Davis v. Gutierrez et al

Filing 30

ORDER denying 22 Motion to Dismiss for Failure to State a Claim. So Ordered by Chief Judge Joseph N. Laplante.(gla)

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

The plaintiff is the Trustee of the GTAT Litigation Trust,
the duly authorized successor-in-interest to GTAT and its
affiliated debtors.
1

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

2

They contend that all of the

Doc. no. 1.

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
3

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).
held oral argument on March 20, 2018.

The court

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

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

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.
was reflected in falling stock prices.

This income decline

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.

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

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.

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

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

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.
7

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.
8

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
10

Complaint (doc. no. 1) at ¶ 63.
Id.

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

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.

The 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).
15

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 prepayments.

16

Squiller would later describe Apple’s sudden revision

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

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

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
excess capacity multiplier.

GTAT’s final model used just a 3%

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.

An 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.
25

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

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 lateAugust 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.

A 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).
36

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

Neither Gutierrez nor Squiller had sold any shares of
GTAT stock in nearly a year prior to these sales.
37

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

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

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

See 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.”).
41

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).

Complaint (doc. no. 1) at ¶¶ 108(f) (breach of fiduciary
duty of care claim) & 114(f) (breach of fiduciary duty of
loyalty claim).
42

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.
the claims on the merits.

That is, the defendants challenge
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

At 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.
48

Because 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.
49

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.”
Inc., 634 A.2d 345, 368 (Del. 1993).

Cede & Co. v. Technicolor,
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.

The 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.
50

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 illequipped judges or juries, which would, in the longrun, 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

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

The 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.
52

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,

It 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.
58

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 illadvised 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.

Although 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.
62

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

To 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-CV93-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).
63

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 fullyinformed 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

The 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.
64

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

The “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.
65

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.

Although 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.
66

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.
Oracle Corp., 867 A.2d at 934.

In re

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

Defs.’ Mem. (doc. no. 22-1) at 48 (quoting Guttman, 823
A.2d at 505) (emphasis omitted).
69

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.’”
(quoting Brehm, 746 A.2d at 263).

Id.

“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 “NonReleased D&O Causes of Action.”71

70

Doc. no. 26-3 at 220.

71

Id. at 209.
55

Under the Plan, “‘Non-Released

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:
cc:

March 27, 2018

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.
57