Trial Court: Santa Clara County Superior Court No. CV044686 Trial Judge: Hon. Neal Cabrinha.
The opinion of the court was delivered by: Duffy, J.
CERTIFIED FOR PUBLICATION
Appellant Berg & Berg Enterprises, LLC, the largest creditor of the failed Pluris, Inc., challenges the trial court‟s sustaining, without leave to amend, respondents‟ demurrers to Berg‟s third amended complaint. Respondents were individual members of Pluris‟s board of directors. After they challenged Berg‟s prior pleadings by successful demurrers and an anti-SLAPP motion, Berg‟s operative pleading alleged a single cause of action for breach of fiduciary duty. Pluris had experienced financial difficulties and had as a result entered into an assignment for the benefit of creditors under Code of Civil Procedure sections 493.010 and 1802.*fn1 The thrust of Berg‟s claim, as finally pleaded, was that the individual directors owed a fiduciary duty to Berg and other Pluris creditors on whose behalf Berg is purportedly proceeding. The duty allegedly arose when Pluris either became insolvent or entered into the "zone of insolvency" at some point before the assignment. The directors allegedly breached that duty by electing to make the assignment, thereby extinguishing Berg‟s plan to use the corporation‟s alleged $50 million of net operating losses through a chapter 11 bankruptcy reorganization that, according to Berg, would have benefitted it and the other creditors by deriving value from the losses. Berg alleged that the directors had failed to conduct a reasonable investigation into its proposed plan before proceeding with the assignment and had they investigated, they would have seen that pursuing Berg‟s bankruptcy plan was the only viable way to protect, and thereby satisfy their fiduciary duty to, Pluris‟s creditors.*fn2
We conclude that Berg failed to plead a cognizable claim for breach of fiduciary duty against the individual directors. And even if a cognizable claim had been alleged, on the pleaded facts, the business judgment rule insulated the directors from personal liability on the alleged claims for breach of fiduciary duty as a matter of law. We accordingly affirm the judgment of dismissal.
I. Prior Pleadings and the Trial Court's Rulings on Challenges Thereto*fn3
Berg‟s initial complaint, on which it proceeded directly on its sole behalf (as opposed to derivatively), named as defendants the respondents here-John Boyle, David Britts, Tony Daffer, Barry Eggers, Diana Everett, John Gerdelman, Cliff Higgerson, Joseph Kennedy, and Bob Williams-all members of Pluris‟s board of directors at some point. The pleading alleged a single cause of action for breach of fiduciary duty. Underlying the claim was the allegation that at all relevant times, Pluris was operating "in a zone of insolvency" during which its board of directors owed its creditors a fiduciary duty. This alleged duty included "the obligation not just to protect the assets of PLURIS but to affirmatively examine a range of possible courses of action to maximize the value of its remaining assets, not merely to take the course of action most expedient to [the individual directors] and make an Assignment [for the benefit of creditors]." This duty was alleged to have been primarily breached by the directors having "fail[ed] to explore whether BERG‟s proposed reorganization [in bankruptcy] would or might have yielded greater assets [than the assignment] for [Pluris‟s] creditors."
The pleading also alleged as background that some six months before the assignment for the benefit of creditors in July 2002, Pluris and a Berg-related entity had entered into a settlement that liquidated and partially secured what came to be Berg‟s claim by assignment, and allowed Pluris to seek additional outside financing. In conjunction with the settlement, Berg‟s principal, Carl Berg, allegedly informed the Pluris directors that if the financing effort failed, Berg "would want to explore ways to derive value from PLURIS beyond the obvious hard and soft assets, including the possibility of obtaining value from the millions of dollars in net operating losses . . . PLURIS ha[d] accumulated. To obtain that value, PLURIS would need to be reorganized under the bankruptcy laws."*fn4 The pleading further alleged that it was not until after the assignment-during the course of later involuntary bankruptcy proceedings initiated by Berg and two other creditors-that Carl Berg offered the details of his plan to use the company‟s net operating losses. These details included that through a bankruptcy reorganization: (1) Berg would make a $150,000 cash contribution to Pluris for the benefit of its unsecured creditors; (2) Berg would reduce the unsecured portion of its claim by $1.5 million in consideration for 100 percent of the stock in the reorganized entity plus the assignment of all claims or causes of action that Pluris had the right to pursue; and (3) Berg would further reduce its unsecured claim by $2.5 million in consideration for all of Pluris‟s non-cash assets, including its intellectual property, software, and inventory. All told, the pleading alleged, these plan details would result in the reduction of Berg‟s unsecured claim by $4 million plus its infusion of $150,000 for the benefit of other unsecured creditors. The import of these background allegations of the initial complaint as relevant here was that they alleged that it was only after the assignment for the benefit of creditors had been made and "during" later involuntary bankruptcy proceedings that Berg provided the details of its plan to use Pluris‟s net operating losses.
Apparently before any responsive pleadings were filed, Berg filed a first amended complaint. The new pleading restated the breach-of-fiduciary-duty claim and added two causes of action for fraudulent and negligent misrepresentation, respectively. It reiterated that before the assignment, Berg had only generally informed Pluris‟s directors of his desire to explore the use of Pluris‟s net operating losses through a petition in bankruptcy if Pluris‟s outside financing efforts failed and that it was only later, during involuntary bankruptcy proceedings, that Berg provided the details of this plan.
Defendant John Boyle demurred to the amended pleading on various grounds. The other directors likewise demurred and some filed an anti-SLAPP motion (under Code Civ. Proc., § 425.16) to the new misrepresentation causes of action, which the other defendants joined. In the face of the anti-SLAPP motion, Berg voluntarily dismissed its two misrepresentation causes of action leaving only its claim for breach of fiduciary duty as the target of the demurrers.*fn5 The court (Judge C. Randall Schneider) sustained the demurrers with leave to amend. The basis of the order was, in essence, lack of standing-Berg‟s claim of injury was not unique to itself or to a particular class of creditors but rather incidental to injury that all of Pluris‟s creditors might have suffered as a result of the assignment for the benefit of creditors. Therefore, the claim was not direct and particular to Berg but rather derivative and assertable only on behalf of all of Pluris‟s creditors.*fn6 The court further noted that in light of its dispositive ruling, it need not directly address another ground raised by demurrer-that the Pluris directors were insulated from liability by the business judgment rule. But, "for the guidance of the parties," the court nevertheless observed that particular allegations of the first amended complaint appeared "sufficient to rebut the business judgment presumption."
Berg filed a second amended complaint, this time on "behalf of [itself] and all other Pluris, Inc. creditors," consistently with the court‟s prior ruling. The new pleading in substance restated the allegations of Berg‟s previously asserted breach-of-fiduciary-duty claim, including that before the assignment for the benefit of creditors, Berg had informed Pluris of its desire to explore use of Pluris‟s net operating losses through bankruptcy in the event Pluris could not obtain outside financing but after the assignment and during later involuntary bankruptcy proceedings, Berg provided details of this plan.
The directors demurred to Berg‟s second amended complaint on numerous grounds. The court (Judge Neal A. Cabrinha) determined that while the pleading could be "reasonably be interpreted as alleging a creditors‟ claim under common law," Berg had failed to allege specific facts to rebut the business judgment rule-"affirmative allegations of facts which, if proven, would establish fraud, bad faith, overreaching, or an unreasonable failure to investigate material facts"-and thus had not stated a viable claim for breach of fiduciary duty. The court ruled that Berg‟s allegations that the directors did not conduct a "reasonable inquiry into alternative methods of financing or alternative ways to derive additional value in Pluris for its creditors, but instead took the easiest path for themselves and assigned all of Pluris‟s assets to an assignee" did not establish "that [the] defendants acted with an improper motive and a conflict of interest. . . . [¶] . . . [¶] At first blush, the allegation that defendants did not explore alternative avenues of financing or alternative ways to derive additional value in Pluris for its creditors pleads around the business judgment rule. However, it is not sufficient to generally allege the failure to conduct an active investigation without (1) alleging facts which would reasonably call for such an investigation, or (2) alleging facts which would have been discovered by a reasonable investigation and would have been material to the questioned exercise of business judgment. . . . [¶] . . . The Second Amended Complaint does not allege facts establishing the existence of any alternative methods of financing or means to increase the value of Pluris‟s assets for the benefit of creditors generally. As a result, it fails to establish a breach of fiduciary duty."
Thus, the court determined that because Berg had failed to plead specific facts to rebut the presumption of non-liability afforded by the business judgment rule, it had failed to adequately plead a cognizable claim for breach of fiduciary duty against the directors. As a result, the court sustained the demurrers with leave to amend.
II. Berg's Third Amended Complaint
This brings us to the operative pleading-Berg‟s third amended complaint.*fn7 In it, Berg, for itself and purportedly on behalf of all Pluris creditors, restated its single cause of action for breach of fiduciary duty against the Pluris directors.*fn8 The pleading alleged in conclusory fashion and without supporting facts that "[a]t least from January 2002, and continuing thereafter, PLURIS was either insolvent or operating within the "zone of insolvency.‟ During this time, PLURIS‟s Board of Directors and each director individually owed a fiduciary duty to act for the benefit of PLURIS‟s creditors." That duty, as alleged, included "the obligation not just to protect the assets of PLURIS but to affirmatively examine a range of possible courses of action to maximize the value of the remaining assets, not merely to take the course of action most expedient to [the directors] and make an Assignment."
As background, the pleading, like its superseded predecessors, went on to allege that in 2001, one of Pluris‟s creditors was a Berg-related entity that had entered into a lease with Pluris, which Pluris repudiated, resulting in litigation. That dispute was settled in February 2002 when Pluris informed Berg‟s principal, Carl Berg, that it was attempting to obtain outside financing to continue operations and that settlement of Berg‟s claim was a condition to receiving that financing. In the course of these discussions, Carl Berg then informed Pluris, allegedly through its board of directors, that if its financing efforts failed, the Berg-related entity or its assignee "wanted to derive value" or "want[ed] to explore ways to derive additional value" from the $50 million in net operating losses that Pluris had accumulated and that one of Berg‟s plans for doing so required a reorganization of Pluris through federal bankruptcy laws.*fn9 The settlement between Pluris and the Berg-related entity liquidated and partially secured the claim, which was then assigned to Berg making it Pluris‟s largest creditor.
Pluris‟s efforts to obtain outside financing did not result in its getting sufficient funds to continue operations as a result of which, on July 11, 2002, Pluris, through its board of directors, made an assignment for the benefit of creditors. According to Berg, in doing so, the directors "failed, refused or neglected to seek or to find any alternative financing or to make a reasonable inquiry into alternative financing even though they knew or reasonably should have known there were a number of potential sources available." The board also "failed to make any reasonable inquiry into alternative ways to derive additional value for the PLURIS creditors other than making an assignment for the benefit of creditors . . . despite the fact that [the directors] were specifically advised there were alternatives that might generate greater value. For example, [Carl] Berg [had] explained [that] if Pluris w[ere] unsuccessful [at obtaining sufficient outside financing], he intended to seek [to benefit from] the value of PLURIS‟s $50 million [in net operating losses through] a bankruptcy reorganization. Pursuant to the reorganization, there would [be] additional benefits to creditors such as [those] incorporated in the proposed Berg plan." These benefits included the same reduction of Berg‟s unsecured claim and a cash contribution to the bankruptcy estate of $150,000 for the benefit of other unsecured creditors that we noted from prior pleadings.*fn10 But, Berg further alleged, "[r]ather than exploring alternative forms of financing, including Berg‟s plans, . . . the Directors took the easiest path for themselves, and made an assignment of all PLURIS‟s assets to an assignee for the alleged benefit of creditors, and then "washed their hands‟ of the matter." Said yet another way, the directors, as shareholders, "[h]aving determined that their own investment in PLURIS essentially had no value, they looked no further and ignored their continuing duties to the PLURIS creditors by, among other things, refusing to examine alternatives which were specifically brought to their attention or to explore other options, all of which would have enhanced the value to the PLURIS creditors. Instead, they assigned PLURIS‟s assets to an assignee, and walked away." Berg still further alleged that the directors "did not explore and had no intention of exploring alternative avenues of financing or ways to maximize PLURIS‟s assets, but instead chose to "cut their losses‟ " by the assignment "without any reasonable inquiry concerning other ways to protect the interests of Berg and the other creditors, despite that several possible alternatives had specifically been brought to their attention by Berg, and other possible alternatives might have been found with modest inquiry."
The pleading then alleged that from the date of the assignment in July 2002 until August 16, 2002, when Berg and two other Pluris creditors filed an involuntary petition in bankruptcy on its behalf, Berg "tried unsuccessfully to contact PLURIS‟s BOARD OF DIRECTORS" and no member of the board contacted Berg "to explore . . . identifying alternative ways to achieve greater value in PLURIS. Nor did any [director] conduct [a] reasonable inquiry to determine how to protect or enhance the value of PLURIS [or how] to protect BERG‟s interests, including an inquiry concerning BERG‟s ability to use PLURIS‟s [net operating losses].
[¶] . . . At no time between January 2002 and the Assignment . . . did PLURIS‟s BOARD OF DIRECTORS ever examine means to increase the value of PLURIS‟s assets for the benefit of creditors generally other than by making an Assignment . . . ."
In the penultimate allegations of the cause of action as relevant here, Berg pleaded that the directors had breached their fiduciary duties by selecting a course of action that was "easiest for them by ignoring alternatives specifically brought to their attention, including BERG‟s proposed reorganization[,] and [by] failing to make any reasonable inquiry into other possible approaches that would or might have yielded greater assets for the creditors;" and by failing "to explore BERG‟s articulated plan to maximize the value of PLURIS‟s [net operating losses for] the benefit [of] creditors."*fn11
The pleading further alleged that "[o]n August 16, 2002, in order to protect their interests and the interests of other creditors, three of PLURIS‟s creditors, including BERG, filed an involuntary petition for bankruptcy [under 11 U.S.C § 303] concerning PLURIS‟s estate. During the bankruptcy proceeding, Berg continued to offer his plans for [Pluris‟s] reorganization."*fn12 In January 2003, at Sherwood, the assignee‟s, request, the bankruptcy court abstained from exercising jurisdiction under title 11 United States Code section 305, subdivision (a)(1) and dismissed the involuntary petition.*fn13
The third amended complaint finally alleged that as a proximate result of the directors‟ breach of fiduciary duty, which Berg alleged to be willful, malicious, and oppressive so as to justify an award of punitive damages, Berg and the other Pluris creditors were damaged in a sum "in excess of $50 million which ...