October 14, 2011

Where a Ch. 7 trustee asserts in an adversary proceeding that a former director of the debtor is liable for breaches of his duties as director, the trustee must plead plausible claims with some specificity. Since the director is protected by the business judgment rule, the trustee's complaint must allege with some specificity how the director acted fraudulently, illegally or in bad faith as to specific matters that came before the board while he was a director.

For example, if the trustee alleges that the director prolonged the Debtor's existence when the Debtor should have ceased operating, the trustee must identify which acts and occurrences the director knew of, or should have known of, that should have caused him to seek cessation of the Debtor's operations. Moreover, the trustee must allege additional facts that would elevate the wrong from simple negligence to gross negligence in order to overcome business judgment protection. If the trustee alleges that the director failed to procure audits that would have uncovered irregularities, the trustee must allege what irregularities an audit would have uncovered. If the trustee alleges that the director failed to implement controls, the trustee must identify what controls the director failed to implement and the facts and circumstances that placed the director on notice of the need for such controls.

October 11, 2011