Davis v. Gutierrez, et al.

2018 DNH 063

• Court: District Court, D. New Hampshire
• Decided: March 27, 2018
• Docket: 17-cv-147-JL
• Status: Published

Opinion

UNITED STATES DISTRICT COURT DISTRICT OF NEW HAMPSHIRE

Eugene I. Davis, as Trustee Of the GTAT Litigation Trust, the Duly authorized successor to GT Advanced Technologies Inc., et al.

v. Civil No. 17-cv-147-JL Opinion No. 2018 DNH 063

Thomas Gutierrez and Daniel W. Squiller

MEMORANDUM OPINION

This case involves the actions (and lack thereof) of two

former corporate officers of the New Hampshire-based GT Advanced

Technologies, Inc. (“GTAT”), a now-bankrupt manufacturer of

materials for consumer electronics. The plaintiff1 alleges that

the two former officers, Thomas Gutierrez and Daniel Squiller,

misled GTAT’s board of directors regarding the technological and

economic feasibility of its venture with Apple, Inc., in which

GTAT was to manufacture sapphire for potential use by Apple to

make its smartphone touch-screens more impervious to ruinous

damage.

Broadly speaking, the plaintiff asserts that the defendants

knew or should have known that the agreement with Apple (“Apple

1 The plaintiff is the Trustee of the GTAT Litigation Trust, the duly authorized successor-in-interest to GTAT and its affiliated debtors. Agreement”) was doomed to fail, misled and concealed their

knowledge from GTAT’s board of directors to get the board to

approve the deal, and then reaped substantial profits before

GTAT collapsed into bankruptcy less than one year after entering

into the agreement. The plaintiff’s complaint asserts four

claims against both defendants: Breach of the Fiduciary Duty of

Care (Count 1); Breach of the Fiduciary Duty of Loyalty (Count

2); Corporate Waste (Count 3); and Equitable Subordination

(Count 5). It also asserts two claims against Gutierrez only:

Breach of Contract (Count 4); and “Objection to Claims” (Count

6), as well as one claim against Squiller only: “Objection to

Claims” (Count 7).

The defendants have moved to dismiss all claims in the

complaint2 other than the breach of contract claim asserted

against Gutierrez in Count 4.3 They contend that all of the

2 Doc. no. 1.

3 The defendants purportedly moved to dismiss the plaintiff’s complaint in its entirety, but make no argument in their motion papers as to Count 4, the breach of contract claim against Gutierrez. At oral argument, the defendants asserted that, despite not addressing Count 4 in their motion papers, they were seeking to dismiss the claim based on Rule 9(b). Although the court fails to see how Rule 9(b) would apply to a claim alleging that Gutierrez breached an agreement to repay a portion of the money GTAT advanced him to purchase a secondary residence, the defendants’ failure to address that claim in their motion is a sufficient reason to deny the motion to the extent it seeks dismissal of Count 4. Coons v. Indus. Knife Co., Inc., 620 F.3d 38, 44 (1st Cir. 2010) (noting that the First Circuit has emphasized that “judges are not obligated to 2 claims are subject to the heightened pleading standard of

Federal Rule of Civil Procedure 9(b) because they all “sound in

fraud” and assert that the plaintiff has pled none of his claims

with the requisite particularity. They further argue that even

if Rule 9(b) does not apply, the plaintiff’s claims should still

be dismissed because they fail under the more lenient pleading

standard of Federal Rule of Civil Procedure 8(a). The court

held oral argument on March 20, 2018. After review of the

defendants’ motion, the plaintiff’s objection, the defendants’

reply, and the parties’ exhibits, and after consideration of

oral argument, the court denies the defendants’ motion in its

entirety.

I. Background

The court culls the following facts from the complaint,

from information contained in documents on which the complaint

relies and which are central to the plaintiff’s claims, and from

publically filed documents. See Curran v. Cousins, 509 F.3d 36,

44 (1st Cir. 2007) (in determining the sufficiency of the

complaint under Rule 12(b)(6), the court may consider “documents

central to plaintiffs’ claim [and] . . . documents sufficiently

referred to in the complaint.” (internal quotation omitted)).

do a party’s work for him, ‘searching sua sponte for issues that may be lurking in the penumbra of the motion papers.’” (quoting United States v. Slade, 980 F.2d 27, 31 (1st Cir. 1992))). 3 A. GTAT and sapphire

Prior to 2010, GTAT -- then known as GT Solar

International, Inc. -- manufactured furnaces and other equipment

used to make components for the solar power industry. As that

industry weakened and GTAT’s revenues declined, GTAT began

producing sapphire crystal growth equipment in mid-2010.

Sapphire, one of the hardest substances on Earth, is generally

scratch and chemical resistant, transparent and durable. It is

typically used in light-emitting diodes (LEDs), light sources

for large outdoor displays, and general illumination for lamps,

architectural lighting, and retail displays. Although it is

naturally occurring, sapphire can also be synthetically

manufactured in “advanced sapphire crystallization furnaces”

(“ASC furnaces” or “furnaces”), which heat component compounds

to temperatures in excess of 3000 degrees Fahrenheit.

After acquiring other companies with experience in the

sapphire industry, GTAT began to design and produce ASC

furnaces, which it sold to third parties to produce sapphire.4

By the end of 2012, GTAT’s sapphire business was primarily

related to manufacturing and selling furnaces, rather than

4 While producing ASC furnaces, GTAT continued its solar power industry-related production.

4 production of sapphire, though GTAT continued to produce

sapphire in limited quantities. After an initial increase in

revenue from its furnace production and sales, however, GTAT’s

revenues and income declined sharply in the fiscal years ending

December 31, 2012 and at the start of 2013. This income decline

was reflected in falling stock prices. GTAT’s stock price fell

from $16.51 per share in early July 2011 to $2.94 per share in

early January 2013. In light of GTAT’s struggles, neither

Gutierrez, GTAT’s president and chief executive officer, nor

Squiller, GTAT’s chief operating officer, received a

performance-based bonus at the end of 2012.

With GTAT’s business struggling, Gutierrez and Squiller

shifted the company’s focus to another market: smartphones.

Gutierrez and Squiller believed that sapphire’s strength,

transparency, and durability made it an ideal material to

replace the glass screens used in most smartphones. At that

time, however, sapphire use had been limited to smaller phone

components, such as camera lenses, because of the high cost of

producing large enough amounts of sapphire of sufficient

quality. To produce synthetic sapphire of high quality, various

compounds are heated to extreme temperatures in ASC furnaces,

which, over a period of weeks, grow large crystal logs of

sapphire called “boules”. These boules, if of sufficient

5 quality, are fabricated and separated into wafers for use in

other products.

In order to lower costs and produce the most affordable

high-quality sapphire material, manufacturers attempt to make

the largest boules possible. By early-2013, the maximum boule

size that any manufacturer (in this case, GTAT) had been able to

produce was 115 kg. According to GTAT, it took roughly three

years (from March 2010 to early 2013) to increase the maximum

boule size from 85 kg to 115 kg. However, it was understood

that much larger boules were necessary to justify cost-effective

production of sapphire for smartphone display screen production.

B. Negotiations with Apple

In early 2013, Gutierrez and Squiller learned that Apple

was considering incorporating sapphire display screens into its

new iPhone 6 that was to be unveiled in late-2014. Both men

made a presentation at Apple’s headquarters regarding GTAT’s

developments in sapphire production at that time.

Over the next several months, Gutierrez and Squiller had

numerous meetings with Apple executives, during which they

pitched GTAT as capable of partnering with Apple. In other

words, although GTAT had primarily been a manufacturer and

marketer of ASC furnaces rather than a producer of sapphire,

Gutierrez and Squiller pitched GTAT as being able to produce and

6 supply Apple with a significant quantity of sapphire in any

venture involving iPhone screens.

In late-May 2013, Gutierrez and Squiller proposed a plan to

Apple in which GTAT would sell 875 furnaces to Apple, install

them at an Apple-owned facility, and manage the entire sapphire

production process at the facility. They proposed an aggressive

sapphire production schedule, including producing 145 kg boules

by late-2013 and 165 kg boules by early-2014.4

A few weeks later, Apple informed GTAT that the new iPhone

6 would have a larger display screen than originally

anticipated. Members of the GTAT team who were working with

Gutierrez and Squiller on the proposed Apple venture informed

them that the change would require a significant increase in

either the size of the sapphire boules GTAT would need to

produce or the number of furnaces that Apple would need to

purchase. Either change would involve a large increase in the

cost to Apple. Gutierrez and Squiller instructed the GTAT team

to figure out a way to limit the cost increase of the deal to

Apple to no more than 20% in order to keep the deal enticing to

Apple and best any deal that might be proposed by a competitor.

4 At that point, GTAT had not yet produced a sapphire boule larger than 115 kg.

7 On June 19, 2013, Gutierrez and Squiller met with Apple

executives again. In light of the larger screen size on the

iPhone 6, they proposed increasing both the number of furnaces

GTAT would supply to Apple (from 875 to 910)5 and the size of the

sapphire boules GTAT would produce. Specifically, Gutierrez and

Squiller proposed producing 165 kg boules in January 2014 and

260 kg boules in June 2014. When Apple expressed doubts about

GTAT’s ability to produce 260 kg boules, particularly those that

would yield enough usable sapphire, Gutierrez agreed to “link

approximately $200M of the [ASC furnace] purchase price to this

milestone putting our money where our mouth is.”6

C. GTAT’s internal team expresses reservations

Throughout the summer of 2013, various members of the GTAT

team that were involved with the Apple venture expressed to

Gutierrez and Squiller their reservations about the parameters

of the proposed deal. For example, Dr. Christine Richardson,

the head of research and development for GTAT, told Squiller

that GTAT’s chances of successfully growing 260 kg boules by

June 2014 was just a four on a scale of one to ten.

5 Gutierrez originally proposed to Apple that GTAT would supply 1,200 furnaces. Three days later, Gutierrez modified his proposal to supply 910 furnaces.

6 Complaint (doc. no. 1) at ¶ 45.

8 In late June 2013, James Zahler, another member of GTAT’s

research and development team, expressed reservations to both

defendants about needing to produce a 260 kg boule within one

year. Zahler noted that a 225 kg boule was already “uncharted

territory” and that a 260 kg boule would increase the “technical

risk” beyond what he was comfortable with.7

On June 26, 2013, Gene Skayne, GTAT’s Vice President of

Finance, emailed Squiller and Paul Matthews, a GTAT product

manager, questioning GTAT’s cost models regarding the

feasibility of the company producing massive quantities of

sapphire on an expedited schedule in a cost-effective manner.

Skayne expressed concern over the aggressive utilization rates8

7 The defendants included with their reply brief a copy of Zahler’s June 2013 email expressing his concerns, see doc. no. 29-3, as well as three other emails containing statements by GTAT employees that the plaintiff alleges shows the infeasibility of the Apple venture. The defendants also include with their reply a document summarizing those emails, see doc. no. 29-1, which they contend shows that the plaintiff “has distorted the documents on which he relies.” Id. at 1. Even if the court could properly consider that document at this stage of the litigation, the defendants overstate the inferences that can be drawn from the communications in their entirety. Regardless, at this stage of the litigation, the court must draw all reasonable inferences in favor of the plaintiff, not the defendants. See Katz v. Pershing, LLC, 672 F.3d 64, 70 (1st Cir. 2012). As explained more fully infra, the defendants’ repeated attempts to have the court draw inferences in their favor is misplaced.

8 A utilization rate is the percentage of days out of the year that the furnaces would need to be operating, as opposed to being out of service for maintenance work and other issues.

9 used in GTAT’s models, which had started at 90% but which

Gutierrez and Squiller had pushed to 98%. Skayne noted that the

change “is very aggressive and I don’t see how we get there.”9

Zahler similarly noted at one point that the 98% utilization

rate was just “wishful thinking.”10

Skayne’s June 26 email also questioned the models’ use of a

4% failed run rate.11 Skayne noted that GTAT’s experience in one

of its plants was a failed run rate of about 10% — 12% even for

much smaller boules, and that previous models for the Apple

project had used an 8% rate. Skayne asked “what has changed?”12

The following day, Skayne emailed Squiller again

questioning the updated models for the Apple project:

I had a call today with [GTAT’s internal] team where we discussed changes made to the assumptions I referenced below . . . changing failed runs from 8% to 4%, going from 165 kg boule to 240 kg boule, etc. It seems like the driving force behind these changes is [Gutierrez’s] aversion to showing the need for more than 1000 furnaces for the 70K screen project. While I understand the need to take an aggressive position to make sure we get this business, we need to be aware of the risks we are taking and work over the coming months to mitigate those risks. . . . I don’t want us all to look stupid next year if we can’t get anywhere near the targets agreed with the customer. We’ve set

9 Complaint (doc. no. 1) at ¶ 63.

10 Id.

11A failed run rate is the percentage of attempts to grow a single sapphire boule per year that are unsuccessful.

12 Complaint (doc. no. 1) at ¶ 65 (alteration omitted).

10 a very high bar for ourselves here and need to make sure we deliver.13

Squiller responded that both he and Gutierrez were aware of the

increased risks, and noted that “Apple has a box we are trying

to get into to make the program viable.”14

D. Apple changes the terms of the deal

In late-August or early-September 2013, Apple suddenly

changed course and proposed entirely different terms to

Gutierrez and Squiller. Under Apple’s revised proposal, rather

than Apple purchasing fewer than 1,000 ASC furnaces from GTAT

and having GTAT manage the production of sapphire, GTAT would:

(a) itself purchase more than 2,000 furnaces to manufacture

250,000 iPhone screens per day using “prepayments” from Apple

(at that time, GTAT had sold and installed fewer than 600

furnaces in its entire history);15 (b) install those furnaces in

a large, yet-to-be constructed facility located in Mesa,

13 Id. at ¶ 66. 14 Id. at ¶ 67. 15The number of iPhone screens to be produced under Gutierrez’s previous proposal is unclear, but it appears to be fewer than 120,000 screens per day. See Complaint (doc. no. 1) at ¶ 44 (alleging that Gutierrez proposed on June 19, 2013 that GTAT sell to Apple 1,200 furnaces to manufacture 120,000 screens per day, and then subsequently submitted a revised proposal which reduced the number of furnaces to 910).

11 Arizona, which GTAT would lease from Apple, and (c) produce

sapphire boules “on an expedited basis, in staggering volumes,

and of unprecedented size and quality.”16 Specifically, with

regard to the production of sapphire boules, rather than the

already optimistic goal of producing a 260 kg boule by June

2014, Apple proposed that GTAT produce (a) a 262 kg boule by

January 6, 2014, (b) 21 such boules by February 1, 2014, (c) 806

such boules by March 31, 2014, and (d) 5,301 such boules by June

30, 2014. GTAT’s failure to adhere to the aggressive schedule

would force it to pay significant liquidated damages penalties.

In addition to these terms, GTAT would need to bear the

cost of more than 700 personnel, utilities, insurance, and raw

materials for the Arizona facility. GTAT would also be required

to grant Apple a security interest in the furnaces. Finally,

Apple was under no obligation to purchase any sapphire from

GTAT, even though GTAT was not allowed to sell its sapphire to

any other entity. In other words, under Apple’s proposal, GTAT

would only realize a profit if (a) the company was able to

produce massive amounts of sapphire that Apple valued in excess

of the prepayments it had transferred to GTAT and (b) Apple

agreed to purchase the sapphire in an amount exceeding the pre-

payments. Squiller would later describe Apple’s sudden revision

16 Complaint (doc. no. 1) at ¶ 47. 12 of the terms of the proposed venture “after months of extensive

negotiations over price and related terms” as “a classic bait

and switch.”17

E. GTAT’s internal team raises concerns about revised terms

GTAT’s internal team’s skepticism about the terms of the

proposed Apple venture grew stronger after Apple provided the

new parameters of the deal. In mid-September 2013, Zahler

informed Squiller that GTAT’s efforts to produce quality

sapphire boules larger than 115 kg were not going well, as

larger boules had lower or only “sporadic” quality performance.18

Richardson felt the “timeline was crazy” while Zahler described

it as “just bonkers.”19 As for Matthews, he felt that the new

terms represented a “paradigm shift,”20 and that Gutierrez’s and

Squiller’s push to make the deal work caused GTAT’s internal

models to “drift[] further and further away from what [GTAT] had

data to support was doable.”21

17 Squiller Decl. (doc. no. 26-2) at p. 5, ¶¶ 10, 11.

18 Complaint (doc. no. 1) at ¶ 59 (alteration omitted).

19 Id. at ¶ 60.

20 Id.

21 Id. at ¶ 62.

13 Matthews expressed concern to Squiller over the increasing

yield rate included with GTAT’s revised cost models, which had

increased from 44% in June 2013 to 57% in August.22 Matthews was

particularly troubled because Apple had not yet given GTAT the

final specifications for the screens to be manufactured and,

therefore, Matthews felt like the projection, which seemed much

too aggressive in any case, was largely guesswork. Eventually,

when GTAT received the final specifications from Apple, Matthews

raised further concerns with Squiller, as those specifications

should have reduced the expected yield rate, but instead the

cost models used by Gutierrez and Squiller showed an increased

yield rate. Squiller responded that the team felt like Matthews

“was resisting the change” and he urged Matthews to “play along

with the requests that were being made.”23 According to

Matthews, however, neither he nor the other members of the GTAT

team believed the projected yield numbers could possibly be

attained.

In September 2013, Richard Gaynor, GTAT’s chief financial

officer, also expressed concern about the 57% yield rate being

used in the models when GTAT’s historic yield rate ranged from

22The yield rate is the percentage of sapphire per boule that is of sufficient quality to be used to create iPhone screens.

23 Complaint (doc. no. 1) at ¶ 70.

14 30% to 40%. When Gaynor asked Skayne if GTAT’s goals under the

Apple Agreement were “supported by actual experiences,” Skayne

replied that the yield numbers simply kept rising and that

Squiller had agreed with Apple that it could be done.24

Gutierrez and/or Squiller made additional changes to the

underlying assumptions in GTAT’s cost models to make Apple’s

revised proposed terms seem workable from GTAT’s perspective.

For example, GTAT’s early models used an “excess capacity”

multiplier between 5% — 15%.25 GTAT’s final model used just a 3%

excess capacity multiplier. Similarly, Gutierrez and Squiller

simply adopted Apple’s proposed fabrication costs and

assumptions26 into GTAT’s models, despite being informed by

GTAT’s team “that Apple’s information was unrealistic.”27 When

the GTAT team expressed these concerns to Squiller, he ignored

them and simply directed them to use Apple’s information.

24 Id. at ¶ 71.

25An excess capacity multiplier is a percentage used to calculate how many additional furnaces need to be produced beyond the minimum number expected for the project (i.e., if GTAT expected to need 100 furnaces under the terms of a deal, and it used a 15% excess capacity multiplier, GTAT would account for the cost of 115 furnaces in its models). It is considered a “safety margin” to guard against failure of furnaces. Complaint (doc. no. 1) at ¶ 68.

26The fabrication costs relate to the process associated with cutting, polishing, and shaping the sapphire boules.

27 Complaint (doc. no. 1) at ¶ 73.

15 F. GTAT board considers and ultimately approves the Apple Agreement

In September 2013, Gutierrez conceded privately that GTAT

had “gotten sucked in” and that the Apple deal “sucks.”28

Nevertheless, because he and Squiller had failed to explore

other potential business partners throughout 2013, Gutierrez

acknowledged that not entering the agreement with Apple meant “a

lot of cost reduction” for GTAT, including cuts to his and

Squiller’s salaries.29 Around the same time, Squiller similarly

acknowledged that GTAT’s “economics were already on the edge”

and “failure likely means bankruptcy of the company.”30

Nevertheless, Gutierrez and Squiller continued to recommend

the Apple deal to GTAT’s board of directors. In September,

Gutierrez represented to the board that GTAT had been “treated

as a valued partner” throughout the negotiation process with

Apple.31 On October 22, 2013, Gutierrez described GTAT as having

made “very significant progress” with negotiations and stated

that the company had secured several key concessions from Apple,

28 Id. at ¶ 50.

29 Id.

30 Id. at ¶ 75 (alteration omitted).

31 Id. at ¶ 76.

16 including contract provisions regarding “warranties, liquidated

damages, treatment of intellectual property and to a more

limited extent the economics of the deal for GTAT.”32 In

addition, Gutierrez assured the board that GTAT’s internal cost

models which showed that the production schedule was feasible

were based on “conservative” assumptions.33

The plaintiff alleges that in reality, however, little if

any of this was true. As Squiller later described, after Apple

had proposed revised terms in late-August or early-September

2013, “[w]hat ensued was anything but an arm’s-length

negotiation. Apple simply dictated the terms and conditions of

the deal to GTAT.”34 And, as discussed supra, the plaintiff

alleges that the assumptions underlying the models were far from

conservative, and in fact were so aggressive that they were

unattainable.

On October 28, 2013, Gutierrez recommended to GTAT’s board

of directors that they approve the Apple Agreement, stating that

management “had deemed the transaction to be in the best

32 Id. (alteration omitted).

33 Id. at ¶ 77.

34 Squiller Decl. (doc. no. 26-2) at 8, ¶ 16.

17 interest of the Company.”35 That same day, the board of

directors voted to approve the Agreement.

The Apple Agreement approved by the board contained terms

similar, if not identical, to those Apple proposed in late-

August or early-September 2013. Specifically, the Agreement

called for Apple and GTAT to jointly develop a facility in Mesa,

Arizona, where GTAT, employing over 700 people and using more

than 2000 ASC furnaces, would manufacture sapphire exclusively

for Apple. Rather than its past practice of selling the

furnaces, GTAT would own and operate them. In addition, Apple

was to provide GTAT with a “prepayment” of approximately $578

million to be paid in installments, which GTAT was to repay over

five years, starting in 2015.

G. Defendants profit from the Apple Agreement

Not surprisingly, shortly after the Apple Agreement was

announced, GTAT’s stock price skyrocketed. In response, on

December 16, 2013, Gutierrez entered into a Rule 10b5-1 plan.36

Between December 16, 2013 and March 13, 2014, Gutierrez sold

35 Complaint (doc. no. 1) at ¶ 51.

36A Rule 10b5–1 plan is an agreement “which allows corporate insiders to set a schedule by which to sell shares.” Wietschner v. Monterey Pasta Co., 294 F. Supp. 2d 1102, 1117 (N.D. Cal. 2003).

18 343,625 shares of GTAT’s stock under the plan. Gutierrez also

sold an additional 90,000 shares on the open market outside of

the plan, and he exercised his option on another 100,000 shares.

On March 14, 2014, Gutierrez entered into another Rule

10b5-1 plan. Pursuant to this second plan, Gutierrez sold an

additional 264,248 shares of GTAT stock and exercised his option

on 100,000 more shares. In total, Gutierrez sold nearly 50% of

his holdings in GTAT stock after the Apple deal for about $10.5

million. Squiller, meanwhile, sold approximately 12% of his

holdings in GTAT stock (121,190 shares) after the Apple

Agreement for about $2 million.37

In addition, both Gutierrez and Squiller received large

cash bonuses after GTAT entered into the Apple Agreement. In

late-2013, Gutierrez received a $1.25 million bonus and Squiller

received a $772,500 bonus.

I. GTAT immediately fails to perform under the Apple Agreement

GTAT quickly fell behind its targets under the Apple

Agreement. Early attempts to successfully produce a 262 kg

sapphire boule failed. In November 2013, four of the five 262

kg boules GTAT produced were unusable, and the fifth yielded

just 43 mm of usable sapphire, well below the necessary yield

37Neither Gutierrez nor Squiller had sold any shares of GTAT stock in nearly a year prior to these sales. 19 rate. By December 2013, GTAT was already four weeks behind

schedule, and attempts to create usable 262 kg sapphire boules

continued to fail.

By June 2014, after repeated delays and failures to adhere

to the production schedule in the Apple Agreement, Gutierrez met

with Apple to “fall on his sword,” and noted several problems

with GTAT’s attempts to meet the parameters of the deal, nearly

all of which were identified by the GTAT team before entering

into the Apple Agreement.38 Shortly thereafter, GTAT abandoned

its attempts to produce a 262 kg sapphire boule, and instead

tried to comply with the other terms of the Apple Agreement by

producing smaller boules.

In addition, the Arizona facility encountered significant

delays and additional costs. The facility required 350 more

employees than what was originally estimated, and it was

considered a “highly contaminated environment” because of the

ongoing construction work.39

In August or September 2014, GTAT attempted to renegotiate

the Apple Agreement. Apple expressed a willingness to make some

of GTAT’s proposed concessions. But it was not close to enough

38 Complaint (doc. no. 1) at ¶ 91.

39 Id. at ¶ 94.

20 to preserve the viability of their arrangement from GTAT’s

perspective.

J. Apple unveiling and GTAT’s financial collapse

On September 9, 2014, Apple unveiled the iPhone 6. During

the iPhone 6 launch, Apple announced that the new phone would

have a display produced from ion-strengthened glass, a product

manufactured by GTAT’s competitor. Within two days of the

announcement, GTAT’s stock price fell more than 25% on heavy

trading volume.

On October 6, 2014, GTAT filed for bankruptcy protection

under Chapter 11 of the Bankruptcy Code, owing $1.3 billion to

its creditors. GTAT’s bankruptcy announcement significantly

diminished the value of the company. On the day of the

announcement, the price of GTAT stock fell from $11.06 per share

to $0.80 per share on the heaviest trading volume in the history

of the company. The NASDAQ immediately suspended trading of the

company’s common stock, and GTAT was formally delisted shortly

thereafter.

Apple withheld its final scheduled prepayment of $138

million because of GTAT’s failure to perform. Thus, GTAT

received a total of $439 million from Apple in prepayments under

the Agreement. GTAT spent more than twice that amount --

21 approximately $900 million –- just to try to meet its

obligations under the Agreement.

II. Analysis

As mentioned above, the plaintiff asserts four claims

against both defendants: Breach of the Fiduciary Duty of Care

(Count 1); Breach of the Fiduciary Duty of Loyalty (Count 2);

Corporate Waste (Count 3); and Equitable Subordination (Count

5). He also asserts two claims against Gutierrez only: Breach

of Contract (Count 4); and “Objection to Claims” (Count 6), as

well as one claim against Squiller only: “Objection to Claims”

(Count 7).

The parties disagree over whether the claims are subject to

the heightened pleading standard of Federal Rule of Civil

Procedure 9(b) or the more lenient pleading standard of Rule

8(a). The defendants argue that Rule 9(b) applies to all of the

plaintiff’s claims, while the plaintiff contends that Rule 9(b)

does not apply to any of his claims.

As discussed infra, because portions of the plaintiff’s

breach of fiduciary duty claims are grounded in fraud, those

portions of the claims are subject to Rule 9(b)’s heightened

pleading standard. The factual allegations in the plaintiff’s

complaint, however, easily clear that bar.

22 A. Heightened pleading standard

Rule 9(b) provides that, “[i]n alleging fraud or mistake, a

party must state with particularity the circumstances

constituting fraud or mistake.” The defendants contend that

although the complaint does not allege a claim for fraud per se,

all of the plaintiff’s claims are “grounded in . . . averments

of fraud,” and therefore are subject to Rule 9(b)’s rigorous

pleading standards. The plaintiff counters that his claims

remain plausible absent allegations of fraud and are therefore

not subject to Rule 9(b)’s heightened pleading requirements.

First, although the parties, and in particular the

defendants, argue over whether Rule 9(b) applies to every claim

asserted in the complaint, the rule plainly does not apply to

Counts 3, 5, 6, or 7. Although a claim for corporate waste,

Count 3, may be based on allegations of fraud and therefore

subject to Rule 9(b), see, e.g., Stern v. Gen. Elec. Co., 924

F.2d 472, 477 (2d Cir. 1991), that is not the basis of the

corporate waste claim in this case.40 Rather, the plaintiff’s

corporate waste claim is based on allegations that in light of

the defendants’ knowledge about the infeasibility of the Apple

venture, no person of ordinary, sound judgment could conclude

40GTAT was incorporated under Delaware law and the parties agree that Delaware law governs Counts 1 through 3 of the complaint.

23 that the venture was in GTAT’s best interest.41 At most, such a

claim alleges that the defendants acted in bad faith, which does

not implicate Rule 9(b). Stern, 924 F.2d at 477 (noting that in

the context of a corporate waste claim, “[u]nlike allegations of

fraud, . . . an allegation of bad faith would not need to be

supported by particular factual statements”). In addition, the

defendants’ arguments as to why the plaintiff’s equitable

subordination and set-off claims, Counts 5, 6, and 7, should be

dismissed are procedural, rather than substantive, in that they

argue that only the Reorganized Debtors, and not the plaintiff,

can bring such claims. They also argue that even if the

plaintiff can bring such claims, he cannot do so in this

litigation. Thus, the only claims to which Rule 9(b) may apply

are the breach of fiduciary duty claims asserted in Counts 1 and

2.

The plaintiff does not meaningfully dispute that at least a

portion of both of his breach of fiduciary duty claims is based

on allegations of fraud. Both claims rest, in part, on

allegations that the defendants breached their fiduciary duty by

intentionally “[f]ailing to disclose material information to

41See Complaint (doc. no. 1) at ¶ 118 (alleging that the defendants committed corporate waste because the Apple Agreement “was so one-sided that no business person of ordinary, sound judgment, particularly persons such as Defendants, who knew about its technical and economic infeasibility, could conclude that the contract was beneficial to the Company.”). 24 [GTAT’s] board of directors regarding the technical and economic

feasibility of the Apple [Agreement].”42 Indeed, as the

plaintiff specifically notes in his objection, this case is

about the defendants’ “misleading statements and failure to

disclose material information to GTAT’s board—in their

capacities as corporate officers—when asking the board to

approve the Apple [Agreement].”43 Thus, at least a portion of

the plaintiff’s breach of fiduciary duty claims is based on

“core allegations [that] effectively charge fraud” and those

portions of the claim therefore fall under the umbrella of Rule

9(b). N. Am. Catholic Educ. Programming Found., Inc. v.

Cardinale, 567 F.3d 8, 15 (1st Cir. 2009) (analyzing claims for

breach of fiduciary duties of loyalty and care under Rule 9(b)

because the claims were based on the defendants’ alleged

fraudulent omission of material facts); see Hallal v. Vicis

Capital Master Fund Ltd., No. CIV.A. 12-10166-NMG, 2013 WL

1192384, at *15 (D. Mass. Feb. 25, 2013) (Boal, J.) (applying

Rule 9(b) to plaintiff’s breach of fiduciary duty claim because

that claim was based on central allegations that the defendants

were involved in an insurance fraud scheme).

42Complaint (doc. no. 1) at ¶¶ 108(f) (breach of fiduciary duty of care claim) & 114(f) (breach of fiduciary duty of loyalty claim). 43 Pl.’s Obj. (doc no. 26) at 40 (emphasis in original). 25 Despite the defendants’ insistence to the contrary,

however, the plaintiff’s breach of fiduciary duty claims are not

based entirely on allegations of fraud. Indeed, the plaintiff’s

breach of fiduciary duty of care claim in Count 1 alleges that

the defendants were obligated “to act in an informed,

deliberate, and rational manner . . . and with the degree of

care that an ordinary prudent person would exercise under the

same or similar circumstances.”44 The plaintiff further alleges

that the defendants “breached their fiduciary duty of care to

[GTAT] by engaging in grossly negligent conduct . . . and by

failing to act in an informed, deliberate and rational manner

with respect to the Apple [Agreement].”45 The plaintiff provides

specific examples of such breaches, including that the

defendants allegedly ignored other business opportunities, put

GTAT into a weak bargaining position with Apple, and ignored

material information regarding the infeasibility of the venture.

The plaintiff’s breach of fiduciary duty of loyalty claim

alleges similar, and often identical, conduct by the

defendants.46 These allegations are not “grounded in fraud” and

are therefore not subject to Rule 9(b)’s heightened pleading

44 Complaint (doc. no. 1) at ¶ 107. 45 Id. at ¶ 108 (emphasis added). 46 See id. at ¶¶ 113-114.

26 requirement. See, e.g., Enercon v. Glob. Computer Supplies,

Inc., 675 F. Supp. 2d 188, 198 (D. Me. 2009) (Singal, J.)

(holding that Rule 9(b) does not apply to all of the plaintiff’s

claims because certain “allegations adumbrate a set of

circumstances plausibly free of fraud”).

Thus, the court will address only the portions of the

plaintiff’s breach of fiduciary duty claims that are based on

core allegations of fraud to determine whether the complaint

meets the heightened pleading standard of Rule 9(b).

B. Particularity under Rule 9(b)

The heightened standard imposed by Rule 9(b) to plead fraud

with particularity “means that a complaint rooted in fraud must

specify the who, what, where, and when of the allegedly false or

fraudulent representations” or omissions. Moore v. Mortg. Elec.

Registration Sys., Inc., 848 F. Supp. 2d 107, 123 (D.N.H. 2012)

(internal citation omitted). In addition, “a complaint’s

general averment of the defendant’s ‘knowledge’ of material

falsity” is inadequate “unless the complaint also sets forth

specific facts that make it reasonable to believe that defendant

knew that a statement was materially false or misleading.”

Cardinale, 567 F.3d at 13 (quoting Greenstone v. Cambex Corp.,

975 F.2d 22, 25 (1st Cir. 1992)) (emphasis in original); N.H.

Elec. Coop., Inc. v. Elster Sols., LLC, No. 16-CV-440-PB, 2017

27 WL 2861667, at *3 (D.N.H. July 5, 2017) (Barbadoro, J.) (“A

plaintiff may allege knowledge or scienter ‘generally,’ but must

still allege facts that meet the plausibility standard of Rule

8(a).”).

The plaintiff alleges that the defendants knew that GTAT

would be unable to meet the demands of the Apple Agreement and

deliberately withheld that information from and gave misleading

information to GTAT’s board, to convince it that GTAT could meet

its contractual obligations. The defendants contend that this

portion of the plaintiff’s breach of fiduciary duty claims fails

under Rule 9(b) because the complaint does not plead a material

misrepresentation or omission, or scienter, with particularity.

Although the defendants purport to challenge the level of

particularity with which the plaintiff has alleged fraud, in

reality, the defendants argue that the plaintiff fails to allege

sufficient facts to show a breach of fiduciary duties in light

of the content of the board meeting minutes and their

presentations to the board. That is, the defendants challenge

the claims on the merits. For example, the defendants do not

contend that the complaint fails to plead the who, what, where,

and when of the allegedly false or fraudulent representations or

omissions. Indeed, as discussed further infra, the complaint is

replete with specific allegations of misrepresentations and

omissions of material fact during the defendants’ presentations

28 to the board regarding the Apple venture. Nor do the defendants

contend that the complaint lacks specific factual allegations

that make it reasonable to believe that the defendants knew that

they were misleading or withholding material information from

the board.

Instead, the defendants charge that the plaintiff “has not

pled his claims with particularity, where, as here, those

allegations, informed by the documents incorporated by

reference, negate, rather than support, any inference of

fraud.”47 As discussed further infra, the defendants quote

extensively from board meeting minutes and their presentations

to the board, pointing to various facts that may support a

defense to the plaintiff’s breach of fiduciary duty claims. For

purposes of Rule 9(b), however, the question is the sufficiency

of the pleadings -- not the merits of the plaintiff’s claims.

The defendants raise no actual challenge the level of

particularity of plaintiff’s allegations of fraud.

As recounted in detail in the background section, and as

discussed further infra, the plaintiff provides ample

allegations of 1) the defendants’ misrepresentations or

omissions of material fact to the board concerning the Apple

venture and 2) the facts known to the defendants at the

47 Defs.’ Reply (doc. no. 29) at 9 (emphasis added).

29 pertinent time that support an inference that they acted with

scienter.48 Although there may be facts that weigh in the

defendants’ favor, those facts do not undermine the

particularity of the plaintiff’s allegations for the purposes of

Rule 9(b).49

C. Sufficiency of the claims under Rule 12(b)(6)

To survive a motion to dismiss under Rule 12(b)(6), the

plaintiff must state a claim for relief by pleading “factual

content that allows the court to draw the reasonable inference

that the defendant is liable for the misconduct alleged.”

Martinez v. Petrenko, 792 F.3d 173, 179 (1st Cir. 2015) (quoting

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). In ruling on such

48At oral argument, the defendants repeatedly argued that the complaint lacked allegations to support a reasonable inference of scienter. By way of example, and as discussed further infra, the complaint alleges that GTAT’s employees continuously warned and expressed grave concerns to the defendants about the unrealistic and unattainable assumptions that the defendants included in their cost models. The complaint further alleges that the defendants ignored those warnings and told the board that the Apple Agreement was in GTAT’s best interest because the assumptions underlying the models were “conservative”. Such allegations, when viewed in the light most favorable to the plaintiff, are sufficient support a reasonable belief and inference that the defendants knew that they were misleading the board.

49Because the defendants fail to make a persuasive argument as to Rule 9(b), the court would deny their motion even if, as they contend, Rule 9(b) applied to every claim asserted in the complaint. 30 a motion, the court accepts as true all well-pleaded facts set

forth in the complaint and draws all reasonable inferences in

the plaintiff's favor. See, e.g., Martino v. Forward Air, Inc.,

609 F.3d 1, 2 (1st Cir. 2010). The court “may consider not only

the complaint but also facts extractable from documentation

annexed to or incorporated by reference in the complaint and

matters susceptible to judicial notice.” Rederford v. U.S.

Airways, Inc., 589 F.3d 30, 35 (1st Cir. 2009) (internal

quotations omitted).

The defendants contend that the plaintiff’s claims for

breach of the fiduciary duty of care, breach of the fiduciary

duty of loyalty, corporate waste, and equitable subordination,

as well as his objections to the defendants’ claims in GTAT’s

bankruptcy action, fail under Rule 12(b)(6). For the reasons

stated infra, they are incorrect as to each claim.

1. Breach of fiduciary duty of care (Count 1)

The fiduciary duty of care requires that directors of a

Delaware corporation both: (1) “use that amount of care which

ordinarily careful and prudent men would use in similar

circumstances”; and (2) “consider all material information

reasonably available.” In re Walt Disney Co. Derivative Litig.,

907 A.2d 693, 749 (Del. Ch. 2005) (internal quotation marks and

citation omitted). Delaware “law presumes that in making a

31 business decision the directors of a corporation acted on an

informed basis, in good faith, and in the honest belief that the

action taken was in the best interests of the company.” In re

Walt Disney Co. Derivative Litig., 906 A.2d 27, 52 (Del. 2006)

(internal quotation marks and citation omitted). A plaintiff

can rebut this presumption, referred to as the business judgment

rule, if he shows that a director failed to inform himself

“fully and in a deliberate manner.” Cede & Co. v. Technicolor,

Inc., 634 A.2d 345, 368 (Del. 1993). The proper standard for

determining whether a director or officer failed to properly

inform himself is gross negligence. Smith v. Van Gorkom, 488

A.2d 858, 873 (Del. 1985); see also United Artists Theatre Co.

v. Walton, 315 F.3d 217, 231 (3d Cir. 2003). A plaintiff can

also rebut this presumption by showing that a director or

officer acted in bad faith. Disney, 906 A.2d at 52. If the

plaintiff successfully rebuts this presumption, “the burden then

shifts to the director defendants to demonstrate that the

challenged act or transaction was entirely fair to the

corporation and its shareholders.”50 Id.

50The plaintiff argues that although the business judgment rule applies to a board of directors or individual directors themselves, it is “far from clear” that the rule applies to officers. Although there are recent cases applying the rule to officers, see, e.g., City of Miami Gen. Emps. v. Comstock, No. CV 9980-CB, 2016 WL 4464156, at *22 (Del. Ch. Aug. 24, 2016), another court has noted that a “vibrant debate exists” as to whether the rule applies to officers. Amalgamated Bank v. 32 a. Substantive due care

Initially, the defendants assert that Count 1 should be

dismissed because it is a “substantive due care” claim -- a

claim that challenges the “wisdom of the decision to enter into

the Apple Agreement” -- which is not recognized under Delaware

law. They cite the following language from In re Caremark Int’l

Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996), the seminal

case outlining directors’ fiduciary duty of care:

What should be understood, but may not widely be understood by courts or commentators who are not often required to face such questions, is that compliance with a director’s duty of care can never appropriately be judicially determined by reference to the content of the board decision that leads to a corporate loss, apart from the good faith or rationality of the process employed. That is, whether a judge or jury considering the matter after the fact, believes a decision substantively wrong, or degrees of wrong extending through “stupid” to “egregious” or “irrational”, provides no ground for director liability, so long as the court determines that the process employed was either rational or employed in a good faith effort to advance corporate interests. To employ a different rule—one that permitted an “objective” evaluation of the decision—would expose directors to substantive second guessing by ill- equipped judges or juries, which would, in the long- run, be injurious to investor interests.

Id. at 967 (emphasis in original).

Yahoo! Inc., 132 A.3d 752, 781 n.24 (Del. Ch. 2016). Because the business judgment rule does not entitle the defendants to dismissal at this stage of the litigation, the court assumes without deciding that the rule applies to officers of a corporation for purposes of this motion only. 33 In characterizing the plaintiff’s breach of fiduciary duty

of care claim as a substantive due care claim, the defendants

appear to attempt to set up a straw man in order to knock it

down. The plaintiff’s claim is not, as the defendants contend,

based on allegations that the defendants breached their duty of

care by merely recommending a risky transaction to the board.

Rather, the claim is based on allegations that the defendants

were either grossly negligent or acted in bad faith in

recommending the Apple Agreement to the board.

Specifically, the plaintiff alleges that the defendants,

either deliberately or through gross negligence, (1) failed to

employ reasonable assumptions regarding the technical

feasibility of the deal in GTAT’s cost models despite repeated

warnings from GTAT employees, (2) failed to relay material

information concerning the negotiations and feasibility of the

Apple venture to the board which may have influenced the board’s

decision, and (3) failed to consider material information that

would have shown that GTAT simply could not satisfy its

obligations under the Apple Agreement. These allegations do not

question the ultimate wisdom of the Apple venture. Rather, they

challenge the defendants’ good faith in recommending the

transaction to the board and question the rationality of the

process by which the defendants’ reached that decision.

Therefore, the plaintiff’s claims in Count 1 is not a

34 substantive due care claim, and the defendants are not entitled

to the dismissal of Count 1 on that basis.

b. Breach of the duty of care

The defendants next contend that even if Count 1 is not a

substantive due care claim, the complaint does not plausibly

allege that they breached their fiduciary duty of care. They

point to their presentations to the board regarding potential

risks of the Apple venture which, they contend, show that they

disclosed accurate information concerning the technical and

economic risks of the deal. The defendants also note that,

rather than hiding any supposed concerns that had been expressed

by the GTAT team, the defendants specifically allowed Richardson

and Mark Bentham51 to make presentations to the board regarding

the Apple venture.52 In addition, the defendants cite the

October 28, 2013 board meeting minutes which show that the board

51Defendants state that Bentham was GTAT’s Vice President, Worldwide Operations.

52The defendants include with their motion to dismiss the minutes of the various board meetings discussing the proposed Apple venture, as well as presentations that Gutierrez and/or Squiller made to the board. See doc. nos. 22-3 – 22-14. The plaintiff quotes from several of these documents in his complaint, and does not meaningfully dispute that the court may consider the minutes at this stage of the litigation, as the content of the defendants’ representations to the board are central to the plaintiff’s claims.

35 retained and met with two well-respected law firms regarding the

potential deal prior to the board’s approval of the Agreement.53

Finally, they make much of the fact that the board itself never

took action against the defendants, and retained both defendants

as senior officers, even after GTAT declared bankruptcy. The

defendants contend that these circumstances unequivocally show

that they acted in good faith and that both they and the board

were diligent and fully informed of the risk of the venture.

The defendants point to various facts that may support a

defense to the plaintiff’s breach of fiduciary duty of care

claim. At this stage of the litigation, however, those facts

simply cannot negate the allegations in the complaint that

support the opposite inference. See In re Dial Complete Mktg. &

Sales Practices Litig., No. 11-MD-2263-SM, 2013 WL 1222310, at

*4 (D.N.H. Mar. 26, 2013) (acknowledging that the defendant’s

proffered facts that undermine the plaintiffs’ allegations “may,

of course, be true,” but noting that at the motion to dismiss

“stage of the litigation, plaintiffs need not disprove that

claim”).

For example, the complaint alleges that the defendants

misled the board concerning the negotiations that led up to the

53 See October 28, 2013 Bd. Meet. Min. (doc. no. 22-12) at 3.

36 Apple Agreement. Gutierrez told the board that GTAT had made

progress with and earned significant concessions from Apple in

their negotiations of the Agreement, and that he and Squiller

deemed the transaction to be in GTAT’s best interest. In

contrast, however, Gutierrez allegedly was unable to procure any

concessions from Apple, thought the deal “sucked,” and did not

believe that GTAT had any chance of fulfilling its obligations

under the Agreement. In addition, in his presentation to the

board on October 28, 2013, the date the board voted to approve

the Apple Agreement, Gutierrez reaffirmed an earlier

representation to the board that Apple treated GTAT “as a valued

‘partner.’”54 Squiller stated in his declaration in GTAT’s

bankruptcy action, however, that because “GTAT had no practical

choice at that stage other than to concede to Apple’s terms,

Apple forced a set of agreements on GTAT that, in combination

with Apple’s economic leverage, put Apple in de facto control of

GTAT.”55 Although the defendants contend that mischaracterizing

negotiations leading up to an agreement is not a violation of

their fiduciary duty because it would not have changed the

54 October 28, 2013 Bd. Pres. (doc. no. 22-14) at 3.

55 Squiller Decl. (doc. no. 22-1) at 7-8, ¶ 15.

37 board’s decision,56 they cite no case law in support of that

proposition.

The complaint also alleges that the defendants misled the

board concerning the technological infeasibility of the Apple

venture. For example, the complaint notes that the defendants

told the board that complying with the terms of the Apple

Agreement -- such as producing a 262 kg sapphire boule

consistent with Apple’s accelerated timeline -- was “plausible”

and a “reasonable proposition” because they had negotiated

“[v]ery conservative start-up yields” and their models were

“conservative compared to actual projections.”57 According to

the complaint, the defendants made these representations despite

being warned repeatedly by GTAT employees that the assumptions

underlying the cost models were completely unrealistic and

unattainable, and that GTAT would be unable to meet Apple’s

production requirements. When faced with these warnings,

allegedly because they were acting in bad faith or because they

were grossly negligent, the defendants’ response, alleged in the

complaint, was continually to ignore them entirely or to push

the underlying assumptions to an even more aggressive point

despite having no basis to do so. Moreover, the defendants

56 See Defs.’ Reply (doc. no. 29) at 22.

57 Complaint (doc. no. 1) at ¶ 77.

38 never disclosed to the board their models, or the allegedly

unrealistic assumptions underlying those models, which

supposedly supported GTAT’s ability to profit under the Apple

Agreement.

In addition, although Richardson and Bentham made

presentations to the board during the October 28, 2013 meeting,

the defendants have not shown that they disclosed GTAT’s

internal team’s concerns. Indeed, the board meeting minutes do

not show that Richardson or Bentham informed the board of the

concerns the GTAT team had expressed to Gutierrez and/or

Squiller over the previous few weeks.58 Richardson “presented a

technical overview of the 262kg program, including product

upgrade objectives, reducing the cost per kg, intellectual

property implications, the development schedule, alternative

strategies for providing material in the event of delay in

process development and process prepayment milestones.”59

Bentham “presented details of the facility and operations plan,

including details on the factory, equipment and facility supply,

58It is worth noting that although the complaint lists several members of GTAT’s research team who expressed concerns regarding GTAT’s internal models, Bentham is not one of them. The complaint contains only one reference to Bentham, and it is that Matthews recalled the utilization rates being a point of contention with Bentham. See Complaint (doc. no. 1) at ¶ 64.

59 October 28, 2013 Bd. Meet. Min. (doc. no. 22-12) at 2.

39 a breakdown of the product cost per kg and the brick delivery

and yield ramp.”60 After those presentations, Gutierrez himself

discussed “management’s risk mitigation strategy.”61 Thus, it is

unclear whether Richardson or Bentham disclosed any concerns

regarding feasibility of the venture to the board.62

Despite the plaintiff’s allegations, the defendants invoke

the business judgment rule, painting the complaint as showing

only “[g]ood faith mistakes in estimation.” They analogize the

circumstances of this case to those of Trenwick Am. Litig. Tr.

v. Ernst & Young, L.L.P., 906 A.2d 168 (Del. Ch. 2006), aff’d

sub nom. Trenwick Am. Litig. Tr. v. Billett, 931 A.2d 438 (Del.

2007). In that case, which the defendants contend is “on all

fours,” a litigation trust brought an action against former

directors of a holding company alleging several claims,

including breach of the fiduciary duty of care, based on an ill-

advised transaction that led to the company’s bankruptcy. The

court granted the defendants’ motion to dismiss the plaintiff’s

breach of fiduciary duty of care claim, holding that the

60 Id.

61 Id.

62Although the defendants note that the board retained legal counsel who attended the October 28, 2013 board meeting, they do not explain why that fact is relevant to the viability of the plaintiff’s breach of fiduciary duty claims. The defendants also do not show that the board’s failure to fire them undermines those claims. 40 business judgment rule provided the defendants with protection

from the claim. The defendants point to the court’s statement

in granting the motion to dismiss that the plaintiff had not

alleged “that [defendants] undertook a major acquisition without

conducting due diligence, without retaining experienced

advisors, and after holding a single meeting at which management

made a cursory presentation.” Id. at 194.

Although the Chancery Court in Trenwick listed those

actions “by way of example,” id., that is hardly an exhaustive

list of conduct that could overcome the business judgment rule.

Regardless, the facts alleged by the plaintiff in this case are

a far cry from those in Trenwick that the court deemed

insufficient to overcome the business judgment rule. In

Trenwick, the plaintiff alleged “that a majority independent

board undertook a business strategy that was ‘all consuming and

foolhardy’ and that turned out badly,” and asked that “the court

infer that the later failure resulted from a grossly deficient

level of effort or from disloyal motives.” Id. Here, in

contrast, the plaintiff alleges that the defendants were warned

repeatedly by GTAT’s internal team that the cost models they

were using were unrealistic and that GTAT could not feasibly

comply with the terms of the Apple Agreement. Despite these

warnings, the defendants, allegedly acting intentionally or in a

grossly negligent manner, withheld this information from the

41 board, and instead painted a distorted picture of the

feasibility of the venture to get the board to approve the deal.

In other words, the complaint does not ask the court to

infer that the failure of the Apple venture was because of gross

negligence or bad faith. Instead, when viewed in the light most

favorable to the plaintiff, the complaint specifically alleges

facts to show gross negligence or bad faith. Those facts are

enough to “give rise to a reason to doubt business judgment

protection,” and are sufficient to survive a motion to dismiss.

In re Walt Disney Co. Derivative Litig., 825 A.2d 275, 289 (Del.

Ch. 2003) (denying motion to dismiss breach of fiduciary duty

claims based on the business judgment rule because “all of the

alleged facts, if true, imply that the defendant directors knew

that they were making material decisions without adequate

information and without adequate deliberation, and that they

simply did not care if the decisions caused the corporation and

its stockholders to suffer injury or loss” (emphasis in

original)); In re Enivid. Inc., 345 B.R. 426, 447 (Bankr. D.

Mass. 2006) (denying motion to dismiss breach of fiduciary duty

of care claim under Delaware law and holding that the business

judgment rule did not apply where the defendant director, among

42 other things, “ignor[ed] information and advice provided by [the

company’s] other officers” regarding a proposed transaction).63

The court denies the defendants’ motion to dismiss as it

pertains to Count 1.

2. Breach of fiduciary duty of loyalty (Count 2)

“[T]he duty of loyalty mandates that the best interest of

the corporation and its shareholders takes precedence over any

interest possessed by a director, officer or controlling

shareholder and not shared by the stockholders generally.” Cede

& Co., 634 A.2d at 361; Guth v. Loft, Inc., 5 A.2d 503, 510

(Del. 1939). The duty of loyalty includes a requirement to act

in good faith, which is “a subsidiary element, i.e., a

condition, of the fundamental duty of loyalty.” Stone ex rel.

AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006)

(internal quotation marks and citation omitted). “‘A failure to

act in good faith may be shown, for instance, where the

fiduciary intentionally acts with a purpose other than that of

advancing the best interests of the corporation.’” Frederick

63To the extent the defendants believe that the business judgment rule protects them from liability, that defense is “dependent on facts more appropriately presented under Rule 56 (motion for summary judgment) or Rule 50 (motion for judgment as a matter of law).” Proffe Publ’g, Inc. v. Lindner, No. 16-CV- 93-JL, 2016 WL 6892466, at *6 (D.N.H. Nov. 22, 2016) (denying motion to dismiss breach of fiduciary duty claim based on the business judgment rule). 43 Hsu Living Tr. v. ODN Holding Corp., No. CV 12108-VCL, 2017 WL

1437308, at *16 (Del. Ch. Apr. 14, 2017) as corrected (Apr. 24,

2017) (quoting Disney, 906 A.2d at 67); see also Schoon v.

Smith, 953 A.2d 196, 206 (Del. 2008).

The defendants argue that the plaintiff’s claim for breach

of the fiduciary duty of loyalty fails for several reasons.

They assert that the plaintiff’s claim is based on allegations

that the defendants 1) had a conflict of interest or acted in

bad faith, 2) breached the duty of candor, and 3) engaged in

insider trading. The defendants contend that the complaint

fails to allege facts that plausibly support any of these

theories. They are incorrect in all respects.

a. Conflict of interest or bad faith

The defendants contend that the complaint fails to

plausibly allege that they had a conflict of interest or acted

in bad faith because, in light of their ownership of a

significant number of GTAT shares, their interests in the Apple

Agreement were perfectly aligned with those of GTAT’s other

shareholders. In other words, the defendants contend that there

is no plausible reason that they would have intentionally driven

GTAT toward a transaction that was guaranteed to fail because

they would have been harmed just like any other shareholder.

44 The complaint alleges that GTAT was a struggling company

and that its struggles negatively impacted the defendants’

compensation. The defendants embarked on a strategy to focus

their business entirely on sapphire, despite having little

experience in that area, and pursued what could generously be

called a risky contractual arrangement with Apple. When Apple

renegotiated the terms of that arrangement, the proposed venture

went from risky to at best foolhardy and at worst doomed to

failure. Armed with that knowledge, the defendants allegedly

deliberately, or in a grossly negligent manner, withheld

critical information from the board of directors which would

have shown that the deal was not technologically feasible and

that it was not in GTAT’s best interest, knowing that approval

of the deal would mean an immediate rise in the value of GTAT

stock and large bonuses for both of them. Once that came to

fruition, both defendants sold significant portions of their

stock to cash in on their alleged deceit, knowing that the jig

would soon be up once GTAT failed to comply with the terms of

the Apple Agreement, which the defendants knew it would.

The defendants contend that this story is a fairy tale,

created by the plaintiff in an effort to find someone to blame

for what was simply a risky deal that was approved by a fully-

informed board of directors. While the defendants may

eventually prove their version of events (or prevent the

45 plaintiff from proving his), at this stage of the litigation,

the plaintiff’s complaint, taken as true with all reasonable

inferences, is more than sufficient to allege that the

defendants acted with a purpose other than advancing GTAT’s best

interests. See Palmer v. Reali, 211 F. Supp. 3d 655, 667 (D.

Del. 2016) (denying motion to dismiss breach of loyalty claim

where the “facts as pled plausibly demonstrate that defendants

placed their own interest in receiving compensation over the

best interest of the Company and its shareholders”); Enivid.,

345 B.R. at 445 (holding that plaintiff had adequately pled that

the defendant director breached his fiduciary duty of loyalty

where the complaint alleged that the defendant was motivated by

his stock position and perquisites “coupled with his unwavering

personal adherence to the acquisition strategy in the face of

mounting operational and financial problems and warnings”).64

The complaint more than sufficiently alleges that the

defendants had a motive to, and did act against GTAT’s economic

64The defendants contend that because their interests were aligned with GTAT’s stockholders generally, they cannot have had a conflict of interest. Although a “director who is also a shareholder of his corporation is more likely to have interests that are aligned with the other shareholders of that corporation,” Orman v. Cullman, 794 A.2d 5, 27 n.56 (Del. Ch. 2002), that fact hardly entitles the defendants to dismissal at this stage of the litigation, particularly in light of their sales of significant portions of their GTAT holdings shortly after the board approved the Apple Agreement.

46 interest. And, as discussed supra, the complaint, viewed in the

light most favorable to the plaintiff, alleges that the

defendants acted in bad faith. Thus, the defendants’ arguments

on this point are misplaced.

b. Candor

The defendants’ remaining arguments are similarly without

merit. The defendants’ contention that the complaint fails to

allege that they breached the duty of candor because they

disclosed all material information regarding the Apple venture

to the board does not require serious attention.65 The duty of

candor “represents nothing more than the well-recognized

proposition that directors of Delaware corporations are under a

fiduciary duty to disclose fully and fairly all material

information within the board’s control when it seeks shareholder

action.” Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992). As

discussed supra, the complaint adequately alleges that the

defendants knew of material information that showed that the

65The “duty of candor” is not an altogether separate duty, but “derives from the duties of care and loyalty.” Pfeffer v. Redstone, 965 A.2d 676, 684 (Del. 2009); see OptimisCorp v. Waite, No. CV 8773-VCP, 2015 WL 5147038, at *72 n. 578 (Del. Ch. Aug. 26, 2015) (noting that the duty of candor “can implicate either the duty of care or the duty of loyalty”), aff’d, 137 A.3d 970 (Del. 2016). Because the defendants raise the issue of the duty of candor with respect to the plaintiff’s allegations in Count 2, the court addresses those arguments here.

47 models GTAT used to show that GTAT could feasibly comply with

the terms of the Apple Agreement were based on fictitious and

unattainable assumptions, and that the defendants withheld that

information from the board. Thus, the complaint adequately

alleges that the defendants breached the duty of candor.

c. Misuse of confidential information

Finally, the complaint sufficiently alleges a breach of the

fiduciary duty of loyalty based on the defendants’ sale of

significant portions of their GTAT stock shortly after the Apple

Agreement was publicly announced when the stock price soared.

As the parties agree, a claim for breach of the fiduciary duty

of loyalty based on the misuse of confidential corporate

information is derived from the standards set forth in Brophy v.

Cities Serv. Co., 31 Del. Ch. 241 (Del. 1949), and, therefore,

is often referred to as a “Brophy claim.” To state a Brophy

claim, a plaintiff must allege that “‘1) the corporate fiduciary

possessed material, nonpublic company information; and 2) the

corporate fiduciary used that information improperly by making

trades because []he was motivated, in whole or in part, by the

substance of that information.’” Kahn v. Kolberg Kravis Roberts

& Co., L.P., 23 A.3d 831, 838 (Del. 2011) (quoting In re Oracle

Corp., 867 A.2d 904, 934 (Del. Ch. 2004), aff’d, 872 A.2d 960

(Del. 2005)). “Delaware case law makes the same policy judgment

48 as federal law does, which is that insider trading claims depend

importantly on proof that the selling defendants acted with

scienter.” Guttman v. Huang, 823 A.2d 492, 505 (Del. Ch. 2002)

The defendants argue that the plaintiff fails to allege a

Brophy claim based on three deficiencies. First, the defendants

contend that the claim fails because the complaint alleges that

most of the trades were made pursuant to a written trading plan,

allowable under Rule 10b5-1.66 Second, they contend that the

complaint must, but does not, allege that the sales were made on

the basis of “hard” information. And third, they contend that

the complaint fails to allege that each individual sale

referenced in the complaint was made on the basis of adverse

material, non-public information. None of these arguments has

merit.

The defendants cite several cases that purportedly hold

that a plaintiff may not rely on a defendant’s sale of stock

pursuant to a Rule 10b5-1 plan to support an inference of

scienter at the motion to dismiss stage. It is true that, as a

general matter, such automatic transactions are not indicative

of scienter. See, e.g., In re Level 3 Commc'ns Inc. Sec.

66Although not specified by the defendants, their first argument appears to pertain to Gutierrez only. The complaint does not allege that Squiller sold his GTAT shares pursuant to a Rule 10b5-1 plan.

49 Litig., 667 F.3d 1331, 1346-47 (10th Cir. 2012) (noting that

sales made pursuant to automatic transactions can rebut an

inference of scienter). What the defendants ignore, of course,

is that the complaint alleges that Gutierrez entered the Rule

10b5-1 trading plans after the announcement of the Apple deal.67

The timing is “sufficient at this stage of the litigation to

prevent the trading plans from entirely undercutting the

inference of scienter.” Levy v. Gutierrez, No. 14-cv-443-JL,

2017 WL 2191592, at *14 (D.N.H. May 4, 2017) (citing In re

Biogen Idec, Inc. Sec. Litig., Civ. No. 05-10400-WGY, 2007 WL

9602250, at *14 (D. Mass. Oct. 25, 2007) & Freudenberg v.

E*Trade Fin. Grp., 712 F. Supp. 2d, 171, 201 (S.D.N.Y. 2010)).

The defendants also claim that the plaintiff’s Brophy claim

must be dismissed because it not based on “hard” information

such as “objective, historical and factual data.”68 They argue

that instead, the plaintiff’s Brophy claim is based on

information such as projections and opinions concerning the

viability of the Apple transaction, and that such “soft”

information does not support such a claim.

It is true that “[g]enerally, ‘soft’ information, such as

projections and estimates as to value, need not be disclosed due

67 Complaint (doc. no. 1) at ¶ 83.

68 Defs.’ Mem. (doc. no. 22-1) at 50. 50 to their lack of reliability.” Repairman’s Serv. Corp. v. Nat’l

Intergroup, Inc., No. 7811, 1985 WL 11540, at *8 (Del. Ch. Mar.

15, 1985); see also In re Facebook, Inc., IPO Sec. & Derivative

Litig., 922 F. Supp. 2d 445, 469 (S.D.N.Y. 2013) (noting that

Delaware courts are reluctant to find valid Brophy claims based

on “soft” information such as trends or projections of

performance), aff’d sub nom. In re Facebook, Inc., Initial Pub.

Offering Derivative Litig., 797 F.3d 148 (2d Cir. 2015). But

under “Delaware law, the fact that information is ‘soft’ (e.g.,

a prediction of future results) rather than ‘hard’ (e.g.,

historical fact) is relevant to, but not entirely dispositive

of” whether a plaintiff has stated a valid Brophy claim. In re

Oracle Corp., 867 A.2d at 934. Regardless, however, the

plaintiff’s Brophy claim is based on more than mere projections

or trends. Giving the allegations in the complaint every

reasonable inference, the defendants knew, based on their

deliberate manipulation of the cost models, that GTAT would be

unable to comply with the requirements of the Apple Agreement

shortly after the deal was consummated. The defendants fail to

explain how such information could appropriately be

characterized as “soft”.

Finally, the defendants argue that the complaint fails to

state a Brophy claim because it does not allege that “each sale

by each individual defendant was entered into and completed on

51 the basis of, and because of, adverse material non-public

information.”69 Here, again, the defendants attempt to misapply

a generalized statement of the law. The complaint alleges

Gutierrez sold over 600,000 shares and Squiller sold 121,190 in

the months following the board’s approval of the Apple Agreement

with knowledge that GTAT would soon thereafter fail to comply

with the material terms of the Agreement and that GTAT’s stock

would tumble in value. Under the defendants’ view of the law,

the plaintiff’s allegations are insufficient because the

complaint fails to separate and specifically discuss each

particular sale that the defendants made. Unsurprisingly, the

defendants fail to cite any case that puts such a high burden on

a plaintiff at the pleading stage, and the court is aware of

none.

For those reasons, the court denies the defendants’ motion

to dismiss Count 2 of the complaint.

2. Corporate waste (Count 3)

“To recover on a claim of corporate waste, the plaintiffs

must shoulder the burden of proving that the exchange was ‘so

one sided that no business person of ordinary, sound judgment

could conclude that the corporation has received adequate

69Defs.’ Mem. (doc. no. 22-1) at 48 (quoting Guttman, 823 A.2d at 505) (emphasis omitted). 52 consideration.’” Disney, 906 A.2d at 74 (quoting Brehm v.

Eisner, 746 A.2d 244, 263 (Del. 2000)). “A claim of waste will

arise only in the rare, ‘unconscionable case where directors

irrationally squander or give away corporate assets.’” Id.

(quoting Brehm, 746 A.2d at 263). “This onerous standard for

waste is a corollary of the proposition that where business

judgment presumptions are applicable, the [directors’] decision

will be upheld unless it cannot be ‘attributed to any rational

business purpose.’” Id. (quoting Sinclair Oil Corp. v. Levien,

280 A.2d 717, 720 (Del. 1971)).

The defendants argue in cursory fashion that because Apple

paid GTAT nearly $500 million during the course of the

Agreement, the transaction cannot possibly be deemed a waste.

But they ignore the crux of the complaint: that the defendants

acted in bad faith, and that their recommendation to the board

to enter into the Apple Agreement was not “based on a valid

assessment of the corporation’s best interests.” White v.

Panic, 783 A.2d 543, 554 n.36 (Del. 2001) (noting how

allegations of bad faith can support a claim for corporate

waste); see also Palmer, 211 F. Supp. 3d at 669 (noting that a

plaintiff can plead a claim for corporate waste when the

decision to enter into a transaction goes “so far beyond the

bounds of reasonable business judgment that its only explanation

53 is bad faith.” (quoting Stanziale v. Nachtomi, 416 F.3d 229, 238

(3d Cir. 2005) (internal quotation marks omitted)).

That is precisely what the complaint alleges here: that the

defendants pursued a transaction and ultimately recommended it

to GTAT’s board of directors while knowing that it would

ultimately doom the company. That GTAT received $478 million in

“prepayments” from Apple, which Squiller later described as a

mere “loan” on which GTAT secured repayment by taking liens on

GTAT assets, does not operate to protect the defendants from a

claim of corporate waste in light of the plaintiff’s allegations

of bad faith.

Accordingly, the court denies the defendants’ motion as it

pertains to Count 3.

3. Equitable subordination and set-off objections (Counts 5-7)

In Counts 5, 6, and 7, the plaintiff sets forth objections

relating to claims scheduled in GTAT’s bankruptcy case on the

defendants’ behalf. The defendants contend that the court

should dismiss these three counts for two reasons. The first is

that under GTAT’s plan of reorganization, it is the Reorganized

Debtors’ right, not the plaintiff’s, to litigate any “objections

to claims.” The second is that even if the plaintiff did have

the right to file or litigate objections to claims, those claims

54 should be addressed in GTAT’s bankruptcy action. According to

the defendants, the claims become relevant in this case only if

the plaintiff recovers a judgment and the defendants seek to

assert the claims defensively.

The defendants have not shown that they are entitled to

dismissal of Counts 5, 6, and 7. They cite GTAT’s plan of

reorganization in its case in the Bankruptcy Court for the

District of New Hampshire. See In re: GT Advanced Technologies

Inc., et al., No. 14-11916-HJB (Bankr. D.N.H. Oct. 6, 2014).

Specifically, they point to § 10.1 of the Plan, which provides:

“Except as otherwise specifically provided in the Plan, after

the Effective Date, the Reorganized Debtors shall have the sole

authority (a) to file, withdraw, or litigate to judgment

objections to Claims . . . .”70 The defendants contend that

Counts 5, 6, and 7 are all considered objections to claims and,

therefore, the Reorganized Debtors, and not the plaintiff, have

the sole authority to litigate such claims.

In response, the plaintiff cites § 8.16(e) of the Plan,

which gives the Trustee the exclusive authority to pursue “Non-

Released D&O Causes of Action.”71 Under the Plan, “‘Non-Released

70 Doc. no. 26-3 at 220.

71 Id. at 209.

55 D&O Causes of Action’ means any potential claims or Causes of

Action” against former directors or officers,72 including “any

and all claims, actions, causes of action, . . . offsets, [and]

counterclaims . . . of any kind or character whatsoever”

belonging to GTAT or its bankruptcy estate, “including Avoidance

Actions.”73 The Plan defines Avoidance Actions to include claims

for subordination and actions under 11 U.S.C. § 510, which

includes the claims asserted in Counts 5, 6, and 7.74

The defendants have not shown that under the Plan language,

only the Reorganized Debtors can bring the claims asserted by

the plaintiff here. Nor have the defendants adequately

explained why, as a matter of law, the plaintiff would have to

pursue his claims in bankruptcy court even if he were authorized

to bring such claims. Therefore, the defendants’ motion to

dismiss is denied as to Counts 5, 6, and 7.

72 Id. at 179.

73 Id. at 167.

74 Id. at 165.

56 IV. CONCLUSION

For the reasons set forth herein, the defendants’ motion to

dismiss19 is DENIED.

SO ORDERED.

___________________________ Joseph N. Laplante United States District Judge

Dated: March 27, 2018

cc: Demetrio F. Aspiras, III, Esq. Brian J.S. Cullen, Esq. Jeremy R. Fischer, Esq. Jason D. Frank, Esq. Elizabeth G. Hays, Esq. Jordan D. Hershman, Esq. Eric D. Madden, Esq. Nathaniel J. Palmer, Esq. William T. Reid, IV, Esq. Emily E. Renshaw, Esq.

19 Doc. no. 22.