Rackwise, Inc. v. Archbold

Filing 132

MEMORANDUM OF DECISION, FINDINGS OF FACT, AND CONCLUSIONS OF LAW signed by Senior Judge William B. Shubb on 9/5/2018. This matter is set for a Status Conference on 9/24/2018 at 01:30 PM in Courtroom 5 (WBS) before Senior Judge William B. Shubb to discuss the jury trial and related proceedings. (Kirksey Smith, K)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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RACKWISE, INC., a Nevada
corporation,
Plaintiff,

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No. 17-cv-797 WBS CKD

v.
GUY ARCHBOLD, an individual,
and DOES 1 to 25, inclusive,

MEMORANDUM OF DECISION, FINDINGS
OF FACT, AND CONCLUSIONS OF LAW

Defendants.

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Plaintiff Rackwise, Inc. brought this action against

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defendant Guy A. Archbold for conversion, fraud, breach of the

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duty of good faith and fair dealing, tortious interference with

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prospective economic advantage, and declaratory and injunctive

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relief arising from defendant’s actions before and after his

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purported termination as plaintiff’s President, CEO, and Chair of

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the Rackwise Board of Directors.

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Conference, the court determined, with the agreement of the

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parties, that plaintiff’s claims for injunctive and declaratory

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relief would be tried before the court separately from

After the initial Pretrial

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plaintiff’s common law claims.

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After conducting a three-day bench trial, the court

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finds in favor of plaintiff in part as to plaintiff’s requests

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for declaratory and injunctive relief.

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constitutes the court’s findings of fact and conclusions of law

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pursuant to Federal Rule of Civil Procedure 52(a).

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expresses no opinion as to plaintiff’s claims for conversion,

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fraud, breach of the duty of good faith and loyalty, and tortious

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interference with prospective economic advantage, which will be

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I.

The court

tried before a jury on a later date.

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This memorandum

Factual and Procedural History

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In 2011, defendant became President, CEO, and Chair of

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the Board of Directors of Rackwise.

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plaintiff’s employment contract (Ex. 11) was valid but do not

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dispute that defendant served as President, CEO, and Chair from

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2011 until his purported termination in 2017.

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claims that he was appointed as Secretary of Rackwise but offers

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nothing other than his testimony in support of that contention.

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The parties dispute whether

Defendant also

On May 7, 2014, Rackwise Funding II, LLC (“RFII”)

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entered into a Subscription Agreement with Rackwise that entitled

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it to appoint two members to Rackwise’s Board and that created

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warrants permitting RFII to purchase shares of Rackwise upon

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notice and payment.

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CEO, also granted another company, Triple R-F, LLC (“Triple R-

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F”), warrants to purchase shares of Rackwise stock.

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(Exs. 4, 5, 20.)1

Defendant, as Rackwise

(Ex. 6.)

Over the years after the incorporation of Rackwise in

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All exhibit numbers refer to the trial exhibit number.
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2011, Rackwise achieved some business successes, including an

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agreement with Unisys Corporation which defendant claimed had

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potential to lead to millions or even billions of dollars in

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revenue for Rackwise.

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continued to lose money every year.

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between Unisys and defendant Archbold soured, and Unisys stopped

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responding to contacts from Rackwise in 2016.

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Internal Revenue Service began taking steps to foreclose on

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Rackwise, (2) Rackwise began to default on its leases and was in

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danger of eviction and termination of business services, and (3)

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Rackwise defaulted on a factoring agreement with Richert Funding,

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LLC (“Richert Funding”) (Ex. 14), on which Richert Funding could

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have foreclosed at any time.

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It is undisputed, though, that Rackwise
Eventually the relationship

Further, (1) the

In late January 2017, plaintiff claims its Board of

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Directors consisted of Archbold, John Kyees, and Michael

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Feinberg.

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himself, Kyees, Feinberg, and Sherman Henderson, notwithstanding

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a July 2016 email from defendant in which Archbold discussed the

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possible removal of Henderson from the Rackwise Board and

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explained “He’s out, period,” (Ex. 12), and testimony that

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Henderson was not involved with Rackwise after July 2016.

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In contrast, defendant claims the Board consisted of

On February 2, 2017, Patrick Imeson, as RFII’s managing

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member, purportedly appointed himself and Bart Richert to the

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Rackwise Board pursuant to RFII’s subscription agreement.

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Imeson, Richert, and Feinberg then held a special telephonic

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meeting of the Rackwise Board, at which they discussed

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defendant’s “recent and unauthorized communications with Unisys”

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and “the potential for litigation from Unisys as a result of such
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communications.”

(Ex. 15.)

Imeson, Richert, and Feinberg then

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terminated defendant for cause as Rackwise President, CEO, and

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Chair.

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Officer of Rackwise.2

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meeting list Imeson and Richert as directors, the minutes do not

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discuss their appointment to the Board.

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notified of the meeting and did not attend.

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of the meeting but was not able to attend.

They also appointed Imeson as Interim Chief Restructuring
While the minutes of the February 2, 2017

Archbold was not
Kyees was notified

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Fearing that the February 2, 2017 meeting and the

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actions taken there might be challenged as invalid, Imeson,

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Richert, Feinberg, and Kyees held another special Board meeting

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on February 3, 2017.

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this meeting and did not attend.

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that RFII had appointed two members to the Rackwise Board under

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RFII’s Subscription Agreement, Imeson and Richert.

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Feinberg ratified Imeson’s and Richert’s appointments and then

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Imeson, Richert, Kyees, and Feinberg voted to remove defendant

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for cause as President, CEO, and Chair of the Rackwise Board, and

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appoint Imeson as Interim Chief Restructuring Officer.

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(Ex. 16.)

Archbold was not notified of
At this meeting, Imeson stated

Kyees and

This newly constituted Board then notified defendant of

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his termination on February 3, 2017 (Ex. 17), though defendant

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continued to hold himself out as Rackwise President, CEO and

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Chair after receiving this notice, by, among other things, making

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an SEC filing disputing the actions taken at the February 2 and 3

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Imeson drafted a notice to the Rackwise Board dated
January 29, 2017 in which he stated RFII was exercising its right
to appoint two Board members to Rackwise (Ex. 18), but it appears
that this notice was not presented to Rackwise or any Rackwise
employees, officers, or directors until the February 2, 2018
Board meeting.
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meetings.

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actions and remove any doubt about the validity of the

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appointment of Imeson and Richert and the termination of

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defendant, Imeson and other Rackwise shareholders formed a

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strategy to obtain over 75% of Rackwise stock so that they could

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then ratify the actions taken at the February 2 and 3 meetings

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through a shareholder vote.

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(See, e.g., Ex. 22.)

Seeking to address defendant’s

Under this strategy, RFII and Triple R-F, through their
managers Imeson and Dwight Richert (brother of Bart Richert),

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exercised their warrants (Exs. 5, 6) to purchase shares of

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plaintiff’s stock on March 22, 2017.

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to purchase 1,448,400 shares of Rackwise stock at an exercise

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price of $.01 per share, and Triple R-F exercised warrants to

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purchase 9,638,740 shares of Rackwise common stock at an exercise

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price of $.01 per share.

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exercise of warrants, RFII deposited $14,484.00 into a Rackwise

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bank account with First Bank in Denver, Colorado, and Triple R-F

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wired $96,387.40 to the same bank account.

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used for Rackwise expenses.

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RFII exercised its warrants

(Exs. 25, 26.)

Pursuant to this

This money was later

After this exercise of warrants, RFII, Triple R-F, and

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other entities managed by Imeson or Dwight Richert held

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14,319,503 shares out of the 18,158,757 total Rackwise shares, or

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about 78.9% of Rackwise’s outstanding stock.

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voted by written consent to terminate Archbold as President, CEO,

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and Chair of the Rackwise Board.

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consent, these shareholders also (1) removed Sherman Henderson as

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a member of the Board, (2) appointed Patrick Imeson and Bart

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Richert as members of the Board of Directors, effective February

(Ex. 27.)

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These entities then

In the written

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3, 2017; and (3) ratified the actions of the Rackwise Board of

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Directors meeting on February 3, 2017, including the termination

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of defendant for cause and the appointment of Patrick Imeson as

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Rackwise Acting Chief Restructuring Officer.

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After the shareholder ratification of defendant’s

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termination in March 2017, defendant continued to act as CEO,

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President, and Chair of Rackwise.

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to Rackwise constituents and employees, held meetings with

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purported Rackwise Board members acting on Rackwise’s behalf,

He held himself out as the CEO

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filed documents with the SEC on Rackwise’s behalf, communicated

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and conducted business with Rackwise investors, and terminated

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Rackwise’s contract with Unisys.

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50, 52-63.)

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(See, e.g., Exs. 24, 28-31, 35-

Plaintiff initiated this action against defendant in

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April 2017 and shortly thereafter moved for a preliminary

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injunction.

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13, 2017 and enjoined defendant, his agents, and anyone acting in

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concert with him from (1) accessing or logging into, or

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attempting to access or log into, Rackwise’s account in the U.S.

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SEC’s online EDGAR filing system; (2) representing himself to

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anyone as being an officer, director, or employee of, or

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otherwise affiliated with Rackwise; and (3) acting, attempting to

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act, or purporting to act on behalf of Rackwise (Docket No. 13.)3

The court granted plaintiff’s motion in part on June

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The court later modified the injunction to clarify
that the injunction did not prevent Archbold or his agents from
“making, signing, or filing any pleading or other document, or
from giving any oral or written testimony, in connection with any
presently pending lawsuit or arbitration proceeding in which the
right to control or ownership of Rackwise, Inc. is in issue.”
(Docket No. 53.)
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After multiple attempts by defendant to stay proceedings under

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various grounds, the case finally proceeded to a bench trial

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regarding the corporate governance issues on August 21, 2018.

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II.

Analysis

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A.

Just Cause

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The court assumes, but does not decide, that defendant

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had a valid employment contract with plaintiff.4

Regardless of

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whether defendant had a valid contract, however, the Board of

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Directors and the Rackwise shareholders had just cause to

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terminate defendant as President, CEO, and Chair of the Rackwise

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Board of Directors.

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during defendant’s tenure, and the company’s poor performance

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alone would be sufficient just cause to terminate defendant.

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Multiple witnesses also testified regarding the poor relations

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between defendant and Rackwise’s most important customer and

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partner, Unisys, which was additional justification for

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defendant’s removal.

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Rackwise continued to lose money every year

Moreover, defendant did not disclose to the corporation

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or the Board his felony charges and a subsequent misdemeanor

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conviction based on a failure to file taxes.

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counts were dismissed, and defendant received only probation,

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defendant’s charges and conviction nevertheless reflect

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negatively on a publicly traded corporation which seeks to do

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business with the federal government.

While most of the

These charges and

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Whether defendant’s employment contract or any
particular provision of the contract is or was valid, as well as
the parties’ rights or obligations with respect to that contract,
remain issues for the jury to determine as part of plaintiff’s
damage claims.
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conviction and failure to disclose also constituted just cause to

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terminate defendant.

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Further, Rackwise was in great financial distress at

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the time of defendant’s removal, with the IRS threatening to

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foreclose on the corporation.

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factoring agreement with Richert Funding, and the corporation

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facing the threat of eviction and termination of business

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services such as telephone and Internet.

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the Rackwise shareholders had just cause to terminate defendant

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Rackwise was in default on its

For all these reasons,

as CEO, President, and Chair of Rackwise.

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B.

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Appointment of Directors and February 2 and 3
Board Meetings

It is undisputed that RFII, though its Subscription

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Agreement, had a right to appoint two directors to the Rackwise

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Board.

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to Rackwise that it was exercising its right to appoint two

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directors, the notice did not identify the individuals whom it

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was appointing, and it is not clear the notice was delivered

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until the February 2, 2017 Board meeting.

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minutes of the February 2, 2017 meeting do not discuss the

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appointment of directors.

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simply assume that Imeson and Richert were Board members, though

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the minutes for the February 3, 2017 meeting do discuss the

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appointment of Imeson and Richert.

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The court notes, though, that while RFII drafted a notice

(See Ex. 15.)

(See Ex. 18.)

The

Rather, those minutes

(Ex. 16.)

As to the February 2 and 3, 2017 Board meetings, the

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court notes that the Rackwise bylaws require that all directors

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be notified before a special Board meeting occurs.

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4.4).

(Ex. 9 at §

It is undisputed that defendant, who was a director of
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Rackwise, was not notified of the February 2 and 3 meetings

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beforehand.5

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justified by emergency circumstances and the fear that defendant

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would impede business at the meetings.

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not cited any authority which would allow a Board meeting to be

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called and conducted without proper notice to all the directors

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in the case of exigent circumstances, absent waiver, consent, or

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approval by the absent director.

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Thus, the court will decline to grant plaintiff’s request for a

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declaration of the court that the February 2, 2017 appointments

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of Imeson and Richert, the February 2 and 3, 2017 Board meetings,

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and the actions taken therein, were valid in and of themselves,

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assuming there was no later shareholder consent.

Plaintiff claims that the lack of notice was

However, plaintiff has

(See, e.g., Ex. 9 at § 4.6.)6

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C.

Exercise of Warrants and Shareholder Consent

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RFII and Triple R-F had valid warrants to purchase

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1,448,400 shares of Rackwise stock at an exercise price of $.01

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per share, and that Triple R-F had valid warrants to purchase

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9,638,740 shares of Rackwise common stock at an exercise prices

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of $.01 per share.

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(See Exs. 5, 6.)

To exercise their warrants, RFII and Triple R-F were

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The court also notes that the evidence regarding
Henderson’s removal as director is somewhat ambiguous, with no
evidence of any formal Board or corporate action, and it is
undisputed that Henderson did not receive notice of the February
2 and 3 meetings beforehand.
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The court expresses no opinion as to whether the
appointment of directors by RFII or defendant’s removal complied
with the Nevada Revised Statutes. While the parties identified
this issue as one to be decided by the court, the submissions and
presentations by the parties at trial were insufficient to allow
the court to make any ruling.
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required to (1) deliver to Rackwise an executed copy of the

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notice of exercise of warrants, (2) surrender the warrant to the

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Secretary of Rackwise at its principal office or any other office

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or agency as specified by Rackwise in writing, and (3) pay the

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applicable exercise price based on the number of shares

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multiplied by the exercise price.

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delivered notices of exercise of these warrants through Imeson

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and Dwight Richert, respectively, on March 22, 2017.

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26.)

Here, RFII and Triple

(Exs. 25,

While the notice of exercise and the warrants were in fact

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delivered to Imeson acting as chief restructuring officer for

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Rackwise, or to Rackwise’s corporate counsel Michael Weiner, they

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were nonetheless delivered to Rackwise.

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Defendant claims that notice of exercise and/or the

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warrants were required to be delivered to him personally as

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Secretary of Rackwise.

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than defendant’s uncorroborated assertion that he was acting as

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Secretary of Rackwise in 2017.

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the requirement of delivery of the warrants appears to be to

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ensure that the warrants were delivered to Rackwise, or the

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principal office where Rackwise’s corporate officers normally are

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found.

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or that if there was a dispute over corporate governance, as

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there is here, that a holder of warrants would be prohibited from

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exercising valid warrants.

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delivery of RFII’s and Triple R-F’s notice of exercise and the

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warrants themselves to Imeson, acting as chief restructuring

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officer, or to Michael Weiner, acting as corporate counsel,

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substantially complied with the delivery of notice of exercise

However, there is no indication other

At any rate, the impetus behind

It cannot be the case that if Rackwise had no secretary,

Accordingly, the court finds that the

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and surrender of warrants requirements.
RFII’s and Triple R-F also paid $14,484.00 and

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$96,387.40, respectively, into a Rackwise bank account,

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representing the purchase price of $.01 per share for the

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purchase of stock under the warrants, as testified by Imeson.

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The fact these funds were deposited into a new Rackwise bank

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account, rather than into an existing Rackwise bank account in

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California (controlled by defendant) does not render the payments

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defective.

Indeed, Imeson testified that the funds paid to

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exercise RFII’s and Triple R-F’s payments were later used for

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Rackwise expenses.

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their warrants substantially complied with the warrants’

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requirements and were therefore valid.

Overall, RFII’s and Triple R-F’s exercises of

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D.

Shareholder Consent

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Under the Rackwise bylaws, stockholders holding at

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least 75% of the Rackwise common stock may remove directors by

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either a vote at a special meeting or by written consent:

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The holders of least seventy-five percent (75%)
of the outstanding shares of stock entitled to
vote may at any time peremptorily terminate the
term of office of all or any of the directors by
a vote at a meeting called for such purpose or by
a written consent filed with the secretary or, in
his absence, with any other officer. Such
removal shall be effective immediately, even if
successors are not elected simultaneously and the
vacancies on the Board of Directors resulting
therefrom shall be filled only by the
stockholders.
(Ex. 9 § 3.3.)

The Rackwise bylaws also allow the shareholders

to “elect a director or directors at any time to fill any vacancy
or vacancies not filled by the directors” and the owners of 50%
of Rackwise stock to act by written consent in lieu of a meeting.
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(Id. at § 3.3, § 2.10.)

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Because RFII and Triple R-F validly exercised their

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warrants, they, along with Rackwise Funding, LLC, Black Diamond

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Financial Group, LLC, and Black Diamond Holdings, held at least

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78.9% of Rackwise common stock.

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Rackwise common stock, these investors were entitled to act by

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consent to remove Archbold and Henderson as directors of the

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Rackwise Board, appoint Imeson and Bart Richert as directors, and

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ratify the actions taken at the March 2 and March 3, 2017 Board

As holders of more than 75% of

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meetings, including the termination for cause of defendant as CEO

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and any other employment he held with Rackwise, and the

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appointment of Imeson as chief restructuring officer.7

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Accordingly, the court will grant in part plaintiff’s request for

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declaratory and injunctive relief.

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IT IS THEREFORE ORDERED that plaintiff’s request for

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declaratory relief be, and the same hereby is, GRANTED in part,

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and the court hereby finds and declares as follows:

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1.

On March 22, 2017, Rackwise Funding II, LLC

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validly exercised its warrants and purchased 1,448,400 shares of

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Rackwise common stock.

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2.

On March 22, 2017, Triple R-F, LLC validly

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exercised its warrants and purchased 9,638,740 shares of Rackwise

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common stock.

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3.

On March 23, 2017, Rackwise shareholders Rackwise

Because the shareholders were allowed to act by written
consent under § 3.3 of the Rackwise bylaws, the court does not
decide whether the March 23, 2017 telephone conference between
Imeson and Dwight Richert, acting on behalf of RFII, Triple R-F,
and other shareholders was sufficient to comply with the bylaws’
requirements for special shareholder meetings.
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Funding, LLC, Rackwise Funding II, LLC, Black Diamond Financial

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Group, LLC, Black Diamond Holdings, LLC, and Triple R-F, LLC,

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acting by written consent in accordance with § 3.3 of the

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Rackwise Bylaws, ratified and approved the removal of Guy

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Archbold and Sherman Henderson as directors of Rackwise effective

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February 3, 2017, and ratified and approved the appointment of

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Patrick Imeson and Bart Richert as directors of Rackwise

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effective February 3, 2017.

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4.

On March 23, 2017, Rackwise shareholders Rackwise

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Funding, LLC, Rackwise Funding II, LLC, Black Diamond Financial

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Group, LLC, Black Diamond Holdings, LLC, and Triple R-F, LLC,

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acting by written consent in accordance with § 3.3 of the

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Rackwise Bylaws, ratified and approved the termination of Guy

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Archbold as an officer and employee of Rackwise effective

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February 3, 2017, and ratified and approved the appointment of

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Patrick Imeson as chief restructuring officer for Rackwise

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effective February 3, 2017.

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5.

No later than March 23, 2017, Defendant Archbold

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ceased to have any legal authority to hold himself out as an

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officer, director, or employee of Rackwise, Inc., or to act on

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behalf of Rackwise, Inc.

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6.

The Rackwise Board, in acting to terminate

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defendant Archbold as an officer, director, and employee of

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Rackwise effective February 3, 2017, and as ratified by the

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Rackwise shareholders, had just cause.

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IT IS FURTHER ORDERED that plaintiff’s request for

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injunctive relief be, and the same hereby is, also GRANTED in

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part, and defendant Guy Archbold, his agents, and any party
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acting in concert with him or his agents are enjoined from:

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accessing or logging into, or attempting to access

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or log into, Rackwise, Inc.’s account in the U.S. SEC’s online

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EDGAR filing system;

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representing himself to anyone as being an

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officer, director, or employee of, or otherwise affiliated with

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Rackwise, Inc.; and

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3.

behalf of Rackwise, Inc.

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acting, attempting to act, or purporting to act on

Plaintiff’s remaining requests for declaratory and
injunctive relief are DENIED.

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This matter is set for status conference on September

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24, 2018, at 1:30 p.m., to discuss the jury trial and related

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proceedings.

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Dated:

September 5, 2018

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