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8/6/2019 Tripath SJ Order
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UNITED
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ORDERON MOTION FOR SUMMARY JUDGMENT
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re:
TRIPATH TECHNOLOGY, INC.,
Debtors.
Case No. 07-50358 CN
Chapter 11
RICHARD C. HERMERDING, asDisbursing Agent of the Post-Effective DateEstate of Tripath Technology, Inc.,
Plaintiff,
vs.
ADYA S. TRIPATHI, aka ACHARYA, Y.S.FU, AKIFUMI GOTO AND ANDYJASUJA,
Defendants.
Adversary No. 09-5004
ORDER ON DEFENDANTS MOTIONFOR SUMMARY JUDGMENT
On November 5, 2010, this court conducted a hearing on the duly noticed motion for
summary judgment by defendants Adaya S Tripathi, A.K. Acharya, Y.S. Fu, Akifumi Goto, and
Andy Jasuja (collectively, the Defendants). All appearances were noted on the record. The
following constitutes the courts findings of fact and conclusions of law under F.R.B.P. 7052.
The parties do not dispute a substantial portion of the relevant facts at issue in Defendants
The following constitutesthe order of the court. Signed May 12, 2011
________________________________________Charles Novack
U.S. Bankruptcy Judge________________________________________
Entered on DocketMay 13, 2011GLORIA L. FRANKLIN, CLERKU.S BANKRUPTCY COURTNORTHERN DISTRICT OF CALIFORNIA
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1 While the Defendants filed objections to some of Hermerdings evidence, all but one of thoobjections were overruled at the November 5, 2010 hearing. To the extent that the court sustainedthe Defendants objection no. 10 relating to certain deposition testimony of Rahul Shinkre, thosefacts are not included herein.
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ORDERON MOTION FOR SUMMARY JUDGMENT
motion for summary judgment.1 Instead, the main thrusts of the parties legal jousts are the
reasonable inferences that the court must make under F.R.B.P. 7056, and the Delaware law that it
must apply. In February 2007, Tripath Technology, Inc. (Tripath), a Delaware corporation, filed
Chapter 11 bankruptcy in the United States Bankruptcy Court for the Northern District of CaliforniIts bankruptcy filing was substantially caused by Tripaths several cash shortage that began, for
purposes of this motion, in 2005, and its subsequent inability to consummate a sale of its assets or
obtain a sufficient cash infusion through borrowing or capital investment. At all relevant times,
Defendants were the sole members of Tripaths board of directors. Acharya, Fu, Goto, and Jasuja
were outside, independent board members (the Outside Board Members), and Tripathi, who
founded the company, served as Tripaths president and chief executive officer. Plaintiff Richard
C. Hermerding is the disbursing agent appointed under the Chapter 11 Debtors confirmed Chapter
11 plan. In his complaint, Hermerding asserts that the Defendants breached their fiduciary duties o
due care, loyalty and good faith by failing to respond to Tripaths financial crisis and preserve
Tripaths net value for its shareholders and creditors.
The parties do not dispute that Tripath was in significant financial trouble from (at least) m
2005 to its bankruptcy filing. During 2005, Tripath resorted to expensive, private financing(including a $4.5 million round of private investment in public equity financing (PIPE) in March
2005, a $6 million line of credit obtained in August 2005, and a second, $5 million PIPE infusion i
November 2005) and was forced to secure the November 2005 PIPE borrowing with its intellectua
property and other personal property assets. When Tripath held its November 2, 2005 board of
directors and audit committee meetings, the Defendants knew or shortly thereafter learned that,
among other things, a) the Nasdaq stock exchange intended to delist Tripath; b) Tripath was
jeopardizing its supplier and distributor relationships by not timely paying its account payables; c)
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2 In September 2006, Tripaths outside corporate counsel strongly advised the Defendants thathey jeopardized violating their fiduciary duties if they did not meet more frequently regardingTripaths financial crisis. The Defendants either ignored or rejected this advice.
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ORDERON MOTION FOR SUMMARY JUDGMENT
Tripaths outside auditor intended to issue a going concern qualification to its audit opinion whic
would question Tripaths ability to continue as a going concern for another year; and d) Tripath
would run out of cash by March/April 2006. During his deposition, Tripathi conceded that the
November 2005 PIPE borrowing began the companys financial death spiral.
Tripaths financial woes escalated in 2006. By early August 2006, Defendants knew that th
company was out of operating capital, that its projected September cash balance would be
approximately $7,000.00, that its account payables were substantially increasing both in amount an
days outstanding, and that the company was allowing one of its largest customers to pre-pay
receivables (to generate cash flow) at a substantial loss. Despite Tripaths ongoing financial crisis
Defendants convened only three regularly scheduled board meetings in 2006: January 31, 2006, M
2, 2006, and August 8, 2006.2 Rather than actively participating in the efforts to rescue the
company, the Outside Board Members instead allowed Tripathi to assume this task. As discussed
greater detail below, the evidence suggests that Tripathis interests did not necessarily align with
those of his company.
Tripathis efforts during 2006 resulted in several potential sale and financing opportunitiesthat possibly could have preserved Tripaths value and generated a greater return to its creditors tha
its Chapter 11 bankruptcy. None of these deals came to fruition, and Hermerding asserts that the
failed negotiations are damning evidence of the Defendants fiduciary lapses. In contrast, the
Defendants assert that the evidence presented to this court demonstrates that they met their fiduciar
obligations. For example, in January 2006, Tripath and Cirrus Logic executed a non-disclosure
agreement and began due diligence regarding Cirrus Logics interest in purchasing some of
Tripaths intellectual property. In April 2006, Cirrus offered to purchase these assets for $30
million, with half of the funds payable immediately. Cirrus informed Tripathi that it wanted to mo
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3 Because the Outside Board Members resided outside the United States and had internationabusiness interests, it may have been difficult for the Board to meet. Regardless, the Defendantsapparently did not even discuss the Cirrus Logic offer by other means. Moreover, the Defendantsnever retained an investment banker or any other professional to advise them on the Cirrus Logicoffer (or any other offer during 2006). Hermerding contends that the Defendants failure to retain investment banker prevented them from effectively and properly marketing Tripath at a time whenthey desperately needed professional, unbiased advice.
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ORDERON MOTION FOR SUMMARY JUDGMENT
quickly and to have a seamless transition of the products, employees, and customer support that
would be part of the transaction. Without consulting with the Outside Board Members, Tripathi
tentatively accepted the $30 million offer but asked that more be paid up front. None of the Outsid
Board Members recalls meeting or discussing the Cirrus Logic offer, and the May 2, 2006 boardminutes do not disclose that it was discussed.3 The Outside Board Members also were not aware
that Cirrus had conducted due diligence. The parties did not consummate any deal, and the eviden
presented to this court does not clearly establish the reasons why the parties terminated their sale
discussions.
In August 2006, Enable Capital Management (which had previously provided bridge
financing to Tripath) offered to make an additional $2.5 million bridge loan to the company. The
loan, in the form of 10% senior secured convertible notes (payable a year from closing), had severa
conditions, including: 1) Tripaths retention of an investment banker to seek strategic alternatives
and partnerships, such as joint ventures and the companys sale; 2) obtaining an additional $8 - 13
million in financing within 90 days; and 3) Tripathis resignation as president and CEO. The
evidence suggests that Tripathi rejected Enables offer by email dated August 16, 2006 without
submitting it to the Outside Board Members. Enable responded to Tripathis August 16
th
email bydirectly emailing the Outside Board Members on August 17, 2006 to inquire whether they had
considered Enables offer. At or about the same time, Tripaths CFO sent his own email to the
Outside Board Members to inform them that he was available to meet with them to discuss Enable
offer. Tripaths controller also emailed the Outside Board Members and informed them that she
believed that the companys investors would timely invest another $8 - 13 million.
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4 Tripathi describes these other offers as ones that he had briefed in the last board meeting.The last board meeting was held on August 8, 2006. There is no evidence before the court that theDefendants discussed any of these offers in any detail during the August 8th board meeting.
5 This endorsement of current management seemingly was in response to the emails that theOutside Board Members received directly from Tripaths corporate controller and CFO. Tripathwas upset that the controller and CFO directly contacted his fellow board members, and heterminated their employment soon thereafter.
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ORDERON MOTION FOR SUMMARY JUDGMENT
Tripathi responded to this flurry of emails with his own email to the Outside Board
Members. In an email dated August 17, 2006, Tripathi briefly informed the Outside Board Membe
of the Enable offer. Tripathis email stated that he was entertaining multiple offers,
4
and that theEnable bridge loan was the worst one and an absolute last resort. He asked for additional time
to bring a definitive deal to the table. Rather than requesting a more detailed explanation of the
Enable offer and a comprehensive status report on the other offers that Tripathi was pursuing, the
Outside Board Members acquiesced and simply endorsed Tripathis rejection of the Enable bridge
loan. Most of the emails from the Outside Board Members simply reiterated their support for
current management.5 Defendant Goto was the only Outside Board Member to express any
concern regarding the status of these other options. His August 17th email response to Tripathi,
which was copied to all directors, stated that I support [Tripathis] direction on this matter
however suggest to have our meeting soon to review all possibilities. . . . [Tripathi] informed us tha
most of our accounting personnel is leaving. That is also my worry because that is very important
division right now. Despite these comments, the Defendants did not convene a special meeting to
discuss the status of the companys financial affairs or Tripathis multiple, other options.
In the fall of 2006, Tripath received competing purchase offers from NanoAmp Solutions,
Inc. (NanoAmp) and Wolfson Microelectronics (Wolfson) that represented Tripaths last gasp
pre-petition opportunities to obtain value for its assets. Neither deal closed, and Hermerding alleg
that Defendants responses to these offers further demonstrate their breach of their fiduciary duties
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28 6 For example, defendant Goto was on vacation from November 1st through November 13th.
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ORDERON MOTION FOR SUMMARY JUDGMENT
NanoAmp conveyed its offer on October 30, 2006. As revised, NanoAmp sought to acquir
virtually all of Tripaths equity with a $15 million investment into the company. NanoAmps
proposal contemplated that Tripath would become its subsidiary and that certain key employees
could participate in the equity of the surviving corporation. NanoAmp contemplated a deal thatwould close in approximately 30 days. The non-binding offer did not mention which key employe
would participate in equity, and its offer would substantially dilute the value of Tripaths present
shares. Moreover, the deal required that Tripathi resign as the companys CEO (but possibly remai
as the companys CTO). Wolfson alternatively proposed an $11 million acquisition through a pre
packaged Chapter 11 bankruptcy, along with a commitment for $1.5 million in bridge/debtor-in-
possession financing. The Chapter 11 bankruptcy would generate little, if any return to the
companys shareholders.
Tripathi waited until November 7, 2006 to convey these offers to the Outside Board
Members; even then, his email only summarily described their terms. Despite the companys
desperate financial straits, the Defendants did not formally meet to review the competing offers6.
In his November 7
th
email, Tripathi stated his preference to pursue the NanoAmp offer. Heinformed the Outside Board Members that the NanoAmp offer would retain a functioning Tripath
and would allow the company to avoid filing a bankruptcy. Although his email concluded by askin
for any comments and advice, this court is unaware of any evidence indicating that the Outside
Board Members responded to this solicitation. Instead, the only evidence before this court is that
defendant Acharya responded by email stating that it was OK for Tripathi to pursue the NanoAm
offer. Defendant Goto may not have seen this email until after he returned from vacation.
The Outside Board Members authorized Tripathi to reject the Wolfson offer and pursue the
NanoAmp without the advice of an investment banker. Hermerding contends that Tripathi down
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7 As part of the deal, NanoAmp may have agreed to reimburse Tripathi for certain legal feeshe had paid on Tripaths behalf.
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ORDERON MOTION FOR SUMMARY JUDGMENT
played the Wolfson offer due to his strong desire to avoid the stigma of his eponymous company
filing for bankruptcy, and there is some deposition testimony supporting his contention. Tripathis
November 7th email did not disclose this reasoning to the Outside Board Members. Nor did it
disclose Wolfsons belief that the company would have sufficient funds after it filed its Chapter 11to confirm a Chapter 11 plan.
Tripathi signed the October 30, 2006 NanoAmp letter of intent on November 10, 2006.
More than a month passed before the Board of Directors met to consider it. On December 12, 2006
in their first full board of directors meeting since August, the Defendants considered the NanoAmp
offer and the previously rejected Wolfson deal. The board minutes starkly state that the company
was insolvent, could not pay its D & O insurance premium, and was facing debenture defaults and
an unlawful detainer proceeding from its landlord. The minutes also indicate that Defendants
approved the NanoAmp proposal. On December 13, 2006, the day after the board meeting,
Tripathi sent an email to NanoAmps CEO requesting that NanoAmp prepare and forward to him
the paper work for my employment/consulting contract (including the complete
medical/dental/vision coverage through the year end 2007), and commitment for Howard Rice
payments,
7
prepared as a part of signing all needed documents. I would still like to ask for myseverance to include full salary until June 30, 2007, for asking me to resign after ten and half years
of service in the CEO capacity. Also as we discussed yesterday, we still need the commitment for
the sabbatical as well.
The evidence strongly suggests that in December 2006, Tripathi backdated favorable
changes in the companys sabbatical policy to July 2006 that would allow him to receive three
months of paid sabbatical from NanoAmp.
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ORDERON MOTION FOR SUMMARY JUDGMENT
On December 15, 2006, NanoAmp terminated its negotiations with Tripath, stating that its
decision is based on an overall review of the risks and benefits of the transaction. Economic
concessions or adjustments would not change this assessment.
Tripath filed its Chapter 11 bankruptcy on February 8, 2007. It assets were purchased durin
the bankruptcy for $4 million by Cirrus Logic. Hermerdings expert witnesses have testified that
had Defendants retained an investment broker or a finance expert to provide them with strategic
advice, Tripath possibly could have negotiated a significantly larger sale without a bankruptcy.
Hermerdings expert quantified the damages at $8.2 million to $18.7 million.
MOTION FOR SUMMARY JUDGEMENT STANDARD
The summary judgment standard under F.R.B.P. 7056 is well settled. Summary judgment
should be granted if the pleadings, the discovery and disclosure materials on file, and any affidavi
show that there is no genuine issue as to any material fact and that the movant is entitled to judgme
as a matter of law. Fed. R. Civ. P. 56(c)(2); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-2
106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986). Only disputes over facts that might affect the outcome the suit under the governing law will properly preclude the entry of summary judgment. Anderso
v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). This courts
duty is not to weigh the evidence and decide the truth of the allegations, but to determine whether
there is a genuine issue for trial. Id. at 249. Where the non-moving party bears the burden of proo
at trial [s]ummary judgment is warranted if the nonmovant fails to make a showing sufficient to
establish the existence of an element essential to [his] case. Nebraska v. Wyoming, 507 U.S. 584,
590, 113 S. Ct. 1689, 124 L. Ed. 2d 317 (1993) (quoting, Celotex, 477 U.S. at 322). The moving
party can meet its burden by pointing out the absence of evidence from the non-moving party, and
it need not disprove the other partys case. Miller v. Glenn Miller Prods., Inc., 454 F.3d 975, 98
(9th Cir. 2006). Accordingly, the nonmoving party must come forward with specific facts showing
there is a genuine issue for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574
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587, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986). Finally, since Hermerding, the plaintiff, is the non-
movant, all justifiable inferences must be drawn in his favor. Anderson, 477 U.S. at 255, 106 S. C
at 2513.
BREACH OF FIDUCIARY DUTY CLAIMS
Tripath is a Delaware corporation, and all parties agree that Delaware law governs the breac
of fiduciary duty claims. Under Delaware law, corporate directors and officers owe their
shareholders fiduciary duties of loyalty and care. Gantler v. Stephens, 965 A.2d 695, 708-09 (Del.
2009). While Hermerdings complaint specifically identifies instances of the defendants alleged
breach of their duty of loyalty, it only generally alleges that defendants conduct violated their duty
of due care. Delawares General Corporation law authorizes a corporation to include it its charter
provision eliminating or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director. Del. Code. Ann. tit.
8, 102(b)(7). Tripaths charter contains such exculpatory language, and defendants have asserted
this provision as an affirmative defense. Accordingly, to the extent that Hermerding asserts that
Defendants breached their duty of due care as directors, this court grants summary judgment in favof Defendants with regard to those claims. The court also grants summary judgment with regard t
any allegations that Tripathi breached his duty of due care as a Tripath officer. The law is clear
that where it is impossible to separate actions taken in fulfillment of a defendants directorial dutie
from actions taken in fulfillment of that defendants duties as a corporate officer, then any duty of
care claim stated against that individual is exculpated. Brown v. Brewer, 2010 U.S. Dist. LEXIS
60863, 2010 WL 2472182, at *3 (C.D. Cal. Jun. 17, 2010). Hermerding has not identified any
actions taken by Tripathi solely in his capacity as a Tripath officer.
Defendants motion for summary judgment with regard to their claim for breach of the duty
of loyalty is, however, denied. To hold a director liable for breaching the duty of loyalty,
Hermerding must demonstrate that a majority of the Director Defendants either [1] stood on both
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sides of the merger or were dominated or controlled by someone who did; or [2] failed to act in goo
faith, i.e., where a fiduciary intentionally fails to act in the face of a known duty to act,
demonstrating a conscious disregard for his duties. Brown, 2010 WL 2472182, at *3, citing,
Lyondell Chem Co. v. Ryan, 970 A.2d 235, 239-40 (Del. 2009). Only the second element appearsbe at issue in this case.
The Delaware Supreme Court has described bad faith in the corporate fiduciary context as
encompassing a spectrum of directorial conduct. In re Walt Disney Co. Derivative Litig., 906 A.2
27, 64 (Del. 2006). At one end lies a category of acts involving non-exculpable, so-called
subjective bad faith, that is, fiduciary conduct motivated by an actual intent to do harm. Brown,
2010 WL 2472182, at *4, citing, Disney, 906 A.2d at 64. The opposite end of the spectrum involv
conduct demonstrating a lack of due care that is, fiduciary action taken solely by reason of gross
negligence and without any malevolent intent. . . . Brown, 2010 WL 2472182, at *4. In the middla third category consists of intentional dereliction of duty or a conscious disregard for ones
responsibilities. Disney, 906 A.2d at 66. [S]uch misconduct . . . is properly treated as a non-
exculpable, . . . violation of the fiduciary duty to act in good faith. Id. It is this last category that
at issue in this case.
Stated differently, imposition of liability requires a showing that the directors knew that the
were not discharging their fiduciary obligations. Where directors fail to act in the face of a know
duty to act, [thereby] demonstrating a conscious disregard for [their] duties, they breach their duty
of loyalty by failing to discharge that fiduciary obligation in good faith. Disney, 906 A.2d at 67.
Because of the emphasis on intent, claims asserting a breach of the duty of loyalty are not
readily susceptible to resolution by summary judgment. More profoundly, however, this court
disagrees with the Defendants contention that the Delaware Supreme Courts decision in Lyondell
heightens the standard for establishing a breach of the duty of loyalty based on lack of good faith.
Defendants assert that, under Lyondell, this court must grant their summary judgment motion if it
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cannot find that the Defendants utterly failed in their duties to find a buyer for Tripaths assets or
lender who could have preserved the company. For the reasons explained more fully by the distric
court in Brown, this court agrees with that courts conclusion that the Lyondell court did not
supplant the definition of bad faith set forth in Disney. Nor did it suggest any unprecedenteddiminishment of Revlon duties, as suggested by the minimalist standard Defendants advance. If
such a radical departure were intended, we think the court would have taken pains to say as much.
Brown 2010 WL 2472182, at *8.
Accordingly, the court must determine whether there is a genuine issue of material fact
regarding whether Defendants consciously disregarded their duties in the face of Tripaths ongoing
financial crisis.
The court reminds the parties that its role is not to make findings of fact but to determine
whether there are genuine issues of material fact after drawing all justifiable inferences in
Hermerdings favor. The court believes that there are genuine issues of material fact regarding
whether Defendants consciously disregarded their duties. The Defendants knew in 2005 that Tripa
was teetering on the financial edge, that it would run out of cash in 2006, and that its auditorsbelieved that it had less than a year to survive unless the company sold itself or found substantial,
additional capital. Tripaths experienced outside counsel informed them that they needed to respon
to this crisis by, if nothing else, meeting more frequently to stay abreast of the companys financial
crisis and direct Tripathis efforts. The mid-August 2006 competing emails that they received from
Enable, Tripathi and Tripaths controller and CFO are stark examples that the Outside Board
Members should have demanded far more information from Tripathi regarding the multiple deals
that he was negotiating on their behalf, and that they should have insisted on a much more active
role in the companys efforts to preserve its value. Instead, the Outside Board Members allowed
Tripathi, who apparently had no experience negotiating the sale of a company, to take the lead, and
furthermore did not retain or even consider retaining an investment banker to assist his efforts. Th
Outside Board Members were at best docile and at worst willfully and consciously delinquent in
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8 Defendants contend that their failure to retain an investment banker and decision to entrustthe companys president with negotiating with potential bidders and investors do not, standingalone, demonstrate that they consciously disregarded their duties. The court believes, however, thathere is no single blue-print for fulfilling the duty to maximize value. Toys R Us, Inc.Shareholder Litigation, 877 A.2d 975, 1000 (Del. Ch. 2005), quoting, Barkan v. Amsted Indus., 56A.2d 1279, 1286 (Del. 1989). The facts presented to this court indicate that the Outside BoardMembers did little beyond delegating their responsibilities to Tripathi, and may have willfullyremained ignorant of his efforts.
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ORDERON MOTION FOR SUMMARY JUDGMENT
their board duties. The trier of act must decide where on the Disney spectrum they fall.8
The court also holds that there are substantial questions of fact regarding Tripathis conduc
The facts and the reasonable inferences therefrom indicate that Tripathi was primarily interested intransactions that would preserve his employment status and sabbatical rights, as well as keep his
self-named company out of bankruptcy. Indeed, the evidence strongly suggests that he back-dated
amendments to Tripaths sabbatical policy in order to negotiate a better employment deal with
NanoAmp (the impact of which could not have improved Tripaths chances of consummating a
NanoAmp transaction). He terminated the employment of Tripath employees who apparently were
willing to assist the Outside Board Members in analyzing transactions that did not meet his persona
goals, failed to keep the Outside Board Members timely and fully apprised of the status of his
negotiations, ignored the need for the Board to meet more frequently, and failed to consult with an
investment broker. This conduct, and in particular, Tripathis interest in deals that would protect h
reputation, employment status and benefits, indicates that he may have violated his duty to advance
corporate well-being over his own. If true, such conduct violates a board members duty of
loyalty. See Revlon, Inc. v. MacAndews & Forbes Holdings, Inc., 506 A. 2d 173 (Del. 1986).
Finally, the court finds that there are substantial questions of fact regarding damages that
merit a trial. Experts routinely testify on a wide range of subjects pertinent to damages. Wright
and Gold, Federal Practice and Procedure - Evidence 6264, p. 241 (1997). As a general rule, th
factual basis of an expert opinion goes to the credibility of the testimony, not the admissibility, and
is up to the opposing party to examine the factual basis for the opinion in cross-examination. In r
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ORDERON MOTION FOR SUMMARY JUDGMENT
Japanese Electronic Products Antitrust Litig., 723 F. 2d 238, 279, (3d Cir. 1983), rev. on other
grounds, Matsushita Elec. Industrial Co. v. Zenith Radio, 475 U.S. 574, 106 S. Ct. 1348, 89 L. Ed.2
538 (1986). While plaintiffs expert testimony may be less persuasive because no pre-petition deal
was consummated, the factual underpinnings of this testimony is a matter for the trier of fact toweigh.
* * * END OF ORDER * * *
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ORDERON MOTION FOR SUMMARY JUDGMENT
COURT SERVICE LIST
George S. TrevorPearson, Simon, Warshaw and Penny
44 Montgomery St. #2450San Francisco, CA 94104
Robert A. JigarjianJigarjian Law Office128 Tunstead Ave.San Anselmo, CA 94960
David PriebeDLA Piper LLP US2000 University Ave.East Palo Alto, CA 94303
Rajiv DharnidharkaDLA Piper LLP US2000 University Ave.East Palo Alto, CA 94303