Tarter Smith et al v. Tarter et al

Filing 26

MEMORANDUM OPINION & ORDER: It is hereby ORDERED as follows: 1. The Defendants' motions to dismiss [Record Nos. 8 , 10 ] are GRANTED; 2. The claims asserted by the plaintiffs against Defendant Joshua Tarter, Donald Tarter and Thomas Gregory are DISMISSED, in their entirety, without prejudice. Signed by Judge Danny C. Reeves on 1/22/2018.(KM)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION
(at Lexington)
ANNA LOU TARTER SMITH et al.,

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Plaintiffs,
V.
JOSHUA DONALD TARTER, et al.,
Defendants.
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Civil Action No. 5: 17-334-DCR

MEMORANDUM ORDER
AND OPINION

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This is a commercial action brought by Plaintiffs Anna Lou Tarter Smith (“Smith”),
Lou Ann Coffey (“Coffey”), and Douglas Tarter, in their individual capacities and in their
derivative capacities on behalf of the Tarter Companies. 1 [Record No. 1] The plaintiffs allege
that Defendants Joshua Donald Tarter (“Joshua Tarter”), Thomas Gregory (“Gregory”), and
QMC Industry Company, Ltd. (“QMC”), conspired to use sensitive company information to
divert cost savings from the Tarter Companies to their own benefit in violation of the Racketeer
Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1962(c) and (d), the Defend
Trade Secrets Act (“DTSA”), 18 U.S.C. § 1836, et seq., the Kentucky Uniform Trade Secrets
Act (“KUTSA”), KRS § 365.880 et seq., and Kentucky common law. [Record No. 1, ¶¶ 136239] Defendants Joshua Tarter and Gregory have moved to dismiss under Federal Rule of
Civil Procedure 12(b)(1), asserting that the plaintiffs lack standing to bring these claims in

1

The “Tarter Companies” are comprised of six entities: Tarter Industries, Tarter Management
Company, Inc., and Green River Gate, Inc. (the “Tarter Corporations”), and Tarter Gate
Company, LLC, Tarter Tube, LLC, and Liberty Tank, LLC (the “Tarter LLCs”).
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their individual or derivative capacities, and under Federal Rule of Civil Procedure 12(b)(6),
on the basis that the plaintiffs have failed to state a claim under the RICO Act or the DTSA,
and because the plaintiffs’ remaining claims are either inadequately pled or should be
dismissed for lack of jurisdiction. 2 [Record Nos. 8, 10] For the reasons that follow, the
defendants’ motions will be granted.
I.
The Tarter Companies are Kentucky companies with their principal place of business
in Casey County, Kentucky. [Record No. 1, ¶ 4] They bill themselves as “the largest
manufacturer of farm gates and animal management equipment in North America.” [Id. ¶ 12]
The Tarter Companies have been family-owned since 1945, and are now managed by the
fourth generation. [Id. ¶¶ 12, 17] Plaintiff Smith and her children, Plaintiffs Coffey and
Douglas Tarter, own 50% of the Tarter companies, while the remaining 50% belongs to Joshua
Tarter and his two siblings, each of whom owns a one-sixth share. [Id. ¶ 17]
Joshua Tarter is a shareholder of the Tarter Corporations and a member and manager
of the Tarter LLCs. [Id. ¶ 19] He has exercised executive authority on behalf of all of the
Tarter Companies, and has variously held himself out as President, Vice-President, Officer,
and Senior Executive of the Tarter Companies. [Id. ¶ 20] Gregory was a management
employee of Tarter Gate Company, LLC, who oversaw engineering and quality, and held

2

Gregory’s motion to dismiss was not filed timely. [Record No. 7] However, the plaintiffs
do not object to the Court considering Gregory’s motion and have responded to his arguments.
[Record Nos. 6, 14] Gregory’s arguments are nearly identical to Joshua Tarter’s arguments,
and the Court finds that considering the motion would further the interests of justice, reduce
the cost of this litigation, and promote responsible case management. See Iron Workers Dist.
Council of So. Ohio & Vicinity Annuity Trust v. Larry N. Carlin, Inc., 3: 17-cv-165, 2017 WL
5054740 (S.D. Ohio, Oct. 17, 2017) (Ovington, M.J.), report and recommendation adopted, 3:
17-cv-165, 2017 WL 5005728 (Rose, D.J.).
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himself out as Vice-President or General Manager of the Tarter Companies. [Id. ¶¶ 26, 30]
The plaintiffs claim that, because of their senior positions, Joshua Tarter and Gregory were in
a position to control the vendors selected by the Tarter Companies, as well as the prices paid
to those vendors, and that they had access to confidential and proprietary information,
including marketing and business strategies, financial data, pricing, costs, profit margins, order
information, and customer relationships. [Id. ¶¶ 21, 22, 28, 29, 33, 77]
The Tarter Companies began to source components for use in their finished products
from Chinese suppliers in 2009. They engaged Xiaofeng Chen to act as their agent in China.
[Id. ¶¶ 34-35] Utilizing Chinese suppliers should have enabled the Tarter Companies to save
substantial costs. [Id. ¶ 36] However, the plaintiffs allege that, in 2010, Joshua Tarter,
Gregory, and Chen devised a plan to funnel these potential savings to themselves. [Id. ¶¶ 37,
40, 52, 58, 73] To accomplish this scheme, they formed Defendant QMC, which the plaintiffs
characterize as a pass-through entity which manufactures nothing. [Id. ¶¶ 38, 58]
According to the plaintiffs, Joshua Tarter and Gregory used their authority to ensure
that the Tarter Companies ordered the components from QMC rather than other suppliers. [Id.
¶¶ 22, 29, 77, 90] QMC would forward the orders to suppliers in mainland China, who would
manufacture the components and ship them directly to the Tarter Companies. [Id. ¶¶ 38-39]
The mainland suppliers would bill QMC for the true cost of the components, but QMC would
substantially inflate the price and invoice the Tarter companies for the higher amount, thus
absorbing the cost savings that the Tarter Companies would have received if they had
purchased directly from the mainland suppliers. [Id. ¶¶ 40, 53-56, 62, 75-76] The plaintiffs
allege that Joshua Tarter and Gregory used their knowledge of the prices the Tarter Companies
paid for the components, the price quotations the Tarter Companies received from other
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potential suppliers, and the Tarter Companies’ profit margins, to determine how much to
inflate the price that QMC charged the Tarter Companies. [Id. ¶ 41] In total, the Tarter
Companies paid QMC approximately $70,053,226.58, via wire transfer, over a seven year
period for the component parts. [Id. ¶¶ 44, 63-72]
The plaintiffs assert that Joshua Tarter and Gregory used their positions within the
Tarter Companies to further this scheme in a variety of ways. Most basically, they reduced
the costs associated with QMC by misappropriating the Tarter Companies’ resources,
including by using the Tarter Companies’ facilities and personnel for QMC business, and using
the Tarter Companies’ funds to pay for QMC expenses. [Id. ¶¶ 45, 83-84, 103, 135] They
also allegedly used their positions within the Tarter Companies to ensure that QMC received
more favorable treatment than other suppliers. [Id. ¶ 93] For example, the Tarter Companies
typically paid QMC 50% of its price in advance, although other suppliers did not receive such
a down payment. [Id. ¶¶ 42, 122] Additionally, the Tarter Companies would not seek bids
from other potential suppliers when a component was sourced by QMC, corrupting the
competitive bid process. [Id. ¶¶ 94, 96, 119, 123] Finally, the Tarter Companies would
allegedly accept defective products supplied by QMC, in contravention of their standard
practice, thus shifting a loss that should have fallen on QMC to the Tarter Companies. [Id. ¶¶
95-96, 105, 135]
According to the plaintiffs, Joshua Tarter, Gregory, and Chen realized that secrecy was
essential for their plan to succeed. [Id. ¶¶ 57, 109, 130] The plaintiffs allege that, as a result,
neither Joshua Tarter nor Gregory disclosed their interest in QMC to the Tarter Companies,
despite their fiduciary duties to do so. [Id. ¶¶ 49, 59-60, 101-07, 113] Further, Joshua Tarter
allegedly misrepresented his ownership interest in QMC to the plaintiffs and the Tarter
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Companies on multiple occasions. [Id. ¶¶ 46-48, 77, 97-100] Nonetheless, after “considerable
investigation,” the plaintiffs discovered Joshua Tarter and Gregory’s ownership interests in
QMC in 2016, and confronted Joshua Tarter in meetings with him and his siblings. [Id. ¶¶
109, 110-12] Joshua Tarter allegedly declined to attend further meetings, did not fully disclose
his relationship with QMC, and refused to disgorge the profits he made from QMC and turn
them over to the Tarter Companies. [Id. ¶¶ 115-17] Gregory resigned from his position on
September 14, 2016, after being confronted for his allegedly improper behavior. [Id. ¶ 114]
The plaintiffs filed this action on August 11, 2017, alleging that Joshua Tarter, Gregory,
and QMC conspired to and did violate RICO, DTSA, and KUTSA, and that they perpetrated
a fraud by concealment and/or omission and unjustly enriched themselves. 3 [Id. ¶¶ 136-46,
147-51, 152-66, 174-81, 182-95, 203-10, 228-31, 237-39] The plaintiffs also claim that Joshua
Tarter and Gregory breached their fiduciary duties to the Tarter Companies and usurped a
corporate opportunity [id. ¶¶ 211-16, 232-36], 4 that Gregory and QMC aided and abetted
Joshua Tarter’s violations of DTSA and KUTSA and his breach of fiduciary duty [id. ¶¶ 167173, 196-202, 217-23], 5 and that Joshua Tarter made fraudulent misrepresentations. 6 [Id. ¶¶
224-27]
Defendants Joshua Tarter and Gregory have moved to dismiss for lack of standing and
for failure to state a claim. [Record Nos. 8, 10] They argue, in relevant part, that the plaintiffs

3

Counts I, II, III, V, VI, VIII, XII, and XIV.

4

Counts IX and XIII.

5

Counts IV, VII, and X.

6

Count XI.
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lack standing to bring these claims in their individual capacities because the only alleged injury
was suffered by the Tarter Companies and not the plaintiffs personally, and that the plaintiffs
lack standing to bring these claims in their derivative capacities because they failed to
adequately plead that they made a demand on the Tarter Companies to bring this action, or that
making such a demand would have been futile. [Record Nos. 8, 10]
II.
The defendants’ argument that the plaintiffs lack of standing to bring this action
contests this Court’s subject matter jurisdiction under Rule 12(b)(1) of the Federal Rules of
Civil Procedure. Lyshe v. Levy, 854 F.3d 855, 857 (6th Cir. 2017) (citations omitted). A
12(b)(1) motion “can either attack the claim of jurisdiction on its face, in which case all
allegations of the plaintiff must be considered as true, or it can attack the factual basis for
jurisdiction, in which case the trial court must weigh the evidence and the plaintiff bears the
burden of proving that jurisdiction exists.” DLX, Inc. v. Kentucky, 381 F.3d 511, 516 (6th Cir.
2004). A facial challenge to the Court’s subject matter jurisdiction, such as the defendants’
challenge here, “merely questions the sufficiency of the pleading.” Ohio Nat. Life Ins. Co. v.
United States, 922 F.2d 320, 325 (6th Cir. 1990). “In reviewing such a facial attack, a trial
court takes the allegations in the complaint as true, which is a similar safeguard employed
under 12(b)(6) motions to dismiss.” Id. “[T]he party claiming jurisdiction bears the burden
of demonstrating that the court has jurisdiction over the subject matter.” Id. at 324.
The defendants’ argument that the plaintiffs have failed to state a claim contests the
sufficiency of the Complaint under Federal Rule of Civil Procedure 12(b)(6). A 12(b)(6)
motion requires the Court to determine whether the Complaint alleges “sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v.
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Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007)). The plausibility standard is met “when the plaintiff pleads factual content that allows
the court to draw the reasonable inference that the defendant is liable for the misconduct
alleged.” Id. (citing Twombly, 550 U.S. at 556). Although the Complaint need not contain
“detailed factual allegations” to survive dismissal, the “plaintiff’s obligation to provide the
grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic
recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555 (internal
quotation marks and citation omitted); see also Iqbal, 556 U.S. at 678 (“[T]he tenet that a court
must accept as true all of the allegations contained in a complaint is inapplicable to legal
conclusions.”).
III.
The plaintiffs bring this action in individual and derivative capacities. However, they
have not alleged that they sustained any personal injuries apart from the costs and loss of cost
savings allegedly incurred by the Tarter Companies. [See Record No. 1, ¶ 135 (asserting that
the plaintiffs “incurred millions of dollars of damages in the form of excessive charges and
cost savings that belonged to the Tarter Companies, as well as the cost of purchasing defective
or substandard products from QMC . . . [and] the diversion of their personnel and other
facilities and resources to support QMC’s business.”); see also id. ¶¶ 145, 150, 164, 172-73,
180-81, 195, 201-02, 209-10, 215-16, 222-23, 227, 231, 236, 239.] The defendants argue that,
because the plaintiffs have failed allege any injury distinct from that sustained by the Tarter
Companies, they lack standing to sue in their individual capacities. [Record No. 8, p. 7; Record
No. 10, p. 15]

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It is a “general precept of corporate law that a shareholder of a corporation does not
have a personal or individual right of action for damages based solely on an injury to the
corporation.” Gaff v. Fed. Deposit Ins. Corp., 814 F.2d 311, 315 (1987). Although there is a
well-recognized exception to this rule when “the shareholder suffers an injury separate and
distinct from that suffered by other shareholders, or the corporation as an entity,” id. (internal
quotation marks and citation omitted), the United States Court of Appeals for the Sixth Circuit
has “conclusively adopted the general rule that a shareholder does not have standing to bring
a direct cause of action under federal law when the only damage alleged is the diminution in
the value of corporate shares.” Id. at 317 (citing Warren v. Mfrs. Nat. Bank of Detroit, 759
F.2d 542, 544 (6th Cir. 1985)). Similarly, Kentucky courts have held that “[a] shareholder’s
rights are merely derivative unless he can show violation of a duty owed directly to him.
Depreciation in value of shareholder’s corporate stock is generally not the type of direct
personal injury necessary to sustain a direct cause of action.” Sahni v. Hock, 369 S.W.3d 39,
47 (Ky. App. 2010) (quoting NBD Bank v. Fulner, 109 F.3d 299, 301 (6th Cir. 1997)). “The
reasoning behind this rule is that a diminution in the value of corporate stock resulting from
some depletion of or injury to corporate assets is a direct injury only to the corporation; it is
merely an indirect or incidental injury to an individual shareholder.” Gaff, 814 F.2d at 315.
The plaintiffs have not plausibly alleged that they sustained any injury as shareholders
of the Tarter Corporations that is not indirect or incidental to the Tarter Corporations’
expenditure of costs and loss of cost savings. As a result, they lack standing to bring an
individual capacity action to redress those injuries. However, the plaintiffs assert that they
nonetheless have standing to sue Joshua Tarter in their individual capacities because they are
members of the Tarter LLCs, Joshua Tarter is manager of the Tarter LLCs, and “members of
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an LLC may bring an action both derivatively and in their individual capacities against
company managers.” [Record No. 1, ¶¶ 1-3, 19; Record No. 14, p. 11] In support, they cite
Griffin v. Jones, 170 F. Supp. 3d 956 (W.D. Ky. 2016), and Patmon v. Hobbs, 280 S.W.3d 589
(Ky. App. 2009).
Griffin and Patmon establish that, under Kentucky law, a managing member of a
limited liability company (“LLC”) owes fiduciary duties both to the LLC and to its individual
members. Griffin, 170 F. Supp. 3d at 965; Patmon, 280 S.W.3d at 595. However, these cases
do not address whether individual LLC members have standing to sue a managing member
when their only alleged injuries are derivative of injuries sustained by the LLC.
The courts that have considered that question have concluded that LLC members, like
corporate shareholders, lack standing to sue in their individual capacities when they have not
suffered any injury that is separate and distinct from the injury to the LLC or its other members.
Pixler v. Huff, 3: 11-cv-207, 2012 WL 3109492 (W.D. Ky. July 31, 2012) (“Kentucky courts
are likely to apply the [direct injury rule] to claims made in the LLC context. Therefore,
Plaintiff may maintain her claims against the Defendants only where she has suffered an injury
that is separate and distinct from that which would be suffered by other members or the LLC
as an entity.”); see also Wells Fargo Fin. Leasing v. Griffin, 5: 13-cv-75, 2014 WL 241778,
*7 (W.D. Ky. Jan. 22, 2014) (finding that when an LLC member’s injury is merely derivative
of an injury to the LLC, the LLC is the “real party in interest” under Federal Rule of Civil
Procedure 17, and the LLC member lacks standing to bring an individual capacity action). See
also KRS § 275.337(1) (“A member may maintain a direct action against a limited liability
company, another member, or a manager to redress an injury sustained by, or to enforce a duty
owed to, the member if the member can prevail without showing an injury or breach of duty
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to the company.”) (emphasis added). The Court agrees with its sister court in the Western
District of Kentucky this rule should apply to both corporate shareholders and LLC members.
The plaintiffs have not plausibly alleged that they sustained any injury as members of
the Tarter LLCs that is not indirect or incidental to the Tarter LLCs’ expenditure of costs and
loss of cost savings. As a result, they lack standing to bring an individual capacity action to
redress those injuries. Accordingly, the plaintiffs lack standing to maintain an individual
capacity action either as shareholders of the Tarter Corporations or as members of the Tarter
LLCs, and their individual capacity claims will be dismissed.
IV.
The plaintiffs also purport to bring this action in their derivative capacities on behalf of
the Tarter Companies. Federal Rule of Civil Procedure 23.1 provides for heightened pleading
standards when a shareholder or member seeks to bring such an action on a company’s behalf.
As relevant here, the plaintiff must “state with particularity” any effort made to prod the entity
into bringing the action on its own behalf, and any reason the plaintiff failed to make such an
effort or the effort was unsuccessful. Fed. R. Civ. P. 23.1(b)(3). Kentucky law similarly
provides that a shareholder or member seeking to bring a derivative action must plead with
particularity that they made a demand on the company to bring the action on its own behalf,
or that making such a demand would be futile. KRS 271B.7-400 (for corporations); KRS
275.337(2) (for LLCs). Kentucky law governs the demand and futility requirements to bring
a derivative action on behalf of a Kentucky company. See McCall v. Scott, 229 F.3d 808, 815
(6th Cir. 2001) (citing Kamen v. Kemper Fin. Servs. Inc., 500 U.S. 90, 96-97 (1991).
The term “demand” means a “demand to commence legal action.” See Sahni, 369
S.W.3d at 45 (construing KRS 271B.7-400); KRS 275.337(2) (providing that the demand must
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request that the relevant decision-makers “cause the company to bring an action to redress the
injury or enforce the right”). A demand for the production of certain information or an
investigation into the plaintiff’s allegations, unaccompanied by a demand to commence legal
action, is insufficient to satisfy this requirement. Sahni, 369 S.W.3d at 46. Here, the plaintiffs
allege that they demanded that Joshua Tarter fully disclose his relationship with QMC and
return all profits of QMC to the Tarter Companies on multiple occasions, and did so in the
presence of the other owners of the Tarter Companies on at least one occasion. [Record No.
1, ¶¶ 46-47, 97, 116-17] But because these requests were not demands to commence legal
action, they fail to satisfy the pre-suit demand requirement under Kentucky law.
However, the plaintiffs may nonetheless bring a derivative action if they allege with
particularity that making such a demand would have been futile. Sahni, 369 S.W.3d at 46. 7
The Complaint alleges that “[d]ue to ownership percentages” the owners of the Tarter
Companies are deadlocked regarding QMC issues, and making a demand for the Tarter
Companies to commence legal action would be futile. 8 [Record No. 1, ¶¶ 117-18] The

7

The plaintiffs incorrectly assert that “the Complaint need only plausibly allege futility.”
[Record No 14, p. 9 (citing Bassett v. Nat’l Collegiate Athletic Ass’n, 528 F.3d 426 (6th Cir.
2008)] “Federal Rule 23.1 of the Federal Rules of Civil Procedure requires that the plaintiff
‘allege with particularity’ the reasons for failing to make a pre-suit demand.” In re Ferro Corp.
Derivative Litig, 511 F.3d 611, 617 (6th Cir. 2008) (quoting McCall v. Scott, 239 F.3d 808,
815 (6th Cir. 2001) (alterations omitted)). Bassett does not hold otherwise.
8

The plaintiffs have not stated who has the authority to cause the Tarter Companies to bring
suit. However, their assertions that the Tarter Companies are deadlocked due to ownership
percentages, and that the plaintiffs own 50% of the Tarter Companies while the other 50% is
owned by Joshua Tarter and his two siblings indicate that such a decision is left to the plaintiffs,
Joshua Tarter, and Joshua Tarter’s two siblings. [Record No. 1, ¶¶ 17, 118] The plaintiffs’
response to the defendants’ motions to dismiss confirms that this is their position. [Record
No. 14, p. 5-11] Accordingly, the relevant decision-makers are the same for the Tarter LLCs
and the Tarter Corporations, and the same futility analysis applies to each of the Tarter
Companies.
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defendants contend that this allegation insufficiently pleads that making a demand would be
futile. [Record No. 8, p. 8-10; Record No. 10, p. 10-15]
The demand futility exception provides that “[w]here it appears that a demand for
action would be unavailing or, if granted, would be in unfriendly hands, such a demand is not
a condition precedent to the right of stockholders to sue on behalf of a corporation.” Sahni,
369 S.W.3d at 45 (quoting Maas v. Tyler, 316 S.W.2d 211, 213–14 (Ky. 1958)). Kentucky
courts have looked to Delaware case law when determining the contours of the demand futility
exception. Id. at 45-46; Allied Ready Mix Co. ex rel. Mattingly v. Allen, 994 S.W.2d 4, 8 (Ky.
App. 1998) (“Delaware cases are the leading cases in this subject area and have been followed
by other courts. This Court finds them persuasive in the case at bar.”).
Delaware law provides that where, as here, the plaintiffs do not challenge any conscious
decision of a corporation’s board of directors, “the court must determine ‘whether or not the
particularized factual allegations . . . create a reasonable doubt that, as of the time the complaint
is filed, a majority of the board of directors could have properly exercised [their] independent
and disinterested business judgment in responding to a demand.” McCall v. Scott, 239 F.3d
808, 816 (6th Cir. 2001) (quoting Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993))
(alterations added and omitted). “This is often the case when, by asking the board to cause the
corporation to enforce its rights, a shareholder would be effectively asking a majority of the
board of directors to cause the corporation to sue themselves.” Gross v. Adcomm, Inc., 478
S.W.3d 396, 402 (Ky. App. 2015) (emphasis in original).
Kentucky courts have presumed that when a member or shareholder seeks bring a
derivative action against a defendant that controls at least 50% of the company, a demand on
the company to bring suit against the defendant would be futile because the defendant could
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unilaterally reject the demand. See id. at 402-04; Sahni, 369 S.W.3d at 46. The plaintiffs
contend that the Court should apply that presumption in this case. [Record No. 14, p. 6-7]
However, the plaintiffs have not alleged that the defendants control 50% of the Tarter
Companies. The only defendant that allegedly has any ownership interest in the Tarter
Companies is Joshua Tarter, who owns 16.6%. [Record No. 1, ¶ 17] The plaintiffs own 50%,
and the remaining 33.4% is owned by Joshua Tarter’s siblings, who are not parties to this
action. [Id.] As a 16.6% owner, Joshua Tarter cannot unilaterally reject a demand for the
Tarter Companies to bring suit, and the presumption that such a demand would be futile is not
warranted.
Accordingly, to invoke the demand futility exception, the plaintiffs must plead with
particularity that Joshua Tarter’s siblings could not have properly exercised their independent
and disinterested business judgment in responding to a demand on the Tarter Companies to
bring this action. McCall, 239 F.3d at 816. The only allegations in the Complaint regarding
Joshua Tarter’s siblings are that the plaintiffs asked Joshua Tarter to disclose his relationship
with QMC and turn over the profits made from QMC in their presence, and that they have not
responded to an e-mail the plaintiffs sent to Joshua Tarter making the same requests. [Id. ¶¶
46, 116-18] The plaintiffs argue that, because Joshua Tarter’s siblings “refused to take any
remedial action against Tarter or Gregory, or even insist honestly and disclose their fraud, it is
plausible these shareholders would not initiate litigation against Tarter and Gregory.” [Record
No. 14, p. 8-9] But plausibility is not the standard. Instead, the plaintiff must make
“particularized factual allegations” sufficient to create “a reasonable doubt” that Joshua
Tarter’s siblings could not have properly exercised their independent and disinterested
business judgment. McCall, 239 F.3d at 816. The fact that Joshua Tarter’s siblings did not
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respond to the plaintiffs’ earlier requests—which were not demands to commence litigation—
does not create a “reasonable doubt” regarding whether they would have been able to exercise
their independent business judgment in responding to a demand to sue.
In their response to the defendants’ motion to dismiss, the plaintiffs suggest that Joshua
Tarter’s siblings are unable to exercise their disinterested business judgment because of their
close personal connection with Joshua Tarter. [Record No. 14, p. 10 (“[Joshua Tarter’s]
siblings, obviously in a difficult personal position, simply refused to engage in addressing or
resolving these issues.”)] The plaintiffs also suggest that if Joshua Tarter’s siblings were to
join this litigation, it could place control of the litigation in “unfriendly hands” because if
Joshua Tarter is found liable he may be forced to tender his stock to the Tarter Companies as
restitution, and as a result Joshua Tarter and his siblings would no longer control 50% of the
Tarter Companies. [Record No. 14, p. 10-11]
As an initial matter, the plaintiffs failed to make these assertions in their Complaint,
and may not amend their Complaint by embellishing their factual allegations in their
subsequent briefs. Brown v. Accenture Fed. Servs., 2016 WL 3298543, at *5 (E.D. Ky. June
13, 2016) (citing Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1107 (7th Cir. 1984)).
Further, even the assertions in the plaintiffs’ response fail to sufficiently allege that Joshua
Tarter’s siblings could not have exercised their independent business judgment in responding
to a demand to sue. Under Delaware law, a director is considered “interested” if he or she: (i)
received a personal financial benefit that was not shared by the other stockholders from the
challenged conduct; (ii) might suffer a “materially detrimental impact” from the proposed legal
action; or (iii) was incapable, due to domination and control, of objectively evaluating a

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demand to assert the company’s claims. Id.; see also White v. Lunsford, 2005-CA-1775, 2006
WL 2787469, *5 (Ky. App. Sept. 26, 2006) (quoting Rales, 634 A.2d at 936).
The plaintiffs do not allege that Joshua Tarter’s siblings received a personal financial
benefit from the conduct at issue. In fact, they expressly assert that Joshua Tarter’s siblings
did not profit from the scheme. [Record No. 14, p. 22 (“[W]hen Tarter devised his scheme to
embezzle millions of dollars from the family business, he did not choose his siblings to enjoy
the fruits of the fraud, but rather chose Gregory and Chen.”)] Also, the plaintiffs have not
indicated that Joshua Tarter’s siblings “would have been unwilling to act on behalf of the
company because they would have been subject to a ‘substantial likelihood’ of liability
stemming from legal action.” White, 2006 WL 2787469, *6. Although it is true that if Joshua
Tarter was forced to give up his ownership interest he and his siblings would no longer control
50% of the Tarter Companies, this same thing can be said of any two owners of the Tarter
Companies. The plaintiffs have pled no facts indicating that the desire to maintain control of
50% of the Tarter Companies together with Joshua Tarter would undermine Joshua Tarter’s
siblings’ independent judgment. [Record No. 1, ¶ 17]
Finally, although personal relationships may sometimes undermine a director’s
independence, “the plaintiff must allege specific facts that would demonstrate that the
challenged directors were controlled by the offending directors through personal or other
relationships.” White, 2006 WL 2787469, *6 (citing Aronson v. Lewis, 473 A.2d 805 (Del.
1984). A conclusory allegation that a director cannot be independent due to a personal
relationship, without more, is not sufficient. Mayer v. Adams, 167 A.2d 729, 732 (Del. Ch.
1961). The plaintiffs have provided no more than a conclusory allegation that the personal
relationship between Joshua Tarter and his siblings would undermine the siblings’
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independence, especially given that Joshua Tarter’s siblings are related to all of the owners of
the Tarter Companies, and not just Joshua Tarter. [Record No. 1, ¶ 17]
In short, the plaintiffs have failed to adequately plead that making a demand on the
Tarter Companies to bring this action would have been futile. As a result, they have failed to
satisfy the statutory prerequisites to bring a derivative action on the Tarter Companies’ behalf,
and their derivative capacity claims will be dismissed for lack of standing. Fed. R. Civ. P.
23.1(b)(3); KRS 271B.7-400; KRS 275.337(2).
V.
The plaintiffs lack standing to bring this action in their individual capacities because
they have not alleged that they suffered any injury that is separate and distinct from the injury
sustained by the Tarter Corporations. Further, they lack standing to bring this action in their
derivative capacities because they have failed to adequately plead that they demanded the
Tarter Companies to sue on its own behalf or that such a demand would have been futile. As
a result, the Court lacks jurisdiction to decide the plaintiff’s claims. 9 Accordingly, it is hereby
ORDERED as follows:
1.

The defendants’ motions to dismiss [Record Nos. 8, 10] are GRANTED.

2.

The claims asserted by the plaintiffs against Defendants Joshua Tarter, Donald

Tarter and Thomas Gregory are DISMISSED, in their entirety, without prejudice. 10

9

Because the Court finds that it lacks jurisdiction over this matter, it need not address the
defendants’ alternative arguments to dismiss under Federal Rule of Civil Procedure 12(b)(6).
See Edwards v. Walter Jones Constr., 98-4366, 2000 WL 302710, *1 (6th Cir. 2000).
10

A final and appealable judgment will be entered upon resolution of claims asserted against
Defendant Hong Kong QMC Industry Co. On January 17, 2018, an entry of default was
entered by the Clerk of the Court against this defendant [Record No. 25] but a Default
Judgment has not been sought or entered as of this date.
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This 22nd day of January, 2018.

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