Delaware law may apply to Royal Ahold's corporate claims as well because Miller was a "dual director” of a Delaware corporation (USF) and its parent company (Royal Ahold). The counterclaimants do not, however, rule out the possibility that Dutch law may apply to Royal Ahold's claims because it is incorporated in the Netherlands, and they specifically reserve the right to submit evidence of foreign law at a later stage if it appears to be relevant. (Memo. in Opp'n at 7, n. 4) (citing
Cremi v. Brown,
. Miller initially argued that Royal Ahold's counterclaim should be dismissed because it failed to plead claims with particularity as required by Rule 9(b). This argument was premised on the belief that, under Maryland law, “bad faith” claims are akin to "fraud” claims, and therefore such claims must comply with Rule 9(b). (Pl.'s Motion to Dismiss at 10.) The defendants correctly countered that Delaware law, not Maryland law, governs the corporate claims and that under the relevant precedent, bad faith claims are distinguishable from fraud claims and therefore Rule 9(b) does not apply. (Defs.’ Memo. in Opp’n at 18, citing
In re Fruehauf Trailer Corp.,
. Del.Code Ann. tit. 8, § 102(b)(7) provides that a company's certificate of incorporation may include: A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duly as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director’s duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct *476 or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit.
. It is worth noting that USF's indemnification provision, though contained in its bylaws and not in the corporate charter or certificate of incorporation, is comparable to the corporate provisions analyzed in other cases under Delaware law. See,
e.g., McCall v. Scott,
. As mentioned previously, see supra note 3, Ahold USA voluntarily dismissed without prejudice its counterclaims against Miller.
. Miller also argues that these fiduciary duties apply only to directors, and that the ultimate responsibility for any losses1 stemming from “dereliction of duty” rests with the board of directors, and not the corporate officers. (Miller Reply at 2.) Miller's contention is without merit. It i? a fundamental principle of corporate law that the fiduciary duties of care, good faith, and loyalty apply to both corporate directors and officers. See, e.g.,
Bates v. Dresser,
. The Sixth Circuit issued a second opinion in
McCall v. Scott, see
. See,
e.g., Interstate Investment & Dev. Co. v. Webster,
. Section 4(b) paragraph (vi) of the employment agreement ("fringe benefits”) provides that the "the Company shall, during the Employment period, pay all of the Executive’s dues and membership assessments of two country clubs in the geographic vicinity of the *483 Company’s headquarters, and such other club memberships as are determined by the Executive and the Board to be useful in connection with the Executive’s duties on behalf of the Company. The Company shall also reimburse the Executive for all reasonable expenses incurred at such club(s) on behalf of the Company.” (CompL, Ex. 1.) In addition, the fringe benefits paragraph provides that "the Executive shall be entitled to the full use of a new car..There is also a paragraph (iii) stating that the “the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid.... or which the Executive is eligible to receive.
and that such benefits shall be known as “other benefits.” Id.
. To support their mutual mistake claim, the companies argue that the Miller employment agreement and compensation package were premised on the perceived profitability and performance of USF, and that because these basic assumptions turned out to be false, "there was at best a mutual mistake between the parties that materially affected the agreed-upon exchange of performances.” (Countered 47.) In Maryland, "[a]t common law recovery of money paid under a mistake of fact is limited to money paid or received under a mistake on the plaintiff's part, or a mutual mistake.”
Wasena Housing Corp.
v.
Levay,