McCrae Associates LLC v. Universal Capital Mgmt Inc et al
ORDER granting in part and denying in part 111 the Motion of Defendants/Third-Party Plaintiffs for Partial Summary Judgment. Signed by Judge Alvin W. Thompson on 9/29/2010. (Jean-Louis, C)
McCrae Associates LLC v. Universal Capital Mgmt Inc et al
UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT ------------------------------x MCCRAE ASSOCIATES, LLC, : : Plaintiff, : : v. : : UNIVERSAL CAPITAL MANAGEMENT, : INC., MICHAEL QUEEN, WILLIAM : COLUCCI, JOSEPH DRENNAN, : THOMAS PICKARD, JEFFREY : MUCHOW and STEVEN PRUITT, : : Defendants/Third-Party : Plaintiffs, : : v. : : STEPHEN FUNK, : : Third-Party Defendant. : ------------------------------x
Civil No. 3:06CV1100(AWT)
RULING ON MOTION FOR PARTIAL SUMMARY JUDGMENT
D e f e n d a n t s and third-party plaintiffs Universal Capital M a n a g e m e n t , Inc. ("UCM"), Michael Queen ("Queen"), William Colucci ( " C o l l u c i " ) , Joseph Drennan ("Drennan"), Thomas Pickard ( " P i c k a r d " ) , Jeffrey Muchow ("Muchow") and Steven Pruitt ( " P r u i t t " ) ( c o l l e c t i v e l y , the "Defendants") have moved for partial s u m m a r y judgment against plaintiff McCrae Associates, LLC ("McCrae"). They seek summary judgment on the Second Count,
S t a t u t o r y Theft as to UCM; the Third Count, Breach of Fiduciary D u t y by Officer as to defendants Queen, Colucci and Drennan; the F o u r t h Count, Civil Conspiracy by Officer as to defendants Queen,
Colucci and Drennan; the Fifth Count, Breach of Fiduciary Duty by D i r e c t o r s as to Queen, Drennan, Pickard, Muchow and Pruitt; the S i x t h Count, Civil Conspiracy by Directors as to Queen, Drennan, P i c k a r d , Muchow and Pruitt; and the Seventh Count, violation of t h e Connecticut Unfair Trade Practices Act, Conn. Gen. Stat. § 421 1 0 a et seq. ("CUTPA"), as to the Defendants. F o r the reasons set forth below, the motion is being granted e x c e p t with respect to the claims against Queen in the Third and F i f t h Counts. I. F A C T U A L BACKGROUND D u r i n g the summer of 2004, Stephen Funk ("Funk"), who is the p r i n c i p a l in McCrae, Queen, Colucci and Drennan began talks in W i l m i n g t o n , Delaware to form UCM, a publicly-held venture capital company. Queen eventually became President and a director of UCM.
Funk had informed Queen that he would not serve as an officer, e m p l o y e e or director of UCM, but he agreed to sit on UCM's Board o f Advisors. stock. Funk eventually received 500,000 shares of UCM
He requested that UCM issue 300,000 of these shares to
M c C r a e , a company controlled by him and his wife, and 200,000 of t h e s e shares to Liberator LLC, a company controlled by his brother. While it is disputed whether Queen or Funk received the
m o s t shares, the parties agree that Funk received more shares than a n y of the other officers or directors of UCM. O n July 1, 2004, UCM executed Subscription Agreements, which
provided for the issuance of 300,000 shares to McCrae in exchange f o r a $300 payment and 200,000 shares to Liberator in exchange for a $200 payment. However, the Subscription Agreements did not
i n c l u d e additional promises the Defendants allege Funk made, i n c l u d i n g promises to identify potential acquisition targets for U C M , to secure funding from outside investors for UCM, to identify t a r g e t acquisition companies, and to provide publicly registered c o r p o r a t e shells to facilitate reverse mergers. Funk did
i n t r o d u c e some investors to UCM, as well as further capitalize UCM w i t h 100,000 shares of another firm and establish other contacts. Subsequent to the receipt by McCrae and Liberator of the 5 0 0 , 0 0 0 shares of UCM stock, Queen came to the conclusion that F u n k had not made a reasonable effort to identify a single i n v e s t m e n t opportunity for UCM in three years, nor a meaningful e f f o r t to raise investor funds to assist UCM in its acquisition activities. The Defendants contend that Funk had diverted to
o t h e r companies business opportunities that should have been d i r e c t e d to UCM. The Defendants further contend that Funk would
n o t have received the 500,000 shares of UCM stock if Funk had not m a d e promises and representations about the services he would p r o v i d e to UCM. Queen concedes that there was no numerical requirement with r e s p e c t to the number of acquisition targets to be identified or s p e c i f i c dollar amounts to be raised by Funk, nor any other
benchmarks that quantified Funk's supposed commitments.
F u n k claims that he had informed Queen that he would continue to d o similar work on his own time, as he had in the past. Nevertheless, the UCM directors, having "understood that S t e p h e n Funk had received his large ownership stake in the company i n exchange for Funk's commitment to play an active role in UCM's b u s i n e s s " and having "understood that Funk had reneged on his c o m m i t m e n t s to UCM and that Mr. Queen did not want UCM to release t h e McCrae and Liberator shares because Funk had lost the right to o w n these shares," (Defs.' L.R. Stmt. (Doc. No. 112)("Defs.' S t m t . " ) at ¶¶ 19, 20), allowed UCM to refuse to reissue McCrae's s h a r e s when stock certificates for UCM were reissued in 2006. Queen states that he made the decision "because Mr. Funk did not f u l f i l l commitments that he made to UCM and, thus, lost the right t o retain these shares." D . Queen at ¶ 9.) (Defs.' Stmt., Ex. B, Decl. of Michael
UCM still holds the stock certificates at issue
a t its office in Delaware. II. LEGAL STANDARD A motion for summary judgment may not be granted unless t h e court determines that there is no genuine issue of material f a c t to be tried and that the facts as to which there is no such i s s u e warrant judgment for the moving party as a matter of law. Fed. R. Civ. P. 56(c). See Celotex Corp. v. Catrett, 477 U.S.
3 1 7 , 322-23 (1986); Gallo v. Prudential Residential Servs., 22
F.3d 1219, 1223 (2d Cir. 1994).
Rule 56(c) "mandates the entry of
s u m m a r y judgment . . . against a party who fails to make a showing s u f f i c i e n t to establish the existence of an element essential to t h a t party's case, and on which that party will bear the burden of p r o o f at trial." See Celotex Corp., 477 U.S. at 322.
When ruling on a motion for summary judgment, the court must r e s p e c t the province of the jury. t r y issues of fact. The court, therefore, may not
See, e.g., Anderson v. Liberty Lobby, Inc.,
4 7 7 U.S. 242, 255 (1986); Donahue v. Windsor Locks Bd. of Fire C o m m ' r s , 834 F.2d 54, 58 (2d Cir. 1987); Heyman v. Commerce & I n d u s . Ins. Co., 524 F.2d 1317, 1319-20 (2d Cir. 1975). It is
w e l l - e s t a b l i s h e d that "[c]redibility determinations, the weighing o f the evidence, and the drawing of legitimate inferences from the f a c t s are jury functions, not those of the judge." U . S . at 255. Anderson, 477
Thus, the trial court's task is "carefully limited
t o discerning whether there are any genuine issues of material f a c t to be tried, not to deciding them. Its duty, in short, is
c o n f i n e d . . . to issue-finding; it does not extend to issueresolution." Gallo, 22 F.3d at 1224.
S u m m a r y judgment is inappropriate only if the issue to be r e s o l v e d is both genuine and related to a material fact. Therefore, the mere existence of some alleged factual dispute b e t w e e n the parties will not defeat an otherwise properly s u p p o r t e d motion for summary judgment. An issue is "genuine . . .
if the evidence is such that a reasonable jury could return a v e r d i c t for the nonmoving party." ( i n t e r n a l quotation marks omitted). Anderson, 477 U.S. at 248 A material fact is one that
w o u l d "affect the outcome of the suit under the governing law." Id. As the Court observed in Anderson: "[T]he materiality
d e t e r m i n a t i o n rests on the substantive law, [and] it is the s u b s t a n t i v e law's identification of which facts are critical and w h i c h facts are irrelevant that governs." Id. Thus, only those
f a c t s that must be decided in order to resolve a claim or defense w i l l prevent summary judgment from being granted. When confronted
w i t h an asserted factual dispute, the court must examine the e l e m e n t s of the claims and defenses at issue on the motion to d e t e r m i n e whether a resolution of that dispute could affect the d i s p o s i t i o n of any of those claims or defenses. m i n o r facts will not prevent summary judgment. Immaterial or See Howard v.
G l e a s o n Corp., 901 F.2d 1154, 1159 (2d Cir. 1990). W h e n reviewing the evidence on a motion for summary judgment, t h e court must "assess the record in the light most favorable to t h e non-movant and . . . draw all reasonable inferences in [its] favor." Weinstock v. Columbia Univ., 224 F.3d 33, 41 (2d Cir.
2 0 0 0 ) (quoting Delaware & Hudson Ry. Co. v. Consol. Rail Corp., 9 0 2 F.2d 174, 177 (2d Cir. 1990)). Because credibility is not an
i s s u e on summary judgment, the nonmovant's evidence must be a c c e p t e d as true for purposes of the motion. Nonetheless, the
inferences drawn in favor of the nonmovant must be supported by t h e evidence. "[M]ere speculation and conjecture is insufficient Stern v. Trustees of
t o defeat a motion for summary judgment."
C o l u m b i a Univ., 131 F.3d 305, 315 (2d Cir. 1997) (quoting Western W o r l d Ins. Co. v. Stack Oil, Inc., 922 F.2d 118, 121 (2d. Cir. 1990)). Moreover, the "mere existence of a scintilla of evidence
i n support of the [nonmovant's] position will be insufficient; t h e r e must be evidence on which [a] jury could reasonably find for t h e [nonmovant]." Anderson, 477 U.S. at 252.
Finally, the nonmoving party cannot simply rest on the a l l e g a t i o n s in its pleadings because the essence of summary j u d g m e n t is to go beyond the pleadings to determine if a genuine i s s u e of material fact exists. 324. See Celotex Corp., 477 U.S. at
"Although the moving party bears the initial burden of
e s t a b l i s h i n g that there are no genuine issues of material fact," W e i n s t o c k , 224 F.3d at 41, if the movant demonstrates an absence o f such issues, a limited burden of production shifts to the n o n m o v a n t , who must "demonstrate more than some metaphysical doubt a s to the material facts, . . . [and] must come forward with s p e c i f i c facts showing that there is a genuine issue for trial." Aslanidis v. United States Lines, Inc., 7 F.3d 1067, 1072 (2d Cir. 1 9 9 3 ) (quotation marks, citations and emphasis omitted). Furthermore, "unsupported allegations do not create a material i s s u e of fact." Weinstock, 224 F.3d at 41. If the nonmovant
fails to meet this burden, summary judgment should be granted. III. DISCUSSION A . Seventh Count: CUTPA C U T P A provides in relevant part that "[n]o person shall e n g a g e in unfair methods of competition and unfair or deceptive a c t s or practices in the conduct of any trade or commerce." G e n . Stat. § 42-110b(a). " T r a d e " and "commerce" means the advertising, the sale or r e n t or lease, the offering for sale or rent or lease, or t h e distribution of any services and any property, t a n g i b l e or intangible, real, personal or mixed, and any o t h e r article, commodity, or thing of value in this state. C o n n . Gen. Stat. § 42-110a(4). "Whether [a] defendant is subject Connelly v. Housing Conn.
t o CUTPA is a question of law, not fact." A u t h o r i t y , 213 Conn. 354, 364-65 (1990).
The Defendants argue that they are entitled to summary j u d g m e n t on McCrae's CUTPA claim because the alleged wrongful acts c o m p l a i n e d of took place outside Connecticut and do not involve t r a d e or commerce, as required under CUTPA. McCrae contends that
C U T P A applies to the Defendants' alleged wrongful acts even though t h e y occurred outside Connecticut because lex loci delicti is s t i l l the primary choice of law principle in Connecticut. The
c o u r t finds persuasive both arguments advanced by the Defendants. 1. Choice of Law
C U T P A does not apply to a violation occurring outside C o n n e c t i c u t unless the violation is "tied to a form of trade or
commerce intimately associated with Connecticut," or Connecticut c h o i c e of law principles dictate the application of Connecticut law. Victor G. Reiling Assoc. & Design Innovation, Inc. v.
F i s h e r - P r i c e , Inc., 406 F. Supp. 2d 175, 200 (D. Conn. 2 0 0 5 ) ( q u o t i n g Uniroyal Chem. Co. v. Drexel Chem. Co., 931 F. Supp. 1 3 2 , 140 (D. Conn. 1996)). There is no evidence that UCM's
b u s i n e s s is a form of trade or commerce intimately associated with Connecticut. Thus, the issue in this case is whether Connecticut
c h o i c e of law principles dictate the application of Connecticut law. I n Abdullahi v. Pfizer, Inc., 562 F.3d 163 (2d Cir. 2009), t h e court observed that "[u]nder Connecticut law, lex loci d e l i c t i , the doctrine that the substantive rights and obligations a r i s i n g out of a tort controversy are determined by the law of the p l a c e of injury, typically applies." Id. at 190 (emphasis added).
However, the court further observed that: C o n n e c t i c u t , however, has conspicuously retreated from a r i g i d application of the doctrine. The Connecticut Supreme C o u r t held that lex loci delicti does not apply to a tort c l a i m when doing so would undermine expectations of the p a r t i e s or an important state policy, produce an arbitrary a n d irrational result, or where "reason and justice" c o u n s e l for the application of a different principle. . .. In such cases, Connecticut courts are required to a p p l y the "most significant relationship" analysis set f o r t h in the Restatement (Second) of Conflict of Laws §§ 6 & 145 (1971) . . . O'Connor, 201 Conn. at 649-50 ... Id. Thus, the "most significant relationship" analysis is used
o n l y if one of three conditions is satisfied: (i) applying lex
loci delicti would undermine expectations of the parties or an i m p o r t a n t state policy, (ii) applying the doctrine would produce a n arbitrary and irrational result, or (iii) reason and justice c o u n s e l for the application of a principle other than lex loci delicti. In O'Connor v. O'Connor, 201 Conn. 632 (1986), the
C o n n e c t i c u t Supreme Court did not "discard lex loci in all of its m a n i f e s t a t i o n s , " but rather, relaxed the application of the principle. Id. at 648.
H e r e , applying the doctrine of lex loci delicti would u n d e r m i n e expectations of the parties. UCM is a Delaware
c o r p o r a t i o n that conducts its affairs from its principal place of b u s i n e s s in Wilmington, Delaware. Negotiations relating to the
f o r m a t i o n of UCM and the issuance of UCM shares in accordance with M c C r a e ' s direction occurred in Delaware. The Subscription
A g r e e m e n t s that provided for the issuance of McCrae's UCM stock a r e governed by Delaware law. UCM currently holds the stock
c e r t i f i c a t e s that are the subject of the dispute between the p a r t i e s in Delaware, and the decision of UCM and the individual d e f e n d a n t s to retain McCrae's shares of UCM stock occurred in Delaware. In addition, none of the individual defendants are The only tie to Connecticut is that Under these circumstances, the court
r e s i d e n t s of Connecticut. M c C r a e is located here.
c o n c l u d e s that it was the expectation of the parties that Delaware l a w would apply to any dispute arising out of the issuance of UCM
shares to McCrae. 1 I n Abdullahi, the court explained how Connecticut courts a p p l y the "most significant relationship" analysis set forth in S e c t i o n s 6 and 145 of the Restatement (Second) of Conflict of Laws: S e c t i o n 145(1) of the Restatement provides that "[t]he r i g h t s and liabilities of the parties with respect to an i s s u e in tort are determined by the local law of the state w h i c h , with respect to that issue, has the most s i g n i f i c a n t relationship to the occurrence and the parties u n d e r the principles stated in § 6." Restatement (Second) § 145(1). Section 6(2), in turn, provides that where a s t a t e is not guided by a statutory directive on choice of law, t h e factors relevant to the choice of the a p p l i c a b l e rule of law include (a) the needs of the interstate and i n t e r n a t i o n a l systems, ( b ) the relevant policies of the forum, ( c ) the relevant policies of other interested s t a t e s and the relative interests of those s t a t e s in the determination of the particular issue, ( d ) the protection of justified expectations, (e) the basic policies underlying the p a r t i c u l a r field of law, ( f ) certainty, predictability and uniformity of r e s u l t , and ( g ) ease in the determination and application o f the law to be applied. R e s t a t e m e n t (Second) § 6(2). The Connecticut Supreme Court h a s determined that Section 145(2) provides courts with g u i d a n c e regarding the evaluation of the policy choices
In addition, it appears that application of the doctrine lex loci delicti would undermine an important state policy of Delaware. Delaware has an interest of regulating the conduct of corporations formed under its laws. See In re English Seafood (USA) Inc., 743 F. Supp. 281, 289 (D. Del. 1990)("The state of Delaware has a strong interest in the formation and termination of corporations under its laws and in the uniform development and application of the statutory scheme that the state legislature and courts have created to regulate those corporations.") -11-
set out in Sections 145(1) and 6(2). O'Connor, 201 Conn. a t 652 . . . Section 145(2) assists with the application o f the principles of Section 6 to tort cases by calling f o r consideration of: ( a ) the place where the injury occurred, ( b ) the place where the conduct causing the injury occurred, ( c ) the domicil, residence, nationality, place of i n c o r p o r a t i o n and place of business of the parties, and ( d ) the place where the relationship, if any, b e t w e e n the parties is centered. R e s t a t e m e n t (Second) § 145(2). These factors are "to be e v a l u a t e d according to their relative importance with r e s p e c t to the particular issue." Id. I d . at 190-91. Evaluation of the factors in § 145(2), keeping in mind their r e l a t i v e importance in the context of this case, leads the court t o conclude that Delaware law applies here. The alleged injury
o c c u r r e d in Connecticut because that is where UCM is located, and t h u s , this factor favors application of Connecticut law. However,
t h e conduct causing the alleged injury occurred in Delaware, and t h e relationship between the parties is centered in Delaware. These factors strongly favor application of Delaware law. The
p l a c e of incorporation or formation and place of business of the p a r t i e s is a neutral factor. Here, in the context of the issuance
o f the shares of stock of a corporation, where shareholders of the c o r p o r a t i o n could reside in any number of different states, the p l a c e where the injury occurred is relatively less important than t h e place where the conduct causing the injury occurred and the p l a c e where the relationship between the parties is centered.
2. Involving Trade or Commerce W h i l e CUTPA does not apply to purely intracorporate c o n f l i c t s , the Connecticut Supreme Court has distinguished the s i t u a t i o n where the alleged wrongdoer's actions go "well beyond g o v e r n a n c e of the corporation, and [are] in direct competition w i t h the interests of the corporation." C o n n . 183, 213 (1996). w a s that: G o l e n b o c k asks us to focus solely on the relationship b e t w e e n the individual, as opposed to corporate, parties t o determine whether CUTPA should apply. Characterizing t h e action as a dispute over the internal governance of t h e corporation, he argues that CUTPA does not extend to c o v e r his actions. We disagree. Golenbock's actions went w e l l beyond governance of the corporation, and placed him in direct competition with the interests of the corporation. Id. By way of contrast, in Keaney v. Eastern Computer Exchange, Fink v. Golenbock, 238
In Fink, for example, the court's analysis
I n c . , No. 3:03CV1893(RNC), 2004 WL 885100 (D. Conn. Apr. 21, 2 0 0 4 ) , the plaintiff entered into an agreement with the defendants p u r s u a n t to which he became a one-third owner of a company in e x c h a n g e for his business development knowledge and expertise. The plaintiff was paid a share of the profits for several years; t h e n the defendants refused to acknowledge him as a co-owner of t h e business and failed to give him a share of the profits. p l a i n t i f f sued, claiming the defendants had violated CUTPA. The The
c o u r t granted the defendants' motion for summary judgment, finding t h a t CUTPA did not apply as this was "an internal dispute over
disclosure and distribution of profits. . . ."
Id. at *2.
a l s o Russell v. Russell, 91 Conn. App. 619, 647-48 (2005)(while d e f e n d a n t wrongfully retained proceeds from a life insurance p o l i c y , he did not use them in manner that placed him in direct c o m p e t i t i o n with corporation, so dispute concerned only ownership i n t e r e s t and distribution of insurance money, not business of c o r p o r a t i o n ) ; NatTel LLC v. SAC Capital Advisors, No. 3 : 0 4 C V 1 0 6 1 ( J B A ) , 2005 WL 2253756, *12-13 (D. Conn. Sept. 16, 2 0 0 5 ) ( d i s m i s s i n g CUTPA claim where claims related to conduct that a l l e g e d l y diluted or obscured value of plaintiff's shares). Similarly, here the wrongful conduct alleged by McCrae relates to a n internal corporate dispute and the distribution of shares in t h e company. There is no connection to any trade or commerce
c a r r i e d on by UCM. B. Second Count: Statutory Theft UCM contends that Connecticut's statutory theft statute, C o n n . Gen. Stat. § 52-564, has no application to this dispute b e c a u s e the claims are governed by Delaware law. agrees. S e c t i o n 52-564 provides: A n y person who steals any property of another, or k n o w i n g l y receives and conceals stolen property, shall pay t h e owner treble his damages. C o n n . Gen. Stat. § 52-564. McCrae argues that lex loci delicti is The court
t h e primary choice of law principle here because application of
Connecticut law would not produce an arbitrary or irrational result. However, producing an arbitrary and irrational result is
j u s t one of the circumstances in which lex loci delicti does not a p p l y to tort claims. As discussed above, application of lex loci
d e l i c t i in this case would undermine expectations of the parties, a n d accordingly, it should not be applied here. The analysis
u n d e r Restatement (Second) of Conflict of Laws §§ 145(1) and 6(2), i n accordance with § 145(2), is the same here as with respect to t h e CUTPA claim. Therefore, the motion is being granted with r e s p e c t to the claim pursuant to Conn. Gen. Stat. § 52-564. C . Third and Fifth Counts: Breach of Fiduciary Duty by Officers and Directors T h e individual defendants move for summary judgment based on t h e i r contention that they are shielded from liability by the b u s i n e s s judgment rule. Delaware law governs these claims because
" t h e law of the state of incorporation normally determines issues r e l a t i n g to the internal affairs of a corporation. t h a t body of law achieves the need for certainty and p r e d i c t a b i l i t y of result while generally protecting the justified e x p e c t a t i o n s of parties with interests in the corporation." First Application of
N a t ' l City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U . S . 611, 621 (1983). "The directors of Delaware corporations have a triad of p r i m a r y fiduciary duties: due care, loyalty, and good faith." Emerald Partners v. Berlin, 787 A.2d 85, 90 (Del. Supr. 2001).
Further: [ t ] h e business judgment rule is a presumption that in m a k i n g a business decision the directors of a corporation a c t e d on an informed basis, in good faith and in the h o n e s t belief that the action taken was in the best i n t e r e s t s of the company and its shareholders. . . . To r e b u t the presumptive applicability of the business j u d g m e n t rule, a shareholder plaintiff has the burden of p r o v i n g that the board of directors, in reaching its c h a l l e n g e d decision, violated any one of its triad of f i d u c i a r y duties: due care, loyalty, or good faith. If a s h a r e h o l d e r plaintiff fails to meet this evidentiary b u r d e n , the business judgment rule operates to provide s u b s t a n t i v e protection for the directors and for the d e c i s i o n s that they have made. If the presumption of the b u s i n e s s judgment rule is rebutted, however, the burden s h i f t s to the director defendants to prove to the trier o f fact that the challenged transaction was entirely fair t o the shareholder plaintiff. Id., at 90-91 (emphasis in the original)(internal quotations, a l t e r a t i o n s , and citations omitted). The court concludes that the
i n d i v i d u a l defendants other than Queen are entitled to summary j u d g m e n t on these claims for breach of fiduciary duty, based on t h e business judgment rule. The plaintiff has failed to create a
g e n u i n e issue of material fact as to good faith, duty of care or l o y a l t y , except as to Queen, and it has not done so with respect t o its claim of waste of corporate assets. Under Delaware law: A failure to act in good faith may be shown, for instance, w h e r e the fiduciary intentionally acts with a purpose o t h e r than that of advancing the best interests of the c o r p o r a t i o n , where the fiduciary acts with the intent to v i o l a t e applicable positive law, or where the fiduciary i n t e n t i o n a l l y fails to act in the face of a known duty to a c t , demonstrating a conscious disregard for his duties. I n re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del.
See also In re J.P. Stevens & Co., Inc. Shareholders
L i t i g a t i o n , 542 A.2d 770, 780-81 (Del. Ch. 1988)(noting that the c o u r t may review the substance of a business decision to determine i f it is "so far beyond the bounds of reasonable judgment that it s e e m s essentially inexplicable on any ground other than bad faith.") McCrae contends that by retention of McCrae's shares,
t h e individual defendants have failed to act in good faith in all t h r e e of the ways enumerated in In re Walt Disney. F u n k had introduced some investors to UCM, further c a p i t a l i z e d UCM with shares of another firm, and established other contacts. However, Funk concedes that the shares were not a gift He also
a n d that he agreed to sit on UCM's Board of Advisors.
c o n c e d e s that he understood that, in exchange for the shares, he w o u l d do for UCM things similar to what he had done at Pennexx. At Pennexx, Funk engaged in significant fundraising when he served a s a shareholder of that corporation. Furthermore, Funk concedes The
t h a t he never identified a single portfolio company for UCM.
r e c o r d shows that Queen decided to withhold the reissued shares f r o m Funk after Queen became aware of Funk's activities with r e s p e c t to two other companies: Bioaccelerate and Tag Entertainment. Furthermore, Queen explained the decision to UCM's
b o a r d members, and the board members consulted with outside legal c o u n s e l in connection with their authorization to defend against M c C r a e ' s claims.
McCrae points to evidence that Queen was between jobs and t r y i n g to determine his career path, and that Queen expressed to F u n k an interest in doing the kind of work that Funk was doing. McCrae also points to evidence that Queen stopped speaking to Funk o n c e Funk made it clear to Queen that his role in UCM's business w o u l d not be as extensive as Queen asserts Funk agreed it would be. It also points to the fact that Queen only informed the other
o f f i c e r s and directors of UCM of the decision to withhold McCrae's s h a r e s after the fact. McCrae also makes arguments based on the Investment Company A c t of 1940, 15 U.S.C. § 80a-1 et seq. (the "40 Act"). These
a r g u m e n t s fail because UCM's sale of founders' shares to Funk o c c u r r e d in the summer of 2004, and at that time UCM was not yet o p e r a t i n g as a business development company governed by the 40 Act. Also, there is no evidence that UCM received any
c o n s i d e r a t i o n from its shareholders when UCM directed its transfer a g e n t to reissue stock certificates to its shareholders in 2006. W h i l e the evidence produced by McCrae creates a genuine issue o f material fact as to whether Queen intentionally acted with a p u r p o s e other than that of advancing the best interests of the c o r p o r a t i o n , McCrae fails as to the other individual defendants to m e e t his burden at the summary judgment stage with respect to any o f the potential bases for a conclusion that any of them failed to a c t in good faith. McCrae has failed to create a genuine issue as
to whether any of these defendants did not have a good faith b e l i e f that Funk's failure to fulfil his commitment to UCM was the r e a s o n for withholding the shares from McCrae. Therefore, these
d e f e n d a n t s are protected by the business judgment rule as to the d u t y of good faith. The court a l s o c o n c l u d e s that all of the individual d e f e n d a n t s except Queen are entitled to summary judgment to the e x t e n t that the plaintiff's claims are based on breach of the duty o f due care or the duty of loyalty. "[T]o invoke the [business
j u d g m e n t rule's] protection directors have a duty to inform t h e m s e l v e s , prior to making a business decision, of all material i n f o r m a t i o n reasonably available to them. Having become so i n f o r m e d , they must then act with requisite care in the discharge o f their duties. . . . [U]nder the business judgment rule
d i r e c t o r liability is predicated upon concepts of gross negligence." Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).
" [ T ] h e duty of loyalty mandates that the best interest of the c o r p o r a t i o n and its shareholders takes precedence over any i n t e r e s t possessed by a director, officer or controlling s h a r e h o l d e r and not shared by the stockholders generally." Cede &
C o . v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993)(citation omitted). "Classic examples of director self-interest in a
b u s i n e s s transaction involve either a director appearing on both s i d e s of a transaction or a director receiving a personal benefit
from a transaction not received by the shareholders generally." Id. at 362. The evidence as to the duties of due care and loyalty is s u b s t a n t i a l l y the same as the evidence as to the duty of good faith. As to Queen, genuine issues of material fact exist as to As to the remaining individual
w h e t h e r he violated these duties.
d e f e n d a n t s , McCrae fails to create a genuine issue as to whether t h e y neglected to take steps to obtain material information r e a s o n a b l y available to them and then act with requisite care, or p u t any self interest ahead of the best interest of the c o r p o r a t i o n and its shareholders. McCrae also contends that the individual defendants breached t h e i r fiduciary duties by wasting corporate assets. "[W]aste e n t a i l s an exchange of corporate assets for consideration so d i s p r o p o r t i o n a t e l y small as to lie beyond the range at which any r e a s o n a b l e person might be willing to trade. Most often the claim i s associated with a transfer of corporate assets that serves no c o r p o r a t e purpose; or for which no consideration at all is received. Such a transfer is in effect a gift." Lewis v.
V o g e l s t e i n , 699 A.2d 327, 336 (Del. Ch. 1997)(citation omitted). "The test for corporate waste is a stringent one and requires that t h e plaintiff plead facts showing that no person of ordinary sound b u s i n e s s judgment could view the benefits received in the t r a n s a c t i o n as a fair exchange for the consideration paid by the
In re Lear Corp. Shareholder Litigation, 967 A.2d
6 4 0 , 656 (Del. Ch. 2008)(internal quotation mark and citation omitted). McCrae points to UCM's monthly operating costs of $90,000 and t h e fact that UCM is in such poor financial condition. It also
p o i n t s to the fact that UCM has borrowed and is in default on two p r o m i s s o r y notes yet is expending funds for legal fees in c o n n e c t i o n with this lawsuit. However, while McCrae characterizes
t h e expenditures as being reckless and for services of dubious v a l u e , it fails to produce evidence that could support a c o n c l u s i o n that corporate assets have been wasted. The mere fact
t h a t UCM has significant operating costs, is in poor financial s h a p e and persists in defending itself in this lawsuit can not s u p p o r t a conclusion under the applicable standard that there has b e e n a waste of corporate assets. Therefore, as to the Third and Fifth Counts, the motion is b e i n g denied as to Queen and granted as to the other individual d e f e n d a n t s , but even as to Queen being granted with respect to the c l a i m of waste of corporate assets. D. Fourth and Sixth Counts: Civil Conspiracy " T h e elements of a civil action for conspiracy are: (1) a c o m b i n a t i o n between two or more persons, (2) to do a criminal or a n unlawful act or a lawful act by criminal or unlawful means, (3) a n act done by one or more of the conspirators pursuant to the
scheme and in furtherance of the object, (4) which act results in d a m a g e to the plaintiff." (2003). Harp v. King, 266 Conn. 747, 778-79,
Those employees "acting in the scope of their employment
c a n n o t conspire with one another or with the corporation that e m p l o y s them; each acts for the corporation and the corporation c a n n o t conspire with itself." Id. at 778. Furthermore,
[i]f the measure of the applicability of that . . . d o c t r i n e was keyed to the alleged wrongdoing of corporate o f f i c e r s , it would quickly become a meaningless concept. In every case of conspiracy . . . there are necessarily a c c u s a t i o n s of wrongful conduct. The test therefore is n o t the wrongful nature of the conspirators' actions but w h e t h e r the wrongful conduct was performed within the s c o p e of the conspirators official duties. Id. at 785-86 (internal citations and brackets omitted). McCrae asserts that an exception to the intracorporate c o n s p i r a c y doctrine applies because the alleged wrongful conduct b y the individual defendants was not performed within the scope of t h e i r official duties. However, the only evidence to which it
p o i n t s is evidence of actions taken by them in their capacities as o f f i c e r s and/or directors. The plaintiff has failed to create a
g e n u i n e issue as to whether the intracorporate conspiracy doctrine a p p l i e s here. Therefore, the motion is being granted as to the
F o u r t h and Sixth Counts. IV. CONCLUSION F o r the reasons set forth above, the Motion of D e f e n d a n t s / T h i r d - P a r t y Plaintiffs For Partial Summary Judgment ( D o c . No. 111) is hereby GRANTED in part and DENIED in part. The
motion is being granted with respect to the Second Count, S t a t u t o r y Theft; granted with respect to the Third Count, Breach o f Fiduciary Duty by Officer as to defendants Colucci and Drennan a n d denied as to defendant Queen; granted with respect to the F o u r t h Count, Civil Conspiracy by Officer; granted with respect to t h e Fifth Count, Breach of Fiduciary Duty by Directors as to d e f e n d a n t s Drennan, Pickard, Muchow and Pruitt and denied as to d e f e n d a n t Queen; granted with respect to the Sixth Count, Civil C o n s p i r a c y by Directors; and granted with respect to the Seventh C o u n t , violation of the Connecticut General Statutes § 42-110a et s e q . ("CUTPA"). T h e Clerk shall enter partial judgment accordingly. I t is so ordered. S i g n e d this 29th day of September 2010 at Hartford, Connecticut.
/s/AWT Alvin W. Thompson U n i t e d States District Judge
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