In Re: Tower Air Inc

Opinions of the United
2005 Decisions States Court of Appeals
for the Third Circuit

8-3-2005

In Re: Tower Air Inc
Precedential or Non-Precedential: Precedential

Docket No. 04-3633

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 PRECEDENTIAL

IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

Case No: 04-3633

IN RE: TOWER AIR, INC.,

Debtor

CHARLES A. STANZIALE, in his
capacity as Chapter 7 Trustee
of Tower Air, Inc.,

Appellant

v.

MORRIS K. NACHTOMI; STEVEN L. GELBAND;
STEPHEN A. OSBORN; HENRY P. BAER;
LEO-ARTHUR KELMENSON; ELI J. SEGAL;
TERRY V. HALLCOM.
_______________

On appeal from the United States District Court
for the District of Delaware
District Court No. 01-403
District Judge: The Honorable Kent A. Jordan
_______________

Argued June 29, 2005
_______________
 Before: NYGAARD, SMITH, and FISHER, Circuit Judges.

(Filed: August 3, 2005)
__________________

Counsel: John L. Reed (argued)
Matt Neiderman
Duane Morris LLP
1100 North Market Street, 12th Floor
Wilmington, Delaware 19801

John J. Soroko
Duane Morris LLP
Diane E. Vuocolo
One Liberty Place
Philadelphia, Pennsylvania 19103
Attorneys for Appellants

Bruce E. Jameson (argued)
Prickett, Jones & Elliot, P.A.
1310 King Street, Box 1328
Wilmington, Delaware 19801

Robert M. Kaplan
Robson Ferber Frost Chan & Essner LLP
530 Fifth Avenue, 23rd Floor
New York, New York 10036

Rodney M. Zerbe
Dechert LLP
30 Rockefeller Plaza

2
 New York, New York 10112

P. Gregory Schwed
Loeb & Loeb
345 Park Avenue
New York, New York 10154
Attorneys for Appellees

___________________

OPINION OF THE COURT
____________________

SMITH, Circuit Judge.

How far will the federal courthouse door swing open for
a direct suit against corporate directors and officers for breaches
of fiduciary duties? That is the difficult question presented in
this case, which pits our federal notice pleading regime against
Delaware’s more restrictive notice pleading requirements. The
appellant, Charles Stanziale, is the trustee of a bankrupt airline,
Tower Air, Inc. He claims that Tower Air’s directors and
officers drove the company into insolvency by indifference and
egregious decisionmaking. The District Court ruled that
Stanziale failed to allege sufficient facts in his multi-count
complaint to rebut Delaware’s presumption that corporate
fiduciaries act within the bounds of business judgment, which
the State defines quite broadly. We conclude that the District
Court erred by applying Delaware’s stricter Chancery Rule 8

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pleading standard, which does not apply in federal court. Under
our federal notice pleading standard, we hold that Stanziale
states four claims that, if proved, would overcome the
protections of Delaware’s business judgment rule.

I.

A. Facts

A Delaware corporation principally operating from New
York, Tower Air was founded in 1982 by defendant-appellee
Morris Nachtomi as an international charter airline.1 The
company soon expanded into domestic and international
scheduled passenger service, and by 1988 Tower Air’s signature
route, which accounted for roughly one-quarter of its revenue,
was scheduled passenger service from New York to Tel Aviv.
By 1999, Tower Air maintained and operated fourteen Boeing
747s and employed more than 1,400 people worldwide.

Nachtomi served as Chairman of the Board and Chief
Executive Officer of Tower Air from 1989 until 2000.
Nachtomi also sat as a director from 1982 until 2000, and,

1
We draw the facts of this case from Stanziale’s Amended
Complaint. As we review the grant of a motion to dismiss, we
take Stanziale’s allegations to be true and construe them in the
light most favorable to him. Christopher v. Harbury, 536 U.S.
403, 406 (2002).

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except for six months in 1998, he was the company’s president
between 1986 and 2000. Nachtomi and his family owned a
substantial majority of outstanding common stock and a
controlling interest in Tower Air. As a result, the other
defendant-appellees served at Nachtomi’s pleasure, and
Nachtomi controlled the firm’s management and operations.2

In the mid-1990s, Tower Air hit turbulence. In 1996, the
company lost twenty million dollars. Nevertheless, the company
expanded its international passenger service, adding an Athens
route in 1997. The next year, Tower Air added a route to Santo
Domingo, Dominican Republic, because Nachtomi’s daughter
expressed personal interest in having the airline do so. Though
that route never turned a profit, Tower Air flew to Santo
Domingo until 2000. Meanwhile, Nachtomi ran Tower Air’s
Tel Aviv office with no oversight by the firm’s other officers or
directors. The Tel Aviv office kept separate financial records
and its own bank account, making it virtually impossible for
Tower Air’s officers in New York to audit the Tel Aviv books.

2
The other defendant-appellees include: Stephen Gelband, a
director since 1985 and Secretary and General Counsel since
1988; Stephen Osborn, a director since 1993 and between 1988
and 1992; Henry Baer, a director since 1993; Leo-Arthur
Kelmenson, a director since 1997; Eli Segal, a director since
1998; and Terry Hallcom, a director – and President and
Executive Vice President for Operations – for six months in
1998.

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Eventually, the Tel Aviv office accumulated significant debt,
and creditors forced Tower Air’s Israeli operations into
liquidation.

While his airline needed cash in the late-1990s, Nachtomi
cut ticket prices so low that the company would not profit on
certain flights even if its planes were full. At around the same
time, Nachtomi and his co-directors failed to ensure that used
passenger tickets were processed for payment from credit card
companies and other third parties. After Tower Air filed for
bankruptcy, unprocessed tickets valued at one million dollars
were found in the company’s U.S. offices. Failure to process
those tickets hurt Tower Air’s cash flow and impeded its ability
to pay creditors. Further, Tower Air’s directors did nothing
when, in June 1998, Nachtomi and another officer received
reports from Tower Air’s Director of Safety of several serious
incidents earlier that year, including a ground collision involving
a Tower Air plane. Apparently, no one told the directors of
these reports, or of negative maintenance reports, including
failure to record aircraft servicing efforts and maintenance and
repair needs.

In the meantime, Tower Air’s jet engines were
deteriorating. At first, Tower Air cannibalized its own engines
to generate spare parts. In 1998, however, Nachtomi directed
that Tower Air lease or buy new engines because, at least
initially, doing so would be cheaper than repairing old engines.
The directors agreed at a special meeting to borrow fifty million

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dollars in part to buy eight new jet engines. That meeting’s
minutes reflect no discussion of the need for new engines, the
state of the old engines, or the financial impact of buying new
engines. Later that year, the directors authorized Nachtomi to
lease four new engines. Again, the board did not discuss the
need for new engines, the state of the old engines, or the
financial ramifications of buying and leasing versus repairing.
Late in 1998, the board authorized the purchase of three new jet
engines for more than eight million dollars.3 Meanwhile, Tower
Air borrowed heavily against its existing engine stock to finance
operating expenses and to pay off old debt. By 2000, eleven out
of nineteen of Tower Air’s planes were out-of-service. By
contrast, seventeen out of twenty planes were in service in 1998.

Tower Air’s fiscal descent culminated in a voluntary
petition for Chapter 11 relief in 2000. Stanziale was appointed
trustee for the company’s bankruptcy estate. He remained
trustee when the bankruptcy was converted from Chapter 11 to
Chapter 7 in late-2000. In June 2001, Stanziale sued Tower
Air’s directors and officers for monetary and punitive damages,
and other relief, as Tower Air’s representative and for the
benefit of its creditors and other parties in interest. In October
2001, Stanziale filed the Amended Complaint before us, which,
in addition to the facts recounted above, alleges that the
defendants breached their fiduciary duties of loyalty, good faith,

3
The Amended Complaint does not mention whether the
board discussed this purchase.

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and due care, grossly mismanaged Tower Air, and wasted
corporate assets.

The Amended Complaint lists seven counts. Count One
alleges that Tower Air’s directors breached their fiduciary duty
to act in good faith by consistently declining to repair Tower
Air’s older engines in lieu of leasing or buying new engines.
According to the Amended Complaint, these decisions caused
Tower Air to incur significant losses and merited no business
judgment protection because they were taken in bad faith.4
Count Two alleges that Tower Air’s officers also breached their
fiduciary duty to act in good faith by leasing or buying new jet
engines, by failing to tell the directors about maintenance
problems, and by failing to address the maintenance problems.5
Count Three alleges that Tower Air’s directors breached their
fiduciary duty to make decisions in good faith when they
approved multi-million dollar leases and purchases without
consideration. Count Three also alleges that the directors failed
to keep themselves adequately informed regarding the daily

4
Each of the seven counts allege essentially this same theory
of causation, loss, and lack of business judgment protection.
5
The Amended Complaint alleges that, given their positions
of authority at Tower Air, the officers could directly or
indirectly control the company. Accordingly, the Amended
Complaint alleges that the officers are liable as direct
participants in, or as aiders and abettors of, the directors’
breaches of fiduciary duties.

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management of Tower Air by ignoring Tower Air’s maintenance
problems, letting Nachtomi run the Tel Aviv office
independently, not reviewing Nachtomi’s decision to fly the
Santo Domingo route, and failing to establish management
controls to ensure that used tickets were processed.

Count Four alleges that the officers breached their
fiduciary duty to act in good faith or to keep themselves
adequately informed by: failing to process used airline tickets,
cutting airline fares to unprofitable levels, failing to oversee and
control Tel Aviv operations, establishing and maintaining the
Santo Domingo route “purely to please” Nachtomi’s family,
ceding all management and control to Nachtomi, failing to
address operations and maintenance problems, failing to
maintain jet engines, and failing to inform the board of the
foregoing problems. Count Five repeats the allegations of
Counts One to Four, and labels the acts and omissions by Tower
Air’s officers “gross negligence and mismanagement.” Count
Six repeats the allegations of Counts One to Five, and labels the
acts and omissions by Tower Air’s directors “corporate waste.”
Count Seven repeats the allegations of Counts One to Six, and
labels the acts and omissions by Tower Air’s officers “corporate
waste.”

B. District Court Decisions

The District Court ruled that the Amended Complaint
failed to state a claim in light of Delaware’s business judgment

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rule. In Delaware, the District Court explained, the business
judgment rule is a “presumption that directors making a business
decision, not involving self-interest, act on an informed basis, in
good faith and in the honest belief that their actions are in the
corporation’s best interest.” Stanziale v. Nachtomi, No. 01-403,
2004 WL 878469, at *3 (D. Del. Apr. 20, 2004). According to
the District Court, a plaintiff may overcome that presumption by
alleging self-dealing or by pleading “with particularity” facts
showing that the challenged decision was not the result of a
valid business judgment. Id.

Because Stanziale alleged no facts showing self-dealing,
the District Court considered whether Stanziale alleged specific
facts showing that the directors’ and officers’ actions bespoke
irrationality or inattention and thus rebutted the presumption of
valid business judgment. On Count One, the District Court
acknowledged a “theoretical exception” to the business
judgment rule for egregious decisions, but held that the purchase
or lease of new engines was not so egregious that “no ordinary
person of sound business judgment would believe it to be
rational.” Stanziale, 2004 WL 878469, at *3-*4 (quotation
omitted). The District Court dismissed Count Two as factually
deficient, concluding that the officers’ alleged failure to ensure
repair and maintenance of jet engines did not constitute
irrationally egregious behavior. Id. at *4-*5.6 Concerning

6
The District Court also rejected as unsupported by authority
Stanziale’s allegation in Count Two that the officers breached

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Count Three, the District Court conceded that liability may arise
for a corporate fiduciary’s inattention, but held that Stanziale
failed to allege with “sufficient particularity” facts suggesting
that the defendants allowed breaches of external legal
requirements or consciously and intentionally acted without
adequate deliberation. Id. at *5-*7. The District Court reasoned
that Stanziale’s list of violations in Count Four lacked facts
suggesting irrationality and cited no cases suggesting that
officers are liable for inattention. Id. at *8. Count Five fell as
“conclusory,” and the District Court ruled that the officers’
alleged failure to discuss the purchase or lease of engines did
not constitute “unintelligent and unadvised” decisionmaking.
Id. The District Court held that Stanziale alleged no facts in
Counts Six and Seven suggesting that Tower Air failed to
receive adequate consideration for its transactions, and thus
failed to allege waste. “[C]onclusory allegations are not
sufficient to overcome the protections of the business judgment
rule,” the District Court stressed. Id. at *9.

Stanziale moved for re-argument on the ground that the
District Court erroneously enforced the heightened factual
pleading standard required in shareholder derivative actions by
Federal Rule of Civil Procedure 23.1. Though conceding that
this was not a derivative suit, the District Court denied the
motion. “[W]hat Plaintiff evidently fails to comprehend is that

their fiduciary duty by failing to tell the directors about
maintenance problems.

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the business judgment rule applies to this case,” the District
Court declared, “and [that] means that Plaintiff was required to
rebut the presumption of that rule with well-pleaded facts, not
conclusory allegations.” Stanziale v. Nachtomi, No. 01-403,
2004 WL 1812705, *2 (D. Del. Aug. 6, 2004). Well-pleaded
facts under Rule 12(b)(6), the District Court explained, are
“specific.” Id. (quoting Grobow v. Perot, 539 A.2d 180, 188 n.6
(Del. 1988) (“Even under the less stringent standard of a [Rule
12(b)(6)] motion to dismiss, all facts of the pleadings and
reasonable inferences to be drawn therefrom are accepted as
true, but neither inferences nor conclusions of fact unsupported
by allegations of specific facts upon which the inferences or
conclusions rest are accepted as true.”) and In re RSL Com
Primecall, Inc., 2003 WL 22989669 (Bankr. S.D.N.Y. Dec. 11,
2003) (“absent well pleaded allegations of specific acts of self-
dealing or even bad faith, Plaintiffs cannot overcome the
presumption afforded by the business judgment rule . . . .”)).
Lacking such specific facts, the District Court ruled that
Stanziale’s complaint merited dismissal. Stanziale asks us to
reverse the District Court on only Counts One through Five.7

7
The District Court exercised jurisdiction under 28 U.S.C. §
1334(b), which provides federal courts subject matter
jurisdiction over civil proceedings related to bankruptcy cases.
We have jurisdiction over the District Court’s order dismissing
Stanziale’s Amended Complaint under 28 U.S.C. § 1291. We
also have jurisdiction over the District Court’s denial of
Stanziale’s motion for re-argument because the orders are

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 II. Analysis

A. Federal Pleading Standard

Stanziale insists on appeal that the District Court applied
the elevated federal pleading standard controlling shareholder
derivative suits.8 We acknowledge some language in the
District Court’s opinions that evokes the derivative suit
standard, but we think the better reading is that the District
Court applied Delaware’s Chancery Rule 8. Applying Chancery
Rule 8 in federal court makes some intuitive sense, as the
language of Chancery Rule 8 mirrors Rule 8 of the Federal

integrally connected, Stanziale expressly appealed both orders,
and the directors and officers briefed the issues raised in both
orders. Cf. Williams v. Guzzardi, 875 F.2d 46, 49 (3d Cir. 1989)
(“We have appellate jurisdiction over orders not specified in the
notice of appeal if there is a connection between the specified
and unspecified order, the intention to appeal the unspecified
order is apparent and the party is not prejudiced and has a full
opportunity to brief the issues.”).
We consider de novo the grant of a motion to dismiss for
failure to state a claim. Wheeler v. Hampton Twp., 399 F.3d
238, 242 (3d Cir. 2005). While denial of a motion for
reconsideration is discretionary, where, as here, that denial
interprets and applies a legal precept, our review is plenary. Le
v. University of Pennsylvania, 321 F.3d 403, 405-06 (3d Cir.
2003).
8
See Fed. R. Civ. P. 23.1 (“The complaint shall . . . allege
with particularity the efforts, if any, made by the plaintiff to
obtain the action the plaintiff desires from the directors . . . and
the reasons for the plaintiff’s failure to obtain the action or for
not making the effort.”).

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Rules of Civil Procedure.9 The problem is that Delaware courts
interpret Chancery Rule 8 to require pleading facts with
specificity. That is not the federal notice pleading standard.

Delaware cases are legion requiring specific allegations
of fact to support a plaintiff’s demand for relief under Chancery
Rule 8. In Grobow v. Perot, the Delaware Supreme Court stated
that even under Chancery Rule 12(b)(6) conclusions of fact will
be rejected if not supported by allegations of “specific facts.”
539 A.2d at 187 n.6. The Delaware Supreme Court reiterated
that maxim in In re Tri-Star Pictures, Inc., Litig., 634 A.2d 319,
326 (Del. 1993), and the Court of Chancery continues routinely
to apply it. See, e.g., Crescent/Mach I Partners L.P. v. Turner,
846 A.2d 963, 984 (Del. Ch. 2000). We recognize that the
District Court (mistakenly) cited derivative suit pleading cases
at times, especially in its first memorandum.10 However, the
District Court drew more heavily from Chancery Rule 8
precedents, and it expressly relied on that Rule alone. Reading
its opinions as a whole, we think it fairest to take the District
Court on its own terms. We conclude that the District Court
applied Chancery Rule 8, not Rule 23.1, and then imputed

9
Compare Del. Ch. Ct. R. 8 (“A pleading which sets forth a
claim for relief . . . shall contain . . . a short and plain statement
of the claim showing that the pleader is entitled to relief . . . .”)
with Fed. R. Civ. P. 8 (“A pleading which sets forth a claim for
relief . . . shall contain . . . a short and plain statement of the
claim showing that the pleader is entitled to relief . . . .”).
10
Citing Aronson v. Lewis, 473 A.2d 805 (Del. 1984), a classic
Delaware derivative case, for its pleading standards was such an
error, as was citing In re RSL Primecall, Inc., which relied on
Aronson.

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Chancery Rule 8's requirements to Federal Rule of Civil
Procedure 8.

Delaware courts consider Chancery Rule 8 specificity
requirements as consonant with notice pleading, see, e.g.,
Salomon v. Pathe Communications Corp., 672 A.2d 35, 39 (Del.
1996), but such notice pleading bears scant resemblance to the
federal species. For example, we recently rejected an appellee’s
argument that a complaint “lacked sufficient factual support”
with the terse declaration that “a plaintiff need not plead facts.”
Alston v. Parker, 363 F.3d 229, 233 n.6 (3d Cir. 2004). We
explained that instead “a plaintiff need only make out a claim
upon which relief can be granted. If more facts are necessary to
resolve or clarify the disputed issues, the parties may avail
themselves of the civil discovery mechanisms under the Federal
Rules.” Id. We held that the District Court erred by mandating
fact-pleading under Rule 12(b)(6), and we vacated and
remanded its decision. As we explained, we merely submitted
to the Supreme Court’s reminder in Leatherman v. Tarrant
County Narcotics Intelligence and Coordination Unit, 507 U.S.
163 (1993), the essence of which it recently reiterated in
Swierkiewicz v. Sorema, 534 U.S. 506, 512 (2002), that the
Federal Rules of Civil Procedure “do not require a claimant to
set out in detail the facts upon which he bases his claim.” 507
U.S. at 168 (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)).

The District Court erred by assuming that Delaware’s
notice pleading cases are interchangeable with federal notice
pleading cases.11 They are not. By requiring Stanziale to allege

11
We take it as a commonplace that under Hanna v. Plumer,
380 U.S. 460 (1965), federal pleading standards apply in federal

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specific facts, the District Court erroneously preempted
discovery on certain claims by imposing a heightened pleading
standard not required by Federal Rule of Civil Procedure 8.

What should the District Court have required Stanziale to
allege? First, regarding facts, the Supreme Court in
Swierkiewicz illustrated the “simplicity and brevity” of factual
allegations required under Rule 8. The Court endorsed Form 9
of the Federal Rules of Civil Procedure Forms, which sets forth
an illustrative complaint of negligence: “On June 1, 1936, in a
public highway called Boylston Street in Boston, Massachusetts,
defendant negligently drove a motor vehicle against plaintiff
who was then crossing said highway.” 534 U.S. at 513 n.7.
Notably, this example provides a few facts; the claim does not
merely state that “defendant negligently injured plaintiff.” The
lesson, as we take it, is that supporting facts should be alleged,
but only those necessary to provide the defendant fair notice of
the plaintiff’s claim and the “grounds upon which it rests.”
Conley, 355 U.S. at 47. That proposition is not inimical to our
teaching in Alston that facts need not be pleaded. A plaintiff
should plead basic facts, such as they are, for those are “the

court. See Ingersoll-Rand Fin. Corp., 921 F.2d 497, 501 (3d
Cir. 1990) (“Since [plaintiff’s] action was brought in federal
court, the Federal Rules of Civil Procedure govern the
sufficiency of the pleadings.”); Gibbs v. Carnival Cruise Lines,
314 F.3d 125 (3d Cir. 2002) (noting that under Hanna “federal
courts apply on-point Federal Rules of Civil Procedure instead
of state procedural practices”). See also 5B C HARLES A LAN
W RIGHT & A RTHUR R. M ILLER, F EDERAL P RACTICE AND
P ROCEDURE § 1357 (3d ed. 2004) (“Federal law governs
whether a complaint in a federal court action states a claim for
relief with the requisite particularity.”).

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grounds” upon which the plaintiff’s claim rests. Even at the
pleading stage, a defendant deserves fair notice of the general
factual background for the plaintiff’s claims. Id. But, as we
explained in Alston and reiterate today, a plaintiff will not be
thrown out of court on a Rule 12(b)(6) motion for lack of
detailed facts. To say that a plaintiff’s claim appears factually
weak is not to say that he states no claim. That truism is
particularly obvious where, as here, a defendant’s motion to
dismiss articulates the plaintiff’s claims that supposedly lack
factual support. See Alston, 363 F.3d at 234. To hold otherwise
would be effectively to transform Rule 12(b)(6) motions into
multi-purpose summary judgment vehicles. That we will not do.

Second, Stanziale must plead around the business
judgment rule. In Delaware, the business judgment rule is a
presumption that directors act in good faith, on an informed
basis, honestly believing that their action is in the best interests
of the company. Aronson v. Lewis, 473 A.2d 805, 812 (Del.
1984).12 Generally speaking, we will not rely on an affirmative
defense such as the business judgment rule to trigger dismissal
of a complaint under Rule 12(b)(6). See In re Adams Golf Inc.
Sec. Litig., 381 F.3d 267, 277 (3d Cir. 2000). A complaint may
be dismissed under Rule 12(b)(6) where an unanswered
affirmative defense appears on its face, however. ALA, Inc. v.

12
The parties on appeal treat both directors and officers as
comparable fiduciaries, and they appear to be correct in doing
so. See Arnold v. Soc’y for Savings Bancorp, Inc., 678 A.2d
533, 539 (Del. 1996) (“Fiduciary duties are owed by the
directors and officers to the corporation and its stockholders.”).
Unless stated otherwise, we therefore will assume for the
purposes of this case that theories of liability against corporate
directors apply equally to corporate officers.

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CCAIR, Inc., 29 F.3d 855, 859 (3d Cir. 1994). Stanziale’s
Amended Complaint declares that the business judgment rule
does not vitiate any of his claims. He thus must plead that he
overcomes the presumption created by that rule – that Tower
Air’s directors and officers acted in good faith and on an
informed basis. In re Walt Disney Co. Derivative Litig., 825
A.2d 275, 286 (Del. Ch. 2003).

Overcoming the presumptions of the business judgment
rule on the merits is a near-Herculean task. Delaware courts
have said that it may be accomplished by showing either
irrationality or inattention. A plaintiff may overcome the
presumption that directors and officers acted in good faith by
establishing that a decision was so egregious as to constitute
corporate waste. Gagliardi v. Trifoods Int’l, Inc., 683 A.2d
1049, 1053 (Del. Ch. 1996) (Allen, Ch.). The burden here is to
show irrationality: a plaintiff must demonstrate that no
reasonable business person could possibly authorize the action
in good faith. Id. at 1054. Put positively, the decision must go
so far beyond the bounds of reasonable business judgment that
its only explanation is bad faith. Parnes v. Bally Entm’t Corp.,
722 A.2d 1243, 1246 (Del. 1999) (en banc). Alternatively, a
plaintiff may overcome the presumption that directors and
officers acted on an informed basis by establishing that a
decision was the product of an irrational process or that
directors failed to establish an information and reporting system
reasonably designed to provide the senior management and the
board with information regarding the corporation’s legal
compliance and business performance, resulting in liability. In
re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 967-70

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(Del. Ch. 1996) (Allen, Ch.).13 Viewing these methods along a
different axis, action may lead to liability where the action or the
process that led to it were irrational; inaction may lead to
liability where no red flag monitoring system is installed and
non-compliance with applicable legal standards results.

B. Application of Federal Pleading Standard

In view of the foregoing, the question for this Court is
whether Stanziale’s Amended Complaint sets out a simple and
brief statement of claims of irrationality or inattention and gives
the directors and officers fair notice of the grounds of those
claims. “[U]nless it appears beyond doubt that the plaintiff can
prove no set of facts in support of his claim[s] which would
entitle him to relief,” Conley, 355 U.S. at 45-46, we must
reverse the District Court.

Count One: Irrationality – Directors

Even under notice pleading standards, Stanziale’s claim

13
For simplicity’s sake we have characterized this as a method
of overcoming the presumption of the business judgment rule.
We acknowledge that “technically speaking, [the rule] has no
role where directors have either abdicated their functions, or
absent a conscious decision, failed to act.” Aronson, 473 A.2d
at 813. Therefore, it is more accurate to say that successfully
alleging inattention circumvents the business judgment rule. But
see In re The Walt Disney Co., 825 A.2d at 286 (“Plaintiffs may
rebut the presumption that the board’s decision is entitled to
deference [under the business judgment rule] by raising a reason
to doubt whether the board’s action was taken on an informed
basis . . . .”).

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that Tower Air’s directors breached their duty to act in good
faith by declining to repair Tower Air’s jet engines and instead
replacing them with new engines must fail. We consider that an
allegation of a classic exercise of business judgment because a
reasonable business person could have reached that decision in
good faith. See Gagliardi, 683 A.2d at 1053. Certainly, bad
faith is not the only possible explanation for the decision. See
Parnes, 722 A.2d at 1246. Moreover, the Amended Complaint
states that Nachtomi charted this course “because the initial
payment was lower than the money needed for repair of the
disabled engines which [Tower Air] already owned.” We earlier
stressed that we will not dismiss a complaint for lack of detailed
facts. The problem here, though, is not the facts that are not
pleaded, but the facts that are. It seems to us that a complaint is
self-defeating when it states an ostensibly legitimate business
purpose for an allegedly egregious decision. Cf. Grobow, 539
A.2d at 190. Given his concession, it appears to us that
Stanziale can prove no set of facts consistent with his claim –
that buying and leasing engines rather than repairing them was
an egregious decision – that would entitle him to relief. We thus
will affirm the District Court on this Count.

Count Two: Irrationality/Inattention – Officers

In Count Two, Stanziale alleges that Tower Air’s officers
did nothing when they were told by the corporate Director of
Safety of quality assurance problems with aircraft maintenance
and of failures to record maintenance and repair work. Whether
the officers’ behavior is construed as an egregious decision or
as unconsidered inaction, that allegation is troubling. Under no
circumstances should aircraft maintenance problems be ignored.
Lives are on the line. Yet, the District Court dismissed Count

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Two on the ground that Stanziale alleged “no facts that would
characterize [the officers’] actions as egregious.” We can
imagine few things more egregious. The officers’ alleged
passivity in the face of negative maintenance reports seems so
far beyond the bounds of reasonable business judgment that its
only explanation is bad faith. See Parnes, 722 A.2d at 1246.
Accordingly, we will reverse the District Court on this Count.14

Count Three: Inattention – Directors

We understand Stanziale here to allege two forms of
inattention: first, that the directors employed an irrational
decisionmaking process in approving multi-million dollar leases
of jet engines; and, second, that the board failed in good faith to
install a legal compliance and business performance monitoring
system. The District Court appeared to wrestle with the first
allegation, but we do not think it presents a close question. We
conclude that Stanziale plainly states a claim of inattention on
the first ground, and therefore we need not reach the second
ground.

Stanziale argues on appeal that the directors’ alleged
rubber-stamping of major capital expenditures is consistent with
bad faith. We agree. In re Caremark instructs that a “good faith
effort to be informed and exercise judgment” is the core duty of

14
We are less sure whether the officers’ alleged failure to
report maintenance problems to the directors, or their alleged
failure to advise the directors concerning the long-term financial
ramifications of the failure to maintain the engines, constitutes
irrationality or inattention. We need not reach this question,
however, as we reverse the District Court on Count Two on
other grounds.

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care inquiry. 698 A.2d at 967. Applying this standard, the
Court of Chancery recently held that a plaintiff stated a claim by
pleading that directors “consciously and intentionally”
disregarded their responsibilities and adopted a “we don’t care
about the risks” attitude regarding a material corporate decision
– hiring a new president. In re The Walt Disney Co., 825 A.2d
at 289. Stanziale alleges that the directors’ inattention when
writing multi-million dollar checks was “intentional, willful . .
. and malicious.” The grounds of his claim are that board
minutes reflect that the aircraft engine outlays were made with
no discussion. That is enough to survive a motion to dismiss
under Federal Rule of Civil Procedure 12(b)(6). The directors
are on notice of the claim, which is cognizable in Delaware, and
the grounds upon which it rests. We of course offer no opinion
on whether a corporate board signing large checks without
comment constitutes a “we don’t care attitude,” for that is not
our mandate. It appears to us possible that Stanziale may prove
a set of facts consistent with his claim of irrational
decisionmaking, and so dismissal was unwarranted.

We recognize the apparent tension between allowing
Stanziale to go forward with this claim while we hold in Count
One that the terms of the decision at issue were not irrational,
but that is simply Delaware law as we understand it. In
Delaware, the merits of a business decision are considered
separately from the process used to reach that decision. In
Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (en banc), for
example, the Delaware Supreme Court emphasized that “[d]ue
care in the decisionmaking context is process due care only.”
Id. at 264 (emphasis in original). Substantive review of business
decisions, the Court explained, instead is effected when
decisions are tested for bad faith or waste. Id.; see also id. at

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264 n.66 (“directors’ decisions will be respected by courts
unless the directors . . . do not act in good faith, act in a manner
that cannot be attributed to a rational business purpose or reach
their decision by a grossly negligent process that includes the
failure to consider all material facts reasonably available.”)
(emphasis added).15 We infer from this language that an
unsuccessful attack on an allegedly egregious decision does not
preclude an attack on the process used to reach that decision. At
all events, we believe it would be premature to order dismissal
of Count Three on the basis of a connection that the parties have
not briefed and that the Supreme Court of Delaware appears to
reject. We thus conclude that our decision on this Count
accords with our decision on Count One. We hold that the
District Court erred in ruling that Stanziale did not allege facts
in Count Three showing conscious disregard “with sufficient
particularity,” and we will reverse.16

15
See also Crescent/Mach I Partners L.P., 846 A.2d at 986 (“I
conclude that the director defendants met their duty of care by
informing themselves adequately and that the real focus of this
case is scrutiny of their actions in terms of an alleged lack of
good faith . . . .”).
16
Stanziale’s second allegation, that the board breached its
duty to install a corporate monitoring and reporting system to
signal the officers and directors regarding the corporation’s legal
compliance and its business performance, poses an important
question that will have to wait for another day. The question
revolves around In re Caremark, which states that directors will
be liable for ignorance of “liability creating activities” only
where the board’s failure to exercise oversight is “sustained or
systemic.” 698 A.2d at 971. The parties vigorously dispute
whether “liability creating activities” refers to lack of directorial
due care, or the corporation’s breach of external law. The

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 Count Four: Irrational Action/Inaction – Officers

Taking together Stanziale’s list in this Count of allegedly
egregious managerial decisions, we conclude that he states a
claim.17 Especially troubling is the allegation that the officers
failed to process used airline tickets worth one million dollars.
If proved, that might constitute gross negligence – but then, by
definition, the only explanation for the failure is not bad faith.
See Parnes, 722 A.2d at 1246. The allegation that Tower Air’s
Santo Domingo Route was established and maintained “purely
to please” Nachtomi’s family, however, seems explicable only
by bad faith. We rely here on Parnes, wherein the Court of
Chancery held that a plaintiff stated a claim under Chancery
Rule 12(b)(6) when he alleged that a corporate chairman and
CEO premised his consent for a merger on a bribe. Parnes, 722
A.3d at 1246-47. The Court concluded that independent
directors could not have approved such a deal in good faith. Id.
We think no reasonable business person acting in good faith
could possibly authorize creating and maintaining an

District Court ultimately avoided that question, holding that no
“sustained or systemic” inattention was alleged. As we hold that
Stanziale has stated a claim of inattention on other grounds, we
need not resolve this dispute, although we wonder how, given
the extent of the allegations in Count Four, Stanziale could be
said to have failed to allege “sustained or systemic” inattention
on the part of the directors.
17
Some items on this list admittedly seem to constitute garden
variety business judgments. Cutting fares unprofitably and
expanding international routes in the midst of a business
downturn would seem to fall into that category. We leave to the
District Court the appropriate characterization of such items,
recognizing that factual development may aid the inquiry.

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unprofitable airline route for years solely to keep his daughter
happy. A desire for familial harmony is not synonymous with
reasoned business judgment. It appears in light of the Santo
Domingo allegation that Stanziale may be able to prove a set of
facts consistent with his claim that Tower Air’s officers acted
irrationally. As the District Court incorrectly dismissed this
Count as factually deficient, we will reverse.18

Count Five: Gross Negligence and
Mismanagement – Officers

Gross negligence in Delaware appears to be synonymous
with engaging in an irrational decisionmaking process. See
Brehm, 746 A.2d at 264 (“[D]irectors must consider all material
information reasonably available, and [their] process is
actionable only if grossly negligent.”); see also McMullin v.
Beran, 765 A.2d 910, 922 (Del. 2000) (citing, inter alia,
Aronson, 473 A.2d at 812).19 Gross negligence is not a theory

18
Stanziale may also allege inattention in Count Four. He
seems to maintain that the officers’ failure to process used
airline tickets, failure to oversee Tower Air’s Tel Aviv
operations, ceding of all management responsibilities to
Nachtomi, and failing to maintain jet engines were products of
an irrational decision-making process. The District Court noted
that Stanziale cited no authority for holding officers liable for
inattention. While Stanziale has cited no such authority on
appeal, either, we do not reach this question as we reverse the
District Court on Count Four on other grounds.
19
We acknowledge that on remand in Brehm the Court of
Chancery appeared to require the plaintiffs in that case to plead
more than gross negligence. In re The Walt Disney Co., 825
A.2d at 278 (noting that “[i]t is rare when a court imposes

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of liability applicable to the merits of business decisions. See
Brehm, 746 A.2d at 264. Accordingly, it seems to us that by
alleging gross negligence Stanziale restates in Count Five the
identical theory of liability – an irrational decisionmaking
process – on which he at least partially predicated Counts Two,
Three, and Four. It is tempting to affirm the District Court’s
dismissal of this Count to excise this apparent redundancy.
Nevertheless, we think Stanziale deserves the opportunity to
refine his theories of liability on remand with the aid of
discovery. It is still early in this litigation. It may be that the
adversarial process in its later stages elicits refinements in the
concepts of gross negligence in Delaware that the parties have
not yet uncovered, focused as they have been on pleading
standards. Having determined that Stanziale successfully stated
claims in Counts Two, Three, and Four, we now hold that
Stanziale has stated a claim in Count Five. We will reverse the
District Court on this Count.

C. Exculpatory Charter Provision

Apparently for the first time on appeal, the directors and
officers argue that Tower Air’s certificate of incorporation
contained an exculpatory charter provision established pursuant
to 8 Del. C. § 102(b)(7) (authorizing a certificate of

liability on directors of a corporation for a breach of the duty of
care . . , [b]ut the facts alleged in the complaint do not implicate
merely negligent or grossly negligent decision making by
corporate directors). Cf. In re Caremark, 698 A.2d at 967 n.16
(“The vocabulary of negligence while often employed, e.g., [in
Aronson], is not well suited to judicial review of board
attentiveness . . . .”). So long as the Supreme Court of Delaware
uses the term, however, we will.

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incorporation to contain “[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 . . . .”). Neither of the District Court’s opinions
mentions this issue. We decline to address it today because “we
generally decline to address arguments for the first time on
appeal,” Lauderbaugh v. Hopewell Twp., 319 F.3d 568, 574 (3d
Cir. 2003), and because the protection of an exculpatory charter
provision appears to be in the nature of an affirmative defense.
As we have said, affirmative defenses generally will not form
the basis for dismissal under Rule 12(b)(6). See In re Adams
Golf Inc. Sec. Litig., 381 F.3d at 277.

III.

For the foregoing reasons, we will affirm the judgment
of the District Court as to Counts One, Six, and Seven, and
reverse the judgment of the District Court as to Counts Two
through Five.

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