Simpson Trust et al v. Invicta Networks, Inc. et al

Filing 58

MEMORANDUM OPINION. Signed by Judge Sue L. Robinson on 4/19/2017. (nmfn)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
MARSHAL T. SIMPSON TRUST, DONALD S.
SIMPSON TRUST, and CHRISTOPHER
BOYD,

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Plaintiffs,

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v.

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INVICTA NETWORKS, INC., VICTOR
SHEYMOV, WILLIAM ESREY, ROBERT J.
HALLMAN, and R. JAMES WOOLSEY,
Defendants.

Civ. No. 16-173-SLR

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MEMORANDUM OPINION

Peter B. Andrews, Esquire, Craig J. Springer, Esquire, and David M. Sborz, Esquire
of Andrews & Springer LLC, Wilmington, Delaware. Counsel for Plaintiffs. Of
Counsel: Matthew L. Dameron, Esquire of Williams Dirks Dameron LLC, Kansas City,
Missouri.
Kurt M. Heyman, Esquire and Dominick T. Gattuso, Esquire of Proctor Heyman
Enerio LLP, Wilmington, Delaware. Counsel for Defendants. Of Counsel: Mark A.
Thornhill, Esquire and Angus Dwyer, Esquire of Spencer Fane LLP, Kansas City,
Missouri.

Dated: April _!!i_, 2017
Wilmington, Delaware

Mo~strictJudge
I.

INTRODUCTION

Plaintiffs Marshal T. Simpson Trust, Donald S. Simpson Trust, and Christopher
Boyd (collectively, "plaintiffs") are shareholders of lnvicta Networks, Inc. ("lnvicta"), a
company in the field of cyber-security technology no longer operating as a going
concern. (D.I. 11f 66; DI. 51 at 1) During some or all of the relevant time period,
lnvicta's board of directors was comprised of defendants Victor Sheymov ("Sheymov"),
William Esrey ("Esrey"), Robert J. Hallman ("Hallman"), and R. James Woolsey
("Woolsey"). 1 (D.I. 51 at 1) Sheymov also served as lnvicta's president, chief executive
officer, and chairman of the board. (D.I. 11f 7).
Perceiving lnvicta to be a "failed" business, plaintiffs filed a complaint on
November 14, 2014 asserting various claims against different combinations of
defendants. (D.I. 1) Defendants Esrey, Hallman, and Woolsey (collectively, the
"director defendants") have moved to dismiss any claims or parts of claims asserted
against them. (D.I. 50) Those claims include count 1 against all defendants for breach
of fiduciary duty, count 2 against all defendants for negligence, count 7 against Esrey
for fraud, and count 8 against Esrey for negligent misrepresentation. (D.I. 1 ,-r,-r 93-104,

137-52) The court has subject matter jurisdiction over this action pursuant to 28 U.S.C.

§ 1332(a). For the reasons discussed below, the director defendants' motion to dismiss
is granted.

At some point Esrey resigned, although it is unclear when. (D.I. 11f 75)

II.

BACKGROUND
lnvicta's initial product lnvisiLAN provided network computer security technology

that lnvicta intended to market to government and corporate clients. (D.I. 1,m13-14)
lnvicta developed a similar product called WizArmor intended for individual consumers.

(Id. at 1115) In 2006, representatives of lnvicta, including Sheymov, solicited Marshal
Simpson for investments in the company. (Id. at 1119) Marshal Simpson shared the
information he received with Donald Simpson and Christopher Boyd. (Id. at 1134) After
receiving additional information about lnvicta, Donald Simpson, on behalf of the Donald
S. Simpson Trust, invested in lnvicta in January 2007. (Id. at 1144) Marshal Simpson,
on behalf of the Marshal T. Simpson Trust, and Christopher Boyd invested in lnvicta in
January 2009. (Id. at 1161-62)
Throughout 2011, plaintiffs received various updates about lnvicta's product
development, marketing, and sales. (Id. at 111165-70) Sheymov stated that the past
year had been "very disappointing." (Id. at 1168) In May 2013, Sheymov emailed
Marshal Simpson that lnvicta continued to be ignored, and he was considering leasing
or selling the company's intellectual property. (Id. at 1175) In September 2013,
Sheymov emailed Marshal Simpson that WizArmor was no longer available due to lack
of funds to support distribution. (Id. at 1176) Sheymov added that he was in
discussions with a buyer for lnvicta. (Id.) In October 2013, Sheymov emailed Marshal
Simpson that he was still working on a sale of lnvicta and there were no other activities
at the company at that time. (Id. at 11 80) Plaintiffs filed their complaint almost a year
later alleging fraud, negligent misrepresentation, and breach of fiduciary duty. (D.I. 1)

2

Ill.

STANDARD OF REVIEW
To survive a motion to dismiss under Fed. R. Civ. P. 12(b)(6), a plaintiff must

plead facts sufficient to "state a claim to relief that is plausible on its face." Ashcroft v.

Iqbal, 556 U.S. 662, 677-78 (2009) (quoting Bell At/. Corp. v. Twombly, 550 U.S. 544,
570 (2007)). The factual allegations do not have to be detailed, but they must provide
more than labels, conclusions, or a "formulaic recitation" of the claim elements. Id. at
678.

Finally, the court must accept "as true the factual allegations in the complaint and

all reasonable inferences that can be drawn therefrom." Trump Hotels & Casino

Resorts, Inc. v. Mirage Resorts Inc., 140 F.3d 478, 483 (3d Cir. 1998).

IV.

DISCUSSION
The director defendants have moved to dismiss the counts asserted against

them based on the failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6), the
failure to join an indispensable party pursuant to Fed. R. Civ. P. 12(b)(7), the failure to
plead demand futility pursuant to Fed. R. Civ. P. 23.1, and untimeliness under the
applicable statute of limitations. (D.I. 51) The court need not address each of these
arguments as it is sufficient grounds to dismiss counts 1 and 2 for failure to plead
demand futility and counts 7 and 8 for failure to state a claim.

A.

Counts 1 and 2: Breach of Fiduciary Duty

Count 1 (for breach of fiduciary duty) and count 2 (for negligence) are identical in
all respects, except count 2 drops the word "fiduciary" and labels the claim "negligence."
(D.I. 11J1J 93-104) Count 2 states that defendants, "as officers and directors of lnvicta,"
"owed duties to Plaintiffs in their capacity as shareholders of the company," and "[s]uch
duties include, but are not limited to, care in the oversight of the company." (Id. at 1J

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100) Accordingly, count 2 is a duplicative breach of fiduciary duty claim. The parties
dispute whether plaintiffs' breach of fiduciary duty claims are direct or derivative. If the
claims are derivative, then they must be dismissed for failure to plead demand futility as
required by Fed. R. Civ. P. 23.1. (D.I. 51at9-10)
Under Delaware law, whether a fiduciary duty claim is direct or derivative turns
on: "(1) who suffered the alleged harm (the corporation or the suing stockholders,
individually); and (2) who would receive the benefit of any recovery or other remedy (the
corporation or the stockholders, individually)?" 2 Tooley v. Donaldson, Lufkin & Jenrette,
Inc., 845 A.2d 1031, 1033 (Del. 2004). Plaintiffs claim that the director defendants
breached their fiduciary duties by "fail[ing] to exercise diligence and oversight." (D.I. 1

,.m 94-95, 100-01)

A claim that directors failed to provide "competent and active

management" is essentially a claim for mismanagement, which is "a paradigmatic
derivative claim." Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *13
(Del. Ch. Mar. Aug. 26, 2005); Feldman v. Cutaia, 951 A.2d 727, 734-35 (Del. 2008)
(mismanagement resulting in a decrease in the value of stock is a derivative claim); see
also South v. Baker, 62 A.3d 1, 14 (Del. Ch. 2012) (explaining why an oversight claim,
or Caremark claim, is subject to the demand requirement). Accordingly, counts 1 and 2
are derivative, not direct, claims.
Plaintiffs argue that counts 1 and 2 are direct, because non-disclosure claims are
direct. (D.I. 54 at 12) Although non-disclosure claims generally are direct, 3 counts 1

2

Although federal law governs the pleading standard, Delaware law governs the
substantive requirements of a derivative claim, including the demand requirement. See
Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95-97 (1991).
3

See Albert, 2005 WL 2130607 at *12 ("Generally, non-disclosure claims are
direct claims").

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and 2 do not allege that the director defendants breached their fiduciary duties by failing
to disclose material information to shareholders. (See D.I. 11J1J 93-104) Rather, counts
1 and 2 allege that the director defendants "fail[ed] to exercise diligence and oversight
over the company's officers and agents, including in matters where those individuals
made representations concerning the company." (Id. at 1J1J 95, 101) Delaware courts
have found that "any harm stemming from ... oversight failures that allowed [the
company] to make material misstatements ... accrues to [the company] itself and to its
stockholders only indirectly," making those claims derivative, not direct. Sandys v.
Pincus, 2016 WL 769999, at *5 (Del. Ch. Feb. 29, 2016), rev'd on other grounds, 152
A.3d 124 (Del. 2016).
Plaintiffs also argue that their derivative claims became direct when lnvicta's
corporate status became void for failure to pay franchise taxes. (D.I. 54 at 13)
However, the case on which plaintiffs rely for this proposition is inapposite. In Gentile v.
Rosselle, the corporation was not void for failure to pay to taxes, but ceased to exist
entirely after it merged into another corporation. 906 A.2d 91, 103 (Del. 2006). Under
well-established Delaware law, derivative claims do not normally become direct when a
corporation has consummated a merger. Instead, under the continuous ownership rule,
derivative plaintiffs lose standing, because a derivative claim is an assert of the
corporation that, like all assets of a corporation in a merger, passes to the surviving
corporation which then has the sole right to prosecute the claim. Feldman, 951 A.2d at
731; Lewis v. Anderson, 477 A.2d 1040, 1049 (Del. 1984). There are two limited
exceptions to the general "loss-of-standing" rule, neither of which plaintiffs have
invoked. See Ark. Teacher Ref. Sys. v. Countrywide Fin. Corp., 75 A.3d 888, 894 (Del.

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2013) (reaffirming that the two exceptions are: (i) "where the merger itself is the subject
of a claim of fraud, being perpetrated merely to deprive shareholders of their standing to
bring or maintain a derivative action"; and (ii) "where the merger is essentially a
reorganization that does not affect the plaintiff's relative ownership in the post-merger
enterprise").
In Gentile, plaintiff did not invoke an exception to the loss-of-standing rule.
Instead, the Delaware Supreme Court found that the plaintiff had alleged claims that fit
within an "expropriation" paradigm that Delaware case law recognizes as being both
direct and derivative. Id. at 99. In those cases, plaintiffs must show that: (1) a
controlling stockholder caused the corporation to issue shares of its stock in exchange
for consideration of lesser value, and (2) as a result, there is an increase in the
controlling stockholder's percentage of ownership that corresponds to a decrease in the
minority stockholders' percentage of ownership. Gentile, 906 A.2d at 99-100; Gatz v.
Ponsoldt, 925 A.2d 1265, 1274 (Del. 2007). Plaintiffs have not alleged facts that fit
within this "expropriation" paradigm.
Ultimately, plaintiffs do not allege that lnvicta has consummated a merger,
declared bankruptcy, or entered into dissolution, only that its status is void for failure to
pay franchise taxes and that the company is no longer operating as a going concern.
Courts interpreting Delaware law have rejected arguments that plaintiffs may bring their
derivative claims directly when a corporation is "no longer operating as a going
concern." See Winer Family Trust v. Queen, 503 F.3d 319, 338 (3d Cir. 2007); see also
Gimaex Holding, Inc. v. Spartan Motors USA, Inc., 2015 WL 9437530, at *2-3 (D. Del.
Dec. 22, 2015) (rejecting plaintiff's argument that derivative claims had become direct

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because alternative entity had dissolved). For all of these reasons, plaintiffs have not
shown that their derivative claims should be reclassified as direct just because lnvicta's
corporate status is void for failure to pay franchise taxes. Under Fed. R. Civ. P. 23.1, a
complaint asserting derivative claims must plead with particularity either that demand
was made and wrongfully refused or why demand is excused as futile. Here, the
complaint contains no such allegations. Accordingly, counts 1 and 2 are dismissed for
failure to comply with Fed. R. Civ. P. 23.1.

B.

Counts 7 and 8: Fraud and Negligent Misrepresentations

The complaint alleges that between December 2008 and November 2012, Esrey
sent four emails to Marshal Simpson. On December 27, 2008, Esrey sent an e-mail
providing updates on potential sales and product testing. (D.I. 1 ~ 48) On April 14,
2009, Esrey sent an email stating that Sheymov "has solved the scale issue" and that
the company was continuing to work on potential sales. (Id.

at~

65) Early on

November 1, 2012, Esrey forwarded information about the company's status that he
had received from Sheymov. (Id.

at~~

68, 71-72) Later on that same day, Esrey sent a

second email reaffirming an earlier statement that all questions about lnvicta should be
directed to Sheymov. (Id.

at~

73) For each email, the complaint alleges that "several

of the assertions contained [therein] ... were not true" without identifying which specific
ones. (Id.

at~~

49, 81, 140).

Based on these emails, plaintiffs claim Esrey is liable for fraud (count 7) and
negligent misrepresentation (count 8). Plaintiffs do not dispute the director defendants'
assertion that Missouri law governs these claims. (D.I. 51 at 17-19). Under Missouri
law, the elements of fraud are: "(1) a representation; (2) its falsity; (3) its materiality; (4)

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the speaker's knowledge of its falsity, or his ignorance of its truth; (5) the speaker's
intent that it should be acted on by the person and in the manner reasonably
contemplated; (6) the hearer's ignorance of the falsity of the representation; (7) the
hearer's reliance on the representation being true; (8) the hearer's right to rely thereon;
and (9) the hearer's consequent and proximately caused injury." Trimble v. Pracna, 167
S.W.3d 706, 712 n. 5 (Mo. 2005).
The court finds that plaintiffs have failed to state a claim for fraud. In
contravention of Fed. R. Civ. P. 8(a), count 7 is nothing more than a threadbare recital
of the elements of a cause of action. The complaint contains no factual basis to support
its conclusory assertion that the false statements were material and no allegations from
which it could be plausibly inferred that Esrey made the statements with the intent to
induce action (or inaction) by plaintiffs in reliance. Indeed, it is notable that, while all
three plaintiffs assert this fraud claim against Esrey, the complaint alleges that Esrey
sent his e-mails only to Marshal Simpson and Marshal Simpson passed the information
on to other plaintiffs. (D.I. 11J1J 48, 65, 72, 73) In addition, under Fed. R. Civ. P. 9(b),
the complaint must allege the "who, what, when, where and how" of each fraudulent
misrepresentation. U.S. ex rel. Moore & Co., P.A. v. Majestic Blue Fisheries, LLC, 812
F.3d 294, 307 (3d Cir. 2016). Plaintiffs, however, fail to identify which statements within
the four e-mails were false, let alone "how" or "why." Accordingly, count 7 for fraud
must be dismissed for failure to state a claim.
The elements of negligent misrepresentation in Missouri are: "(1) the speaker
supplied information in the course of his business; (2) because of the speaker's failure
to exercise reasonable care, the information was false; (3) the information was

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intentionally provided by the speaker for the guidance of limited persons in a particular
business transaction; (4) the hearer justifiably relied on the information; and (5) due to
the hearer's reliance on the information, the hearer suffered a pecuniary loss."

Renaissance Leasing, LLC v. Vermeer Mfg. Co., 322 S.W.3d 112, 134 (Mo. 2010). Like
count 7, count 8 is nothing more than a threadbare recital of the elements of a cause of
action, except plaintiffs have failed to make even conclusory assertions that Esrey
provided the information "in the course of his business" and "the information was
intentionally provided by the speaker for the guidance of limited persons in a particular
business transaction." Accordingly, count 8 for negligent misrepresentation must be
dismissed for failure to state a claim.

V.

CONCLUSION
For the foregoing reasons, the director defendants' motion to dismiss (D.I. 50) is

granted. Those portions of counts 1 and 2 asserted against the director defendants and
all of counts 7 and 8 are dismissed without prejudice.

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