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In re Chemed Corporation, Shareholder Derivative Litigation

United States District Court, D. Delaware

February 26, 2019




         Pending before the Court in this consolidated shareholder derivative action is the renewed motion ("Motion") of Defendants Kevin J. McNamara, Patrick P. Grace, Thomas C. Hutton, Walter L. Krebs, Andrea R. Lindell, Thomas P. Rice, Donald E. Saunders, Arthur V. Tucker, Jr., George J. Walsh III, Frank E. Wood, David P. Williams, Ernest J. Mrozek, and Nominal Defendant Chemed Corporation ("Chemed" or the "Company") seeking to dismiss, pursuant to Federal Rules of Civil Procedure 23.1 and 12(b)(6), the Corrected Amended Verified Shareholder Derivative Complaint (the "Amended Complaint") filed by Plaintiff Michael Kvint ("Plaintiff or "Mr. Kvint").[1] (D.I. 88) For the reasons that follow, the Court recommends that Defendants' Motion be GRANTED with prejudice.

         I. BACKGROUND

         A. The Parties

         Mr. Kvint is a current owner of Chemed common stock. (D.I. 81 at ¶ 15) He has continuously owned his shares since August 2, 2007 and "will hold Chemed shares continuously throughout the pendency of this action." (Id.)

         Nominal Defendant Chemed is a publicly traded company that is incorporated in Delaware and maintains its principal place of business in Cincinnati, Ohio. (Id. at ¶ 16) Chemed, through its affiliated subsidiaries (collectively referred to herein as "Vitas," and together with Chemed, "the Company"), provides end-of-life hospice care services under the Vitas Innovative Hospice® brand; Vitas serves its patients through 44 hospice programs in 15 states and in the District of Columbia. (Id. at ¶¶ 1, 16)

         The remaining Defendants are current and former members of Chemed's Board of Directors (the "Board") and/or executives at Chemed (collectively, the "Individual Defendants").[2] The background of the various Individual Defendants is set forth more fully in the Court's Report and Recommendation regarding a previous motion to dismiss filed in this case (the "first MTD R&R"). (See D.I. 46 at 2-4) At the time the Amended Complaint was filed, Chemed's Board was composed of 10 directors. (D.I. 81 at ¶ 185; D.I. 92 at 11 n.10) For the purposes of the instant Motion, Plaintiff specifies that only five of these directors are relevant. These are five directors that either served on the Board's Audit Committee during the relevant times when it is alleged that misconduct occurred, or who attended meetings of the Audit Committee during that time: Defendants Grace, Rice, Saunders, Walsh and McNamara (the "Audit Committee Defendants"). (See D.I. 103 (hereafter "Tr.") at 49-51 ("So we have these five [directors]. And these are really the five I want to focus on for purposes of my argument because all of the [Delaware General Corporation Law Section] 220 documents really go to these five people."); see also D.I. 92 at 11 & n. 10)

         With regard to these five Audit Committee Defendants, three of them actually served on the Audit Committee during the relevant time period at issue here. Defendants Grace and Saunders served on the Audit Committee starting in May 1998 (with Saunders serving as the committee's Chairman since May 2002), (D.I. 81 at ¶¶ 21, 26), and Defendant Rice served on the Audit Committee since May 2009, (id. at ¶ 25; see also D.I. 92 at 11 & n.10). The other two directors were not members of the Audit Committee during the relevant time period; however they both served as directors during that time period and are alleged to have attended the relevant Audit Committee meetings. Defendant Walsh attended Audit Committee meetings from 2009 or 2010 until 2013. (See D.I. 81 at ¶ 28 ("According to documents produced in response to the [Section] 220 [r]equest, Walsh attended Audit Committee meetings from 2009 to 2013."); but see Id. at ¶ 37; D.I. 92 at 11 n. 10 ("Defendant Walsh ... attended Audit Committee meetings from at least 2010 to 2013."))[3] Defendant McNamara attended every Audit Committee meeting from 2007 to 2013. (D.I. 81 at ¶¶ 37, 147; see also D.I. 92 at 11 n.10 ("McNamara attended every Audit Committee meeting from 2007 until the filing of the DOJ Action."))

         B. Procedural History

         The instant case has a very lengthy procedural history. The Court will set out the relevant portions of that history here.

         On November 6, 2013, without first making a demand on the Board, former Lead Plaintiff KBC Asset Management N.V. ("KBC") filed this shareholder derivative action in this Court. (D.I. 1) In its Complaint (the "KBC Complaint"), KBC alleged that the Individual Defendants breached the fiduciary duties of good faith, loyalty, and due care in managing Chemed's affairs relating to certain alleged misconduct that had taken place at Vitas. (Id. at ¶¶ 169-71) In lieu of an Answer, on February 12, 2014, Defendants filed a motion to dismiss for failure to state a claim. (D.I. 12) On September 29, 2014, Chief Judge Leonard P. Stark denied that motion to dismiss without prejudice in light of a related case that had been transferred to this Court from the United States District Court for the Southern District of Ohio (the "North action"). (D.I. 29) Chief Judge Stark also ordered that both actions (KBC's action and the North action) be referred to the Court for all purposes, up to and including resolution of case-dispositive motions. (Id.)

         KBC then moved to consolidate the North Action with KBC's action, and asked the Court to appoint it as Lead Plaintiff and to appoint its outside and Delaware counsel as Lead and Liaison Counsel, respectively. (D.I. 30) After oral argument on the contested consolidation motion, on February 2, 2015, the Court issued a Memorandum Opinion and related Order, in which it, inter alia: (1) ordered the two actions consolidated for all purposes; (2) appointed KBC as Lead Plaintiff and its counsel as Lead Counsel and Liaison Counsel in the consolidated action; and (3) allowed Lead Counsel 30 days to file a consolidated complaint or to designate one of the pending complaints as the operative complaint in the case. (D.I. 40, 41) Subsequently, the parties submitted a joint stipulation, asking the Court to, inter alia: (1) designate the KBC Complaint as the sole, operative complaint; (2) deem Defendants' motion to dismiss to have been re-filed and/or re-submitted; (3) allow the submission of supplemental briefing on that motion; and (4) take the motion under advisement and decide the motion upon the previously-filed briefs and supporting documents, as well as the new supplemental briefing. (D.I. 42)

         After supplemental briefing on the motion was completed, (D.I. 43-44), on December 23, 2015, the Court issued the first MTD R&R, (D.I. 46). Therein, the Court recommended: (1) dismissal with prejudice as to Plaintiffs' allegations of breaches of the duty of care; (2) dismissal without prejudice of Plaintiffs' duty of loyalty claims; (3) that Plaintiffs be permitted 14 days from the date of the District Court's affirmance to file an amended complaint addressing deficiencies cited in the first MTD R&R relating to the duty of loyalty claims; and (4) dismissal with prejudice of the duty of loyalty claim upon failure to amend. (Id. at 47-48)

         On May 12, 2016, via a Memorandum Order, the District Court adopted the first MTD R&R. (D.I. 53) In doing so, it dismissed the KBC Complaint, and further ordered that: "(1) Plaintiff shall, if it chooses, file within thirty (30) days of the date of this Order an amended complaint that addresses the deficiencies of its duty of loyalty claim .. . and (2) failure to do so shall result in dismissal with prejudice." (Id. at 3)

         On June 13, 2016-the deadline for KBC to file an amended complaint per the District Court's May 12, 2016 Order-Mr. Kvint's counsel filed a letter with the Court indicating that they had "just been advised that KBC will not in fact be filing an amended complaint." (D.I. 55-1 at 1) Mr. Kvint's counsel requested that Mr. Kvint be granted an extension of time to file a motion for leave to file an amended complaint, as well as a motion to substitute himself as plaintiff in place of KBC. (Id.) The Court granted Mr. Kvint's request and, on June 30, 2016, Mr. Kvint filed his "Motion for Leave to Substitute Plaintiff and File Amended Complaint[.]" (D.I. 58) The reason Mr. Kvint sought to substitute himself as plaintiff in this action (in place of KBC) was that KBC had inadvertently sold its Chemed stock and, as a result, had lost standing to maintain the suit. (D.I. 61 at 1) The Court thereafter held oral argument on Mr. Kvint's motion, and ordered supplemental briefing after oral argument. (D.I. 67) On April 25, 2017, the Court issued a Report and Recommendation recommending that the District Court grant Mr. Kvint's motion to the extent that Mr. Kvint sought to intervene in the action. (D.I. 74 at 28)[4] The Court also recommended that Mr. Kvint be allowed to file an amended complaint asserting a duty of loyalty claim. (Id.)[5] The District Court adopted this Report and Recommendation in full on May 16, 2017. (D.I. 79)

         Mr. Kvint filed an amended complaint on May 2, 2017, (D.I. 75), and thereafter filed a "corrected" version of that complaint, which is the now-operative Amended Complaint, (D.I. 81). On September 29, 2017, Defendants then filed the instant Motion seeking to dismiss the Amended Complaint. (D.I. 88) Initial briefing was completed on December 29, 2017. (D.I. 96) Upon the request of Mr. Kvint, (D.I. 98), oral argument was held on February 28, 2018, (Tr.). Following oral argument, the Court issued an Order permitting supplemental briefing that: (1) allowed Mr. Kvint to explain his view as to whether the Court could and should take judicial notice of certain materials relating to a federal securities fraud class action in the United States District Court for the Southern District of Ohio; and (2) allowed Defendants the ability to respond to Mr. Kvint's argument regarding judicial notice, and to comment on two cases that Mr. Kvint's counsel raised for the first time during oral argument. This supplemental briefing was complete as of March 12, 2018. (D.I. 102)

         C. Factual Background[6]

         The Court's focus with regard to the instant Motion is necessarily on the allegations in Mr. Kvint's Amended Complaint. However, because there is significant overlap between the factual allegations in the prior KBC Complaint and those in the Amended Complaint, and because the Court has previously found that the allegations regarding the duty of loyalty claim in the KBC Complaint were deficient, the content of the KBC Complaint is also relevant here. Put differently, it will be helpful to set out what allegations in the Amended Complaint are new (i.e., were not found in the KBC Complaint) as a way of helping to articulate whether the Amended Complaint sufficiently pleads a duty of loyalty claim. Therefore, this "Factual Background" section will delineate the factual allegations: (1) common to both the KBC Complaint and Amended Complaint (collectively, the "Complaints"), and (2) that are new, and are contained only in the Amended Complaint. The latter "new" allegations are mainly drawn from documents that Mr. Kvint obtained from Chemed pursuant to a books and records request made via Section 220 of the Delaware General Corporation Law (the "Section 220" documents). Because the factual allegations not drawn from the Section 220 documents are nearly identical in both Complaints, the Court will cite only to the Amended Complaint unless otherwise indicated.[7]

         1. Facts Common to the KBC Complaint and Amended Complaint

         a. Eligibility and Billing Under Medicare

         This action relates to Chemed subsidiary Vitas' compliance with the eligibility and billing requirements of the Health Insurance for the Aged and Disabled Program, commonly known as the Medicare Program ("Medicare").[8] (D.I. 81 at ¶¶ 11, 39) Vitas operates hospice programs providing end-of-life care services, including routine home care, general inpatient care, crisis care, and respite care. (Id. at ¶¶ 16, 78) Medicare Part A establishes an insurance program providing assistance with costs related to hospital, related post-hospital, home health services, and hospice care[9] for qualified individuals. (Id. at ¶ 40); see also 42 U.S.C. § 1395c.

         Hospice care is generally divided into four types of care, each associated with a different rate of Medicare payment. 42 C.F.R. §§ 418.302; 418.306; Medicare Claims Processing Manual, Ch. 11, § 30.1. Continuous home care, also known as "crisis care," is used for a patient who elects to receive hospice care at home or in a long-term facility (such as a nursing home); crisis care demands the highest daily rate of Medicare payment. Medicare Claims Processing Manual, Ch. 11, § 30.2; (D.I. 81 at ¶ 45). To bill Medicare for crisis care, the patient must actually be in a period of crisis (that is, a period requiring continuous care which is predominantly nursing care to achieve palliation or management of acute medical symptoms) and cannot be in an inpatient facility (e.g., a hospice inpatient unit or hospital). 42 C.F.R. §§ 418.204(a), 418.302(b)(2); Medicare Claims Processing Manual, Ch. 11, § 30.1. Additionally, for the care to be eligible for Medicare billing, the hospice must provide this care for a minimum of eight hours during a 24-hour day (otherwise the services are considered routine home care). (D.I. 81 at ¶ 47)

         b. Plaintiffs Claim

         Both Complaints contain allegations that the Board "cause[d] and allow[ed] [Chemed, through its Vitas subsidiaries] to engage in nearly a decade of systematic illegal billing ... in disregard of Medicare guidelines and patients' medical needs." (Id. at ¶ 1) This misconduct, Plaintiff asserts, was at the core of Chemed's business strategy and deeply embedded in its regular practices. (Id. at ¶ 2; see also Id. at ¶ 8)

         Specifically, it is alleged that "since at least 2004" and through at least 2013, Chemed, through Vitas, submitted or caused the submission of fraudulent claims to Medicare in violation of the False Claims Act ("FCA"), [10] other federal statutes, and state laws. (Id. at ¶¶ 1, 8, 65, 68 (citing 18 U.S.C. §§ 286-87, 1341, 1343, & 42 U.S.C. §§ 1320a-7b(a)) & 69; D.I. 75-2, ex. A; see also D.I. 92 at 1) Plaintiff asserts, inter alia, that the fraudulent submissions stem from Vitas' enrollment and billing of Medicare for patients who: (1) received crisis care services but who were not actually eligible for such care because they were not terminally ill; (2) received crisis care services that were not consistent with Medicare requirements; and (3) were in hospice care but were not, in fact, in a period of crisis. (D.I. 81 at ¶¶ 1, 118)

         The Amended Complaint contains one Count (Count I): an allegation that the Individual Defendants breached their fiduciary duties to Chemed and its shareholders. (Id. at ¶¶ 202-04) Plaintiff asserts that the Individual Defendants breached the fiduciary duties of good faith, loyalty, due care, [11] and candor[12] by, "inter alia, approving, authorizing, acquiescing in, and/or willfully turning a blind eye to Chemed's substantial and systematic violation of federal and state law and the Company's submission of thousands of fraudulent claims to Medicare[.]" (Id. at ¶ 11; see also Id. at ¶¶ 202-04)

         c. Allegations Regarding Additional Relevant Lawsuits, Investigations, and Witness Interviews

         The Complaints spell out Vitas' and Chemed's alleged legal violations largely by drawing from the content of other lawsuits and governmental investigations.

         For example, the Complaints note that during the relevant period, Chemed and Vitas have been subject to a number of qui tarn FCA lawsuits. (Id. at ¶¶ 88-108) In total, the Complaints quote liberally from complaints in four qui tarn suits (and incorporate the contents of those qui tow complaints by reference): Spottiswood ex. rel. United States v. Chemed Corp., No. l:07-cv-04566 (N.D. 111.) ("Spottiswood'); United States & Texas ex rel. Urick v. Vitas HME Solutions, Inc., No. 5:08-cv-00663-OLG (W.D. Tex.) ("C/n'c&"); Rehfeldt ex rel. United States & Texas v. Vitas Healthcare Corp., No. 3:09-cv-00203-B (N.D. Tex.) ("Rehfeldfy, and United States ex rel. Gonzales v. Vitas Healthcare Corp., No. 4:13-cv-0344 (W.D. Mo.) ("Gonzales"). (Id.) The qui tarn actions were filed in 2007, 2008, 2009, and 2012, respectively, and detail alleged wrongdoing occurring at Vitas beginning as early as 2001. In these actions, as set out in the Complaints, qui tarn relators alleged that, inter alia, Vitas billed for continuous home care when such care was unnecessary or was not in fact provided to individuals, (see, e.g., Id. at ¶¶ 88, 92, 101), '"forced"' continuous home care on patients who did not need it, (see, e.g., Id. at ¶ 93), and engaged in a management-driven scheme to fabricate justifications for the certification and/or re-certification of hospice care for otherwise ineligible patients, (see, e.g., id, at ¶¶ 105-06). Aside from the Rehfeldt action, which was voluntarily dismissed about six months prior to the filing of this action, (D.I. 89 at 7 n.6; D.I. 90, ex. 5 (order of dismissal in the Rehfeldt action dated May 1, 2013)), in early May 2013 the United States Department of Justice ("DOJ") partially intervened in the remainder of the qui tarn lawsuits "with respect to the allegations that Vitas submitted or caused the submission of false or fraudulent claims for continuous home care and routine home care[, ]" (D.I. 81 at ¶¶ 90, 98, 108; see also D.I. 89 at 7 n.6; D.I. 92 at 2; Tr. at 56-57).

         Additionally, on May 2, 2013, the DOJ filed a civil FCA complaint in United States v. Vitas Hospice Servs., No. 4:13-cv-00449-BCW (W.D. Mo.) (the "DOJ Action"). (D.I. 81 at ¶¶ 110-32) In the complaint ("the DOJ Action Complaint"), which is frequently cited in and incorporated by reference into the Amended Complaint, [13] the government similarly charged that: (1) Chemed and Vitas "knowingly submitted or caused the submission of false claims to Medicare for crisis care services that were not necessary or not actually provided[;]" (2) "Vitas' management set goals for the number of crisis care days that were to be billed to Medicare and pressured staff to increase the numbers of crisis care claims submitted to Medicare, without regard to whether the services were appropriate or were actually being provided[;]" (3) "Chemed and Vitas knowingly submitted or caused the submission of, false claims for patients who were not terminally ill[;]"; and (4) the companies "violated the FCA and misspent tens of millions of taxpayer dollars from the Medicare program." (Id. at ¶ 111) The government also alleged that Chemed and Vitas "executives closely monitored the Company's ADC [average daily census] and set aggressive admissions goals for their direct reports [, ]" and that "Chemed management regularly corresponded" with Vitas management about the ADC and growth in admissions, "making focused frequent inquiries if they believed the numbers reported were too low." (Id. at ¶ 127 (emphasis omitted))[14]

         The Complaints also reference a securities fraud class action lawsuit that was filed against Chemed in 2012.[15] (Id. at ¶ 141 n.27) In that action, In re Chemed Corp. Sees. Litig., No. 1:12- cv-00028-MRB (S.D. Ohio), the lead plaintiffs alleged that Chemed and its senior management defrauded Chemed's investors by concealing a scheme of fraudulent billing relating to Medicare hospice reimbursement. (Id.) That action was settled for $6 million in 2014 "without any admission of fault, liability[, ] or wrongdoing." (D.I. 89 at 7 n.6; see also D.I. 81 at ¶ 172)

         Additionally, the Complaints detail how Chemed and Vitas have been the subject of certain federal and state inquiries or investigations since 2005. (D.I. 81 at ¶¶ 163, 166) The Office of Inspector General ("OIG") for the United States Department of Health and Human Services first subpoenaed Vitas on April 7, 2005 regarding allegations of improper Medicare and Medicaid billing for hospice care. (Id. at ¶ 163) Additional OIG subpoenas or requests for Vitas records in this subject matter area came in May 2009, August 2009, June 2012 and September of 2012. (Id. at ¶¶ 165-66; see also D.I. 75-2, ex. 27) Chemed also received similar Vitas-related subpoenas regarding investigations by the Texas Attorney General's Office in September 2010 and by the Florida Attorney General's Office in 2012. (D.I. 81 at ¶ 166)

         Both Complaints include allegations that, at various points from 2005 through 2012, certain of the qui tarn complaints, state investigative subpoenas, and OIG subpoenas/record requests set out above were noted in Chemed's SEC filings, and that these filings, in turn, were certified and signed by certain of the Individual Defendants. (Id. at ¶¶ 163-66)[16]

         2.Allegations Drawn from the Section 220 Documents[17]

         In an attempt to remedy the deficiencies in the KBC Complaint that were noted by the Court in the first MTD R&R, Mr. Kvint included in the Amended Complaint additional allegations drawn from the Section 220 documents. (D.I. 81 at 1; D.I. 89 at 2; D.I. 92 at 5 ("The most significant aspect of the Amended Complaint, ... and what sets it apart from the [o]riginal Complaint, is the inclusion of the [Section] 220 [d]ocuments[.]")) The Section 220 documents include, inter alia, Chemed Board minutes, Audit Committee minutes, and "Board packages[.]" (D.I. 81 at 1; see also D.I. 92 at 5; D.I. 75-2, exs. 1-31)[18]

         Mr. Kvint alleges that the Section 220 documents indicate that "attendees at Chemed's Audit Committee meetings .. . received regular reports, year-after-year, about the 'OIG Investigations' and other 'material legal matters' related to Plaintiffs allegations, including . . . the Urick qui tarn action and the federal securities fraud class action." (D.I. 81 at ¶ 4; see also Id. at ¶¶ 143-48) Specifically, Mr. Kvint relies on memoranda sent to the Audit Committee and Audit Committee minutes regarding Audit Committee meetings from 2007 to 2013; these documents show who was in attendance at the meetings and what topics were discussed. (Id. at ¶ 147; see also D.I. 75-2, exs. 1-26) Additionally, Plaintiff describes a "'Report to Chemed Audit Committee'" (the "Audit Committee Report" or "report"), which the Audit Committee received on May 20, 2013. This Audit Committee Report (Exhibit 27 to the Amended Complaint) contains a list of'"Regulatory Reviews'" and '"Legal Reviews'" that occurred or were occurring between October 2010 and April 2013. (D.I. 81 at ¶ 151; D.I. 75-2, ex. 27) The "Legal Reviews" list makes reference to, inter alia, various OIG investigations, and certain of the qui tarn actions. (D.I. 81 at ¶ 151; D.I. 75-2, ex. 27)[19]

         Additional information regarding the content of the Section 220 documents and the allegations relating thereto is discussed in Section III below.


         A. Rule 23.1

         Generally, a corporation's board of directors is tasked with the decision of whether to initiate or pursue a lawsuit on behalf of the corporation. Del. Code tit. 8, § 141; In re Citigroup Inc. S'holder Derivative Litig., 964 A.2d 106, 120 (Del. Ch. 2009) ("Citigroup"). This responsibility flows from the '"cardinal precept'" of Delaware corporate law that '"directors, rather than shareholders, manage the business and affairs of the corporation.'" Citigroup, 964 A.2d at 120 (quoting Aronson v. Lewis, ATS A.2d 805, 811 (Del. 1984)).

         Pursuant to Federal Rule of Civil Procedure 23.1, in order to maintain a derivative action on behalf of a corporation in federal court, a shareholder plaintiffs complaint must, inter alia, "state with particularity": "(A) any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members; and (B) the reasons for not obtaining the action or not making the effort." Fed.R.Civ.P. 23.1(b)(3); see also Raul v. Rynd, 929 F.Supp.2d 333, 340 (D. Del. 2013). In this way, Rule 23.1 imposes a requirement that "a shareholder plaintiff make a pre-suit demand on the board of directors prior to filing a derivative suit on behalf of the company, or provide a satisfactory explanation for why the plaintiff has not done so." Raul, 929 F.Supp.2d at 340. The "demand requirement allows the corporate machinery to self-correct problems and to safeguard against frivolous lawsuits." Id; see also Ryan v. Gifford, 918 A.2d 341, 352 (Del. Ch. 2007).

         In assessing a motion to dismiss filed pursuant to Rule 23.1, a court considers the well-pleaded allegations of the complaint, the documents incorporated into the complaint by reference and judicially-noticed facts; in doing so, it draws all reasonable inferences in favor of the plaintiff. Raul, 929 F.Supp.2d at 337 n.\;Resnikv. Woertz, 774 F.Supp.2d 614, 635 (D. Del. 2011). However, the court is not obligated to accept as true bald assertions, unsupported conclusions and unwarranted inferences, or allegations that are self-evidently false. In re Caterpillar Inc. Derivative Litig., Civil Action No. 12-1076-LPS-CJB, 2014 WL 2587479, at *7 (D. Del. June 10, 2014) (citing Raul, 929 F.Supp.2d at 341).

         While Rule 23.1 sets out the pleading standard for derivative actions in federal court (including the specificity of pleading required as to pre-suit demand), the substantive requirements of demand are ultimately a matter of state law. King v. Baldino, 409 Fed.Appx. 535, 537 (3d Cir. 2010). In that regard, Delaware state law, applicable here, instructs that when making a demand on the board of directors would clearly be futile, the demand requirement may be excused. See Aronson, 473 A.2d at 814-15, overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). Successfully alleging that demand is excused, however, is a "difficult feat under Delaware law." Ryan, 918 A.2d at 352 n.23; see also Richelson v. Yost, 738 F.Supp.2d 589, 597 (E.D. Pa. 2010) (citing Ryan and explaining that demand futility "is a very onerous standard for a plaintiff to meet").

         As to allegations of demand futility, if what is at issue in the lawsuit is an actual decision made by the board of directors of a company, then a court must determine whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested or independent; or (2) the challenged decision or transaction was otherwise the product of a valid exercise of business judgment. Aronson, 473 A.2d at 814; In re J.P. Morgan Chase & Co. S'holder Litig., 906 A.2d 808, 820 (Del. Ch. 2005) (explaining that demand is excused if either prong of the Aronson test is satisfied). If, however, a plaintiff does not challenge a "decision" of the board of directors, then the test articulated in Rales v. Blasband, 634 A.2d 927, 930 (Del. 1993) applies instead.[20] In re China Auto. Sys. Inc. Derivative litig., CONSOLIDATED C.A. No. 7145-VCN, 2013 WL 4672059, at *5 (Del. Ch. Aug. 30, 2013). Pursuant to the Rales test, a court must determine "whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand." Rales, 634 A.2d at 934; see also In re China Auto. Sys., 2013 WL 4672059, at *5.

         Plaintiff and Defendants agree that the Rales test applies here "because Plaintiff 'never reference[s] any particular Board decision to act or to not act[.]'" (D.I. 89 at 10 (quoting D.I. 46 at 17 n.13); D.I. 92 at 10 ("The parties agree that the Rales test applies here."))

         B. Rule 12(b)(6)

         When a Court considers a Rule 12(b)(6) motion, it similarly accepts as true the well-pleaded allegations of the complaint, drawing all reasonable inferences in favor of the plaintiff. See Raul, 929 F.Supp.2d at 341. As with review of a Rule 23.1 motion, a court reviewing a Rule 12(b)(6) motion is not obligated to accept as true bald assertions, unsupported conclusions and unwarranted inferences, or allegations that are self-evidently false. Id. The standard for pleading demand futility with particularity under Rule 23.1 is more stringent than the standard under Rule 12(b)(6). Halpert v. Zhang, 966 F.Supp.2d 406, 415 (D. Del. 2013); cf. In re China Agritech, Inc. S'holder Derivative Litig., C.A. No. 7163-VCL, 2013 WL 2181514, at *24 (Del. Ch. May 21, 2013).


         Mr. Kvint's primaiy argument is that the allegations in the Amended Complaint (and, particularly, the new allegations drawn from the Section 220 documents) cure the deficiencies identified in the first MTD R&R, and raise a reasonable doubt as to the disinterestedness of the five Audit Committee Defendants during the relevant time period. (D.I. 92 at 5, 10-11)

         The Court will assess Mr. Kvint's argument in step-by-step fashion. First, it will summarize additional principles of Delaware law that are relevant to Mr. Kvint's legal position. Second, the Court will summarize the relevant findings in the first MTD R&R-i.e., it will detail its reasoning as to why the allegations in the KBC Complaint were not sufficient, on their own, to plead demand futility. Third, it will examine in greater detail the supplemental allegations in the Amended Complaint drawn from the Section 220 documents. And fourth, it will analyze whether the Amended Complaint's combined allegations (that is, the allegations that were also found in the original KBC Complaint, plus the new allegations regarding the Section 220 documents) are sufficient to plead that demand on the Board was futile.

         A. Pleading a Caremark Claim Under Delaware Law

         One way a plaintiff can make a showing of demand futility, sufficient to satisfy Rales, is by pleading facts sufficient to demonstrate that at least half of the directors would face a "substantial likelihood of personal liability" were they to comply with a shareholder's demand to pursue litigation. See In re Intel Corp. Derivative Litig., 621 F.Supp.2d 165, 170-71 (D. Del. 2009) (internal quotation marks and citation omitted); see also Taylor v. Kissner, 893 F.Supp.2d 659, 666 (D. Del. 2012). Mr. Kvint argues that here, the Audit Committee Defendants would indeed have faced a substantial likelihood of personal liability, because they "breached their fiduciary dut[y of loyalty] by willfully turning a blind eye to the long-running unlawful billing and enrollment scheme occurring at Vitas." (D.I. 92 at 11) More particularly, he asserts that the Audit Committee Defendants were "aware of Vitas' widespread practice of submitting false Medicare billings for hospice and crisis care services" and that they made "the conscious decision to condone the illegal activities by failing to investigate and/or remedy the violations." (Id. at 4; see also Id. at 5 ("[The Audit Committee Defendants] breached their fiduciary duty by turning a blind eye to the blatant misconduct at Vitas, thereby utterly failing to make a good faith effort to investigate and take steps to stop the violations.") (citing D.I. 81 at ¶ 144))

         Although Mr. Kvint does not cite to or even reference the case in his briefing, it is clear that his allegations attempt to make out a "Caremark claim": a claim asserting '"that the defendants are liable for damages that arise from a failure to properly monitor or oversee employee misconduct or violations of law.'" Melbourne Mun. Firefighters' Pension Trust Fund v. Jacobs, C.A. No. 10872-VCMR, 2016 WL 4076369, at *7 (Del. Ch. Aug. 1, 2016) (quoting Citigroup, 964 A.2d at 123); see also David B. Shaev Profit Sharing Account v. Armstrong, No. Civ.A. 1449-N, 2006 WL 391931, at *4 (Del. Ch. Feb. 13, 2006) (noting that a Caremark claim is one that asserts that the "directors failed to act when they otherwise should have done so") (citing In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996)).[21] It is plaintiffs burden in a Caremark case to demonstrate either that '"(a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.'" Melbourne, 2016 WL 4076369, at *7 (emphasis in original) (quoting Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006)). "Under [the second] formulation of [a] Caremark [claim], [i.e., the one at issue here, ] a plaintiff may state a valid oversight claim by pleading (1) that the directors knew or should have known that the corporation was violating the law, (2) that the directors acted in bad faith by failing to prevent or remedy those violations, and (3) that such failure resulted in damage to the corporation." Id. at *8 (citing Caremark, 698 A.2d at 971)).[22]

         Pressing this type of a Caremark claim requires "a showing that the directors knew they were not discharging their fiduciary obligations or that they demonstrated a conscious disregard for their duties." Intel, 621 F.Supp.2d at 174 (emphasis in original); see also Citigroup, 964 A.2d at 122-25.[23] This test is "rooted in concepts of bad faith; indeed, a showing of bad faith is a necessary condition to director oversight liability." Citigroup, 964 A.2d at 123 (emphasis in original). Overall, this theory of liability has been said to be '"possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.'" Horman v. Abney, C.A. No. 12290-VCS, 2017 WL 242571, at *7 (Del. Ch. Jan. 19, 2017); see also Intel, 621 F.Supp.2d at 174.

         B. The Relevant Allegations and Findings Discussed in the First MTD R&R

         In the first MTD R&R, the Court found that KBC had inadequately pleaded that the Director Defendants faced a substantial likelihood of liability for their alleged breach of the fiduciary duty of loyalty; as a result, demand was not excused. (D.I. 46 at 24-25) Specifically, the first MTD R&R focused on the lack of particularized allegations that the Director Defendants knew or should have known that Vitas was violating the law. (Id. at 24-47)[24]

         The Court came to these conclusions only after summarizing the various allegations made in the KBC Complaint and their legal effect. The Court noted that the "most significant allegations" as to whether "the Director Defendants had actual knowledge of [or should have known of the existence of] the alleged [fraudulent billing] scheme" were those relating to the various investigatory demands and complaints made upon Vitas during the years in question. (Id. at 35-36) Below the Court will lay out in greater detail what allegations the KBC Complaint pleaded as to these legal matters, which fell into three general categories: (1) those relating to subpoenas and other investigative demands; (2) those relating to the four qui tarn actions; and (3) those relating to the DOJ Action and the DOJ intervention in the Spottiswood, Urick, and Gonzales actions. (Id. at 35-44) The Court will also explain the other relevant allegations in the KBC Complaint, and will describe why, in the first MTD R&R, the Court found that the collective weight of these allegations were insufficient to plead demand futility.

         1. Subpoenas and Other Investigative Demands

         The first MTD R&R included discussion of the fact that Chemed's Board had received notice of certain state and federal subpoenas and other ...

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