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Marvin H. Maurras Revocable Trust v. Bronfman

United States District Court, Seventh Circuit

September 24, 2013

MARVIN H. MAURRAS REVOCABLE TRUST and YONGQIAN ZHAO, derivatively on behalf of ACCRETIVE HEALTH, INC., Plaintiffs,
v.
EDGAR M. BRONFMAN JR., J. MICHAEL CLINE, STEVEN N. KAPLAN, STANLEY N. LOGAN, DENIS J. NAYDEN, ARTHUR H. SPIEGEL III, and MARY A. TOLAN, MARK A. WOLFSON, Defendants, and ACCRETIVE HEALTH, INC., Nominal Defendant.

MEMORANDUM OPINION AND ORDER

GARY FEINERMAN, District Judge.

In these consolidated shareholder derivative lawsuits, Marvin H. Maurras Revocable Trust ("Maurras Trust") and Yongqian Zhao claim on behalf of Nominal Defendant Accretive Health, Inc., that Accretive's directors-Edgar M. Bronfman, Jr., J. Michael Cline, Steven N. Kaplan, Stanley N. Logan, Denis J. Nayden, Arthur H. Spiegel III, Mary A. Tolan, and Mark A. Wolfson-violated fiduciary duties they owed Accretive under Delaware law and breached federal securities law. In particular, the 130-page, four-count consolidated verified shareholder derivative complaint alleges that Defendants: (1) breached their duties of loyalty and good faith by knowingly causing or permitting Accretive to violate various state and federal laws with the result that Accretive's stock value plummeted when the alleged violations came to light; (2) breached their fiduciary duty to maintain internal controls regarding Accretive's compliance with federal and state healthcare, debt collection, and consumer protection laws; (3) made untrue statements or omissions of material fact in connection with the purchase or sale of Accretive stock, in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5; and (4) breached § 29(b) of the Securities Exchange Act, 15 U.S.C. § 78cc(b), by receiving incentive compensation and fees while violating § 10(b) and Rule 10b-5. Doc. 72. Unless otherwise noted, all docket references are to Case 12 C 3395.

Defendants have moved to dismiss the complaint for failure to adequately allege demand futility under Federal Rule of Civil Procedure 23.1(b)(3)(B) and, alternatively, for failure to state a claim upon which relief can be granted. Doc. 93. The complaint is dismissed for failure to adequately allege demand futility, but the dismissal is without prejudice and with leave to file an amended complaint.

Background

In considering the motion to dismiss, the court assumes the truth of the complaint's factual allegations, though not its legal conclusions. See Munson v. Gaetz, 673 F.3d 630, 632 (7th Cir. 2012). Besides the complaint itself, the court must consider "documents attached to the complaint, documents that are critical to the complaint and referred to in it, and information that is subject to proper judicial notice, " along with additional facts set forth in Plaintiffs' brief opposing dismissal, so long as those facts "are consistent with the pleadings." Geinosky v. City of Chicago, 675 F.3d 743, 745 n.1 (7th Cir. 2012). The facts set forth below are stated as favorably to Plaintiffs as permitted by the complaint and the other materials just mentioned, with all reasonable inferences drawn in Plaintiffs' favor. See Westmoreland Cnty. Emp. Ret. Sys. v. Parkinson, ___ F.3d ___, 2013 WL 4266586, at *8 (7th Cir. Aug. 16, 2013) (in evaluating whether plaintiffs in a derivative suit have adequately pleaded demand futility, "any inferences reasonably drawn from the factual allegations of the complaint must be viewed in the light most favorable to the plaintiffs") (quoting In re Abbott Labs. Derivative S'holder Litig., 325 F.3d 795, 803 (7th Cir. 2003)).

The distinction between factual allegations that must be taken as true and conclusory assertions that must be ignored is crucial to the resolution of this motion. Plaintiffs repeatedly submit that their theory of demand futility rests not on the premise that Defendants were unaware of Accretive's ongoing (alleged) legal violations due to inadequate reporting mechanisms, but on the premise that Defendants " knew about [Accretive's] violations of debt collection and health privacy laws, but decided to forego costly compliance and put short-term unlawful gain above the interest of [Accretive]." Doc. 108 at 35; see also id. at 32 ("the Court must apply the Aronson test [for demand futility] because Plaintiffs allege that a majority of Accretive's Board had actual knowledge of illegal wrongdoing, yet consciously decided not to take any steps to prevent or remedy the situation"); id. at 35 ("Plaintiffs do not allege mere lack of oversight, and no fair reading of the Complaint supports that conclusion"); id. at 36 ("Here, Plaintiffs provide particularized facts that the Individual Defendants knew about [Accretive's] unlawful debt collection practices and systematic violations of patient rights and yet failed to take any action to prevent or remedy the issues."); id. at 39 ("the Individual Defendants knowingly permitted Accretive to systematically violate numerous debt collection and patient privacy laws in its quest to maximize short-term profits at the expense of the long-term value of the Company"). As discussed in detail below, Plaintiffs have adequately alleged that Accretive broke the law. But given Plaintiffs' theory of demand utility, resolution of this motion turns on whether Plaintiffs have adequately alleged that the Defendants other than Tolan had sufficient knowledge of Accretive's illegal actions and yet consciously refrained from taking steps to remedy the situation. Because this is a long opinion, and in an effort to most clearly set forth the court's rationale for concluding that demand futility has not been adequately alleged, the Background section will address certain pleading issues when recounting certain of the complaint's key allegations.

Accretive's business and history. Accretive is a Delaware corporation that is publicly traded on the New York Stock Exchange. Doc. 72 at ¶ 21. Accretive is a debt collector whose business is contracting with hospitals to collect payments from their patients and their insurers. Id. at ¶ 3. Accretive is distinguished from run-of-the-mill debt collectors by its use of private patient data to make predictions about individual patients that will guide its debt collection practices and by its integration of its debt collection services into the entire cycle of healthcare provision; in Accretive's words, it offers end-to-end "revenue cycle management services" to help hospitals "more efficiently manage their revenue cycles, which encompass patient registration, insurance and benefit verification, medical treatment documentation and coding, bill preparation, and collections." Id. at ¶ 31. Accretive's board of directors consists of the eight individual defendants and one director emeritus, who is not permitted to vote and who will not be mentioned again. Id. at ¶ 21. One defendant, Mary Tolan, is both a director and Accretive's CEO and President; the other seven defendants are outside directors, meaning that they are not Accretive officers. Id. at ¶¶ 22-29. Accretive also has an Audit Committee, which during the period of alleged wrongful conduct (November 2010 through November 2012) was composed of Logan, Kaplan, and Wolfson. Id. at ¶¶ 2, 265.

Accretive was formed in 2003 by two private equity and hedge fund firms, Accretive LLC ("Accretive LLC, " to distinguish it from nominal defendant Accretive Health, Inc., which is referred to as "Accretive") and Oak Hill Capital Management, LLC. Id. at ¶ 32. These two firms have controlled Accretive throughout its existence: they hired Tolan to be Accretive's founding CEO, each firm has two of its officers on Accretive's Board (Bronfman, Cline, Nayden, and Wolfson), and they continued to wield influence through their ownership of a substantial portion of Accretive's stock. Ibid. Accretive held an initial public offering in May 2010 and a second public offering in March 2011. Id. at ¶¶ 33, 36. Most of the defendants- Tolan, Cline, Bronfman, Nayden, Wolfson, and Spiegel-made millions of dollars each from sales of Accretive stock. Id. at ¶¶ 33-38.

Defendants' debt collection history. The complaint details the "tarnished history regarding debt collection practices" of one of Accretive's two founding firms, Accretive LLC. Id. at ¶¶ 39-44. In short, Accretive LLC got in trouble with the Minnesota Attorney General in 2009 after buying substantial ownership and control stakes in both a Minnesota-based arbitration company, which handled many consumer credit card collections arbitrations, and a major debt collection agency. Id. at ¶¶ 39-40. The Attorney General alleged that the arbitration company misled consumers and the public by holding itself out as a neutral forum despite its extensive cross-ties with Accretive LLC and its debt collection firm, which created a conflict of interest. Id. at ¶ 41. Soon thereafter, the arbitration company left the consumer arbitration business and the debt collector filed for bankruptcy. Id. at ¶ 42. Plaintiffs submit that Bronfman, Cline, Nayden, Wolfson, and Tolan were familiar with these transactions and with the Attorney General's objection to them, and therefore "were aware of the highly regulatory history in Minnesota regarding debt collection practices and of the Minnesota Attorney General's successful litigation against [the arbitration company].... They knew that Lori Swanson, who was elected Attorney General in 2006 and re-elected for a four-year term in 2010, would not tolerate fast and loose debt collection practices that misled consumers in her state." Id. at ¶ 44. This personal knowledge and experience could be relevant here because a central allegation in this lawsuit, discussed below, is that Defendants failed to monitor Accretive closely enough to prevent it from engaging in unlawful debt collection practices, or even that Defendants knew about those practices but did nothing to stop them.

The Fairview contracts. Fairview Health Services is a nonprofit that owned several hospitals in Minnesota at all relevant times and had fiscal year 2010 revenues of around $2.8 billion. Id. at ¶ 45. Accretive's business relationship with Fairview was formed through two contracts made in 2010. Id. at ¶ 46. The first was the "Revenue Cycle Operations Agreement" ("RCA") signed in March 2010. Ibid. Under the RCA, Fairview outsourced day-to-day revenue cycle operations (that is, billing and debt collection) to Accretive; Fairview executed a power of attorney to empower Accretive to make billing decisions on its behalf as related to Medicare, Medicaid, and third-party insurers. Ibid. In 2011, Accretive's revenue under the RCA was around $100 million, which was roughly 12% of Accretive's total revenue that year. Ibid. Accretive received both a base fee and incentive payments from Fairview for increasing the percentage of the money owed to Fairview by patients and their insurers that was actually paid. Id. at ¶ 48. The RCA empowered Accretive to control, reassign, and fire Fairview employees associated with the revenue cycle. Id. at ¶ 47. Accretive's RCA with Fairview was one of approximately fifty similar agreements Accretive had with other hospital groups in the United States. Id. at ¶ 52.

The second contract between Accretive and Fairview was the "Quality and Total Cost of Care" contract ("QTCC"). Id. at ¶ 53. Plaintiffs describe the QTCC as "Accretive's crown jewel and the template for its future business plan"; Fairview was the first (and so far the only) client to sign a QTCC with Accretive, but Accretive hoped that the Fairview QTCC would serve as a model to be duplicated with other hospitals. Id. at ¶¶ 53, 56. The QTCC greatly increased Accretive's integration into Fairview's business by allowing Accretive to assist Fairview in negotiations with HMOs and insurers, to manage health risk assessments for patients, to automate care plans, to manage the pharmacy, and to decide the duration of hospital stays for Fairview patients. Id. at ¶ 53. The QTCC also allowed Accretive to rate and assess the financial performance of Fairview's doctors, to assign patients to various risk categories, and to pay incentives to the more "efficient" doctors based on their patients' risk scores. Id. at ¶ 54. Accretive projected that it would take in $60 million in revenue for every $1 billion in net revenues to Fairview, with the bulk of this income coming from incentive fees. Id. at ¶¶ 54-55.

The entire Accretive board (other than Logan, who was not yet a director) approved the QTCC on October 21, 2010, after being extensively briefed on its terms. Id. at ¶ 57. Due to the QTCC's central place in Accretive's business model, the board received regular updates on it. Id. at ¶ 60. For example, at the board meeting held on November 2, 2010, the board was presented with the QTCC's details and informed that it was expected to cut almost $500 million in healthcare costs for Fairview by 2015. Ibid. As Accretive's CEO, Tolan made several public statements promoting the value to Accretive of the QTCC, and in its Form 10-K filed with the SEC on February 29, 2012, Accretive claimed that it expected to earn $60 million in revenue from the QTCC each year. Id. at ¶¶ 61-62.

Key to the QTCC was a software system called "AccretiveQ." Id. at ¶ 59. AccretiveQ took as its inputs highly personal patient data, and its outputs were "risk scores" for use in managing care plans, pharmacy management, and hospital stay durations. Ibid. AccretiveQ's computer model identified "high priority" patients, those whom Accretive viewed as the sickest 5% of the population and expected to account for 50% of healthcare costs. Ibid. The model also generated "Willingness to Pay" scores for patients, which incorporated sensitive patient information such as race, religion, zip code, and medical history. Ibid.

Accretive's allegedly unlawful debt collection practices. To maximize Fairview's savings and, concomitantly, its own incentive revenues, Accretive sought to shift the focus at Fairview in a way that would increase savings and income at the expense of patient care. Id. at ¶ 63. For instance, Accretive made Fairview staff understand that if they did not collect money from patients who were seeking emergency room treatment, they would be fired. Id. at ¶ 64. "Accretive's money-collecting techniques included concerted efforts to collect from patients before they were admitted to the hospital, at their bedside, and even in the emergency room itself. Accretive and Fairview tracked and graded each Fairview employee based on the patient's estimated share of the bill they collected each week.... [A]n Accretive manager sent an email to several Fairview employees after one of them collected a past due balance from a patient, saying, I witnessed the entire event and it was like poetry.'" Id. at ¶ 67.

Accretive prepared scripts for emergency room attendants to use with patients and their families that were intended to imply (falsely and unlawfully) that the patient would not be treated until the payment was made. Id. at ¶ 68. A Fairview risk management consultant suggested that Accretive's aggressive debt collection practices might be violating the Emergency Medical Treatment and Active Labor Act ("EMTALA"), 42 U.S.C. § 1395dd et seq., also known as the "Patient Anti-Dumping Law, " which requires hospitals to provide stabilizing treatments to patients with emergency conditions without regard to insurance coverage or ability to pay. Id. at ¶ 78. Ultimately, Fairview was found to have violated EMTALA and other federal patient-protection laws. Id. at ¶ 79.

Fairview personnel complained that Accretive's tracking of their collection rates was demeaning and harmful to staff morale while contributing little to collections, but Accretive Vice President of Business Development Peter VanRiper replied that "we'll continue with it as-is. Our experience is that collections performance just doesn't get to target performance without this level of rigor." Id. at ¶ 70. Plaintiffs' allegations continue along the lines of the foregoing. Id. at ¶¶ 71-78.

Accretive's debt collection behavior at Fairview's hospitals and elsewhere resulted in a large number of civil suits being filed against Accretive under the Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. § 1692 et seq., and similar Minnesota statutes. Doc. 72 at ¶¶ 80, 85-88. For example, Accretive was sued for leaving a message about a debt owed by one person on another person's answering machine, contrary to the FDCPA's prohibition on communication by a debt collector with persons other than the debtor. Id. at ¶ 85; see 15 U.S.C. § 1692c(b). Moreover, despite entering in March 2010 into the Fairview RCA, under which Accretive began to act as Fairview's debt collector, Accretive did not become licensed as a debt collection agency with the Minnesota Department of Commerce until January 2011. Doc. 72 at ¶ 83.

For purposes of this motion to dismiss, there is no dispute about the allegations just set forth; as it must at the pleadings stage, the court will take as true that Accretive engaged in that alleged conduct and that it thereby violated the FDCPA, the EMTALA, and Minnesota law. The more important issue is what level of awareness Defendants had of these unlawful activities.

Plaintiffs allege that the unlawful practices were in keeping with "the tone at the top set by at least five Board members... -Bronfman, Cline, Nayden and Wolfson-and the CEO Tolan, who were all more concerned with short-term gain than faithfully stewarding the long-term interests of" Accretive, id. at ¶ 63, and that "[u]pper management at Accretive, particularly Defendant Tolan, knew of and approved of this strong arm approach, " id. at ¶ 65. Plaintiffs do not make any specific allegations to back up their conclusory statements about the "tone at the top"; they do not say, for instance, that Tolan or any other defendant told Fairview employees that they would be fired if they did not demand pre-treatment payments from emergency room patients, or that they directed Accretive employees to tell Fairview employees those things. Rather, Plaintiffs' specific allegations are of actions by Tolan's inferiors, including VanRiper, Ken Stoll (Vice President of Client Services), Tim Barry (President of Quality), an employee named Brandon Weber, and an employee named Andrew Crook to whom Plaintiffs' counsel immaturely and unprofessionally refer as "Andrew I Am Not A' Crook." Id. at ¶¶ 63-64, 66. Plaintiffs allege that "Barry directly reported to Defendant Tolan and Crook, in turn, directly reported to Barry, " id. at ¶ 65, but absent any factual allegation suggesting that Tolan knew of or encouraged the illegal practices, one cannot reasonably infer that Barry and Crook would have told Tolan that they were encouraging unlawful behavior. There is no general rule that corporate officials are presumed to know everything their subordinates know or that they are presumed to be complicit in their underlings' law-breaking. To the contrary, "Delaware courts routinely reject the conclusory allegation that because illegal behavior occurred, internal controls must have been deficient, and the board must have known so." Desimone v. Barrows, 924 A.2d 908, 940 (Del. Ch. 2007). The principle applies even to members of an audit committee or other subsection of the board. See South v. Baker, 62 A.3d 1, 17 (Del. Ch. 2012) ("As numerous Delaware decisions make clear, an allegation that the underlying cause of a corporate trauma falls within the delegated authority of a board committee does not support an inference that the directors on that committee knew of and consciously disregarded the problem for purposes of Rule 23.1.") (citing cases).

Plaintiffs also allege that "Accretive's Board knew about, and indeed approved the QTCC contract in October 2010, and yet still failed to ensure that the Company met the very minimal requirement of licensure" to act as a debt collector in Minnesota. Id. at ¶ 83. However, Plaintiffs do not allege that the directors were aware that Accretive was operating without a license, and nor do they allege that the "very minimal" task of compliance with applicable licensing regimes is the sort of thing that did rise or should have risen to the board level. Drawing such an inference in Plaintiffs' favor would not be reasonable, as a corporate board is permitted to assume that direction or oversight from the board is not needed to ensure that the firm's employees take care of such mundane tasks. See In re Pfizer, Inc. Derivative Sec. Litig., 307 F.App'x 590, 593 (2d Cir. 2009) (refusing to infer that the Pfizer board had knowledge of "the existence of [a scientific study] that may have found cardiovascular risks related to [a Pfizer drug]... simply because it existed and was related to Pfizer's core' business"); In re ITT Corp. Derivative Litig., 653 F.Supp.2d 453, 461-62 (S.D.N.Y. 2009) (rejecting the plaintiffs' submission that the board of a defense manufacturing company was aware of the company's failure to obtain temporary export licenses for its night vision goggles, a matter for which outside counsel had been retained, where the complaint did not allege that the issue was brought to the board's attention); Ferre v. McGrath, 2007 WL 1180650, at *6 (S.D.N.Y. Feb. 16, 2007) ("Allegations of knowledge explained solely by the directors' service as directors, without more, are insufficient as a matter of law-even where, as here, the plaintiff alleges that the matters in suit relate to the corporation's core' business."); see also In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959, 968 (Del. Ch. 1996) ("Most of the decisions that a corporation, acting through its human agents, makes are, of course, not the subject of director attention. Legally, the board itself will be required only to authorize the most significant corporate acts or transactions: mergers, changes in capital structure, fundamental changes in business, appointment and compensation of the CEO, etc.").

Plaintiffs allege that several of the FDCPA lawsuits described in the complaint were settled and that Defendants, or at least some of them, presumably were aware of the settlements. Doc. 72 at ¶ 88. The argument is that the lawsuits (or the underlying violations) constituted "compliance incident[s] at a B level or higher, " that Accretive's Director of Internal Audit was supposed to bring such incidents to the Audit Committee's attention and presumably did so, that some Defendants sat on the Audit Committee, and that the Audit Committee would have to disclose the risk created by the lawsuits to the entire board. Ibid. The court takes all this as true for purposes of this motion: Defendants knew Accretive was being sued for FDCPA violations, and could have concluded that there might have been some merit to the accusations. But all that means is that Defendants knew about possible prior violations and were on notice of the possibility of present or future violations; that does not make it reasonable to infer that Defendants had actual knowledge of ongoing violations, much less that they encouraged or condoned such violations. See In re SAIC Inc. Derivative Litig., ___ F.Supp.2d ___, 2013 WL 2466796, at *18 (S.D.N.Y. June 10, 2013) (noting that "magnitude and duration [of a company's alleged wrongdoing] may be probative of whether the Board knew or should have known about a violation of the law, though these factors will rarely suffice in their own right to satisfy Rule 23.1's requirement... that plaintiffs allege with particularity actual or constructive board knowledge, " and refusing to infer that the board had knowledge of the ongoing wrongdoing solely based on the fact that one project's costs "ballooned from $63 million in 2001 to $700 million by 2010") (citation and internal quotation marks omitted); In re Intel Corp. Derivative Litig., 621 F.Supp.2d 165, 174 (D. Del. 2009) (holding that even where there is evidence that the directors knew of "the ongoing investigations into Intel's alleged anti-competitive business practices, " that alone is "insufficient for the Court to draw the significant inference that the Directors had constructive knowledge that an alleged failure to respond to the red flags' would be a breach of their fiduciary duties, " given that "Plaintiff fails to identify what the Directors actually knew about the red flags' and how they responded to them"); see also Jacobs v. Yang, 2004 WL 1728521, at *6 n.31 (Del. Ch. Aug. 2, 2004) (holding that demand futility was not adequately pleaded where the plaintiff asserted that "the current board had knowledge of [the challenged transactions, which began several years earlier] and failed to recover on behalf of [the company] for any wrongdoing").

Given this, the complaint does not adequately allege that Defendants were or should have been aware that Accretive was committing FDCPA violations of such magnitude as to threaten the company's relationship with Fairview or its ability to do business in Minnesota. The distinction between actual knowledge of the alleged violations (or intent that the violations occur), on the one hand, and the mere failure to monitor for possible violations, on the other, is significant because Plaintiffs' theory of demand futility is premised in substantial part on the allegation that "a majority of Accretive's Board had actual knowledge of illegal wrongdoing, yet consciously decided not to take any steps to prevent or remedy the situation, " and not that the board was unaware of illegal wrongdoing due to its failure to institute proper monitoring mechanisms. Doc. 108 at 32 (emphasis added). Thus, the inquiry turns on the extent of Defendants' actual knowledge of ongoing violations. As discussed below, Plaintiffs have not adequately pleaded that Defendants other than Tolan possessed the requisite knowledge.

The complaint also addresses a court-ordered agreement between Fairview and the Minnesota Attorney General that existed throughout Accretive's relationship with Fairview and that placed further restrictions on Fairview's (and, by extension, Accretive's) debt collection practices. Doc. 72 at ¶¶ 93-121. These allegations do not add much to those just discussed, so a brief summary suffices. Fairview became concerned that some of Accretive's debt collection policies were putting Fairview in violation of its agreement with the Minnesota Attorney General. Id. at ¶ 99. After numerous complaints from Fairview, and responses from Accretive that Fairview found inadequate to address its concerns, Fairview decided to "transition its debt collection business away from Accretive effective January 31, 2012." Id. at ¶ 119. Shortly thereafter, Fairview terminated all relations with Accretive. Id. at ¶ 120.

Again, the key question for purposes of this motion is not whether Accretive was causing Fairview to violate its agreement with the Minnesota Attorney General-Plaintiffs have adequately alleged that it was-but how much Defendants knew about the gravity of the situation. Plaintiffs allege that when Fairview employees began to be concerned that Accretive was making them violate the agreement, "[t]he alarm escalated through Fairview's organization, reaching its Board of Directors, and escalated through Accretive's organization, coming on numerous times directly to the attention of Defendant CEO Mary Tolan. It is reasonable to infer that Defendant Tolan briefed the entire Board, the Audit Committee and certainly the four private equity directors [Cline, Bronfman, Nayden, and Wolfson] about the frustrations that the Fairview Board was expressing to her about Accretive's glaring violations of the law. Nevertheless, the minutes of the Audit Committee and of the Board of Directors show that the Board took absolutely no action to remedy the egregious violations of federal and Minnesota law by Accretive executives and employees." Id. at ¶ 99 (emphasis added).

Plaintiffs have adequately alleged that Tolan had actual knowledge of Fairview's complaints and that Accretive had violated the law. But contrary to Plaintiffs' assertion, it is not reasonable to infer from those facts that Tolan would have explained this situation to the board, and in particular it is not reasonable to infer that she would have told the board that Accretive was engaged in "glaring violations of the law." That the board and Audit Committee minutes show that Defendants took no action on the issue does not plausibly suggest that Defendants were briefed on the Accretive-Fairview strife and its underlying causes but decided to take no action. See Wood v. Baum, 953 A.2d 136, 142 (Del. 2008) ("Delaware law on this point is clear: board approval of a transaction, even one that later proves to be improper, without more, is an insufficient basis to infer culpable knowledge... on the part of individual directors."); In re Bidz.com, Inc. Derivative Litig., 773 F.Supp.2d 844, 856 (C.D. Cal. 2011) (holding that the allegation that "each individual director had knowledge of the existence of shill bidding at Bidz, yet failed to take any action to curb the shill bidding, " did not sufficiently allege demand futility because the plaintiffs "failed to allege particularized facts demonstrating that the [directors] actually knew about the alleged shill bidding, failed to act in light of such knowledge, and did so knowing their conduct breached their fiduciary duties to the company or otherwise broke the law") (internal quotation marks omitted) (citing Stone v. Ritter, 911 A.2d 362, 369-70 (Del. 2006)). More generally, it is not reasonable to infer that whenever a company has violated a law and the CEO is aware of that violation, the CEO will inform the board-particularly where, as here, the violations are alleged to have been pursuant to the CEO's plan to put short-term profits before principles. Doc. 72 at ¶ 63; see In re Johnson & Johnson Derivative Litig., 865 F.Supp.2d 545, 571-72 (D.N.J. 2011) (refusing to infer that the board had knowledge of an ongoing violation, even where the CEO "had knowledge of, and responsibility for, and approved and ultimately as CEO directed the use of the Company's... kickback strategy" and had received warning letters from the FDA, reasoning that "[w]ithout allegations that [the CEO] shared his knowledge with the Board, the Court cannot conclude that the Board was ever aware of the FDA letters").

Plaintiffs also allege that Tolan and other Accretive executives put together a "Fairview-Accretive Partnership Discussion, " which set forth "Ideas to Address Issues with AG and Overall Relationship." Doc. 72 at ¶¶ 107-109. Among those "ideas" was "Board oversight on relationship, " and Plaintiffs allege that the referenced board is Accretive's, not Fairview's. Id. at ¶ 109. But the fact that Accretive's executives suggested more board oversight as a way of addressing Fairview's concerns with Accretive's practices does not support a reasonable inference that the board (other than Tolan) was aware of the alleged Accretive misconduct giving rise to those concerns; to the contrary, the fact that the executives suggested more oversight reflects the executives' view that the board was not aware of the specifics of the Fairview-Accretive strife at the time the "Partnership Discussion" was formulated. Moreover, there is no allegation that the "board oversight" plan was ever implemented.

Plaintiffs make another attempt to establish actual knowledge in ¶ 92 of their complaint:

All of the above [that is, the allegations about various unlawful debt collection activities, including violations of the court-ordered agreement between Fairview and the Minnesota Attorney General that imposed further restrictions, Doc. 72 at ¶ 90] was clearly known by the Individual Defendants.
The Company's 2010 10-K and the 201110-K both stated that "our new business opportunities have historically been generated through high-level industry contacts of members of our senior management team and boards of directors and positive references from existing customers." The Board also knew, as stated in both 2010 and 201110-Ks, that "in rendering our services, we must comply with customer policies and procedures regarding charity care, personnel, compliance and risk management as well as applicable federal, state and local laws and regulations." Despite their own description of their duties and responsibilities, and despite the Board's familiarity with the RCA and the QTCC contracts, whose execution required that Accretive adhere to Fairview's obligations under its agreement with the Minnesota AG, the Board failed to even oversee that the Company was appropriately registered as a debt collector in the state of Minnesota. Moreover, the Board knew that under both the RCA, and especially the QTCC contract, Accretive would be intimately involved with the operations of the ten Fairview hospitals. Nevertheless, the Board minutes reveal that neither the Board nor the Audit Committee took any steps to ensure that Accretive's debt collection practices complied with the Fairview-Minnesota Attorney General Agreement.

Doc. 72 at ¶ 92. These factual allegations support Plaintiffs' contentions that "the Board failed to even oversee that the Company was appropriately registered as a debt collector" and that "neither the Board nor the Audit Committee took any steps to ensure that Accretive's debt collection practices complied with the" agreement between Fairview and the Minnesota Attorney General. However, nothing in this passage or the complaint as a whole raises the reasonable inference that Defendants actually knew of Accretive's unlawful practices, as opposed to being simply ignorant of those practices. True, nothing in the complaint is necessarily inconsistent with Defendants' having knowledge of Accretive's unlawful activities, but mere consistency does not suffice; Plaintiffs must make factual allegations that give rise to a reasonable inference of knowledge, and they have failed to do so. See McReynolds v. Merrill Lynch & Co., Inc., 694 F.3d 873, 885 (7th Cir. 2012) ("Where a complaint pleads facts that are merely consistent with' a defendant's liability, it stops short of the line between possibility and plausibility of entitlement to relief.'") (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 554, 557 (2007)); In re Capital One Derivative S'holder Litig., ___ F.Supp.2d ___, 2013 WL 3242685, at *17 (E.D. Va. June 21, 2013) ("It is not enough for plaintiffs to plead that the directors as a whole became aware of the red flags because they were disclosed in the financial statements. ...


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