Neblett v. Louis J. Brothers et al

Filing 251

MEMORANDUM OPINION & ORDER: 1) Defs' motions for summary judgment ( 199 , 201 ) are GRANTED, and the claims against them are hereby DISMISSED WITH PREJUDICE; 2) The Trustee's motions for summary judgment ( 208 , 209 ) are DENIED; 3) On or before 7/9/2018, the Trustee shall file a stipulation dismissing Def Brothers from this action or a status report stating how he otherwise intends to proceed against Brothers. Signed by Judge William O. Bertelsman on 7/3/2018.(ECO)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
NORTHERN DIVISION
AT COVINGTON
CIVIL ACTION NO. 2:15-CV-168 (WOB-CJS)
JOHN P. NEBLETT

PLAINTIFF

VS.

MEMORANDUM OPINION AND ORDER

LOUIS J. BROTHERS, ET AL.

DEFENDANTS

This matter is before the Court on various motions for summary
judgment (Docs. 199, 201, 208, 209).
The Court previously heard oral argument on these motions and
took the matter under submission.

After further study, the Court

now issues the following Memorandum Opinion and Order.
Factual and Procedural Background
A. Defendants’ Sales of Rad-Chips to Valley Forge
Valley Forge Composite Technologies, Inc. (“Valley Forge”)
was a publicly traded company with its principal place of business
in Covington, Kentucky.

Valley Forge was purportedly engaged in

the production and sale of momentum wheels used by spacecraft for
altitude control.

In addition, following the terrorist attacks on

September 11, 2001, Valley Forge stated in public filings that it
was developing homeland security and counter-terrorism products,
including a personal screening system called “ODIN” and a system
to detect narcotics, explosives and bio-chemical weapons called

“THOR.”

(See Doc. 215-17, Investor Information).

Ultimately,

however, the THOR and ODIN systems proved unviable, and Valley
Forge never sold a THOR or ODIN device or generated sales, income
or profit from them.

(Brothers Plea Agreement, Doc. 199-18 at 5;

Brothers Depo. Doc. 199-2 at 63).
At all relevant times, Louis Brothers (“Brothers”) was Valley
Forge’s Chief Executive Officer, Chief Financial Officer, and
Chairman of the Board of Directors.
the company’s bookkeeper.

Brothers’ wife, Rosemary, was

Other employees were Kyle Seeger, an

engineer; Keith McClellan, General Counsel; Larry Wilhide, VicePresident of Engineering; and Jim Carr, a friend of Brothers.
1. Avnet/Xilinx
Avnet, Inc. serves customers in the electronics industry.

At

all relevant times, Avnet served as a manufacturing representative
for a company called Xilinx, Inc.

(“Xilinx”).

In August 2009,

Avnet extended credit to Valley Forge so it could purchase goods
through Avnet.
From 2009 to 2013, Valley Forge purchased from Xilinx, through
Avnet, electronic components known as radiation hardened chips
(“rad-chips”).

Rad-chips are designed to resist radiation levels

found in space, high altitudes, and nuclear facilities.

At the

time of these sales, rad-chips were classified as defense articles
and their export was regulated by the Arms Export Control Act
(“AECA”), 22 U.S.C. §§ 2778-80, the International Traffic in Arms
2

Regulations

(“ITAR”),

22

C.F.R.

parts

120-30,

the

Export

Administration Act of 1979 (“EAA”), 50 U.S.C. app §§ 2401-10, and
the Export Administration Regulations (“EAR”), 15 C.F.R. parts
730-74.

These regulations required any person intending to export

defense articles to obtain governmental approval and to file “enduser” certificates with U.S. Customs and Border Protection.
When Valley Forge purchased rad-chips from Avnet, Avnet would
obtain

the

chips

from

Xilinx.

Avnet

managed

the

customer

relationship between Xilinx and Valley Forge, and it provided
salespeople and engineering personnel to work with Valley Forge.
Xilinx also contracted with Bear VAI, an independent sales
representative company based in Kentucky, to service the Valley
Forge account.
of

Bear

VAI

(Chetan Depo. Doc. 203-7 at 3185).
occasionally

visited

Valley

Forge’s

Jason Meyer
office,

but

Brothers never told Meyer what Valley Forge was doing with the
microchips.

(Brothers Depo. 57).

In July 2009, Valley Forge placed a large order with Avnet.
On July 23, 2009, Avnet’s customer care department emailed Brothers
and asked for additional information, including end user data.
Brothers responded:
End User (OEM) is Valley Forge until we build it into our
product.
It could be shipped worldwide.
We do not want
restricted [] ITAR restricted product.
Project information: Momentum Wheels and control system for
our miniature particle accelerators.
May be used in our
nuclear explosion detection product but that will be
evaluated.
3

(Doc. 224-1).
In August 2009, Evelyn Morales of Xilinx circulated an email
to

Xilinx

distributors,

sales

representatives,

and

customers

informing them of new ITAR requirements for certain products.
(Doc. 2203-18 at 3241-46).

This email specifically noted that

ITAR prohibited the export of certain products to China.
3243).

(Id. at

It also attached a sample end-user certificate that

customers would be required to complete, as well as a list of
products subject to ITAR regulations. This email triggered queries
about

whether

Valley

Forge’s

order

was

subject

to

these

requirements.
On August 6, 2009, Jason Meyer of Bear VAI stated:

“If these

are space-grade devices and being exported, then they will need to
complete the forms before they can purchase.
have to advise.”

The customer will

(Doc. 203-18 at 3239).

On August 27, 2009, Kimberly Marriott of Avnet met with Valley
Forge and reported back to Bear VAI:
I met with the customer today and here is what I found out.
Valley Forge is a company that has been in a R&D phase since
911. . (sic) Valley Forge is a fully funded company and
ready to start this application which is a Security System
for Cargo’s called Baldur.
The eau is 500 to 1k but the
dollar revenue is 3 to 4 million. There [sic] design is done
at the Covington location.
Prototypes is schedule for
December “09” and production soon thereafter.
Question. . . Do they need to fill out forms for this itar??
It’s not Space related . . . just wanted to make sure. OR

4

do you think I need to send this [to] someone at Xilinx to
verify?
(Doc. 199-28 at 2635 (bold added).
Bear VAI forwarded this information to Chetan Khona, Regional
Sales Manager at Xilinx, who responded:
Per the instructions, this in [sic] not a part on the list of
parts that Xilinx has requested us to fill out for ITAR
purposes. Having said that, it is eerily close so if Hanneke
or Evelyn want to comment, that is fine.
I would move forward as if no ITAR requirements are needed.
Nice opp — I don’t have too many $3-4M opps fall out of the
sky on our lap. Let’s be sure to set a goal to learn more
about this opp as a branch initiative for growth at the next
review.
(Id.).
After further correspondence, Gary Brady of Avnet emailed
Brothers

that

Chetan

Khona

of

Xilinx

had

informed

him

that

“paperwork is not necessary” but if “we find out otherwise we can
always work the issue at that time.”

(Doc. 203-18 at 3237).

In January 2010, Valley Forge placed another order with Avnet,
which

caused

Kimberly

Marriott

of

Avnet

to

ask

him

“what

application this is Baldur or Thor perhaps.” (Doc. 224-1 at 4041).
Brothers responded “All products.”

(Id.).

In September 2010, Xilinx’s Export Compliance department
raised a question about one of the end-user certificates submitted
by Valley Forge:
[A] statement of “Research and Development for data
acquisition system in radiated environment” seems a little
5

generic. Is our sales person knowing and comfortable with
what they use these devices with, or do we happened [sic] to
know the end (satellite) program they are working on?
(Doc. 203-23 at 3283).
VAI,

who

in

turn

This query was forwarded to Avnet and Bear

communicated

with

Xilinx’s

Khona.

Khona

responded:
To answer your question below, these devices are going into
body and cargo scanner equipment. Body scanning as in airport
scanner and cargo scanning as counter-terrorism equipment.
These are not space applications.
Attached is more info on the company.
(Doc. 203-23 at 3281).
Upon receipt of this information, Xilinx’s Export Compliance
responded:
So does Valley Forge develop and sell body and cargo scanners
with our ITAR FPGAs?
By signing our EUC, they have
acknowledged that they would be responsible to inform their
customers with the ITAR nature of our and their devices and
apply ITAR license if their products are ever to be exported.
I will approve the PO based on this understanding, please
communicate this message to the customer if we have not yet.
(Doc. 203-23 at 3280) (emphasis added).
That same day, Gary Brady of Avnet emailed Brothers about the
above questions from Xilinx:
Just a quick note that Xilinx questioned the End Use Cert.
that you filled out. Thanks to Jason and Chetan; they gave
some more details concerning your product and Xilinx did
approve. However, Xilinx did want us to remind you that by
signing their EUC you have acknowledged that you would be
responsible to inform your customers with the ITAR nature of
the product and apply ITAR license if your product is
exported.

6

(Doc. 203-17 at 3234) (emphasis added).
“[O]f course.”

Brothers responded:

(Id.).

On June 6, 2011, Kimberly Marriott of Avnet emailed Brothers
and Kyle Seger at Valley Forge:
Peter Hache from Xilinx who is Chetan Konan’s manager will be
coming through the territory the week of July 11th.
Peter
would like to stop in and introduce himself preferably
Wednesday 7/13 at 2:30. Jason Meyer the rep and Myself would
also be in attendance for the requested meeting. May I ask
if you both can allow a few minutes out of your busy schedule
to meet with Peter for a quick introduction?
(Doc. 224-1 at 4043).
The next morning, Seger forwarded the message to Brothers,
stating:
This Peter guy is one of the top guys in Xilinx. He’s Chetan’s
boss. While I was on the phone with Kim, she was saying he
wants to come in because he’s getting suspicious and is trying
to find out what all the parts are being used for.
Figured I’d let you know.
(Id.).
On October 2012, Jason Meyer of Bear VAI sent Brothers an
email regarding an end-user certificate that Valley Forge had
submitted for a purchase from Avnet:
Lou – here is the hold up.
has to state a US entity.

End user cannot state TBD.

It

If you like, you could list Valley Forge, or state same as
above, sign and date.
(Doc. 224-1 at 4044). Brothers responded that he would “take care”
of

it,

and

the

next

day

Valley

7

Forge

submitted

an

end-user

certificate that listed Valley Forge as the end user and “THORLVX” as the specific end use.

(Doc. 203-6 at 3152).

2. Aeroflex/Quality Components
Another company called Aeroflex also sold rad chips to Valley
Forge through its representative Quality Components (“QC”).1
In an email dated January 14, 2008, Brothers requested a quote
for certain chips from John McDonough at QC, stating “We only want
parts that are unregulated.”

(Doc. 199-27 at 2618).

Aeroflex,

through QC, responded with a quote that noted that completed State
Department End User Certificates would be required for the purchase
of any ITAR-regulated items.

(Doc. 199-27 at 2617-2633).

Those

certificates required Valley Forge to agree to comply with U.S.
export laws governed by ITAR.

(Id. at 2633).

This January 2008 inquiry did not result in any purchase by
Valley Forge from Aeroflex.

(Rush Decl. Doc. 215-4 at 3635).

It

was not until June 2009 — a year and a half later — when Aeroflex
shipped its first order to Valley Forge.

(Rush Decl. Exh. B. Doc.

215-4 at 3640-43).
On August 26, 2009, Jim Rush, Regional Sales Manager for
Aeroflex, emailed Brothers:
I spoke to our Export Compliance manager to understand the
rules with respect to exporting Aeroflex Colorado Springs

1

Originally named as a defendant herein, Quality Components has
settled with the Trustee.
8

devices.
He sent me the attached regulations that I have
included for your review.
He mentioned that the rules have gotten tighter over the last
couple of years and virtually everything that Aeroflex
Colorado Springs makes for space requires a state department
license to ship out of country.
I double checked the specific parts list that we quoted to
you on 8/24/09 and all the parts fall under state department
rules (including the devices with an “L” radiation
designator).
Also parts shipped to you earlier this year
would be included under the state department rules.
(Doc. 215-7 at AERO0021918) (emphasis added).
Rush testified that he asked Brothers several times how Valley
Forge intended to use the microchips, and Brothers told him that
the chips were to be used in reaction wheels and the THOR and ODIN
systems.

(Rush Decl. Doc. 215-4 at 3636; Doc. 215-23 at 3850,

internal Aeroflex email from Rush for Valley Forge order for Odin
and Thor systems).
In January 2013, in response to a concern raised by an
Aeroflex Regional Sales Manager, Rush asked Brothers if any of the
material Valley Forge purchased from Aeroflex was being exported
to China, and Brothers stated that it was not.

(Rush Decl. Doc.

215-4 at 3636, Doc. 215-8 at AERO0012712).
3. Valley Forge’s Export of Chips and What It Told the
Supplier Defendants
Aeroflex and Avnet shipped the rad-chips to Valley Forge in
Kentucky.

Brothers’ plea agreement describes what Valley Forge

then did with the chips:

9

VFCT’s office contained an interior room with no windows
and one entrance. This room was used to repackage the
microcircuits for export. This room was secured by a
lock the Defendant had installed on the door to safely
store the microcircuits and limit access to them. When
the microcircuits were delivered to the office, the
Defendant and others would remove the microcircuits from
their original packaging, which was designed to insure
the integrity of the microcircuits during shipping. The
Defendant
and
others
would
then
repackage
the
microcircuits in Federal Express (FEDEX) packaging for
export.
They often marked the FEDEX packages as
“computer memory chips” and understated the value of the
contents. The Defendant and others insured the original
packaging and labels were destroyed or shredded. The
Defendant and others would then export the microcircuits
to Hong Kong and the PRC by FEDEX.
(Doc. 199-18 at 5).
Valley Forge did not tell the suppliers that the microchips
were being purchased to sell to customers in Hong Kong.

(Brothers

Depo. 71-72, 79; Brothers Depo. Doc. 215-2 at 3619).

Instead,

Brothers falsely told the suppliers that the chips were being
purchased for use in the THOR and ODIN systems.

(Brothers Depo.

76; Marriott Depo., Doc. 203-10 at 3199; Rush Depo., Doc. 199-32
at 2657; Seger Depo. Doc. 231-4 at 5991).

Seger testified that

Brothers instructed him not to tell the suppliers that the chips
were being repackaged and sold overseas.
79, 140).

(Seger Depo. 203-11 at

Carr also testified that he never told Avnet, Aeroflex,

or Xilinx that the chips were going to be shipped overseas.

(Carr

Depo. Doc. 203-12 at 3207).
Brothers and Seger also submitted to Avnet and Xilinx “EndUser Certificates” which stated, falsely, that the products would
10

not be exported by Valley Forge.2
prosecuted

criminally,

swore

in

Brothers, who was ultimately
his

plea

agreement

that

he

falsified the end-user certificates that Valley Forge submitted to
suppliers or that he failed to return them.

(Doc. 199-18 at 5).

He also so testified in his deposition in this matter:
Q.
And you would falsify these end-user statements, stating
the microcircuits were for application in THOR or ODIN and
would not be exported from the United States, correct?
A.

Correct.

(Brothers Depo. 66) (Doc. 203-3).

See also Brothers Depo. 75-76.3

Brothers testified that from 2008 to 2013, Valley Forge never
submitted end-user certificates to Aeroflex.

(Brothers Depo. Doc.

224-1 at 3999; Brothers Depo. Doc. 215-2 at 3618).

Brothers

further swore in his plea agreement that one end-user statement
for a purchase from Aeroflex that showed the People’s Republic of
China as the intended destination of those products was never
returned to Aeroflex.
2 at 3616).

(Doc. 199-18 at 6; Brothers Depo. Doc. 215-

Brothers further swore that he falsified or failed to

return the end-user statements to avoid detection.

(Id.).

2

The Avnet end-user certificates required Valley Forge to
acknowledge its responsibility to comply with all export laws and
regulation. See, e.g., Doc. 203-6 at 3092.
3

All the end-user certificates that Valley Forge submitted to
Avnet are at Exhibit F to the Declaration of Benedict Hur, which
is attached to Xilinx and Avnet’s Joint Motion for Summary
Judgment. (Doc. 203-6). They span October 2009 to February 2013.
11

Brothers also swore in his plea agreement that Valley Forge
falsified its public filings:
In general, Defendant represented to the SEC and
investors that VFCT’s revenues and profits were from the
sale of various aerospace products and other mechanical
devices including momentum wheels, but implied that
sales of THOR and ODIN were imminent when they were not.
In addition, the Defendant in March 2008, represented
VFCT was in the business of buying and selling electronic
parts for resale to foreign markets, primarily Japan.
In fact, almost all of the revenues and profits of VFCT
between 2009 and January, 2013 were from the export of
microcircuits to Hong Kong and the PRC without a license
or written permission of the Department of State.
(Doc. 199-18 at 2541).

See also Valley Forge Form 10-K dated

April 13, 2010 (Doc. 203-1) (touting the THOR and ODIN
products).
In

2010,

when

Valley

Forge’s

revenues

jumped

from

$250,000 to $12 million, the company’s auditor told Brothers
that Valley Forge would have to disclose on its Form 10-K the
source of this revenue.
auditor.

Brothers refused and fired the

(Hawkins Depo. at 19-20, Doc. 199-12).

Between 2009 and 2012, most of the revenue that Valley
Forge earned was from the illegal sale of the microchips
overseas.

(Brothers

Depo.

46)

(Doc.

203-3).

Brothers

testified that the revenue from those sales was around $37$40 million, and that Valley Forge kept it all.
Depo. Doc. 199-2 at 81-82).

(Brothers

The monies received from the

sale of the microchips to Hong Kong were deposited into Valley

12

Forge general accounts and used to pay the company’s operating
expenses, such as rent, employee compensation, professional
services, working capital, and debt repayment.

(R. Brothers

Depo. Doc. 203-13 at 3213-14 and Doc. 199-5 at 120-24; Bradley
Depo. Doc. 203-19 at 3250-51; Brothers Depo. At 201-09, Doc.
199-9; Gilinsky Depo. at 76, Doc. 199-25).
C. Criminal Prosecution and This Litigation
The Department of Justice discovered Brothers’ illegal scheme
and, in February 2013, the government seized Valley Forge’s bank
accounts, files, and computers.4
In the meantime, when Valley Forge failed to pay Avnet, Avnet
filed a diversity suit in this Court on April 8, 2013, alleging
claims for breach of contract, action on account, and quantum
meruit/unjust enrichment.

Avnet, Inc. v. Valley Forge Composite

Tech., Inc., Cov. Case No. 13-cv-051.

Valley Forge defaulted, and

this Court entered a default judgment in Avnet’s favor on September

4

Brothers was ultimately indicted in 2014, along with his wife,
on various federal criminal charges related to the illegal export
of these items. He pled guilty to some of the charges in 2015,
and Judge Amul Thapar sentenced him to 93 months imprisonment on
March 2, 2016. United States v. Brothers, Cov. Crim. Case. No.
14-35.
Rosemary Brothers pled guilty to Misprision of Felony for her
role in assisting her husband in the illegal export of the
microchips. (Doc. 199-29 at 2638-48). Judge Thapar sentenced her
to three years’ probation. Cov. Crim. Case No. 15-28, Doc. 31.
13

17, 2013 in the amount of $673,803.25.

(Case 13-cv-51, Doc. 25).

Valley Forge then moved to have the default judgment set aside.
Before this Court ruled on that motion, Valley Forge filed for
bankruptcy in the United States Bankruptcy Court for the Middle
District of Pennsylvania.

This Court thus stayed the case and

denied all pending motions without prejudice.
D.

Proceedings in the Bankruptcy Court

Avnet and other creditors of Valley Forge, including Aeroflex
Colorado Springs, Inc. (“Aeroflex CS”), filed proofs of claim in
the Bankruptcy Court for the money that Valley Forge owed them.
Valley Forge requested discovery under the bankruptcy rules to
investigate whether potential claims could be brought against
Avnet and others for involvement in Brothers’ illegal scheme.

The

Bankruptcy Court allowed discovery as to Avnet but declined to
allow discovery as to Xilinx.5

5 In

the meantime, two executives of Valley Forge filed a qui tam
action in this Court on January 31, 2014, against Avnet, Xilinx,
Inc., and Aeroflex Inc., alleging violations of the False Claims
Act in connection with the rad-chip sales to China.
Levine v.
Avnet, Inc., Cov. Civil Case No. 14-17. The United States declined
to intervene and ultimately moved the Court to dismiss the case,
stating that it was in the best interest of the United States to
“avoid expending any further resources on the action.” (Doc. 201). After a hearing, and over the relator’s objection, the Court
granted the government’s motion to dismiss on April 1, 2015.

14

Valley Forge’s Chapter 11 case was converted to a Chapter 7
proceeding, and John P. Neblett was appointed as Trustee on
February 18, 2015.
On June 15, 2015, the Trustee in Bankruptcy filed an Adversary
Complaint

in

the

Bankruptcy

Court,

asserting

claims

against

Brothers, Avnet, Aeroflex Inc., Aeroflex CS, Quality Components,
Inc., and Xilinx, Inc.

(Cov. Civil Case No. 15-168, Doc. 115-2).6

The claims asserted by the Trustee are:
Count I:

Breach of fiduciary duty against Brothers;

Count II:

Civil conspiracy/aiding and abetting breach of

fiduciary duty against the other defendants;
Count III:

Negligence against the defendants other than

Brothers;
Counts IV & V: Objections to Avnet’s and Aeroflex’s proofs of
claim filed in the underlying bankruptcy case.7

6

Brothers filed an answer to the Adversary Complaint in the
Bankruptcy Court, but does not appear to have made any further
filings. The Trustee has not moved for summary judgment on the
claim it asserts against Brothers in this matter. The Court
assumes that the Trustee does not intend to proceed against
Brothers given the circumstances, but it will require the
Trustee to state its position on the record.
7

These objections are derivative of the Trustee’s tort claims.
15

Generally, the Trustee’s claims are based on allegations that
the supplier defendants were acting in concert with Brothers to
circumvent the federal restrictions on the chips’ export to China.8
On August 3, 2015, Avnet filed in the Bankruptcy Court a
motion to dismiss the adversary complaint against it, arguing that
the claims were barred by res judicata because they were never
asserted as counterclaims in Avnet’s 2013 case in this Court.
(Doc. 65).

Avnet then filed a motion to withdraw the adversary

claims against it from reference to the Bankruptcy Court and to
transfer venue of those claims to this Court under 28 U.S.C. §
1404(a). (Case 15-168, Doc. 1). The District Court for the Middle
District of Pennsylvania granted that motion on September 21, 2015.
However, instead of transferring only the claims against Avnet,
the Court withdrew the entire adversary action from the Bankruptcy
Court and transferred it to this Court.

(Case No. 15-168, Doc.

16).9
Thereafter, the Clerk of Court created a new case for the
transferred action, Covington Civil Action 15-168.

8

These allegations are very similar to those made in the qui tam
suit.

9

The Trustee also filed a second adversary complaint against
certain professional service providers to Valley Forge, including
its accountant, auditors, and attorneys, alleging that they
committed negligence and breached their fiduciary duties in their
services, allowing Brothers to carry out his illegal scheme. (Doc.
79-2).
16

After transfer, the Aeroflex defendants and Xilinx also filed
a motion to dismiss.

(Doc. 79).

Following briefing and a hearing, the Court denied the motions
to dismiss. (Doc. 126). The Court found that Avnet’s res judicata
argument was without merit.

(Id.).

The Court also held that it

would be premature to apply the in pari delicto defense at the
pleading stage, but it noted that defendants could renew that
defense on summary judgment.
Now,

after

these

complex

proceedings,

the

parties

have

conducted discovery and filed motions for summary judgment, which
are ripe for resolution.
Analysis
A. Count II: Civil Conspiracy/Aiding and Abetting Fiduciary
Breach 10

1. Elements of this Claim
Although the Trustee has labelled Count II of the adversary
complaint “Civil Conspiracy/Inducing, Facilitating and Aiding and
Abetting Breach of Fiduciary Duty,” there is no legal distinction
between those two theories under Kentucky law.

See Community Ties

of America, Inc. v. NDT Case Services, LLC, No. 3:12-CV-00429,

10

The Court will not address at length Avnet’s argument that the
Trustee’s claims against it are barred by res judicata. The Court
rejected that argument in its Order of June 26, 2016 (Doc. 126),
and the same reasoning applies at this stage.
17

2015 WL 520960, at *17 (W.D. Ky. Feb. 9, 2015) (citing Steelvest,
Inc. v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476, 485 (Ky.
1991)).

Rather, such a claim is appropriately analyzed as simply

an aiding and abetting claim.

Id. (citations omitted).

To prevail on this claim, the Trustee must show: “(1) the
existence and breach of a fiduciary duty; (2) the defendant gave
the breaching party ‘substantial assistance or encouragement’ in
effectuating the breach; and (3) the defendant knew that the
party’s conduct breached that fiduciary duty.”

Sierra Enter. Inc.

v. SWO & ISM, LLC, 264 F. Supp.3d 826 (W.D. Ky. 2017) (internal
quotation and citation omitted).
“Under Kentucky law, constructive knowledge is not sufficient
to support a claim of aiding and abetting; instead, a plaintiff
must show that a defendant had actual knowledge that a tortfeasor
was engaged in wrongful conduct.”

Great Am. Inc. Co. v. Poynter,

Civil Action No. 1:10-CV-00161, 2013 WL 1181445, at *4 (W.D. Ky.
Mar. 20, 2013) (citation omitted). See also Miles Farm Supply, LLC
v. Helena Chem. Co., 595 F.3d 663, 666 (6th Cir. 2010) (same).
“Although

‘actual

knowledge’

is

required,

the

requisite

intent and knowledge may be shown by circumstantial evidence.”
Sierra Enter., 264 F. Supp. 3d at 840 (internal quotations and
citation omitted).

18

2. Knowledge of Brothers’ Breach of Fiduciary Duty
Despite the voluminous record in this matter, the Trustee has
failed to adduce any evidence from which a reasonable juror could
conclude that the supplier defendants had actual knowledge that
Brothers was illegally exporting the microchips that Valley Forge
purchased from them.

Instead, as discussed above, Brothers took

affirmative steps to conceal his actions from defendants and
mislead them — as well as investors and the stock market — that
the chips were being used in momentum wheels and the ODIN and THOR
systems.
Brothers gave sworn testimony on three occasions prior to
responding to summary judgment: (1) in his sworn plea agreement
dated July 30, 2015; (2) in his deposition in the Bankruptcy Court
on June 3, 2014; and (3) in his deposition in this case taken on
March 14 and 15, 2017.

On those occasions, Brother swore that he

never told the supplier defendants that he was exporting the chips;
that he instead falsely told them that the chips were being used
in ODIN and THOR; that he falsified the end user certificates that
he submitted to Avnet/Xilinx to show that Valley Forge was the end
user; that he never submitted end user certificates to Aeroflex;
that one Aeroflex end user certificate that showed the Hong Kong
company as the end user was never returned to Aeroflex; and that
he did these things to avoid detection.

19

In

opposition

to

summary

judgment,

however,

the

Trustee

submitted a declaration in which Brothers declares that “each of
the

Supplier

Defendants

knew

and

was

fully

aware,

from

the

beginning of our relationship, that the micro-chip components
which they supplied me were destined for overseas.”

(Doc. 226 at

¶ 19).11
The Sixth Circuit has “long held that a party may not create
a factual issue by filing an affidavit, after a motion for summary
judgment

has

testimony.”

been

made,

which

contradicts

[his]

earlier

Bush v. Compass Group USA, Inc., 683 F. App’x 440,

448 (6th Cir. 2017) (citation and internal quotations omitted).
“A directly contradictory affidavit should be stricken unless
the

party

opposing

summary

judgment

provides

a

persuasive

justification for the contradiction.” Id. See also Powell-Pickett
v. AK Steel Corp., 549 F. App’x 347, 352 (6th Cir. 2013) (“The
rule therefore is that a party opposing summary judgment with an
affidavit that contradicts her earlier deposition must explain why
she disagrees with herself.”).

11

The Trustee first attached this declaration to his motion for
summary judgment (Doc. 208-1); however, the declaration was not
executed.
It was not until October 30, 2017, that the Trustee
filed a copy of the declaration executed by Brothers. (Doc. 226).
20

This

rule

applies

equally

to

proffered

affidavits

that

attempt to retract admissions made in a criminal plea agreement.
See Scholes v. Lehmann, 56 F.3d 750, 762 (7th Cir. 1995).
The Sixth Circuit has explained the reasoning for this “sham
affidavit” doctrine:
The rationale behind the doctrine, which is applied in
some form in nearly every circuit, is simple: [i]f a
party who has been examined at length [under oath] could
raise an issue of fact simply by submitting an affidavit
contradicting his own prior testimony, this would
greatly diminish the utility of summary judgment as a
procedure for screening out sham issues of fact.
France v. Lucas, 836 F.3d 612, 622 (6th Cir. 2016) (internal
quotations and citations omitted).
Although defendants stressed the contradictory nature of
Brothers’ declaration in their responses to the Trustee’s
motion for summary judgment, the Trustee has made no effort
to

state

a

assertions.

“persuasive

justification”

for

Brothers’

new

In fact, the Trustee does not acknowledge the

issue at all.

See France, 836 F.3d at 624 (“Finally, the

plaintiffs have utterly failed to provide an explanation for
the

conflict

between

Bray’s

affidavit

and

his

previous

testimony at Lucas’s trial.”).
Under such circumstances, the Sixth Circuit has held
that

a

district

court

should

decline

to

consider

the

contradictory statements and is further within its discretion

21

to strike the declaration in its entirety.

Bush, 683 F.3d

448.
Disregarding

Brothers’

inadmissible

post-deposition

declaration, the record is devoid of any evidence from which
one could reasonably infer that the supplier defendants knew
that

Brothers

was

illegally

exporting

the

microchips

in

violation of his fiduciary duty to Valley Forge.
The supplier defendants are thus entitled to summary
judgment on Count II of the adversary complaint.
B. Count III: Negligence
To prevail on a negligence claim under Kentucky law, the
plaintiff must prove that the defendant 1) owed the plaintiff a
duty of care, 2) the defendant breached the standard of care by
which his or her duty is measured, and 3) that the breach was the
legal causation of the consequent injury.

Simons v. Strong, 978

F. Supp.2d 779, 783 (E.D. Ky. 2013) (citing Pathways, Inc. v.
Hammons, 113 S.W.3d 85, 88-89 (Ky. 2003)).
The element of duty is a question of law for the court to
decide.

Id.

Negligence per se is codified in KRS 446.070, which provides
a cause of action for any person injured by “the violation of any
statute.”

However, the “any statute” language applies to Kentucky

statutes.

St. Luke Hosp., Inc. v. Straub, 354 S.W.3d 529, 534

(Ky. 2011) (citations omitted).

“Violations of federal laws and
22

regulations . . . do not create a cause of action based on KRD
446.070.”

Id.

Here, the Trustee was asked in interrogatories to state the
basis for his allegation that the supplier defendants owed a duty
to Valley Forge.

The Trustee responded:

Defendant Xilinx had a duty to refrain from engaging in
any conduct that would jeopardize and imperil Valley
Forge by causing it to be in violation of federal rules
and regulations relating to the trafficking in
controlled articles.
Doc. 203-20 Doc. 199-19.
Similarly,

in

his

motion

for

summary

judgment

on

the

negligence claim, the Trustee states:
Defendants knew, and
conduct placed Valley
violations of the AECA
a duty to refrain from

it was foreseeable, that their
Forge in jeopardy for potential
and the ITAR. As such, they had
all such conduct.

(Doc, 208-12 at 9).
Invoking federal statutes, however, does not give rise
to a cause of negligence under Kentucky law.
In his reply brief in support of summary judgment, the
Trustee states that he is relying on a common law negligence
theory under Kentucky law.

(Doc. 244 at 9).

However, any common law claim fails as a matter of law because
there is no duty flowing from the supplier defendants to Valley
Forge under the undisputed facts.

23

“For a common-law negligence claim, the standard of care is
that of the ordinary care that a reasonably prudent person would
exercise under the circumstances.”

Simons, 978 F. Supp.2d at 784

(internal quotations and citations omitted).

Under Kentucky’s

“universal” duty of care, “every person owes a duty to every other
person to exercise ordinary care in his activities to prevent
foreseeable injury.”

James v. Meow Media, Inc., 300 F.3d 683, 690

(6th Cir. 2002) (quoting Grayson Fraternal Order of Eagles v.
Claywell, 736 S.W.2d 328, 332 (Ky. 1987)).
This

duty

is

“circumstantially

limited:

the

duty

exercise ordinary care to prevent foreseeable harm.”

is

Id.

to
See

also Grand Aerie Fraternal Order of Eagles v. Carneyhan, 169 S.W.3d
840, 849 (Ky. 2005)) (noting that the “universal duty of care” is
“not boundless”).
The

foreseeability

inquiry

boils

down

to

“whether

a

plaintiff’s interests are entitled to legal protection against the
defendant’s conduct.”

Id. at 691 (citation omitted).

pure question of law for the court.

This is a

Id.

Here, the harm to Valley Forge is alleged to flow from
defendants’

failure

to

abide

by

the

federal

statutes

and

regulations governing the export of the rad-chips and similar
military grade components. But these laws were designed to protect
national security and foreign policy, not to protect companies
from

deceit

and

financial

harm
24

caused

by

their

executives.

Preventing harm to Valley Forge is thus not within the scope of
these laws’ purposes, such that the harm to it as a result of their
alleged violation was not “foreseeable.”

Thus, the Trustee has

failed to demonstrate a common law duty owed to Valley Forge by
the supplier defendants.

Compare T&M Jewelry, Inc. v. Hicks, 189

S.W.3d 526, 531 (Ky. 2006) (finding that common law duty of care
rose from Gun Control Act as to plaintiff who was injured by gun
illegally sold by defendant to person under eighteen years old;
principal purpose of Act was to limit access to handguns by persons
under age twenty-one).
The Trustee wholly fails to address these defects, arguing in
his reply brief only that defendants cannot now raise the duty
issue because the Court allowed the case to proceed beyond the
pleading stage.

(Doc. 227 at 15-18).

This misplaced “law of the

case” argument is without merit, as the Court may always consider
on summary judgment issues on which it reserved at the pleading
stage.
For

these

reasons,

therefore,

the

Court

will

grant

the

supplier defendants’ motions for summary judgment on the Trustee’s
negligence claim.12

12

Dismissal of the substantive claims against the supplier
defendants also means that Counts IV and V — the Trustee’s
objections to defendants’ claims in the bankruptcy case — fail
because they depend on a finding in favor of the Trustee on the
aiding and abetting and negligence causes of action.
25

C. In Pari Delicto
Even absent the above deficiencies, the Court concludes that
the Trustee’s claims fail under the doctrine of in pari delicto.
“In pari delicto refers to the plaintiff’s participation in
the same wrongdoing as the defendant.”

In re Dublin Securities,

Inc., 133 F.3d 377, 380 (6th Cir. 1997) (internal quotations and
citation omitted).

“The doctrine is premised upon the equitable

principle that [n]o Court will lend its aid to a man who founds
his cause of action upon an immoral or illegal act.”

Id.

In Dublin Securities, the Sixth Circuit applied the in pari
delicto doctrine to bar claims of a bankruptcy trustee, standing
in the shoes of a debtor, against third parties where the debtor
had carried out a fraudulent stock offering.

The trustee alleged

that the third parties — law firms who had represented the debtor
and prepared many of the documents for the securities sales — knew
or should have known of the illegal activities and failed to
apprise the businesses of them.
The District Court dismissed the claims on a Rule 12(b)(6)
motion,

and

the

Sixth

Circuit

affirmed,

reasoning

that

the

trustee’s complaint on its face showed that “the debtor’s own
actions

were

instrumental

in

perpetrating

the

fraud

on

the

individuals choosing to invest in the Dublin Securities schemes.”
Id.

The Court stated that “[s]uch “purposeful conduct thus

26

establishes conclusively that the debtors were at least as culpable
as the defendants in this matter.”

Id.

Here, it is abundantly clear that Brothers was the moving
force in his scheme to acquire rad-chips and illegally export them
to China, notwithstanding any alleged involvement by the supplier
defendants.

Indeed, the very first count in the complaint is

against Brothers for breach of his fiduciary duties to Valley Forge
due to his “illegal and criminal activities.”

(Compl. ¶ 94).

And the Trustee conceded in interrogatory responses that
Brothers “provided untrue and deceptive information on the End Use
Certificates” provided to Xilinx.

(Doc. 203-21 at 3264).

Further, as noted above, Brothers’ plea agreement sets out in
detail the deliberate actions he took to acquire the microchips
and to falsify the end user forms provided to defendants to conceal
his plans to export the chips to Hong Kong.

Likewise, his

deposition testimony confirms that he falsely told defendants that
the chips were for use in the ODIN and THOR systems.

And when

directly asked by Jim Rush of Aeroflex whether Brothers was
exporting the chips to China — one month before the government
seized Valley Forge’s business — Brothers lied and said he was
not.
As a matter of law, therefore, Brothers was thus “at least as
culpable” as the defendants in the illegal export scheme, making
this doctrine applicable.
27

To

avoid

this

result,

the

Trustee

invokes

interest” exception to the in pari delicto doctrine.
26-27).

the

“adverse

(Doc. 225 at

This exception provides that knowledge of the agent

(Brothers) is not imputed to the principal (Valley Forge) when it
is

clear

that

the

agent

would

not

communicate

the

fact

in

controversy to the principal, such as where the communication would
prevent the consummation of a fraudulent scheme the agent was
perpetrating.

In re: Merv Properties, L.L.C., 539 B.R. 516, 529

(B.A.P. 6th Cir. 2015) (citing Illinois Cent. R. Co. v. Fontaine,
289 S.W. 263, 267-68 (Ky. 1926)).
“However, the adverse interest exception is not applicable
when

the

company

question.”

actually

benefits

Id. (citation omitted).

from

the

transaction

in

See also BancInsure, Inc. v.

U.K. Bancorporation Inc./United Ky. Bank of Pendleton Cnty, Inc.,
830 F. Supp.2d 294, 302-03 (E.D. Ky. 2011) (noting that Kentucky
courts recognize exception to adverse interest exception where the
corporation benefits by the transaction).
Valley

Forge’s

SEC

filings

and

the

Trustee’s

adversary

complaint against Valley Forge’s attorneys and accountants reveal
that Brothers’ illegal export of the rad-chips directly benefitted
the company.

In the second adversary complaint, the Trustee

alleges that “all the revenue generated by Valley Forge during the
period 2009 through January 2013 was from the purchase and sale of
rad-chips.”

(Doc. 79-2, ¶ 60).
28

The undisputed record in this case also shows that, between
2009 and 2012, virtually all revenue earned by Valley Forge came
from the microchip sales.

(Brothers Depo. 46).

Valley Forge

retained approximately $37 to $40 million in those revenues and
used them to pay the company’s operating expenses and to purchase
more microchips.
Brothers himself testified that the sale of the microchips to
the Pacific Rim was a means of getting access to those markets in
preparation for the sale of other products in the future:
Q.

So as you told Ben, it brought money into Valley Forge?

A.

In the prospects of future —

Q.

Right.

A.

Correct.

And opened up business relationships?

(Doc. 199-2 at 2377).
Further, in its public filings, Valley Forge disclosed that
it was not making any money on the THOR and ODIN products that it
claimed to be developing, but nonetheless the company’s profits
from 2009 to 2010 increased from $259,000 to $2.5 million.

(Doc.

79-3).
Thus, no reasonable person could conclude that Valley Forge
did not benefit from Brothers’ illegal activities.
The Trustee attempts to create an issue of fact on the
question of benefit through the declaration of Evan Levine, a

29

person who became a board member in February 2013, after the
Department of Justice seized Valley Forge’s accounts.13
Levine states in his proffered declaration that he performed
an investigation that revealed that Brothers had “diverted” funds
from the sale of the microchips to himself, his son, and another
business he owned.

(Doc. 224-27).

This creates no triable issue.

Levine’s declaration is

inadmissible because the Trustee never identified Levine as a
witness during discovery.

See Fed. R. Civ. P. 37(c)(1) (“If a

party fails to . . . identify a witness as required . . ., the
party is not allowed to use that . . . witness to supply evidence
on a motion . . .”).
Second, even if Brothers later diverted some of the revenues
to himself, it is undisputed that Valley Forge still benefitted to
the tune of millions of dollars in revenues that allowed it to
stay afloat for years.
The Trustee argues that Brothers’ scheme actually harmed
Valley Forge because his scheme led to the ultimate downfall of
the company.

However, that ultimate outcome does not negate the

fact that, for approximately four years, Valley Forge received
millions of dollars in revenue as a result of the illegal rad-chip
sales, absent which the company would likely have failed sooner.

13

Levine was one of the two relators in the qui tam case.
30

Moreover, Brothers’ fraud was not directed at Valley Forge
but rather at federal authorities whose export restrictions he
violated.

Rejecting a similar argument, another court has stated:

{W]hen an officer or director’s actions were not
undertaken to loot or defraud his corporation and the
corporation derived some benefit from them, the actions
are imputed to the corporation, even if they ultimately
resulted in the failure of the corporation. . . .
It is uncontested that BLI received the prevailing rate
of interest for the triangular transactions and that, in
some instances, BLI received an additional fee from BNLV
attributable to the triangular transactions.
As
discussed above, the deception or fraud motivating the
triangular transaction scheme was not targeted at BLI
but at federal regulators. BLI, as well as its parent
companies BLCA and BLNV, temporarily benefitted from the
triangular transaction scheme.
Thus, Defendants’
knowledge of the triangular transactions and their
actions in executing the triangular transactions are
imputed to BLI.
Banco Latino Int’l v. Gomez, 95 F. Supp.2d 1327, 1336 (S.D.
Fla. 2000) (citation omitted) (emphasis added).
Therefore, because Valley Forge directly benefitted from
Brothers’ unlawful actions, the adverse interest exception
does not apply, and the Trustee’s claims are barred by in
pari delicto.

Therefore, having heard from the parties, and the Court
being advised,
IT IS ORDERED that:

31

(1)

Defendants’ motions for summary judgment (Docs. 199,
201) be, and are hereby, GRANTED, and the claims
against them are hereby DISMISSED WITH PREJUDICE;

(2)

The Trustee’s motions for summary judgment (Docs. 208,
209) be, and are hereby, DENIED; and

(3)

On or before July 9, 2018, the Trustee shall file a
stipulation dismissing defendant Brothers from this
action or a status report stating how he otherwise
intends to proceed against Brothers.

This 3rd day of July, 2018.

32