Miller v. McDonald (In Re World Health Alternatives, Inc.)

MEMORANDUM OPINION

This opinion is with respect to defendant Brian T. Licastro’s (“Licastro”) motion (Doc. # 98) to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) and Federal Rule of Bankruptcy Procedure 7012. For the reasons stated below the Court will deny the motion with respect to Counts I, II, III, IV, V, VII, and XIII, and grant the motion with respect to Counts IX, X, XI, and XII. 1

BACKGROUND

The facts contained in this section are as set forth in the First Amended Complaint (“Complaint”). (Doc. # 113.) The Complaint is a rather comprehensive document, consisting of 257 paragraphs covering 46 pages.

The Parties

The Debtors in this chapter case are World Health Alternatives, Inc. and affiliated entities (collectively, “World Health” or “Company”). World Health was a Florida corporation that maintained its principal place of business in Pittsburgh, Pennsylvania. World Health provided healthcare staffing services to hospitals and other healthcare facilities nationwide. (Doe. # 113, ¶ 6.)

World Health filed its chapter 11 petition on February 20, 2006. The case was converted to a chapter 7 case on October 31, 2006 and George L. Miller (“Trustee”) was appointed the chapter 7 trustee.

The Defendants are Richard E. McDonald (“McDonald”) who served as pres *581 ident, chairman of the board, principal financial officer and principal accounting officer of World Health from its inception as a public company on February 20, 2003 until June 23, 2004 at which time he became chief executive officer; Marc D. Roup (“Roup”) who was World Health’s chief executive officer until his resignation on June 23, 2004; John C. Sercu (“Ser-cu”) who served as World Health’s chief operating officer from May 2004 until on or about August 16, 2005 when he became chief executive officer after McDonald’s resignation; Bruce Hayden (“Hayden”) who served as World Health’ chief financial officer from July 18, 2005 through August 24, 2005; Frederick R. Jackson, Sr. (“Jackson”) who served as a member of World Health’s board of directors throughout the relevant period; John W. Higbee (“Higbee”) who served as a member of World Health’s board throughout the relevant period; Brian T. Licastro (“Licastro”) who served as World Health’s vice president of operations and in-house general counsel, on a de facto and/or formal basis; 2 Mark B. Rinder (“Rinder”) who served as a financial consulting advisor to World Health; and Deana J. Seruga (“Seruga”) who served as World Health’s corporate comptroller during all relevant times.

World Health’s Board of Directors consisted of three members: McDonald, Jackson, and Higbee. Jackson and Higbee were appointed by McDonald in 2004. The board did not hold annual meetings in 2003 or 2004, and thus, public shareholders did not elect any directors. (Doc. # 113, ¶ 64.) Allegedly, McDonald had general authority to execute Jackson’s signature on board-related documents. Therefore, he had the power to execute documents on behalf of the majority of the board. (Doc. # 113, ¶¶ 65-66.)

Company’s Growth and Financing— 2003-2004

On February 20, 2003, World Health became a public company. (Doc. # 113, ¶ 9.) It underwent a “reverse merger” to acquire 100% of the common stock of Better Solutions, Inc. (“Better Solutions”), a healthcare staffing company, from its founders and co-owners, McDonald and Roup. (Doc. # 113, ¶ 29.) World Health provided McDonald and Roup with 33,000,-000 shares of newly-issued World Health common stock, making them the controlling shareholders of World Health, owning approximately 82% of its outstanding shares. (Doc. # 113, ¶ 30.)

As of March 31, 2003, World Health had assets totaling $245,727 and negative shareholders equity of $91,762. Sales for the three months ended March 31, 2003 totaled $942,887, and World Health reported a net loss of $395,016, or $0.01 per share. (Doc. # 113, ¶ 32.)

In December 2003, World Health redeemed 8,000,000 shares of common stock each from McDonald and Roup. (Doc. # 113, ¶ 33.) In its Form 8-K filing with the Securities and Exchange Commission (the “SEC”) on December 8, 2003, World Health stated that the purpose of the redemption was to reduce the long term *582 delutive effect on World Health’s future earnings per share. (Doc. # 113, ¶ 35.)

Through the redemption, World Health obtained sufficient authorized shares to execute a strategy of future growth. The center piece of the strategy was a series of private placement transactions (“PPT”). From December 2003 through December 2004 World Health executed numerous PPTs, through which it issued common and preferred stock, warrants for the purchase of common stock, and convertible debentures. (Doc. # 113, ¶¶ 35-36.) It purportedly raised approximately $38 million through these financial transactions. (Doc. #113, ¶ 38.) Additionally, World Health allegedly received approximately $6.9 million from the exercise of warrants issued in connection with these PIPE transactions. (Doc. # 113, ¶ 39.)

Throughout 2003 and 2004, and one instance in 2005, World Health used the funds raised to make the following acquisitions:

(1) Superior Staffing Solutions, Inc., December 22, 2003.

(2) Pulse Healthcare Staffing, Inc., April 30, 2004.

(3) Care For Them Inc., May 7, 2004.

(4) Curley and Associates, LLC, June 1, 2004.

(5) Travel Nurse Solutions, Inc. (“TNS”), October 14, 2004.

(6) J & C Nationwide Inc., November 15, 2004.

(7) Parker Services, Inc., December 31, 2004.

(8) Universal Staffing Group, Inc., July 27, 2005.

Debt Obligations

By the end of 2004, World Health used up all of the funding it raised through the PPTs. To continue its ongoing operation and acquisitions, World Health procured secured debts from CapitalSource Finance, LLC. (“CSF”) to refinance outstanding indebtedness and provide additional liquidity. (Doc. # 113, ¶¶ 68-70.) On February 14, 2005, World Health and CSF entered into a series of agreements (“CSF Agreement”). (Doc. #113, ¶ 70.) The CSF Agreement included a term loan (“CSF Term Loan”) in the amount of $7,500,000 and a revolving credit facility that provided a maximum loan amount of $37,000,000. (Doc. # 113, ¶ 72.) World Health and each of its subsidiaries were co-borrowers under the CSF Agreement. The obligations under the CSF Agreement were secured by substantially all of World Health and its subsidiaries’ assets. (Doc. # 113, ¶ 73.)

In addition to the CSF Agreement, World Health had incurred other obligations. First, pursuant to the TNS acquisition, World Health pledged substantially all of its assets to secure approximately $2.5 million in secured obligations due and owing to the sellers (“Seller Parties”). The Seller Parties agreed to subordinate all of their rights to payments and liens to those of CSF. (Doc. # 113, ¶¶ 76-77.)

World Health received notice from the Internal Revenue Service (the “IRS”) that on or about February 7, 2006 the IRS filed liens in favor of the United States on all properties and rights to property belonging to a California subsidiary. (Doc. # 113, ¶ 78.) The IRS alleged that as of February 3, 2006 that subsidiary was indebted to the United States for approximate $1,256,241.27. (Doc. #113, ¶79.) Furthermore, the IRS notified World Health that on or about February 7, 2006 it filed liens in favor of the United States on all properties and rights to property belonging to another subsidiary. The IRS alleged that as of February 2, 2006 that subsidiary was indebted to the United States in the approximate amount of *583 $2,274,316.23. (Doc. #113, ¶¶ 80-81.) The IRS tax liability amounted to in excess of $4,000,000.

Corporate Waste

The Trustee alleges that since 2003 Defendants engaged in and/or allowed the routine waste of World Health’s limited resources on expensive and unnecessary luxuries for their personal benefits. (Doc. # 113, ¶ 82.) One instance was World Health leasing 25 hour of flight time on a private jet from Marquis Jet for a payment of $112,939.70. (Doc. # 113, ¶ 83.) In 2004, World Health spent another $114,181.11 on six different chartered flights. (See Doc. # 113, ¶ 88.)

According to World Health’s SEC Form 10-KSB (as amended) for 2003 (“2003 Annual Report”), at the time of the chartering, World Health had a gross revenue of $3,093,337 and a negative net income of $33,094 (before adjustment for taxes). At the close of fiscal year 2003, World Health had $177,699 in cash and $1,516,265 in total current assets. Thus, the Trustee alleges that Defendants caused and/or allowed World Health to squander nearly 7.5% of the total current assets on leasing 25 hours of flight time on a private jet. (Doc. # 113, ¶¶ 83-86.) Another example of the alleged waste was World Health paying monthly leases for Roup’s and McDonald’s luxury cars. (Doc. # 113, ¶ 87.) The monthly payments were $2,207.38 and $2,045.72, respectively. (Doc. #113, ¶ 87.)

During this time World Health was executing its PPT to raise approximately $40 million to fund its operations and growth. According to its SEC Form 10-KSB (as amended) for 2004 (“2004 Annual Report”) World Health had a net loss of $13,427,523 for the fiscal year. (Doc. # 113, ¶ 89.)

Fraudulent Activities

The Trustee pleads that World Health’s management never implemented a system that allowed them to report any accounting and reporting abnormalities in World Health’s financial reports, books, or records. (Doc. # 113, ¶¶ 98-100.) The following fraudulent activities allegedly occurred as a result.

(a) 2002 IRS Reporting

As early as 2002 McDonald commenced a scheme of manipulating the IRS. McDonald would “cut and past” documents to demonstrate that payments were made to the IRS to satisfy outstanding taxes. Then, he would fax these cut-and-pasted documents to the IRS as evidence of alleged payment of taxes. In actuality, these payments were never made and taxes owed by one of the subsidiaries remained due and outstanding. (Doc. # 113, ¶¶ 98-100.)

(b) Related Party Loan Account

McDonald created a related party loan account to offset discrepancies that would occur when funds were not appropriately paid. (Doc. # 113, ¶¶ 106-07.) For example, he would reward himself with excessive bonuses that World Health could not satisfy, instead of taking the cash, McDonald would increase the value of the related party loan. (Doc. # 113, ¶ 107.) In addition, when payroll tax checks were issued by World Health, McDonald would not remit the checks to the IRS and enter an offsetting line-item into the related party loan account to hide the discrepancy. (Doc. # 113, ¶ 108.)

On August 16, 2004, World Health issued a press release announcing its second quarter of 2004 results. In it World Health listed a $1,518,571 related party loan liability. (Doc. # 113, ¶ 109.) In its August 23, 2004 Form 10-QSB filing with the SEC, again it listed the related party loan as a $1,518,571 liability. (Doc. # 113, ¶ 111.) By the third quarter of 2004 the *584 related party loan listed in Form 10-QSB had increased to $3,644,307. (Doc. # 113, ¶ 112.)

On March 29, 2005, World Health announced the financial results for year-end 2004. The press release listed a lower amount for the related party loan, $3,010,420, in World Health’s current liabilities. (Doc. #113, ¶ 113.) The 2004 Annual Report confirmed the lower amount of $3,010,420. (Doc. # 113, ¶ 114.) The apparent reduction was the result of World Health beginning to “repay” the purported loan. (Doc. #113, ¶ 116.) By the first quarter 2005 the related party loan liability had decreased to $1,089,949. (Doc. # 113, ¶ 118.)

(c) Misrepresentations in Financial Statements

McDonald misrepresented his educational background in several SEC filings. For example, in the 2003 Annual Report he described his educational background as follows:

Mr. McDonald received the following degrees in Business Administration:(a) In April 1996, a Bachelor of Science Degree from the University of Pittsburgh; (b) in May 2000, a Master’s Degree from Bridgewater University located in London, England; and (c) in May 2001, a Doctoral Degree from Bridgewater University.

(Doc. # 113, ¶ 121.) However, this representation was false. On July 15, 2004, McDonald signed and filed a Form 8-K with the SEC stating:

[I]t was confirmed that Mr. McDonald did attend the University of Pittsburgh but the records available at the time could not confirm that he graduated with a B.S. degree.

(Doc. # 113, ¶ 123.) The Form 8-K stated that all educational credentials should be deemed removed from McDonald’s biography. McDonald had not graduated from the University of Pittsburgh, and Bridge-water University is an unaccredited school that offers degrees over the internet for very little work. (Doc. # 113, ¶ 123.)

From the third quarter of 2003 to June of 2004, McDonald signed and filed certifications as chief executive officer with each Form 10-QSB and 10-KSB filed with the SEC pursuant to § 302 and § 906 of the Sarbanes-Oxley Act of 2002. (Doc. # 113, ¶ 124.) Roup also signed and filed certifications as chief financial officer with each Form 10-QSB and 10-KSB filed with the SEC from the third quarter of 2003 until his resignation in June of 2004. (Doc. # 113, ¶ 124.) The certifications stated that they each had reviewed the reports, and based on their knowledge the reports do not contain any untrue, omission, or misleading statement of material fact, and based on their knowledge the reports fairly presented in all material respects the financial condition of World Health. (Doc. # 113, ¶ 124.) The Trustee alleges that these certifications were false and misleading. (Doc. # 113, ¶ 126.)

Defendants released false information regarding the financial viability of World Health to the public, therefore, to World Health’s creditors. On March 29, 2005, Defendants issued a press release announcing World Health’s results for the fourth quarter and year-end 2004. For the fourth quarter, World Health reported sales of $22,553,603, an increase of 2244% over sales reported for fourth quarter of 2003. World Health attributed the growth to acquisitions and organic growth. Defendants reported that World Health experienced gross profit for the fourth quarter of $3,928,592, and increase of 802% compared to the fourth quarter of 2003. For the year, World Health reported sales of $40,339,739 compared to sales of $3,693,337 for 2003. Gross profit for the year was *585 $10,242,997, compared to $1,599,794 in 2003. Total assets as of December 31, 2004 were reported as $100,697,761 compared to $5,301,358 in 2003. Shareholder’s equity increased to $36,018,763 compared to $2,184,551 in 2003. In the press release, McDonald stated:

The Company achieved critical mass in the fourth quarter, substantially through strategic acquisitions and strong organic growth. We now offer all of the product lines that are integral to staffing the healthcare industry, making us a ‘one-stop’ staffing solution for an entire healthcare system. We have established a national reach and expect the benefits to include additional client contracts, a deeper talent pool of consultants and stronger financial performance. We have also reduced our overall debt and improved our financial and operating position.

The first quarter of 2005 has also yielded excellent results so far and put us on schedule to meet our goals for the year. We expect our first quarter earnings to be $.08 to $.10 per share on revenues of $39 million to $42 million. Overall, we believe we are well positioned to meet the increasing demand for healthcare staffing services that the Company has been experiencing and we reiterate our guidance for 2005 of $200 million in revenues and $.50 to $.55 in net earnings.

The Company expects to report a corresponding non-cash, beneficial increase in earnings in the first quarter of 2005 as a result of having incurred in the fourth quarter of 2004 certain non-cash expenses associated with preferred stock transactions recognized in the fourth quarter.

By incurring certain non-cash expenses in 2004, we have, in our estimation, positioned the Company for a profitable 2005. The financing we completed with CapitalSource Finance LLC in February 2005 to refinance existing indebtedness should provide us with the working capital and flexibility needed for us to grow our revenues to over half a billion dollars within the next two years through organic growth and acquisitions.

Defendant Sercu added:

We are on track and continue to execute our plan to become the premier healthcare staffing Company [sic] in the market. We have exceeded our organic growth expectations and continue to experience the benefits of our integration efforts. Our key performance metrics are increasing and all divisions are seeing the results of efforts to improve profitability. (Doc. # 113, ¶ 128.) The Trustee alleges that McDonald and Sercu’s statements were false and misleading because World Health lacked adequate internal controls and was, therefore, unable to ascertain its true financial condition and could not properly ascertain its debt or its tax liabilities. (Doc. # 113, ¶ 129.)

On April 15, 2005, World Health filed its 2004 Annual Report with the SEC. It reiterated the results stated in the March 29, 2005 press release. The 2004 Annual Report also contained McDonald’s certifications pursuant to §§ 302 and 906 of the Sarbanes-Oxley Act of 2002. The Trustee claims that these reports were false and misleading because World Health lacked adequate internal controls and was, therefore, unable to ascertain its true financial condition. (Doc. # 113, ¶¶ 130-31.)

On May 13, 2005, World Health issued a press release announcing it was changing the financial results released for the fourth quarter and fiscal year 2004 after deter *586 mining that “large, non-cash expenses in connection with a preferred stock transaction that occurred in December 2004” were improperly recorded. The press release quoted McDonald as stating:

We recorded the non-cash expenses in the fourth quarter of 2004 because we wanted to utilize a conservative reporting approach until we could consult with the Office of the Chief Accountant [of the SEC] and confirm that our position that the preferred stock conversion and redemption features did not create a need for any derivative accounting was correct. Additionally, the Company determined that the warrants associated with the transaction were a liability and therefore the $3,003,591 fair value of the warrants was recorded as a liability. The Company believed it was important to pursue this matter to increase the transparency of its financial reporting and better enable the market to evaluate the Company’s financial results in 2004 and in the future. This positive restatement completes the Company’s review of this matter as referenced in our 10-KSB for 2004.

The press release further stated that World Health was filing a Form 10-KSB/A later that day setting forth revised financial statements that would exclude the large, non-cash expenses relating to the preferred stock transaction. According the press release, “[a]s a result, the Company’s earnings for the quarter and fiscal year ended December 31, 2004 increased to 14 cents.” A comparison of the Form 10-KSB/A filed on or about May 18, 2005 with the March 29, 2005 press release announcing showed the opposite. The restatement merely reduced World Health’s reported loss by 14 cents per share, from $0.81 per share to $0.67 per share. (Doc. # 113, ¶ 133.)

On May 16, 2005, World Health filed Form 10-QSB with the SEC for the period ended March 31, 2005. The report noted that:

Effective December 15, 2004, the Company closed on a financing transaction with a group of private investors (“Investors”) of up to $11,825,000. The financing consisted of two components: (a) 12,823 shares of Series A Convertible Preferred Stock with a principal amount of $12,823,000 at a dividend rate of 8% per annum and (b) Warrants registered in the name of each Investor to purchase up to a number of shares of common stock of the Company equal to 25% of such Investor’s Subscription Amount divided by the subscription amount of $3.00 per share. The Investors have the right to purchase an aggregate of 1,068,-583 shires [sic] of the Company’s restricted common stock. The Warrants have an exercise price equal to the closing price of the Company’s common stock on the day prior to the closing ($3.86). The Warrant, which expires five years from the date of issuance, results in proceeds of $4,124,730 to the Company upon its exercise. The dividends are cumulative until December 31, 2006, and will be paid from an escrow established at closing if the Investors elect to be paid in cash. Under certain circumstances the Company may elect to pay the dividend in shares of the Company’s common stock.

The Preferred Stock is convertible into shares of Common Stock of the Company at a conversion price of $3.00 per share, which would result in the issuance of 4,274,333 shares of the Company’s common stock if all shares were converted.

(Doc. #113, ¶ 134.) The Trustee believes that these statements were false and misleading because Defendants were unable *587 to correctly account for World Health’s convertible debt and warrants associated with its preferred stock, and was in breach of its existing financing agreements. (Doc. # 113, ¶¶ 135.)

The Form 10-QSB for the period ended March 31, 2005 contained McDonald’s certifications pursuant to §§ 302 and 906 of the Sarbanes-Oxley Act of 2002. The Trustee alleges that the certifications were false and misleading because Defendants failed to implement adequate internal controls at World Health, thus, unable to ascertain its true financial condition. (Doc. # 113, ¶¶ 135-36.)

World Health’s false and misleading financial reporting became public in the second half of 2005. On July 18, 2005, World Health announced Hayden as the Chief Financial Officer. (Doc. # 113, ¶ 137.) On August 16, 2005, World Health first indicated that it had discovered fraudulently reported financial results. On that date, World Health unexpectedly and abruptly announced that McDonald had resigned as president and chief executive officer “for health and family reasons.” World Health appointed Sercu as acting chief executive officer. It also announced that it had notified the SEC that it would not file its 10-Q for the second quarter of 2005 on time. (Doc. # 113, ¶ 138.)

The Trustee alleges that the above described conduct reflects materially false and misleading information because they failed to disclose the following material adverse facts that Defendants knew or should have known:

(a) Defendants engaged in improper accounting practices. Defendants admitted that World Health’s prior financial reports were materially false and misleading when it announced that it was going to restate the financial results for 2004 and 2005.

(b) There were discrepancies in the financial statement on the recognition of a convertible debenture and warrant agreement associated with World Health’s preferred stock.

(c) There was underpayment of tax liabilities in excess of $4,000,000.

(d) Irregular reports to World Health’s lenders resulted in excess funding under World Health lending arrangements of approximately $6.5 million.

(e) World Health was in breach of existing financing documents.

Defendants were increasing or knew of the increase in the revenue reported in publicly-filed financial statements by including funds received from the exercise of warrants. The inclusion of such non-revenue amounts significantly increased the reported revenue and artificially inflated World Health’s reported financial performance. (Doc. # 113, ¶¶ 143-44.)

(d) Double Borrowing on Receivable

The Trustee alleges that World Health executed a scheme to “borrow” twice on certain account receivable. World Health maintained numerous Master Factoring Agreements with Advance Payroll Funding (“Factoring Agreements”). The Factoring Agreements allowed World Health to receive instant cash in an amount equal to a percentage of the “sold” accounts receivable, subject to adjustment. (Doc. # 113, ¶ 146.)

The problem with the Factoring Agreements was that the “factored” accounts receivable were included in the CSF Agreements’ borrowing base calculation. Thus, World Health was able to borrow a percentage of these accounts receivable from CSF, even though the receivables were already “sold” and World Health no longer retained the right to collect on the receivables. (Doc. # 113, ¶ 148.) Also, World Health was not using payments re *588 ceived to satisfy its obligations under the CSF Agreements. (Doc. # 113, ¶ 147.)

Furthermore, when World Health prepared the borrowing base calculation for the CSF Agreements, it provided the reports to McDonald, who would then forward the information to CSF. The Trustee claims that McDonald altered the value of accounts receivable used in the borrowing base calculation before forwarding the documents to CSF. (Doc. # 113, ¶¶ 149-50.) The Trustee also claims that members of World Health’s management, including Roup, Sercu, Higbee, Jackson, Licastro, and Seruga became aware of or should have been aware of the malfeasance and misdealing and discrepancies in World Health’s revenues. They, however, did not take any action consistent with their fiduciary duties to remedy or ameliorate the discrepancies until after McDonald’s resignation. (Doc. # 113, ¶ 151.) The Trustee points to World Health’s statement that its reports to its lenders were “irregular” as an admission that management intentionally falsified those reports. (Doc. # 113, ¶ 152.)

Indemnification Agreement

On August 29, 2005, World Health filed a Form 8-K with the SEC announcing that it had entered into an Indemnification Agreement with each of World Health’s executive officers and directors who were named Defendants in several securities class actions. 3 (Doc. # 113, ¶ 154.) The Indemnification Agreement purportedly included Hayden, Sercu, Licastro, Higbee, Jackson, and Rinder (collectively “Indemnified Defendants”). (Doc. # 113, ¶¶ 154-55.) It covered against costs associated with shareholder fraud lawsuits, including attorney’s fees and damages that the Indemnified Defendants may otherwise have to pay. (Doc. # 113, ¶ 155.)

The Trustee alleges that the provisions of the Indemnification Agreement constituted a fraudulent conveyance to the Indemnified Defendants. (Doc. # 113, ¶ 159.) He contends that no consideration was provided by the Indemnified Defendants in exchange for the Indemnification Agreement. (Doc. #113, ¶ 158.) Although the announcement was made on August 29, 2005 the Indemnification Agreement was dated August 21, 2005, one day prior to the filing of the first securities class action. The announcement also came approximately 60 days before the revelation that World Health was undertaking an investigation of its accounting systems because of inadequate controls, examining past financial statements for possible restatement, and withholding its financial statements for the third quarter of 2005 because of problems with the accounting systems. (Doc. # 113, ¶ 156.)

World Health’s Collapse

On August 24, 2005, World Health filed a Form 8-K with the SEC announcing that the management discovered approximately $22 million in debt of which it was not previously aware. On September 9, 2005, World Health announced that it had retained Alvarez & Marsal LLC, a global professional services firm specializing in turnaround management, to work with World Health’s board of directors and management to evaluate the business plan and strategic capital structure of World Health. (Doc. #113, ¶ 162.) On September 13, 2005, World Health filed a Form 8-K announcing it was aware of the SEC’s formal investigation involving it. (Doc. # 113, ¶ 163.) On September 23, 2005, World Health filed a Form 8-K announc *589 ing that Bristol Investment Fund, Ltd. notified World Health that it was in default of the terms of the Convertible Debentures and related warrants to purchase common stock issued in May of 2005 due to breaches by World Health of the terms of the Debenture and Purchase Agreement. Bristol notified it of a demand for payment of $6,288,373 plus interest and costs. (Doc. # 113, ¶ 164.) A securities law class action complaint was filed in the United States District Court for the Western District of Pennsylvania. World Health filed its chapter 11 petition on February 20, 2006. The case was converted to a chapter 7 case on October 31, 2006 and the Trustee was appointed.

The Complaint

The Complaint alleges 13 counts: (I) breach of fiduciary duty against all Defendants; (II) aiding and abetting breach of fiduciary duty against all Defendants; (III) corporate waste against all Defendants; (IV) aiding and abetting waste of corporate assets against all Defendants; (V) negligent misrepresentation against all Defendants; (VI) fraud against McDonald; (VII) aiding and abetting fraud against all Defendants other than McDonald; (VIII) turnover of property of estate against McDonald; (IX) fraudulent transfer under 11 U.S.C. §§ 548 and 550 against McDonald, Sercu, Hayden, Jackson, Higbee, Licastro, and Rinder; (X) fraudulent transfer under Pennsylvania Uniform Fraudulent Transfer Act, § 5104 against McDonald, Sercu, Hayden, Jackson, Higbee, Licastro, and Rinder; (XI) fraudulent transfer under Pennsylvania Uniform Fraudulent Transfer Act, § 5105 against McDonald, Sercu, Hayden, Jackson, Higbee, Licastro, and Rinder; (XII) equitable subordination; and (XIII) professional negligence against Licastro. (Doc. # 113, ¶¶ 173-257.)

STANDARD OF REVIEW

Licastro moves to dismiss the Complaint pursuant to Rule 12(b)(6) of the Federal Rule of Civil Procedure, which is made applicable to this case by Rule 7012 of the Federal Rules of Bankruptcy Procedure. In considering a motion to dismiss under Rule 12(b)(6), courts must accept as true all allegations in the complaint and draw all reasonable inferences in the light most favorable to the plaintiff. Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir.1997); Rocks v. Philadelphia, 868 F.2d 644, 645 (3d Cir.1989). A motion to dismiss should be granted if “it appears to a certainty that no relief could be granted under any set of facts which could be proved.” D.P. Enters. Inc. v. Bucks County Cmty. Coll., 725 F.2d 943, 944 (3d Cir.1984).

DISCUSSION

(a) Breach of Fiduciary Duty Claim (Count I)

Both parties agree, Florida law should govern the breach of fiduciary duty claim (Count I). (See Doc. # 99, p. 9; Doc. # 104, p. 11.) Under Delaware and Florida laws, issues involving corporate internal affairs are governed by the law of the state of incorporation. Select Portfolio Serv. Inc. v. Evaluation Solutions, LLC, No. 3:06-CV-582-J33 MMH, 2006 WL 2691784, at *9 (M.D.Fla. Sept.20, 2006); In re Circle Y Yoakum, Texas, 354 B.R. 349, 359 (Bankr.D.Del.2006) (citing Vantage-Point Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108, 1115 (Del.2005)). A breach of fiduciary duty claim involves the internal affair of a corporation. Coleman v. Taub, 638 F.2d 628, 629, n. 1 (3d Cir. 1981). Thus, because World Health was incorporated in Florida, Florida law governs this claim.

*590 Licastro argues that the fiduciary claim should be dismissed because the Trustee did not plead the claim with particularity. (See Doc. # 99, pp. 9-11.) He cites Florida law requiring a plaintiff of a breach of fiduciary duty claim to demonstrate with particularity the facts which purportedly created the breached duty. See Parker v. Gordon, 442 So.2d 273, 275 (Fla. 4th DCA, 1983). In addition, he asserts that federal courts have heightened the pleading requirement of Federal Rules of Civil Procedure Rule 9(b) for breach of fiduciary duty claims which rely on allegations of fraudulent conduct. See Am. Mobile Commc’ns, Inc. v. Nationwide Cellular Serv., Inc., No. 91 Civ. 3587, 1992 WL 232058, *6 (S.D.N.Y. Sept. 3, 1992); Frota v. Prudential-Bache Sec. Inc., 639 F.Supp. 1186, 1193 (S.D.N.Y.1986). Licastro contends that the Complaint did not contain any specific allegation of him breaching his fiduciary duty to the shareholders or the Company. Rather, the Trustee grouped Licastro with the other Defendants who are officers of World Health and imputed his breach based on the lack of conduct or misconduct of the group.

While it is true that there is a heightened pleading requirement for a breach of fiduciary duty claim based on fraudulent conduct of a defendant, that is not the case here. The basis for the Trustee’s claim is that Licastro breached his duty of care by failing to implement an adequate monitoring system and/or the failure to utilize such system to safeguard against corporate wrongdoing. See In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 967-71 (Del.Ch.1996); Stone v. Ritter, 911 A.2d 362, 370 (Del.2006). Even though Florida law governs this claim, Delaware law is still relevant because “[t]he Florida courts have relied upon Delaware corporate law to establish their own corporate doctrines.” Connolly v. Agostino’s Ristorante, Inc., 775 So.2d 387, 388 n. 1 (Fla.Dist.Ct.App.2000) (citing Int’l Ins. Co. v. Johns, 874 F.2d 1447, 1459 n. 22 (11th Cir.1989)).

The Trustee relies on ATR-Kim Eng Fin. Corp. v. Araneta, No. 489-N, 2006 WL 3783520 (Del.Ch., Dee.21, 2006) for his position. In Araneta, the court found two defendants who were directors and officers of the company liable for not stopping the company’s majority shareholders and fellow director from transferring the company’s assets to members of his family, a violation of his fiduciary duties. See id. at *1,19, 23-25. The court cited the Delaware Supreme Court’s Stone decision for directors’ liability:

Caremark articulates the necessary conditions predicated for director oversight liability: (a) the directors utterly failed to implement any reporting or information system or controls; or (b) haying-implemented such a system or control, consciously failed monitor or oversee its operation thus disabling themselves from being informed of risks or problems requiring their attention.

Id. at *24 (citing Stone, 911 A.2d at 370). The court reasoned that:

One of the most important duties of a corporate director is to monitor the potential that others within the organization will violate their duties. Thus, a “director’s obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board considers to be adequate, exists.” Obviously, such a reporting system will not remove the possibility of illegal or improper acts, but it is the directors’ charge to “exercise a good faith judgement that the corporation’s information and reporting system is in concept and design adequate to assure the board that appropriate information will come to its attention in a *591 timely manner as a matter of ordinary questions, so that it may satisfy its responsibility.”

Id. at *23-24 (quoting Caremark, 698 A.2d at 970).

The Trustee alleges that as the vice president of operation and in-house general counsel to World Health, Licastro was responsible for failing to implement any internal monitoring system and/or failing to utilize such system as is required by Caremark and Araneta. The material misrepresentations contained in World Health’s SEC filings are examples of such failure. Since the SEC adopted a final rule pursuant to § 307 of the Sarbanes-Oxley Act, effective August 5, 2003, a general counsel has an affirmative duty to inspect the truthfulness of the SEC filings. 17 C.F.R. Part 205 (Jan. 29, 2007). Section 307 addresses the professional responsibilities of attorneys. It directs the SEC to issue rules that “set[] forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers.” Sarbanes-Oxley Act § 307, 15 U.S.C. § 7245 (2005). The standards must contain a rule requiring “an attorney to report evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the issuer up-the-ladder within the company.” Id. Therefore, the Trustee appropriately asserts that Licastro as the in-house general counsel and the only lawyer in top management of World Health during the relevant period, had a duty to know or should have known of these corporate wrong doings and reported such breaches of fiduciary duties by the management.

In his reply brief, Licastro takes a different tact and argues that Delaware law does not support the breach of fiduciary duty claims against officers because the Caremark line of cases all addressed the fiduciary duties of directors, not officers. Licastro asserts: “The Trustee has sought to drastically broaden the scope of Care-mark by expanding liability for allegedly failure of oversight to not just corporate directors, but also to corporate officers and employees. Delaware law does not recognize this principle.” (Doc. # 126, pp. 1-2.) That statement is both correct and wrong. It is correct that Delaware law does not impose fiduciary duty on “employees” generally, but it is incorrect that it does not impose failure of oversight (fiduciary duty) as to officers. Of course, Licastro was not just an “employee”; he was an officer in two respects, vice president of operations and general counsel. See Sarah Helene Duggin, AALS Annual Meeting Article: the Pivotal Role of the General Counsel In Promoting Corporate Integrity and Professional Responsibility, 51 St. Louis U.L.J. 989, 1014-15 (2007)(“Many perhaps most, general counsel are corporate officers. Titles such as ‘vice president and general counsel’ or ‘vice president, legal affairs’ are common.... As vice presidents ..., in addition to their professional obligations, general counsels owe fiduciary allegiance to the corporation as officers.”); Lyman P.Q. Johnson & Mark A. Sides, Corporate Governance and the Sarbanes-Oxley Act: The Sarbanes-Oxley Act and Fiduciary Duties, 30 Wm. Mitchell L.Rev. 1149, 1205-06 (2004) (“Although often overlooked, corporate officers, including senior officers such as the ... General Counsel, Executive Vice Presidents, ... and others are ‘agents’ of the corporation. Agency is a fiduciary relationship. Even though senior officers of corporations typically have employment agreements, they still occupy a fiduciary status in relation to the corporate principal.”). Thus, in this respect I believe Licastro is wrong.

While it is true that all of the cases relied upon by the Trustee involved di *592 rectors’ conduct, not officers’, I believe the Caremark decision itself suggests that the same test would be applicable to officers. In the Caremark opinion the court, when addressing the meaning of the prior decision of Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125, 130-31 (Del.1963), stated: “The case can be more narrowly interpreted as standing for the proposition that, absent grounds to suspect deception, neither corporate boards nor senior officers can be charged with wrongdoing simply for assuming the integrity of employees and the honesty of their dealing on the company’s behalf.” Caremark, 188 A.3d at 969 (emphasis added). Also, in Miller v. U.S. Foodservice, Inc., 361 F.Supp.2d 470, 477 (D.Md.2005), the court, in reliance upon the Delaware decision of Aronson v. Lewis, 473 A.2d 805, 812 (Del.1984), stated: “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.” Miller, 361 F.Supp.2d at 477. In re Walt Disney Co. Derivative Litigation, No. Civ. A. 15452, 2004 WL 2050138, at *3 (DeLCh. Sept.10, 2004), clearly suggests that Licastro is wrong on this point:

To date, the fiduciary duties of officers have been assumed to be identical to those of directors. With respect to directors, those duties include the duty of care and the duty of loyalty. There has also been much discussion regarding a duty of good faith, which may or may not be subsumed under the duty of loyalty. Ovitz became an officer of Disney on October 1, 1995 when he became President of the corporation, and he became a director on January 22, 1996. Therefore, upon becoming an officer on October 1, 1995, Ovitz owed fiduciary duties to Disney and its shareholders.

Id. at *3 (internal citation omitted).

Other courts have also applied the Delaware law and recognized that officers owe fiduciary duties to the corporation. In Stanziale v. Nachtomi (In re Tower Air, Inc.), the Third Circuit Court of Appeals upheld the bankruptcy trustee’s claims against Tower Air’s directors and officers. Count two alleged that Tower Air’s officers breached their fiduciary duty to act in good faith, inter alia, by failing to tell the directors about maintenance problems, and by failing to address the maintenance problems. 416 F.3d 229, 234 (3d Cir.2005). The Third Circuit hel