Davis v. 24 Hour Fitness Worldwide Inc.

Filing 110

MEMORANDUM. Signed by Judge Gregory M. Sleet on 9/30/2014. (mdb)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
CHRIS A. DAVIS,
Plaintiff/Counter-Defendant,
v.
24 HOUR FITNESS WORLDWIDE, INC.,
a Delaware corporation,
Defendant/Counter-Claimant.

)
)
)
)
)
)
)
)
)
)

Civil Action No. 12-1370-GMS

MEMORANDUM
I.

INTRODUCTION
The plaintiff, Chris A. Davis ("Davis"), filed this diversity action on October 29, 2012,

against the defendant, 24 Hour Fitness Worldwide, Inc. ("24HFW"), alleging breach of contract
and unjust enrichment. (D.I. 1.) On November 21, 2012, 24HFW filed its Answer, along with
counterclaims against Davis, seeking declaratory judgment and alleging breach of fiduciary
duties, fraud, equitable fraud, negligent misrepresentation, and fraudulent concealment. (D.I. 7.)
24HFW voluntarily dismissed its counterclaims for fraud and equitable fraud on May 1, 2014.
(D.I. 73.) Presently before the court is Davis' motion for summary judgment for the remainder
of24HFW's counterclaims. (D.I. 79.) Davis argues these claims are barred by a three-statute of
limitations.

For the reasons stated below, the court will grant Davis' motion for summary

judgment.

II.

BACKGROUND 1
Davis, a limited partner with the private equity firm Forstmann Little & Co. ("FL"), was

elected to the board of directors ("Board") of 24HFW in 2006, after FL acquired all of 24HFW's

1

The majority of the facts are taken from 24HFW's Counterclaims. (D.I. 7.) Although Davis disputes
many of these characterizations, she adopts them for purposes of the summary judgment phase.

voting shares. (D.I. 7,
the Board. (Id.

~

~~

1, 14, 18.) In or around December 2008, Davis became the Chair of

21.) Around this time, Davis sought increased compensation via a phantom

stock agreement with 24HFW and had the law firm Kirkland & Ellis LLP ("Kirkland") outline a
proposal for the Board's Compensation Committee.

(!d.~~

23-24.)

The Compensation Committee and subsequently the entire Board considered the proposed
phantom stock agreement as well as some alternative proposals on May 19, 2009, but ultimately
took no action. (!d.

~~

42-44.) Instead, on May 20, 2009, the Board sent Kirkland a list of

"basic terms" for a potential agreement. (!d.

~

47.) Thereafter Davis "took charge" of working

to finalize the phantom stock agreement and instructed Kirkland to alter several key provisions.
(!d.

~~50-52.)

Most important, the revisions included: "(a) changing the settlement date for the

award from a date in 2013 to a date in 2012; and (b) specifying that the entire award shall be
settled in cash, instead of settlement of thirty percent (30%) of the award in stock." (!d.

~

51.)

Kirkland sent a finalized phantom stock agreement ("PSA") to 24HFW's CEO, Carl
Liebert, for execution on June 15, 2009. (Id.. ~ 54.) Liebert was not aware of any agreement
previously reached by the Board concerning "the PSA. (!d.

~

55.) Liebert sent the PSA to

Edward Beck, 24HFW's General Counsel, and Jeff Boyer, 24HFW's CFO, neither of whom
knew whether the terms correctly reflected any prior agreement. (!d.

~55-56;

D.I. 81, Ex. E.)

Liebert, Boyer, and Beck all recognized that the PSA specified a cash payment, to be settled in
2012, rather than 2013. (D.I. 81, Ex. B at 95-96; Ex. E.) Liebert nevertheless signed the PSA
on or about June 15, 2009, with Davis signing on June 17, 2009. 2 (Id. ~58.) Liebert, Beck, and
Boyer never conferred with anyone on the Compensation Committee, the Board, or at Kirkland
to determine whether the PSA accurately reflected the true agreement.

2

24HFW confirmed through discovery that CFO Jeff Boyer also received and read the PSA prior to
Liebert's signing. (D.I. 81, Ex. A at 14.)

2

The details of the PSA were subsequently published in 24HFW's June 2009 quarterly
report ("June 2009 Financials"). (D.I. 81, Ex. Fat 14-15.) 24HFW's management prepared the
June 2009 Financials and distributed them to the Board's Audit Committee. 3 (!d. Ex. D at 10305; Ex. H at 114-15.)

Director Dale Frey, a member of the Audit Committee who had

previously been involved with the Board discussions concerning the PSA, received (or should
have received) the 2009 June Financials within fifty days of the June 30, 2009 issue date. (!d.
Ex. D at 102; Ex. Hat 114-15.)
In 2011, Liebert for the first time reached out to members of the Board with concerns
about the upcoming 2012 cash settlement date under the PSA. (D.I. 7

~

66.) Directors Wayne

Smith and Frey indicated that they were surprised to learn that the payment was due in 2012,
rather than 2013. (D.I. 86, Ex. 37 at 82.) After conducting an investigation, the Board voted on
September 13, 2012 to repudiate the PSA. (Id. Exs. 49, 50.) Davis filed her Complaint shortly
thereafter on October 29, 2012. (D.I. 1.) 24HFW filed its counterclaims on November 21, 2012.
(D.I. 7.)

III.

STANDARD OF REVIEW
Under Federal Rule of Civil Procedure 56( c), summary judgment is appropriate "if the

pleadings, depositions, answers to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any material fact and that the moving
party is entitled to a judgment as a matter oflaw." See also Celotex Corp. v. Catrett, 477 U.S.
317,322 (1986). The moving party bears the burden of proving that no genuine issue of material
fact exists. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 585 n.10

3

The parties dispute whether the June 2009 Financials were distributed to the entire Board or just the Audit
Committee. Despite there being internal inconsistencies among 24HFW's management and members of the Board
concerning the policy of distribution, the court will assume at this stage that only Audit Committee members
received the June 2009 Financials. (D.I. 81, Ex. D at 106; D.I. 86, Exs. 43, 44.)

3

(1986). A fact is material if it "could affect the outcome" of the proceeding. Lamont v. New

Jersey, 637 F.3d 177, 181 (3d Cir. 2011). There is a genuine issue "if the evidence is sufficient
to permit a reasonable jury to return a verdict for the non-moving party." !d. When determining
whether a genuine issue of material fact exists, the district court must view the evidence in a light
most favorable to the nonmoving party and draw inferences in that party's favor. Wishldn v.

Potter, 476 F.3d 180, 184 (3d Cir. 2007). If the moving party is able to demonstrate an absence
of disputed material facts, the nonmoving party must then "come forward with 'specific facts
showing that there is a genuine issue for trial."' Matsushita, 475 U.S. at 587 (citing FED. R. CIV.
P. 56( e)).

Importantly, the mere existence of some evidence in support of the nonmoving party will
not prove sufficient for denial of a summary judgment motion. See Anderson v. Liberty Lobby,

Inc., 477 U.S. 242, 249 (1986). Rather, the nonmoving party must present enough evidence to
enable a jury to reasonably find for it on that issue. !d.

Specifically, the party opposing

summary judgment "must present more than just 'bare assertions, conclusory allegations or
suspicions' to show the existence of a genuine issue." Podobnik v. US. Postal Serv., 409 F.3d
584, 594 (3d Cir. 2005) (quoting Celotex Corp., 477 U.S. at 325). Thus, a nonmoving party
asserting that a material fact is in dispute must support this assertion by: "(A) citing to particular
parts of materials in the record, including depositions, documents, electronically stored
information, affidavits or declarations, stipulations, . . . admissions, interrogatory answers, or
other materials; or (B) showing that the materials cited [by the opposing party] do not establish
the absence ... of a genuine dispute...." See Fed. R. Civ. P. 56(c)(l). If the nonmoving party
fails to make a sufficient showing on an essential element of its case for which it has the burden

4

of proof, the moving party is entitled to judgment as a matter of law. See Celotex Corp., 477
U.S. at 32.
IV.

DISCUSSION
Davis asserts that 24HFW's counterclaims are time-barred by a three-year statute of

limitations. The parties do not dispute that, under Delaware law, a three-year statute of
limitations governs the counterclaims at issue and that 24HFW first asserted its claims on
November 21, 2012. Thus, the question in dispute is whether the statute of limitations clock
began to run prior to the critical date: November 21, 2009.
Davis argues that the statute of limitations came into play immediately upon the execution
of the PSA on June 17, 2009. Alternatively, she argues that 24HFW was on inquiry notice no
later than September 2009, when Frey should have received the June 2009 Financials.
In response, 24HFW argues that the statute of limitations must be tolled from the date of
execution because of (1) equitable tolling, (2) fraudulent concealment by Davis, and (3)
blameless ignorance.

24HFW maintains that it was not placed on inquiry notice until after

November 21, 2009.
A. Date of Accrual
"It is axiomatic that the statute of limitations begins to run when the plaintiffs cause of

action accrues." Shockley v. Minner, 726 F. Supp. 2d 368, 375 (D. Del. 2011). Under Delaware
law, it is "crystal clear that a claim accrues as soon as the wrongful act occurs," regardless of
whether the plaintiff is ignorant ofthe wrong. See Albert v. Alex. Brown Mgmt. Servs., Inc., No.
762-N, 2005 WL 1594085, at *18 (Del. Ch. June 29, 2005) (citing Wal-Mart Stores Inc. v. AIG

Life Ins. Co., 860 A.2d 312, 319 (Del. 2004)).

Each of 24HFW's counterclaims alleges

misconduct occurring prior or up to the date of execution of the PSA on June 17, 2009. Thus, in

5

order to avoid the statute of limitations, 24HFW must establish that there is reason to toll the
statute.
B. Tolling of the Statute of Limitations

Even after the date of accrual, the statute of limitations will be tolled until a plaintiff
knew or should have known of the breach. See Marvani S.p.A. v. Keehan, 900 F. Supp. 2d 377,
395 (D. Del. 2012). "[T]he statute will begin to run only upon the discovery of facts constituting
the basis of the cause of action or the existence of facts sufficient to put a person of ordinary
intelligence and prudence on inquiry which, if pursued, would lead to the discovery of such
facts." Wal-Mart, 860 A.2d at 319 (internal quotation marks omitted).

The plaintiff (or

counterclaimant) bears the burden of proving tolling. Smith v. Whelan, 566 F. App'x 177, 179
(3d Cir. 2014) (citing In re Tyson Foods, Inc., 919 A.2d 563,585 (Del. Ch. 2007)).
24HFW argues that it did not and could not have known of the alleged conduct, and
therefore the statute must be tolled. Specifically, 24HFW asserts that its ignorance is excused
under either the doctrines of equitable tolling, fraudulent concealment, or blameless ignorance. 4
(D.I. 85 at 13-14.) Davis counters that 24HFW fails to meet its burden under any of these
theories. (D.I. 80 at 9-13.) Most telling, however, is Davis' argument that 24HFW was placed
on inquiry notice of Davis' allegedly improper conduct prior to the execution of the PSA, and
certainly no later than September 2009, when at least Frey should have been made aware of the
June 2009 Financials. (!d. at 13-16.)
The court agrees with Davis that 24HFW had inquiry notice of the alleged wrongful
conduct prior to November 21, 2009, and therefore 24HFW's counterclaims are barred by the

4

The court need not address whether 24HFW satisfied its burden in proving its theories of tolling because
underlying each of the doctrines is the requirement that 24HFW did not have inquiry notice. See Smith, 566 F.
App'x at 179 ("[R]relief from the statute extends only until the plaintiff is put on inquiry notice." (citing In re Tyson
Foods, 919 A.2d at 585)).

6

relevant three-year statute of limitations. The undisputed facts show that three members of
24HFW's management team knew of the terms of the PSA prior to its execution: Liebert (CEO),
Beck (General Counsel), and Boyer (CFO).

Each acknowledged the key terms of the PSA,

which form the basis for 24HFW's counterclaims: the 2012 settlement ·date and the cash
payment. Liebert ultimately signed the PSA without having ever checked with a member of the
Compensation Committee or the Board to determine whether the terms were accurate.
24HFW argues that Liebert's, Beck's, and Boyle's knowledge of the PSA is irrelevant
because they did not know to what the Board had previously agreed. (D.I. 85 at 18.) 24HFW
goes so far as to say that attributing their knowledge to the company is "absurd"-that it "blinks
the reality" of the circumstances. (D.I. 85 at 18.) Unfortunately, 24HFW's view would place
blinders on its management-including its CEO-and turn them into a mere rubberstamp with
no obligation to seek out information. The test for inquiry notice does not necessarily require the
"discovery of facts constituting the basis of the cause of action"; rather, inquiry notice may also
be established by ''the existence of facts sufficient to put a person of ordinary intelligence and
prudence on inquiry which,

if pursued, would lead to the discovery' of such facts." Wal-Mart,

860 A.2d at 319 (internal quotation marks omitted) (emphasis added). Although it may be true
that Liebert, Beck, and Boyer had no reason to suspect any wrongful conduct on Davis' part
simply from the terms of the PSA, had they conducted a reasonable inquiry-e.g., asking any
Board member, sending an e-mail, making a phone call, etc.-they would have discovered
discrepancies between what the Board allegedly approved and what Kirkland sent Liebert to
sign. See Eluv Holdings (BVI) Ltd. v. Dotomi, LLC, No. 6894-VCP, 2013 WL 1200273, at *12
(Del. Ch. Mar. 26, 2013) (taking into account the "relative ease with which Plaintiffs could have
discovered their injury" in finding that inquiry notice existed).

7

Because the knowledge of officers and management is attributable to the company, the
court finds that 24HFW had inquiry notice when the PSA was executed in June 2009. See
Medtronic Vascular, Inc. v. Advanced Cardiovascular Sys., Inc., No. 98-80-SLR, 2005 WL

46553, at *4 (D. Del. 2005). As such, 24HFW's counterclaims are time-barred by the three-year
statute of limitations.
Even assuming that management's knowledge of the PSA was insufficient to offer inquiry
notice, the court nevertheless finds inquiry notice existed no later than September 2009, when
24HFW distributed its June 2009 Financials to the Audit Committee.

24HFW argues that

summary judgment is inappropriate because there are too many controverted facts surrounding
the June 2009 Financials. The court disagrees. Rather, regardless of 24HFW's characterization
of the

fa~ts,

Frey was placed on inquiry notice. Although Frey does not actually recall reading

the June 2009 Financials, 24HFW does not dispute that he, at the very least, was one of the
Board members who should have received and reviewed the quarterly report. The June 2009
Financials should have been received no later than fifty days after the report was completed.
(D.I. 81, Ex. D at 102; Ex. Hat 114-15.) 24HFW first argues that Frey may not have actually
read the June 2009 Financials. Failure to read, however, does not excuse Frey's obligation to
perform a reasonable inquiry. See Vichi v. Koninklijke Philips Elecs., NV., 85 A.3d 725, 794
(Del. Ch. 2014) ("[R]egardless of whether [plaintif:fJ personally reviewed the documents, he was
on notice of the information they contained .... "); Pomeranz v. Museum Partners, L.P., No.
20211, 2005 WL 217039, at * (Del. Ch. Jan. 24, 2005) ("At the very least, the September
financials ought to have raised plaintiffs' suspicions, and this is all that is required for inquiry
notice. Once a plaintiff is in possession of facts that make him suspicious, or that ought to make
him suspicious, he is deemed to be on inquiry notice." (emphasis added) (internal quotation

8

marks omitted)). Second, 24HFW argues that, assuming Frey did read the financials, "there are
several reasons why he would not recognize the potential significance of one or two lines out of
24 single-spaced pages of financial details." Ignoring 24HFW's inaccurate description of the
PSA's inclusion in the June 2009 Financials, (D.I. 81, Ex. F, at 14-15.), the court finds 24HFW's
attempt (once again) to downplay Frey's obligations and abilities inappropriate. 24HFW argues
that "a full four months" had elapsed since the Board's consideration of the PSA, and Frey could
not be expected to remember the details of their discussions. (D.I. 85 at 19.) This point is
dubious to begin with and further undermined by the fact that Frey immediately recalled the
details of the May 2009 discussion when Liebert finally came to him at the end of 2011. (D.I.
86, Ex. 37 at 82.) 24HFW also argues that Frey did not realize the import of the terms of the
PSA because he assumed that Kirkland had prepared the PSA in accordance with the Board's
wishes. (D.I. 85 at 20.) Again, this argument ignores the fact that it was Frey's obligation, as a
member of the Audit Committee, to review the quarterly financial reports, rather than assume
they were correct. (D.I. 81, Ex. D at 105; D.I. 86, Ex. 37 at 114-17.)
Although 24HFW asserts that "[a]ll ofthese controverted facts make this theory of inquiry
notice incapable of summary disposition," in reality, the facts establishing inquiry notice are not
in question.

At two time points prior to November 21, 2009, agents of 24HFW received

sufficient factual information to put them on actual notice of the alleged wrongful conduct, or at
least to motivate a reasonable person to undertake an investigation that would have led to
discovery of the alleged wrongful conduct. See Wal-Mart, 860 A.2d at 319. Although questions
of reasonableness are usually ill-suited for resolution at the summary judgment stage, the court
finds that no rational factfinder could conclude that 24HFW was not placed on inquiry notice
prior to November 21, 2009. See In re Adams Golf, Inc., 618 F. Supp. 2d. 343, 351 (D. Del.

9

2009); see also Eluv Holdings, 2013 WL 1200273, at *12 (granting summary judgment where
claimants unreasonably failed to discover their injury). Thus, the three-year statute oflimitations
began to run prior to the critical date. (D.I. 7.) 24HFW's counterclaims are time-barred by the
statute oflimitations. The court grants Davis' motion for summary judgment.
V.

CONCLUSION
In view of the foregoing, Davis' motion for summary judgment is granted. (D.I. 79.)

24HFW's counterclaims are barred by statute oflimitations.

Dated: September

foJ , 2014

10