Official Committee of Unsecured Creditors of Midway Games Inc. v. National Amusements Inc. (In Re Midway Games Inc.)

OPINION ON MOTIONS TO DISMISS AND FOR ABSTENTION

I. INTRODUCTION 1

The Official Committee of Unsecured Creditors (the “Committee”) brought this adversary action to recover alleged damages to the estate of Midway Games Inc. and affiliates (the “Debtor” or “Midway”) 2 resulting from several financial transactions. The defendants (“Defendants”) are: (i) Shari E. Redstone (“Ms. Redstone”), Robert J. Steele (“Steele”), Joseph A. Cali-fano, Robert N. Waxman, William C. Bar-tholomay, Peter C. Brown (collectively, the “Board Defendants”); and (ii) Debtor’s former controlling shareholders, National Amusements, Inc. (“NAI”), NAI Sumco, Inc., Sumner M. Redstone 2003 Trust, and Sumner M. Redstone (“Mr. Redstone”) (collectively the “Redstone Defendants”). The Committee claims in its 56 page, 22 claim, 285 paragraph Amended Complaint (the “Amended Complaint” or “Am. Compl.”) that both the Board Defendants and Redstone Defendants either approved, acquiesced or aided and abetted in two transactions: a $90 million loan from the Redstone Defendants (“the NAI Loan”), and a $40 million factoring agreement with NAI (the “Factoring Agreement”) (collectively, the “Challenged Transactions”) with the result that Midway acquired additional debt instead of taking steps to seek alternative transactions, restructure or seek bankruptcy relief. The Challenged Transactions have led the Committee to con- *309 elude that the Board Defendants put both their own interests and the interests of the Redstone Defendants above what was best for Debtor’s survival and thereby breached their fiduciary duties of care and loyalty. The Committee also challenges several transfers which it seeks to avoid.

The Court has before it the motions to dismiss (the “Motions”) of (1) defendants William C. Bartholomay, Peter C. Brown, Joseph A. Califano, and Robert N. Wax-man (collectively, the “Independent Directors”) (D.I. 42); (2) the Redstone Defendants (D.I. 47); and (3) Ms. Redstone and Steele (“Redstone/Steele”) (D.I. 39). The parties fully briefed the Motions and the Court heard oral argument on November 17, 2009. For the reasons that follow, the Motions are granted in part and denied in part. The Defendants have also moved for the Court to abstain from deciding certain of the claims. The Court is dismissing the claims subject to the abstention motion and, accordingly, will not decide Defendants’ request.

II. JURISDICTION

The Court’s jurisdiction rests upon 28 U.S.C. §§ 157(b)(1) and 1334(b) and (d). The adversary proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B) and (O).

III. FACTS

Midway was a video game manufacturer, publisher and developer headquartered in Illinois, and is a Delaware corporation. Am. Compl. ¶ 2. It was best known for developing and producing “Mortal Kom-bat.” Until the end of November 2008, the Redstone Defendants owned an 87.2 percent interest in the Debtor. Am. Compl. ¶ 28. The Independent Directors, Ms. Redstone (daughter of Mr. Redstone), and Steele, an officer of NAI (Vice President of Strategy and Corporate Development), constituted the Debtor’s Board. 3 Am. Compl. ¶¶ 18-26 and ¶ 29. The Independent Directors received compensation in the form of annual retainers and meeting fees. Am. Compl. ¶ 93.

The Independent Directors received $979,211 in compensation during the pre-petition years of 2008 and part of 2009, as follows (Am. Compl. ¶ 93):

Bartholomay: $202,000 in 2008 and $42,298 in 2009;

Brown: $210,413 in 2008;

Califano: $220,500 in 2008 and $45,875 in 2009; and

Waxman: $212,500 in 2008 and $45,625 in 2009.

Wells Fargo and the 2005 and 2006 Noteholders

Debtor failed to record a profit beginning in 2001, and subsequently offered convertible notes through private placements to hedge funds to raise capital. Am. Compl. ¶¶ 30, 31. By the end of September 2007, Debtor had $150 million in outstanding notes (collectively the “Notes” and “Noteholders”). Am. Compl. ¶ 31. In addition to the Notes, Debtor owed $20 million in loan obligations due under a secured loan agreement with Wells Fargo (“the Wells Fargo Facility”).

The NAI Loans

Debtor discovered in early 2008 that it needed additional funding to satisfy a liquidity covenant in the Wells Fargo Facility. Am. Compl. ¶ 32. Debtor hired Ernst & Young (“E & Y”) to audit Debtor’s businesses. Am. Compl. ¶ 33. During its audit, E & Y told Debtor that if Debtor *310 was unable to satisfy the liquidity covenant, it would include a “going concern qualifier” in its 2007 fiscal year audit opinion. Am. Compl. ¶ 38. Without a “clean” audit from E & Y, Debtor would not be able to secure additional financing and would be unable to operate. For these reasons, Debtor approached NAI, which agreed to provide enough financing not only to replace the Wells Fargo Facility, but also to satisfy E & Y’s liquidity concerns. Am. Compl. ¶¶ 33 & 34. On January 15, 2008, Debtor formed an independent committee (“Special Committee”) of its Board, comprised of the Independent Directors, to supervise negotiations with NAI. Am. Compl. ¶ 35. Negotiations resulted in the NAI Loan of $90 million. 4

NAI Factoring Agreement

Over the course of the next several months, Debtor’s businesses continued to suffer, now with the additional weight of the credit crisis and recession. In April 2008, Debtor’s management informed the Board that it had decided to delay the release date of one of the new video games, which would likely cause a cash deficiency of $28 million to $32 million in September and October 2008. Am. Compl. ¶¶ 53-57. In order to compensate for this deficit, Debtor asked NAI to enter into the factoring agreement whereby Debtor would allocate receivables in exchange for immediate financing. Am. Compl. ¶¶ 57-65. The Factoring Agreement took effect in September 2008, and provided Debtor with financing up to $40 million. Am. Compl. ¶ 167.

Sale of NAI’s Interest in Midway

On November 14, 2008, the Redstone Defendants approached Mark E. Thomas (“Thomas”), and proposed to sell him their controlling stock interest in Debtor and $70 million of the $90 million NAI Loan. On November 21, 2008, Thomas made an offer to pay $1 million in exchange for the Redstone Defendants’ 87 percent of Debt- or’s common stock. Am. Compl. ¶ 76. However, after learning that the Redstone Defendants would not indemnify him for claims of unjust enrichment and corporate waste, Thomas lowered his offer to $100,000.00. Am. Compl. ¶ 77. Without making a counter offer, the Redstone Defendants agreed to the purchase price and executed the agreement with Thomas on November 28, 2008. 5 Am. Compl. ¶ 77-79 (the “Thomas Transaction”). The Thomas Transaction caused Debtor to lose some or all of $700 million in net operating losses and tax attributes that Debtor could have used for federal income tax purposes or that might have attracted a purchaser or partner. At the same time, the Redstone Defendants availed themselves of tax losses from the Thomas Transaction. (Am. Compl. ¶¶ 82-85).

Debtor’s Chapter 11 Filing

Debtor filed voluntary Chapter 11 petitions in this Court on February 12, 2009. (D.I. 1). Debtor immediately filed a motion for use of cash collateral (the “Cash Collateral Motion”). (D.I. 14). The Court entered an Interim Order, but because the Thomas Transaction raised “red flags,” the Interim Order only allowed use of cash collateral for fees, expenses, or causes of action relating to the “validity, enforceabil *311 ity, perfection, or priority of the prepetition liens and security interests” of the Debtor’s prepetition obligations. (D.I. 41). The Court conducted an evidentiary hearing on the Cash Collateral Motion on February 17, 2009. (D.I. 41). After hearing and considering the evidence, the Court entered a Final Cash Collateral Order which also authorized the Committee to investigate or prosecute, on behalf of the Debtor’s estate, any claims arising out of or relating to Debtor’s loans from NAI, NAI’s sale of its ownership interest in Debtor to Thomas or any action or omission of any insider or affiliate of the Debt- or including, but not limited to, NAI, AHS or any other affiliate, insider, or shareholder of the Debtor. (D.I. 251).

In the course of the Chapter 11 case, Debtor sold substantially all of its assets to Warner Bros. Entertainment (the “Sale”). The Court approved the Sale for $35.7 million on July 1, 2009. Am. Compl. ¶ 103.

The Committee’s Standing

At the conclusion of the hearing on the Cash Collateral Motion, the Court granted the Committee’s oral motion for standing to assert claims in the face of the alarming Thomas Transaction. In so holding, the Court responded to what it perceived to be a potentially fraudulent sale to Debtor’s detriment, and apparent inaction by Debt- or. The Committee acted swiftly in response to the Court’s concern about the propriety of a transaction in which Thomas, a person of relatively modest means in the corporate world, purchased control of the Debtor and $70 million of debt for $100,000.

The Motions and the Committee’s response address the “colorable claim” inquiry which the Court would have had to resolve had the Independent Directors contested the Committee’s standing. Although the Court did not decide the requisite cost/benefit question which is a factor in determining standing, the potential recovery clearly and greatly outweighs the cost. Since the Court’s adjudication of the Motions has provided ample opportunity to determine the likelihood of success and cost/benefit elements to grant standing, the Court is satisfied that it properly granted standing to the Committee. Compare In re STN Enters., 779 F.2d 901 (2d Cir.1985), and MIG, Inc., Case No. 09-12118(KG) (Memorandum Order) (Del. Bankr.Dec. 18.2009).

Adversary Proceeding

On May 11, 2009, armed with standing, the Committee filed the Complaint which essentially challenged the Thomas Transaction and the NAI Loans. The Defendants filed motions to dismiss. Rather than file a response to these motions, the Committee filed the Amended Complaint. (D.I. 35). Defendants have now moved to dismiss the Amended Complaint.

IV. DISCUSSION

Defendants seek dismissal of all claims (“Claims” or “Claim,” as appropriate) for relief in the Amended Complaint pursuant to F.R.Civ.P. 12(b)(6) and F.R.Bankr.P. 7012, for failure to state a claim upon which relief can be granted. The question, therefore, is whether the Committee has sufficiently alleged facts which, if proven, entitle it to relief. If so, the Committee will have an opportunity to prove the Claims after discovery. The Claims state the Committee’s effort to recharacterize both the NAI Loan and Factoring Agreement, avoid preferential and fraudulent transfers pursuant to 11 U.S.C. §§ 544, 547, 548 and 550, recover for breaches of fiduciary duties and aiding and abetting those breaches, and to obtain equitable subordination. The following chart summarizes the Amended Complaint:

CLAIM NATURE OF CLAIM DEFENDANTS

*312 First Recharacterization NAI

Second Actual Fraudulent NAI Transfer § 548(a)(1)(A)

Third Constructive Fraudulent NAI Transfer § 548(a)(1)(B)

Fourth Actual Fraudulent NAI Transfer § 544

Fifth Constructive Fraudulent NAI Transfer § 544

Sixth Preference § 547 NAI

Seventh Recharacterization NAI

Eighth Actual Fraudulent NAI Transfer § 548(a)(1)(A)

Ninth Constructive Fraudulent NAI Transfer § 548(a)(1)(B)

Tenth Actual Fraudulent NAI Transfer § 544

Eleventh Constructive Fraudulent NAI Transfer § 544

Twelfth Preference § 547 NAI

Thirteenth Constructive Fraudulent Board Transfer § 548 Defendants

Fourteenth Constructive Fraudulent Board Transfer § 544 Defendants

Fifteenth Preference § 547 Board Defendants

Sixteenth Breach of Fiduciary Board Duty Defendants

Seventeenth Breach of Fiduciary Redstone Duty Defendants

Eighteenth Breach of Fiduciary Redstone Duty Defendants

Nineteenth Breach of Fiduciary Redstone Duty Defendants

Twentieth Aiding and Abetting Board Breach of Fiduciary Defendants Duty

Twenty Aiding and Abetting Redstone

First Breach of Fiduciary Defendants Duty

Twenty Equitable NAI

Second Subordination

Rule 12(b)(6) Standard of Review

A motion to dismiss pursuant to Rule 12(b)(6) serves to test the sufficiency of the factual allegations in a plaintiffs complaint. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir.1993). To survive a motion to dismiss under Rule 12(b)(6), a plaintiffs complaint must contain sufficient “factual allegations” which, if true, would establish “plausible grounds” for a claim: “the threshold requirement ... [is] that the ‘plain statement’ possess enough heft to ‘sho[w] that the pleader is entitled to relief.’ ” Twombly, 550 U.S. at 557, 127 S.Ct. 1955. However, “labels and conclusions” or “formulaic recitation of the elements of a cause of action” are not sufficient. Id. at 555, 127 S.Ct. 1955. Legal conclusions are not entitled to the presumption of truth. Ashcroft v. Iqbal, — U.S. —, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). In deciding a motion to dismiss under Rule 12(b)(6), a court tests the sufficiency of the factual allegations and evaluates whether a plaintiff is “entitled to offer evidence to support the claims,” and “not whether a plaintiff will ultimately prevail.” Oatway v. Am. Int’l Group, Inc., 325 F.3d 184, 187 (3d Cir.2003). This is true even if “actual proof of those facts is improbable” and “a recovery is very remote and unlikely.” Twombly, 550 U.S. at 556, 127 S.Ct. 1955.

As discussed above, the Court must accept as true all allegations in the Amended Complaint and draw reasonable inferences in a light most favorable to the plaintiff. Phillips v. County of Allegheny, 515 F.3d 224, 231 (3d Cir.2008); Morse v. Lower Merion School District, 132 F.3d 902, 905 (3d Cir.1997). However, “a court need not credit a plaintiffs ‘bald assertions’ or ‘legal conclusions’ when deciding a motion to dismiss.” Sands v. McCormick, 502 F.3d 263, 267-68 (3d Cir.2007) (quoting Morse, 132 F.3d at 906).

Applicable Law

The internal affairs doctrine provides that only the state of incorporation has the authority to regulate a corporation’s internal affairs. Edgar v. MITE Corp., 457 U.S. 624, 645, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982). “Few, if any, claims *313 are more central to a corporation’s internal affairs than those relating to alleged breaches of fiduciary duties by a corporation’s directors and officers.” In re Fedders North America, Inc., 405 B.R. 527, 539 (Bankr.D.Del.2009) (citing In re Topps Co. Shareholders Litigation, 924 A.2d 951 (Del.Ch.2007)). The claims addressing breaches of fiduciary duties and related claims involve the internal affairs of Debt- or, and the laws of the state of incorporation control. The Court will therefore apply Delaware law in its decision. The remaining claims are subject to the Bankruptcy Code.

A. FIDUCIARY DUTY CLAIMS

Breach of Fiduciary Duty Claims Against the Board Defendants Including the Independent Directors

(Claim Sixteenth)

Directors of a Delaware corporation have a triad of fiduciary duties to uphold: the duties of care, loyalty, and good faith. These fiduciary responsibilities do not operate intermittently and are “one of the most important methods of regulating the internal affairs of corporations, as these cases articulate the equitable boundaries that cabin directors’ exercise of their capacious statutory authority.” In re Topps Co. Shareholders Litig., 924 A.2d 951, 960 (Del.Ch.2007). The Committee alleges that the Board Defendants intentionally abandoned their fiduciary duties and instead served the best interests of the Redstone Defendants which resulted in breaches of the duties of care, loyalty and good faith. In supporting its claims, the Committee references instances of alleged misconduct by the Board Defendants surrounding the NAI Loan and Factoring Agreement, including the failure to: (1) seek independent third-party financing; (2) consider seeking bankruptcy protection or an out-of-court restructuring; (3) analyze Debtor’s solvency and evaluate Debtor’s capacity to support any additional debt; (4) investigate any potential errors in Debtor’s books and records; and (5) hire independent professionals to analyze the fairness of the NAI Loan and the Factoring Agreement, and alternatives.

The Board Defendants contend that the Amended Complaint lacks sufficient facts to overcome the presumptions of the business judgment rule. Additionally, the Board Defendants argue that they are exculpated from personal liability because Debtor’s certificate of incorporation contains a provision that, when read in conjunction with the Delaware General Corporation Law, 8 Del. C. § 102(b)(7), requires the Court to dismiss the duty of care claims. Section 102(b)(7) provides:

(b) In addition to the matters required to be set forth in the certificate of incorporation by subsection (a) of this section, the certificate of incorporation may also contain any or all of the following matters:

(7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director’s duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit....

The breach of fiduciary duty claims against the Board Defendants are derivative claims as the Committee stands in the *314 shoes of Midway. As such, the claims are limited to harm which Debtor, not the creditors directly, suffered from the Challenged Transactions. The issue, therefore, is how the Challenged Transactions, which provided Debtor with cash it desperately needed, harmed Debtor, not how they directly harmed creditors. More to the point, what facts does the Committee advance to demonstrate that the Board Defendants breached duties leading to injury to the Debtor?

The Amended Complaint contains the following specific factual allegations:

1. The Redstone Defendants controlled Midway at the time of the Challenged Transactions. Am. Compl. ¶ 28-29.

2. Midway was in severe financial distress when the Challenged Transactions occurred. Am Compl. ¶¶ 30-34.

3. The Board Defendants, including the Independent Directors, did nothing to determine Debtor’s solvency, or hire a restructuring professional.

4. During the relevant time period, the Redstone Defendants’ media empire was on the brink of financial collapse. The Redstone Defendants therefore commenced the liquidation of their controlling stake in Midway in order to claim over $700 million in tax losses. Am. Compl. ¶¶ 70-71.

5. The Thomas Transaction accomplished the Redstone Defendants’ strategy. They sold their controlling interest and $70 million debt for the distress price of $100,000, thereby placing in control of Midway a wholly unsuitable and unknown individual. Am. Compl. ¶¶ 74-75. The Redstone Defendants did not seek a qualified, strategic purchaser.

6. As the Redstone Defendants were benefitting from the substantial tax benefits arising from the Thomas Transaction, Debtor was losing tax attributes because of the change of control. The Board Defendant’s failure to consider the Debtor’s solvency status or to retain a restructuring professional meant that the Board Defendants never considered the use of its most potentially valuable assets, its tax attributes. Am. Compl. ¶ 82-86.

7. Ms. Redstone resigned as director of Midway shortly before the Thomas Transaction and Steele resigned shortly after. Am. Compl. ¶¶ 69 and 80.

8. The Debtor’s Board appointed the Independent Directors to investigate possible financing arrangements between Debtor and NAI. Am. Compl. ¶ 35. However, the Board Defendants did not authorize them to seek other financing, or consider and propose alternatives. Am. Compl. ¶ 36. In considering the means for the Redstone Defendants to provide funds to Midway, the Independent Directors analyzed the consequence to the Redstone Defendants. Am. Compl. ¶ 37. The transaction took the form of the NAI Loan rather than an equity infusion — better for the Redstone Defendants but not for Midway. Am. Compl. ¶ 37.

9. The Independent Directors also deferred to Ms. Redstone/Steele to negotiate the terms of the Challenged Transactions, despite their relationship to the Redstone Defendants. Am. Compl. ¶ 39. The Amended Complaint also provides that Ms. Redstone and Mr. Steele, both conflicted directors, received “a mandate from the Special Committee ... to negotiate an unrestricted $30 million infusion of cash into Midway [and] ... notwithstanding them supposed separation from the functions of the Special Committee — interacted frequently with NAI representatives on [Debtor’s] behalf.” The Amended Complaint further provides that both Ms. Red-stone and Mr. Steele “nevertheless undertook substantial efforts to assist [Debtor] *315 and NAI to consummate these transactions.” Am. Comp. ¶¶ 39, 47.

The facts do not rise above the substantial legal hurdles facing the Committee. Delaware law gives great deference to management. The Committee’s difficulty is accentuated by its concession that the terms of the Challenged Transactions were fair and at market rates. Moreover, there are no factual allegations that the Board Defendants profited personally.

The clear upshot of the Committee’s claims against the Board Defendants is that Midway should have filed for bankruptcy rather than enter into the Challenged Transactions. Delaware law does not support such claims. The Delaware Court of Chancery and the Delaware Supreme Court, the Nation’s preeminent authorities on corporate law, interred “deepening insolvency” as a cause of action in Trenwick Am. Litigation Trust v. Ernst & Young, L.L.P., 906 A.2d 168 (Del.Ch.2006), aff'd, 931 A.2d 438 (Del.2007). In rejecting the claim that the directors breached their fiduciary duties to creditors by failing to consider a bankruptcy filing, instead incurring additional debt, the Vice Chancellor concluded:

It is no doubt regrettable that Trenwick ... became insolvent. That insolvency no doubt injured their stockholders, creditors, customers, and employees. But the mere fact of a business failure does not mean that a plaintiff can state claims against the directors, officers, and advisors on the scene just by pointing out that their business strategy did not pan out. If simple failure gave rise to claims, the deterrent to healthy risk taking by businesses would undermine the wealth-creating potential of capitalist endeavors. For that reason, our law defines causes of action that may be pled against business fiduciaries and advisors with care, in order to balance society’s interest in promoting good-faith risk-taking and in preventing fiduciary misconduct. The Litigation Trust has failed to meet its burden to plead facts stating claims of that kind against the defendants in this case.

Trenwick, 906 A.2d at 218. The Vice Chancellor therefore dismissed the litigation trust’s complaint, holding that the business judgment rule protects good faith, disinterested business decisions from claims of creditors, even of an insolvent corporation. Id. at 195 n. 75

Similarly, this Court recently dismissed claims brought by a creditors committee against, inter alia, the prepetition directors. In Official Comm. of Unsecured Creditors of Fedders North America, Inc. v. Goldman Sachs Credit Partners L.P. (In re Fedders North America, Inc.), 405 B.R. 527 (Bankr.D.Del.2009), Judge Shannon, on facts similar to the facts here, dismissed the committee’s complaint, citing Trenwick. In Fedders, a previously successful business found itself in a liquidity crisis and borrowed $90 million. The company soon filed for bankruptcy and the committee charged the directors with breaching their fiduciary duties by delaying the unavoidable bankruptcy. Judge Shannon reasoned, consistent with controlling Delaware law, that directors are within the appropriate exercise of their judgment in taking steps to continue the firm’s operations in an effort to expand the potential for creditor recovery. Fedders, 405 B.R. at 541-43.

Trenwick and Fedders are entirely consistent with a line of cases holding that directors are not liable for decisions they make and actions they take in an effort to prolong the corporation’s viability, even in the face of insolvency. In North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del.2007), the Delaware Supreme *316 Court held that directors do not have a duty to protect creditors of an insolvent corporation at the expense of the corporation and its shareholders. 6 This Court also has rejected deepening insolvency as a valid claim. See Fedders and In re Radnor Holdings Corp., 353 B.R. 820 (Bankr. D.Del.2006).

The law is thus settled that directors do not have a duty to creditors of an insolvent corporation to abandon the effort to rehabilitate the corporation in favor of creditors’ interests. A claim based on deepening insolvency must fail even if, as here, an aggrieved creditor attempts to side-step the rejected legal claim. Where, as here, the Committee calls “a discredited deepening insolvency cause of action by some other name,” the claim must, too, be rejected. Radnor, 353 B.R. at 842. The Amended Complaint simply does not allege sufficient facts which, taken as true, sustain the Committee’s claim that the Board Defendants can be held liable for a breach of the duty of care, even in the absence of an exculpation provision in the certificate of incorporation. It therefore follows that the Committee has failed to state a claim for gross negligence or reckless disregard of their duties, which carry a heavier burden. The Court finds that the duty of care claims are in reality claims of deepening insolvency and are not sustainable.

In addition to failing to state a claim under Delaware law, the Committee also faces the hurdle that Debtor’s Certificate of Incorporation contains an exculpation clause for breaches of the duty of care in accordance with Section 102(b)(7) of the Delaware General Corporation Law, 8 Del. C. § 102(b)(7). Article Eighth of Debtor’s certificate of incorporation provides:

To the fullest extent permitted by the General Corporation Law of the State of Delaware, as the same may be amended and supplemented, no director shall be personally liable to the Corporation or its stockholders for monetary damages for fiduciary duty as a director.

(D.I. 44 at 5).

Section 102(b)(7) of the Delaware General Corporation Law permits a corporation, by so providing in its certificate of incorporation, “to protect its directors from monetary liability for duty of care violations, i.e., liability for gross negligence.” 5 Balotti & Finkelstein, The Delaware Law of Corporations and Business Organizations, Ch. 4, § 4.19, p. 200.10 (1986); see also John Hancock Capital Growth Management Inc. v. Aris Corp., Del. Ch., C.A. No. 9920, Jacobs, V.C., Mem.Op. at 4, 1990 WL 126656 at *2 (Aug. 24, 1990).

One of the primary purposes of section 102(b)(7) is to encourage directors to undertake risky, but potentially value-maximizing, business strategies, so long as they do so in good faith. Prod. Res. Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 777 (Del.Ch.2004). However, exculpation clauses do not eliminate personal liability without limitation. The Delaware Supreme Court has held 7 that when a duty of care breach is not the exclusive claim, a court may not dismiss based solely upon an exculpatory provision. The Dela *317 ware Supreme Court stated in Emerald, Partners:

[T]he shield from liability provided by a certificate of incorporation provision adopted pursuant to 8 Del.C. § 102(b)(7) is in the nature of an affirmative defense. Defendants seeking exculpation under such a provision will normally bear the burden of establishing each of its elements.... Nonetheless, where the factual basis for a claim solely implicates a violation of the duty of care, this Court has indicated that the protections of such a charter provision may properly be invoked and applied.

Emerald Partners, 726 A.2d at 1223-24.

Exculpation clauses also constitute affirmative defenses according to the Court and the Third Circuit Court of Appeals. “The exculpation clause is an affirmative defense and the determination of the viability of that defense is not proper at [the dismissal] stage.” In re The Brown Schools, 368 B.R. 394, 401 (Bankr.D.Del.2007); see also In re Tower Air, Inc., 416 F.3d 229, 238, 242 (3d Cir.2005) (stating that exculpation provisions are affirmative defenses that generally can not form the basis of a Rule 12(b)(6) dismissal). However, where a complaint does not adequately contain facts supporting a claim that directors acted in bad faith or conscious disregard of their responsibilities, Rule 12(b)(6) dismissal is appropriate. Malpiede v. Townson, 780 A.2d 1075, 1093 (Del.2001); In re Lukens Inc. Shareholders Litigation, 757 A.2d 720, 733-34 (Del.Ch.1999), aff'd sub nom. Walker v. Lukens, Inc., 757 A.2d 1278 (Del.2000). See also, In re Caremark Int’l Deriv. Lit., 698 A.2d 959, 971 (Del.Ch.1996), requiring a plaintiff to show a “sustained or systematic failure of the board to exercise oversight....”

The court in Caremark defined “a sustained or systematic failure” as either an utter failure to implement reporting or information controls or a conscious failure to monitor, “thus disabling [the fiduciaries] from being informed of risks or problems requiring their attention.” Id. at 970. The Board Defendants were active in managing Debtor’s affairs, as even the Amended Complaint describes.

The Independent Directors “considered different ways for the Redstone Defendants to inject capital into [Debtor].” [Am. Compl. ¶ 37],

The Independent Directors sought out interested third parties, not only the Redstone Defendants, for the Factoring Transaction, only one of which made an offer but on less favorable terms. [Am. Compl. ¶ 57.]

The Court concludes, based on the Amended Complaint, that the Committee does not have sufficient facts to create a plausible claim that the Board Defendants violated their fiduciary duty of care. To the extent the Board Defendants did, the exculpation clause in Midway’s certificate of incorporation shields them from liability.

Duty of Loyalty and Good Faith

The Court’s inquiry does not end with a finding that the Board Defendants are insulated from duty of care liability, which is but one of the triad of duties. The Board Defendants also had responsibility to perform their duties with loyalty and good faith. 8

*318 The duty of loyalty mandates that a corporate fiduciary act with “undivided and unselfish loyalty to the corporation” and that “there shall be no conflict between duty and self-interest.” Weinberger v. UOP, Inc., 457 A.2d 701 (Del.1983)(citing Guth v. Loft, Inc., 5 A.2d 503, 510 (Del.1939).) There are two ways to breach the duty of loyalty: (1) self-dealing and (2) failure of oversight. In this case, the Independent Directors did not stand on both sides of the NAI Loan and Factoring Agreement and therefore self-dealing is not a viable claim.

But even when board action does not involve self-dealing and the business judgment rule standard of review is applicable, a plaintiff can prevail by showing that the directors breached their duty of loyalty. In the case of the duty of loyalty, the plaintiff does so by showing that board action was not undertaken in a good faith effort to further the stockholders’ best interests, but for some personal reason, such as entrenchment. If the plaintiff proves subjective bad faith of that kind, it can have the challenged action set aside in equity as a breach of the duty of loyalty and potentially recover monetary damages or other relief for the injury to the corporation. Harvard at 18-19. The duty of loyalty is implicated because the Committee has alleged that the Independent Directors violated their duties of oversight and good faith, as explained below.

As a subsidiary element of the duty of loyalty, a successful claim for the breach of the duty of good faith requires a plaintiff to demonstrate one of three actions: “1) where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation; 2) where the fiduciary acts with the intent to violate applicable positive law; or 3) where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.” In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del.2006). Where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge their fiduciary obligations in good faith. Stone v. Ritter, 911 A.2d 362, 370 (Del.2006).

The Committee’s claims rest upon the third category, failure to act, which describes the lack of good faith conduct that the Caremark Court held is “a necessary condition” for finding director oversight liability.

In the Motions, the Board Defendants argue that the alleged breach of the duty of good faith is meritless because their actions did not rise to a heightened level of “a complete and utter failure to act in the face of a known duty.” In re Caremark, 698 A.2d at 971. To support this conclusion, the Board Defendants suggest that the Committee is alleging this breach solely because they disagree with the Independent Directors’ decision not to seek bankruptcy relief sooner. The Independent Directors further provide that they were proactive in trying to keep Debtors out of bankruptcy by: meeting 16 times; acquiring additional financing; succeeding in obtaining a clean audit opinion; addressing problems with Midway’s cash forecasting system; approving the Factoring Agreement with NAI; and considering various methods to restructure Debtor’s business.

The problem with the specific factual allegations is that taken individually or in combination, even assuming then truth, they do not plausibly demonstrate or create a basis for a finding of liability upon proof. The Challenged Transactions pro *319 vided essential funding. The Committee does not allege that the terms of the Challenged Transactions were unfair or that the Board Defendants profited from them, a highly telling concession. The Committee does not allege that the form of the Challenged Transactions harmed Debtor as opposed to its creditors directly. As discussed in the following section of this opinion, the R