Case: Doc: 113 Filed: 01/19/10 Page: 1 of 22

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1 Case: Doc: 113 Filed: 01/19/10 Page: 1 of 22 IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF OKLAHOMA OKLAHOMA CITY DIVISION In re: ) Case No TMW ) (Jointly Administered) HAROLD S STORES, INC., et al., ) Chapter 7 ) Judge T.M. Weaver Debtors. ) ) ) ) DOUGLAS N. GOULD, Chapter 7 Trustee ) FOR HAROLD S STORES, INC., et al., ) ) Adversary Proceeding Plaintiff, ) ) No TMW v. ) ) RONALD S. STAFFIERI, WILLIAM ) HASLAM, WILLIAM HOWARD LESTER,) HUBERT W. MULLINS, RONALD DE ) WAAL, MARGARET A. GILLIAM, ) LEONARD M. SNYDER, JODI L. ) TAYLOR, CLARK J. HINKLEY, ) JAMES D. ABRAMS, ROBERT L. ) ANDERSON, BOB COLE, ) RONHOW, L.L.C., AND RONUS, INC., ) ) Defendants. ) ) MEMORANDUM IN SUPPORT OF MOTION TO DISMISS CLAIMS AGAINST DIRECTOR AND OFFICER DEFENDANTS STAFFIERI, HASLAM, LESTER, MULLINS, GILLIAM, SNYDER, TAYLOR, HINKLEY, ABRAMS, ANDERSON AND COLE

2 Case: Doc: 113 Filed: 01/19/10 Page: 2 of 22 TABLE OF CONTENTS I. INTRODUCTION...1 II. SUMMARY OF ALLEGATIONS...3 A. The Company and its Officers and Directors...3 B. Harold s Allegedly Enters a Zone of Insolvency...4 C. The Director and Officer Defendants Take Action to Save the Company...4 D. The Trustee s Critique of the D&O Defendants Efforts to Save the Company5 III. MOTION TO DISMISS STANDARD...6 IV. ARGUMENT...6 A. The Mismanagement Claims Are Barred by the Business Judgment Rule....7 B. The Transactional Claims Fail as a Matter of Law Deepening Insolvency Is Not Legally Cognizable Damage Under Oklahoma Law The Transactional Claims Against Cole and Taylor Also Fail Because Cole and Taylor Were Not Directors The Trustee Does Not Allege Any Specific Actions by Snyder that Harmed the Company C. The Trustee s Waste Claim Does Not Allege any Actual Waste...15 V. CONCLUSION...16 i

3 Case: Doc: 113 Filed: 01/19/10 Page: 3 of 22 TABLE OF AUTHORITIES CASES Ashcroft v. Iqbal, 129 S. Ct (2009)...6, 10, 14 Beard v. Love, 173 P.3d 796 (Okla. Civ. App. 2007)...7 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)...6, 10 Brehm v. Eisner, 746 A.2d 244 (Del. 2000)...7-8, 9, 10, Buchwald v. Renco Group (In re Magnesium Corp. of America), 399 B.R. 722 (Bankr. S.D.N.Y. 2009)...15 Commercial Financial Services, Inc. v. J.P. Morgan Securities, Inc., 152 P.3d 897 (Okla. Civ. App. 2006) , 13 In re CompuCom Systems, Inc. Stockholders Litigation, 2005 WL (Del. Ch. Sept. 29, 2005)...8 Dias v. City & County of Denver, 567 F.3d 1169 (10th Cir. 2009)...6 Dura Pharmaceuticals v. Broudo, 544 U.S. 336 (2005)...11 In re Freeport-McMoRan Sulphur, Inc. Shareholders Litigation, 2001 WL (Del. Ch. Jan. 5, 2001)...8 H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129 (Del. Ch. 2003)...8 Joseph v. Frank (In re Troll Commc ns, LLC), 385 B.R. 110 (Bankr. D. Del. 2008)...12, 13 Kidd v. Swink, 2002 WL (S.D.N.Y. Oct. 23, 2002)...10 Official Committee of Bond Holders of Metricom, Inc. v. Derrickson, 2004 WL (N.D. Cal. Feb. 25, 2004)...8 Official Committee of Unsecured Creditors of Radnor Holdings Corp. v. Tennenbaum Capital Partners, LLC (In re Radnor Holdings Corp.), 353 B.R. 820 (Bankr. D. Del. 2006)...12, 16 Telxon Corp. v. Meyerson, 802 A.2d 257 (Del. 2002)...7 ii

4 Case: Doc: 113 Filed: 01/19/10 Page: 4 of 22 Trenwick America Litigation Trust v. Ernst & Young, L.L.P., 906 A.2d 168 (Del. Ch. 2006), aff d, 931 A.2d 438 (Del. 2007)...12 RULES Fed. R. Civ. P. 8(a)(2)...6 Fed. R. Civ. P. 12(b)(6)...6 iii

5 Case: Doc: 113 Filed: 01/19/10 Page: 5 of 22 I. INTRODUCTION In this adversary proceeding, Plaintiff Douglas N. Gould, as trustee, asks the Court and ultimately a jury to second-guess the business judgments of the former officers and directors of Harold s Stores, Inc. ( Harold s or the Company ), a bankrupt apparel retailer. Although it is undisputed that the officers and directors took numerous actions to try to save the Company and stave off bankruptcy, the trustee seeks, with the benefit of hindsight, to hold some of the Company s former directors, Ronald S. Staffieri, William Haslam, W. Howard Lester, Hubert W. Mullins, Margaret A. Gilliam, Leonard M. Snyder, Clark J. Hinkley, James D. Abrams, Robert L. Anderson, and and two former non-director officers, Jodi L. Taylor and Bob Cole, (collectively, the D&O Defendants ), personally liable for the failure of their efforts. 1 But the 31-page Second Amended Complaint, replete with you should have invective, does not allege any facts showing the kind of misconduct legally sufficient to support a claim against officers or directors of an Oklahoma corporation. The Second Amended Complaint asserts two categories of claims against the D&O Defendants (1) claims that the D&O Defendants mismanaged the Company (the Mismanagement Claims ), and (2) claims that the Directors approved several transactions with Defendants Ronus and RonHow that allegedly benefitted Ronald de Waal, the Company s controlling shareholder, at the expense of creditors and minority shareholders (collectively, the Transactional Claims ). 1 This motion and memorandum concern only the trustee s claims against the D&O Defendants. Defendants W. Howard Lester, Ronald de Waal, RonHow, L.L.C., and Ronus, Inc. (the Lesterde Waal Defendants ) are filing a separate motion to dismiss the claims against them, which are set out in the second part of the Second Amended Complaint.

6 Case: Doc: 113 Filed: 01/19/10 Page: 6 of 22 The Mismanagement Claims, the factual basis for which is set forth primarily in Paragraphs of the Second Amended Complaint, fail because the trustee has not alleged facts overcoming the presumption of the business judgment rule. The business judgment rule protects officers and directors from liability for their decisions, unless the decisions resulted from a conflict of interest or from a grossly negligent decision-making process. The trustee alleges a variety of supposed mismanagement, such as the D&O Defendants failure to accurately anticipate fashion trends, inability to correctly identify and cater to the [Company s] customer base, poor inventory level management, and ineffective marketing and product placement. (2d Am. Compl. 55.) Notably absent, however, are any factual allegations that could support a claim that the D&O Defendants conduct consisted of anything more than good faith business judgments. No fraud is alleged. Nor has the trustee alleged facts showing that the D&O Defendants were interested in the decisions constituting the supposed mismanagement or that they used a grossly negligent decision-making process. Consequently, the D&O Defendants supposed mismanagement is protected by the common law business judgment rule, so the Mismanagement Claims fail to state an actionable claim. The Transactional Claims, the factual basis for which is set forth in Paragraphs of the Second Amended Complaint, which arguably fall outside the business judgment rule at the pleadings stage, fail because the Second Amended Complaint does not allege facts showing that the allegedly interested transactions proximately caused any damage to the Company. Although not saying so explicitly, the trustee clearly relies on a deepening insolvency theory of damages, 2

7 Case: Doc: 113 Filed: 01/19/10 Page: 7 of 22 which has been expressly rejected by Oklahoma courts. Without a showing of how the challenged transactions, consisting primarily of loans on which interest was not paid, proximately caused any legally cognizable damages, the Transactional Claims cannot stand. In sum, the trustee alleges three counts against the D&O Defendants: Breach of the Fiduciary Duty of Care (Count I); Breach of the Fiduciary Duty of Loyalty (Count II); and Corporate Waste (Count III). The Second Amended Complaint fails to state a claim against the D&O Defendants on each of these counts, and therefore, it should be dismissed. II. SUMMARY OF ALLEGATIONS A. The Company and its Officers and Directors Harold s was an Oklahoma corporation that operated a retail apparel chain. (Trustee s Second Amended Complaint [Dkt. 97] ( 2d Am. Compl. ) 1, 18.) The Company sold highquality clothes directly to consumers, primarily through brick-and-mortar stores. Movants Clark J. Hinkley, Leonard M. Snyder, Hubert W. Mullins, and Ronald S. Staffieri, served as both officers and directors of the Company. (Id. 2, 5, 8, 10.) Movants James D. Abrams, Robert L. Anderson, William Haslam, W. Howard Lester, and Margaret A. Gilliam were directors of the Company. (Id. 3, 4, 7, 11, 12.) Defendants Jodi L. Taylor and Bob Cole served as Chief Financial Officers of the Company, but they were never directors of the Company. (Id. 9, 13.) 3

8 Case: Doc: 113 Filed: 01/19/10 Page: 8 of 22 B. Harold s Allegedly Enters a Zone of Insolvency The crux of the Second Amended Complaint focuses on the D&O Defendants actions or inactions once the Company entered into the zone of insolvency. 2 (See, e.g., 2d Am. Compl. 19.) Specifically, the trustee alleges that in the 1990s and early 2000s, the Company suffered several years of losses and that [b]y at least the beginning of 2003, Harold s was in the zone of insolvency or simply insolvent. (Id.) The trustee claims that during this period, the Company experienced operating losses and lack of cash flow. (Id. 71.) C. The Director and Officer Defendants Take Action to Save the Company The trustee acknowledges that while the Company was insolvent, the D&O Defendants took various actions to save the Company, including the following: obtaining funds for working capital, including a Wells Fargo revolving credit facility in 2003 (id. 33); developing internet sales in 2004 (id. 56); expanding brick and mortar stores (id.); obtaining subordinated loans from RonHow in 2006 (id. 36, 39); obtaining increases in the RonHow subordinated loan in 2007 (id. 42, 45); obtaining additional subordinated loans from Ronus in 2008 (id. 47, 48, 49); deregistering the Company in 2007 (id. 46); facilitating a reverse stock split in 2007 (id. 44); and investing capital expenditures to open new store locations and renovating existing store locations (id. 58). 2 As is required for a motion to dismiss, the D&O Defendants have assumed that the specific facts alleged by the trustee are true only for the purposes of this motion. The D&O Defendants do not in any way concede that any of the trustee s allegations are true or accurate and reserve all of their rights to deny such allegations. 4

9 Case: Doc: 113 Filed: 01/19/10 Page: 9 of 22 Despite the D&O Defendants efforts, like many other companies in this distressed economic environment, Harold s was forced to file for bankruptcy protection on November 7, (Id. 72.) D. The Trustee s Critique of the D&O Defendants Efforts to Save the Company The trustee now critiques the D&O Defendants efforts to manage and save the Company, alleging that their efforts came too late and were ineffective, and that different business decisions should have been made. In particular, the trustee alleges that the D&O Defendants grossly mismanaged the Company through their negligent employment decisions, failure to accurately anticipate fashion trends, inability to correctly identify and cater to the Harold s customer base, poor inventory level management, refus[al] to hire qualified management, ineffective marketing and product placement, opening new store locations, decision to alter the timing and quantity of fall and winter merchandise, and set[ting of] an unrealistically high and unattainable budget. (2d Am. Compl. 53, 54, 55, 58, 59, 68.) The trustee particularly excoriates the Company s decision to obtain financing from RonHow and Ronus. The trustee admits, however, that [w]ithout the additional funding from de Waal [who controlled RonHow and Ronus], Harold s had no ability to continue as a going concern. (Id. 51.) Although the trustee claims the terms of these loans were unfair, he does not deny that the Company received the loan proceeds. Nor does he allege that the loans were repaid according to the supposedly unfair terms; in fact, the Second Amended Complaint expressly notes that interest was not paid on the subordinated secured loans. (Id. 52.) Of 5

10 Case: Doc: 113 Filed: 01/19/10 Page: 10 of 22 course, the trustee could not make such allegations, because it is indisputable that Ronus and RonHow lost millions of dollars when the Company failed. III. MOTION TO DISMISS STANDARD When reviewing a motion to dismiss a complaint under Rule 12(b)(6), courts assume the truth of all well-pleaded facts in the complaint. Dias v. City & County of Denver, 567 F.3d 1169, 1178 (10th Cir. 2009) (emphasis added). [W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged--but it has not show[n] -- that the pleader is entitled to relief. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1950 (2009) (citing Fed. R. Civ. P. 8(a)(2)). Moreover, the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Id. at Thus, [t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice. Id. To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. Id. (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). To determine whether a complaint states a claim to relief that is plausible, the court must draw on its judicial experience and common sense. Id. at IV. ARGUMENT The trustee s Second Amended Complaint fails to state a claim against the D&O Defendants. First, the trustee s Mismanagement Claims are barred by the business judgment rule. Second, the trustee s Transactional Claims are barred because the trustee has not alleged 6

11 Case: Doc: 113 Filed: 01/19/10 Page: 11 of 22 legally cognizable damages or proximate cause. Finally, the trustee s waste claim fails to allege any actual waste. For these reasons, which are discussed in detail below, the counts asserted against the D&O Defendants should be dismissed. A. The Mismanagement Claims Are Barred by the Business Judgment Rule. The common law business judgment rule shields officers and directors from liability for most business decisions. See Beard v. Love, 173 P.3d 796, 804 (Okla. Civ. App. 2007); Brehm v. Eisner, 746 A.2d 244, 258 (Del. 2000). 3 The business judgment rule applies to claimed breaches of both the fiduciary duty of care and the fiduciary duty of loyalty. See, e.g., Brehm, 746 A.2d at (care); Telxon Corp. v. Meyerson, 802 A.2d 257, 264 (Del. 2002) (loyalty). When applying the business judgment rule, courts presume that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company and its shareholders. Beard, 173 P.3d at 804 (internal quotation marks and citation omitted). Therefore, directors decisions will be respected by courts unless the directors are interested or lack independence relative to the decision, do not act in good faith, act in a manner that cannot be attributed to a rational business purpose or reach their decision by a grossly negligent process.... Brehm, 746 A.2d at 264 n Oklahoma case law regarding the business judgment rule (and corporate governance in general) is sparse. Nevertheless, because the Oklahoma General Corporation Act is based on the Delaware Act, decisions of the Delaware Courts are very persuasive to Oklahoma courts. Beard, 173 P.3d at 802 (citation omitted). 7

12 Case: Doc: 113 Filed: 01/19/10 Page: 12 of 22 Thus, to avoid a motion to dismiss under the business judgment rule, the trustee must make a plausible showing that the D&O Defendants were either interested in a particular transaction or decision or that they used a grossly negligent decision-making process. See, e.g., Brehm, 746 A.2d at 267 (upholding dismissal of complaint because plaintiffs did not allege facts showing a grossly negligent process); In re CompuCom Sys., Inc. Stockholders Litig., 2005 WL (Del. Ch. Sept. 29, 2005) (dismissing, on business judgment rule grounds, claim alleging domination of board by interested party) (unpublished); Official Comm. of Bond Holders of Metricom, Inc. v. Derrickson, 2004 WL , at *5 (N.D. Cal. Feb. 25, 2004) (same) (unpublished); H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 150 (Del. Ch. 2003) (dismissing, on business judgment rule grounds, claim where complaint did not show directors were interested in transaction); In re Freeport-McMoRan Sulphur, Inc. S holders Litig., 2001 WL (Del. Ch. Jan. 11, 2001) (dismissing, on business judgment rule grounds, challenge to merger because plaintiffs did not allege disloyalty or use of a grossly negligent process) (unpublished). The Second Amended Complaint in this case fails to make the requisite allegations with respect to the Mismanagement Claims. First, there are no allegations that the supposed mismanagement resulted from fraud or self-interest on the part of the D&O Defendants. Indeed, aside from the strained allegations that de Waal dominated and controlled several directors, which arguably would remove the Ronus and RonHow transactions from the protection of the rule, the trustee does not even attempt to show that the challenged decisions resulted from any self-interest on the part of the D&O Defendants. Rather, the trustee alleges that the D&O Defendants committed a variety of acts of mismanagement because of their negligence, gross negligence, or recklessness. (2d Am. 8

13 Case: Doc: 113 Filed: 01/19/10 Page: 13 of 22 Compl. 79.) Thus, because they were not tainted by self-interest, the business judgment rule protects the D&O Defendants from liability unless their decisions resulted from a grossly negligent decision-making process. The Mismanagement Claims exemplify the very hindsight bias that the business judgment rule is designed to prevent. Nothing in the paragraphs supporting the Mismanagement Claims alleges any specific facts about the D&O Defendants decision-making process. Rather, the allegations simply second-guess strategic business decisions. Courts do not measure, weigh or quantify directors judgments.... Due care in the decisionmaking context is process due care only. Brehm, 746 A.2d at 264 (emphasis in original). Thus, decisions such as those involving the D&O Defendants alleged negligent employment decisions, failure to accurately anticipate fashion trends, inability to correctly identify and cater to the Harold s customer base, poor inventory level management, refus[al] to hire qualified management, ineffective marketing and product placement, opening new store locations, decision to alter the timing and quantity of fall and winter merchandise, and set[ting of] an unrealistically high and unattainable budget are presumed to be in good faith and are protected by the business judgment rule. (2d Am. Compl. 53, 54, 55, 58, 59, 68.) Aside from the conclusory allegation in Paragraph 53, which is entitled to no weight under Iqbal, the trustee has not alleged that any of this so-called mismanagement resulted from a grossly negligent decision-making process. Indeed, the trustee has not alleged what process the D&O Defendants used to make the challenged decisions at all. The substance of the decisions is not subject to reconsideration, regardless of how they turned out. 9

14 Case: Doc: 113 Filed: 01/19/10 Page: 14 of 22 In an apparent attempt to shore up the omission of factual allegations regarding the D&O Defendants decision-making process, the trustee alleges that the directors abdicat[ed] their decision making authority and acted in bad faith. (2d Am. Compl. 53.) Such conclusory allegations do not pass muster under Twombly and Iqbal. See, e.g., Iqbal, 129 S. Ct. at 1951 (rejecting as conclusory allegations that defendants knew of, condoned, and willfully and maliciously agreed to subject [the plaintiff] to harsh conditions of confinement and that one defendant was the principal architect of this invidious policy ). Given the strength of the business judgment rule, the complaint must do more than just allege ordinary business decisions with pejorative characterizations added or that plaintiff regards the decision as unwise, foolish, or even stupid. Kidd v. Swink, 2002 WL , at *2 (S.D.N.Y. Oct. 23, 2002) (dismissing complaint on business judgment rule grounds) (internal quotation marks and citation omitted) (unpublished); see Brehm, 746 A.2d at 264. Because the trustee has not alleged facts regarding the D&O Defendants decision-making process, let alone facts showing it was grossly negligent, the Second Amended Complaint fails to rebut the presumption of the business judgment rule. Accordingly, all claims based on the D&O Defendants alleged mismanagement should be dismissed. B. The Transactional Claims Fail as a Matter of Law. Undoubtedly recognizing that almost all challenges to business decisions are barred by Oklahoma s business judgment rule, the trustee stretches to allege some interested transactions on the part of the D&O Defendants that would avoid the rule s protection. Thus, the trustee spends three pages of the Second Amended Complaint alleging relationships that supposedly resulted in Ronald de Waal s dominating several directors. Even if these allegations were true, 10

15 Case: Doc: 113 Filed: 01/19/10 Page: 15 of 22 they would exempt only the Company s loans from RonHow and Ronus from the protection of the business judgment rule. And even if the business judgment rule cannot apply to these claims at the pleadings stage, the trustee must still allege sufficient facts to set forth a plausible breach of fiduciary duty claim against the D&O Defendants for approving these transactions. The trustee has not done this, because the Second Amended Complaint does not set forth any facts plausibly showing that the Company s transactions with RonHow and Ronus proximately caused any legally cognizable harm to the Company. At most, the loans made to the Company which the trsutee alleges to have been insolvent made the Company more insolvent, to the detriment only of the lenders, Defendants RonHow and Ronus. Only damages proximately caused by a breach of fiduciary duty may be recovered under Oklahoma law. See Commercial Financial Servs., Inc. v. J.P. Morgan Sec., Inc., 152 P.3d 897, 900 (Okla. Civ. App. 2006). To survive a motion to dismiss, the plaintiff must plead facts showing the causal connection between an alleged economic loss and the allegedly wrongful conduct. See Dura Pharms. v. Broudo, 544 U.S. 336, 347 (2005). Against these standards, the Second Amended Complaint fails because it does not set forth sufficient facts showing how any of the challenged decisions could have proximately caused any legally cognizable damage to the Company. Instead, the trustee has attempted to plead a deepening insolvency claim without using that phrase. 1. Deepening Insolvency Is Not Legally Cognizable Damage Under Oklahoma Law. A deepening insolvency claim is based on the theory that by prolonging the life of an insolvent company, bad actors cause the company to become even more insolvent leading to a hopelessly bankrupt business with larger than necessary debt owed to its creditors. Commercial 11

16 Case: Doc: 113 Filed: 01/19/10 Page: 16 of 22 Financial Servs., 152 P.3d at As a matter of law, deepening insolvency claims are not cognizable in Oklahoma. Id. at 900 ( Deeper insolvency is not a recognized measure of damages in Oklahoma. ); see also Trenwick America Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 205 (Del. Ch. 2006) (rejecting deepening insolvency under Delaware law), aff d, 931 A.2d 438 (Del. 2007); Joseph v. Frank (In re Troll Commc ns, LLC), 385 B.R 110, 122 (Bankr. D. Del. 2008) ( Because deepening insolvency has been rejected as a valid cause of action or a theory of damages under Delaware law, the Motions to Dismiss Count One will be granted. ). In other words, a board is not required to wind down operations simply because a company is insolvent, but rather may conclude to take on additional debt in the hopes of turning operations around. Official Comm. of Unsecured Creditors of Radnor Holdings Corp. v. Tennenbaum Capital Partners, LLC (In re Radnor Holdings Corp.), 353 B.R. 820, 842 (Bankr. D. Del. 2006). The Second Amended Complaint alleges in detail that the Defendants breached their duties to the Company by approving loan transactions whereby Ronus, Ronhow and Wells Fargo provided the Company with financing to support the Company s operations after the Company was insolvent. The Second Amended Complaint does not explain, however, how these loans hurt the Company. See id. at 842 (noting that obtaining a loan increases liabilities (the amount of the loan) and assets (the cash provided by the loan) in the same amount. ) (citation omitted). Indeed, the Second Amended Complaint specifically alleges that Harold s was dependent on additional funding from Ronus and RonHow to remain afloat. (2d Am. Compl. 51 ( Without the additional funding from de Waal, Harold s had no ability to continue as a going concern. ).) Although the trustee avoids using the term, the allegations related to the D&O Defendants approval of financing and related transactions are classic deepening insolvency 12

17 Case: Doc: 113 Filed: 01/19/10 Page: 17 of 22 claims. The trustee s theory is that the D&O Defendants should reimburse the Company for the amount of debt incurred after the Company entered the zone of insolvency. This is made clear by the trustee s demand for damages of more than $36 million (2d Am. Compl. at 79, 84, 86), which is roughly the amount of debt the trustee alleges was outstanding at the time of the bankruptcy filing. (Id. 52.) Paragraphs 19 and 73 of the Second Amended Complaint set forth the trustee s deepening insolvency theory. The trustee asserts that by at least the beginning of 2003, Harold s was in the zone of insolvency or simply insolvent. (2d Am. Compl. 19.) The trustee continues, [i]nstead of liquidating, restructuring or selling the clearly insolvent company, [the D&O Defendants]... continu[ed] the company s unhealthy financial dependence on RonHow and Ronus without reworking its unprofitable business model. (Id. 73.) A claim like the trustee s that an insolvent company failed to liquidate or restructure early enough, thereby increasing the amounts owed to the company s creditors (which ironically include Defendants Ronus and RonHow), is precisely the sort that has been rejected by Oklahoma and many other jurisdictions as a deepening insolvency claim. See, e.g., Commercial Financial Servs., 152 P.3d at (rejecting claim that consultant allowed company to become more insolvent rather than liquidating, thereby prolonging the insolvency ); In re Troll Commc ns, 385 B.R. at 121 (dismissing claim that failing to take prompt corrective action in the face of insolvency caused the corporate life of the debtors to be artificially extended ). Because [d]eeper insolvency is not a recognized measure of damages in Oklahoma, Commercial Financial Services, 152 P.3d at 900, the trustee s allegations that the Director Defendants harmed the Company by causing it to incur debt, whether from Ronus, 13

18 Case: Doc: 113 Filed: 01/19/10 Page: 18 of 22 RonHow or Wells Fargo, after Harold s entered the zone of insolvency do not state a claim and should be dismissed. 2. The Transactional Claims Against Cole and Taylor Also Fail Because Cole and Taylor Were Not Directors. The trustee alleges that Defendants Bob Cole and Jodi L. Taylor, two former officers of Harold s, breached fiduciary duties owed to the Company apparently based on their attendance at board meetings at which certain high-level transactions were approved. Assuming, for the purposes of this motion only, that officers owe fiduciary duties of care and loyalty under Oklahoma law that track the duties of directors, the trustee has not alleged (and indeed cannot allege) that Mr. Cole or Ms. Taylor who were not members of the Company s board of directors authorized or approved any of the challenged transactions involving Ronus and RonHow. Without such allegations, the trustee s claims against Mr. Cole and Ms. Taylor, which are indiscriminately lumped together with claims against the former directors, are not plausible and should be dismissed. See Iqbal, 129 S.Ct. at 1949 ( a claim has facial plausibility sufficient to avoid a motion to dismiss when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. ). Because the trustee has not pleaded facts showing that the challenged transactions with Ronus and RonHow were authorized by Mr. Cole or Ms. Taylor, who were not directors of the company, the trustee s breach of fiduciary duty claims against these two individuals fail. There is no conceivable justification for the trustee s embroiling them in this litigation. 14

19 Case: Doc: 113 Filed: 01/19/10 Page: 19 of The Trustee Does Not Allege Any Specific Actions by Snyder that Harmed the Company. Although not an interested transaction, and thus a decision that is protected by the business judgment rule, it is worth pointing out that the trustee also does not allege any facts showing how the hiring of Leonard M. Snyder harmed the Company. Indeed, the trustee devotes two pages of the Second Amended Complaint to discussing alleged misconduct of Mr. Snyder while he was the CEO of other companies, but the trustee has not alleged any facts showing that Mr. Snyder caused any particular harm to Harold s. (2d Am. Compl ) The Second Amended Complaint is silent about what, if anything, Mr. Snyder did while he was CEO. The closest thing to such an allegation is that Stuffing the Channels supposedly occurred when Snyder was CEO. (Id. 67.) This allegation, even if it were true (which it is not), does not show harm to the Company. At most, it would show an injury to the Company s creditors, which the trustee does not have standing to assert. See Buchwald v. Renco Group (In re Magnesium Corp. of America), 399 B.R. 722, 758 (Bankr. S.D.N.Y. 2009) ( [T]he Trustee... has standing to bring only those actions the Debtors could have commenced if not for the bankruptcy filing. ). Because the trustee has not alleged an injury to the Company that resulted from the appointment of Mr. Snyder or from any alleged inflation of the Company s sales figures, the Second Amended Complaint does not establish a plausible theory of causation or damages with respect to such claims. C. The Trustee s Waste Claim Does Not Allege any Actual Waste. The judicial standard for determination of corporate waste is well developed. Roughly, a waste entails an exchange of corporate assets for consideration so disproportionately small as 15

20 Case: Doc: 113 Filed: 01/19/10 Page: 20 of 22 to lie beyond the range at which any reasonable person might be willing to trade. Brehm, 746 A.2d at 263. The trustee s waste claim is premised on three sets of transactions (1) RonHow s and Ronus s conversion of debt to equity; (2) the Company s issuance of promissory notes in lieu of accrued dividends to preferred shareholders; and (3) the Company s entering into secured loans with Ronus and RonHow. (2d Am. Compl. 86.) The trustee does not describe how any of the transactions could have wasted corporate assets. First, the conversion of debt to equity does not waste any corporate assets. The Company merely exchanged one obligation, i.e., debt, for an obligation of a lower priority, i.e., equity. Indeed, the transactions very likely benefitted the Company s balance sheet. See In re Radnor Holdings Corp., 353 B.R. at 842. Second, the trustee critically does not allege that the promissory notes supposedly issued in lieu of dividends were ever paid. Thus, nothing of any value ever left the Company. Finally, the Company undoubtedly received consideration in exchange for the Ronus and RonHow loans it got the proceeds of the loans. Interest was not paid on these loans (2d Am. Compl. 52), so under no circumstances could the loans have resulted in an exchange of corporate assets for disproportionately small consideration. Indeed, if anyone got disproportionately small consideration as a result of these loan transactions, it was de Waal, Lester, Ronus and RonHow, who lost millions of dollars as a result of unrepaid loans and equity investments that turned out to be worthless. Accordingly, the trustee s corporate waste claim is illogical and implausible on its face and should be dismissed, under Iqbal. V. CONCLUSION For the reasons discussed above, the Director and Officer Defendants respectfully request that the Court dismiss the claims asserted against them. 16

21 Case: Doc: 113 Filed: 01/19/10 Page: 21 of 22 /s/ Ross A. Plourde Ross A. Plourde, OBA # 7193 MCAFEE & TAFT, A PROFESSIONAL CORPORATION 10th Floor, Leadership Square 211 North Robinson Oklahoma City, Oklahoma (t) (f) ross.plourde@mcafeetaft.com /s/ Thomas M. Byrne Thomas M. Byrne (admitted pro hac vice) Jamala S. McFadden (admitted pro hac vice) Joshua A. Mayes (admitted pro hac vice) SUTHERLAND ASBILL & BRENNAN LLP 999 Peachtree Street NE Atlanta, Georgia (t) (f) tom.byrne@sutherland.com jamala.mcfadden@sutherland.com joshua.mayes@sutherland.com Attorneys for Defendants Ronald S. Staffieri, William Haslam, W. Howard Lester, Hubert W. Mullins, Margaret A. Gilliam, Leonard M. Snyder, Jodi L. Taylor, Clark J. Hinkley, James D. Abrams, Robert L. Anderson and Bob Cole 17

22 Case: Doc: 113 Filed: 01/19/10 Page: 22 of 22 CERTIFICATE OF SERVICE I hereby certify that I have this day electronically filed the foregoing Memorandum in Support of Motion to Dismiss Claims Against Director and Officer Defendants Staffieri, Haslam, Lester, Mullins, Gilliam, Snyder, Taylor, Hinkley, Abrams, Anderson and Cole with the Clerk of Court using the CM/ECF system, which will automatically send notification of such filing to the following attorneys of record, each of whom is a registered participant in the Court s electronic notice and filing system: James A. Jennings III jaj@jchlaw.com Attorney for Plaintiff Kristin A. McLaurin kristin.mclaurin@bgllp.com Attorney for Plaintiff Cherish K. Ralls cherish.ralls@crowedunlevy.com Attorney for Debtor This 19th day of January, /s/ Thomas M. Byrne Thomas M. Byrne