Hosack v. Utopian Wireless Corporation et al
Filing
18
MEMORANDUM OPINION (c/m to Plaintiff and Mr. Geist 9/30/11 sat). Signed by Chief Judge Deborah K. Chasanow on 9/30/11. (sat, Chambers)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
:
DOUGLAS HOSACK
:
v.
:
Civil Action No. DKC 11-0858
:
UTOPIAN WIRELESS CORP., et al.
:
MEMORANDUM OPINION
Presently
pending
and
ready
for
resolution
in
this
shareholder derivative action is the parties’ joint motion for
voluntary dismissal.
(ECF No. 15).
The relevant issues have
been briefed and the court now rules pursuant to Local Rule
105.6, no hearing being deemed necessary.
For the reasons that
follow, this motion will be granted.
I.
Background
The following facts are set forth in the complaint.
No. 2).
(ECF
Defendant Utopian Wireless Corporation is a holder and
lessor of broadband wireless spectrum rights in the 2.5 GHz
EBS/BRS spectrum band regulated by the Federal Communications
Commission.
Prior to November 18, 2010, Utopian’s board of
directors consisted of three members: (1) Defendant Rudolph J.
Geist, chairman and chief executive officer; (2) Holly P. Geist,
chief financial officer and the spouse of Mr. Geist; and (3)
Plaintiff Douglas Hosack, the chief operating officer.
Mr. and
Mrs. Geist and Plaintiff are the corporation’s three largest
shareholders.
In 2009, Mr. Geist proposed that the corporation issue him
a loan in the amount of one million dollars.
expressed
concern
regarding
certain
aspects
When Plaintiff
of
the
proposed
transaction, Mr. Geist became enraged, physically intimidated
Plaintiff, and threatened to terminate his employment.
Under
pressure, Plaintiff reluctantly agreed to approve the loan.
March
12,
2009,
corporation,
a
Plaintiff
promissory
executed,
note
on
behalf
authorizing
the
of
On
the
immediate
distribution of one million dollars to Mr. Geist.
The note
provided that repayment of the principal and interest would be
made
by
the
Disbursement
earlier
Date”
or
of
“the
“the
date
Third
on
Anniversary
which
the
of
the
Lender
has
available a total cash balance in all its accounts of less than
$50,000
and
requires
operational expenses.”
1.5).
additional
cash
funding
for
continued
(ECF No. 2-1, promissory note, at ¶
The note was secured by Mr. Geist’s shares of Utopian
stock, which the company was entitled to reclaim and cancel upon
default, “based on the fair market value of the Collateral at
the time of a Default . . . provided that the fair market value
of the common shares . . . shall not be less than $4.00 per
share.”
(ECF No. 2-1, security agreement, at ¶¶ 2, 7).
2
In 2010, Utopian was awarded approximately eight million
dollars in grants and over two million dollars in loans under
the Broadband Initiatives Program of the Rural Utility Service
of the Department of Agriculture, which was part of the American
Recovery and Reinvestment Act of 2009 (“the RUS funding”).
On
or about November 5, 2010, Plaintiff took certain action to
ensure that false certifications were not filed with respect to
the
RUS
contrary.
funding,
On
despite
November
Mr.
Geist’s
18,
2010,
Plaintiff’s employment as a result.1
instructions
Mr.
Geist
to
the
terminated
As of that date, Mr. Geist
had not repaid any portion of the loan.
On January 25, 2011, Plaintiff received a preemptive rights
notice and disclosure letter soliciting the sale of additional
Utopian stock to current shareholders.
In response, Plaintiff,
via counsel, sent a letter to the board of directors demanding
that it refrain from soliciting investment until the Geist loan
had been repaid.
On
February
21,
2011,
Plaintiff
received
an
amended
solicitation notice stating, in part:
Since
November
2010,
Utopian
has
been
surviving on funds drawn on a limited line
of credit made available to the Corporation
1
Plaintiff instituted a separate law suit alleging, inter
alia, wrongful termination.
See Hosack v. Utopian Wireless
Corp., et al., Civ. No. DKC 11-0420.
That case was closed on
August 24, 2011, upon the filing of a stipulation of dismissal
with prejudice.
3
from Morgan Stanley Inc., which was provided
solely due to the personal guarantee of
Rudolph
J.
Geist,
Utopian’s
CEO
and
principal stockholder. To date, Utopian has
drawn down $350,000 on the line of credit.
The
line
of
credit
is
subject
to
cancellation at any time upon notice from
Morgan Stanley for any reason, or in the
event Mr. Geist withdraws the guarantee.
Mr. Geist has notified Utopian that he will
be withdrawing the guarantee.
(ECF No. 2-6, at 1-2) (“the Second Solicitation”).
The Second
Solicitation further stated that if additional capital was not
raised
soon,
Utopian
“would
be
forced
to
immediately
and
completely discontinue operations, and will have no ability to
assist its spectrum lessors in meeting the Substantial Service
requirements, thereby putting all of its spectrum lease assets
at substantial risk of forfeiture on May 1, 2011.”
(Id. at 3).
The notice also warned Utopian shareholders, “if you elect not
to purchase the convertible notes, your equity in Utopian will
be
subject
to
substantial
dilution.”
(Id.
at
1
(emphasis
omitted)).
On March 1, 2011, Plaintiff, proceeding pro se, commenced
this action against Utopian and Mr. Geist by filing a complaint
in the Circuit Court for Montgomery County, Maryland.
2).
(ECF No.
The complaint seeks: (1) a temporary restraining order
enjoining
the
Solicitation;
cancellation
private
(2)
of
a
the
placement
temporary
Morgan
restraining
Stanley
4
proposed
line
of
by
the
order
Second
enjoining
credit;
(3)
an
injunction
against
the
Second
Solicitation
without
full
disclosure by Utopian; (4) an injunction against cancellation of
the line of credit pending repayment of the Geist loan; (5) an
injunction against Geist’s participation in financing of Utopian
pending his repayment of the loan; (6) equitable appointment of
a
receiver;
(7)
equitable
appointment
of
an
independent
attorney; and (8) equitable rescission of the Geist loan.
Along
with the complaint, Plaintiff filed two emergency motions for
temporary
restraining
orders,
seeking
to
enjoin
the
Second
Solicitation and cancellation of the line of credit, which were
heard and denied by the circuit court on March 1, prior to
service of the complaint.
Defendants timely removed to this court on the basis of
diversity of citizenship, and Plaintiff did not challenge the
propriety of removal.
On April 7, 2011, Utopian moved to stay
these proceedings for six months pending completion of a special
litigation
committee
investigation
and
requested a brief extension of the stay.
report,
and
Mr.
Geist
Plaintiff consented to
the stay and did not oppose Mr. Geist’s requested extension.
On
May 3, the court granted Defendants’ motions and stayed all
proceedings in this litigation until November 3, 2011.
(ECF No.
14).
On August 24, 2011, the parties jointly filed the pending
motion for voluntary dismissal with prejudice, attaching a fully
5
executed settlement agreement and release.
(ECF No. 15).2
The
following day, the court issued an order requiring Utopian to
give notice of the proposed dismissal of the derivative claims
to the remaining Utopian shareholders, providing ten days for
the shareholders to file any objections.
(ECF No. 16).
Utopian
provided notice to the shareholders on August 30, 2011 (ECF No.
17), and no objection has been filed.
II.
Standard of Review
Pursuant to Federal Rule of Civil Procedure 23.1(c), “[a]
derivative
action
may
be
settled,
voluntarily
dismissed,
or
compromised only with the court’s approval” after “[n]otice . .
. [has been] given to shareholders or members in the manner that
the court orders.”
As the United States Court of Appeals for
the Fifth Circuit explained in Maher v. Zapata Corp., 714 F.2d
436, 455 (5th Cir. 1983):
Settlements of shareholder derivative
actions are particularly favored because
such litigation is “notoriously difficult
and unpredictable.” Schimmel v. Goldman, 57
F.R.D. 481, 487 (S.D.N.Y. 1973); Republic
National Life Insurance Company v. Beasley,
73 F.R.D. 658, 667 (S.D.N.Y. 1977); Haudek,
[The
Settlement
and
Dismissal
of
2
The settlement agreement purports to resolve all claims
brought by Plaintiff in the derivative action and in the prior
employment and contract dispute (Civ. No. DKC 11-0420).
As
consideration supporting dismissal of the derivative action, the
parties provide mutual releases and covenants not to sue or
disparage.
The agreement further provides that the Utopian
defendants will not seek reimbursement of costs or attorneys’
fees from Plaintiff for filing the derivative action.
6
Stockholders’
Actions-Part
II:
The
Settlement, 23 Sw.L.J. 765, 793 (1969)]. The
courts, therefore, do not lightly reject
such settlements. See Florida Trailer &
Equipment Company v. Deal, 284 F.2d 567, 571
(5th
Cir.
1960).
Before
approving
the
settlement of a shareholders’ derivative
action, however, the district court must
determine that there has been no fraud or
collusion in arriving at the settlement
agreement, and that it is fair, reasonable,
and adequate. Young v. Katz, 447 F.2d 431,
433 (5th Cir. 1971); Miller v. Republic
National Life Insurance Company, 559 F.2d
[426, 428-29 (5th Cir. 1977)]. In making
these determinations, the district court
enjoys wide discretion, and in exercising
its discretion, the court should not decide
the merits of the action or attempt to
substitute its own judgment for that of the
parties. Lewis v. Newman, 59 F.R.D. 525, 527
(S.D.N.Y.1973).
The
district
court’s
approval of a settlement agreement is not
therefore to be disturbed unless the court
“clearly abused its discretion.” Young, 447
F.2d at 432; Miller, 559 F.2d at 429.
However, the court, upon consideration
of a proposed settlement, must state its
reasons for approving it and should examine
a proposed settlement in light of the
objections raised to it, and set forth with
sufficient detail a reasoned response to
them, including supportive findings of fact
and conclusions of law as may be necessary,
so that an appellate court, in the event of
an appeal, will have a basis for conducting
a meaningful review of the exercise of the
district
court’s
discretion.
Cotton
v.
Hinton, 559 F.2d 1326, 1330-31 (5th Cir.
1977).
(footnote omitted).
7
III. Analysis
In
the
memorandum
supporting
the
motion
for
voluntary
dismissal, the parties set forth their agreement as to events
occurring since the filing of the complaint that have either
rendered moot the relief sought by Plaintiff or clarified that
certain claims are not cognizable.
Copies of the motion for
voluntary dismissal, including the supporting memorandum, were
provided to each of the Utopian shareholders and, as noted, no
objection has been filed.
The
Second
complaint
primarily
Solicitation,
which
challenges
Plaintiff
the
propriety
feared
would
of
result
the
in
dilution of the shares of Utopian stock held by stockholders who
declined to participate.
The parties now agree that:
After the Circuit Court for Montgomery
County denied Plaintiff’s request for a
temporary
restraining
order
that
would
prevent the Stock Solicitation, Utopian
issued convertible notes that Utopian had
the right to repay in full at any time prior
to July 31, 2011.
Utopian exercised its
right to repay the convertible notes, and
has repaid in full all amounts due under all
convertible notes issued, such that no
convertible
notes
remain
outstanding.
Therefore, there has been no change in
Utopian’s ownership, or dilution of any
shareholder’s interest in Utopian.
On
August
9,
2011,
Utopian
provided
its
shareholders with notice of these events.
(ECF
No.
Plaintiff
15-1,
sought
at
to
2).
As
the
Second
enjoin,
has
now
8
Solicitation,
taken
place
and
which
the
convertible notes issued pursuant thereto have been repaid by
the company, the concern that dilution might result has not come
to fruition.
Accordingly, the derivative claims in this regard
have been rendered moot.
Plaintiff’s claims regarding the loan to Mr. Geist were
based
on
his
belief
that
Utopian’s
reported
near-insolvency
triggered the early repayment provisions of the loan.
While
that may or may not have been the case, the parties agree that
Utopian is now on more solid financial footing, as evidenced by
its repayment of all amounts due under the convertible notes
that it raised in the Second Solicitation.
Thus, the parties
assert, “[t]here is no need to trigger an early repayment of the
Loan as Utopian is not in need of cash from the repayment . . .
which is due in March 2012,” i.e., the third anniversary of the
disbursement
date.
shareholder
contends
(Id.
at
at
this
3).
To
the
extent
point
that
the
early
that
no
repayment
provisions were triggered, and the time for repayment of the
loan has not yet passed, the derivative claims in this regard
appear to be premature.
The claims seeking to enjoin Mr. Geist’s withdrawal of his
guaranty of the Morgan Stanley line of credit were related to
the company’s threatened insolvency; indeed, Plaintiff alleged
that because “this harm threatens Utopian’s very survival, it
would be both substantial and irreparable.”
9
(ECF No. 2 ¶ 49).
The circuit court denied Plaintiff’s request for a temporary
restraining order enjoining cancellation of the line of credit,
however.
Although it is unknown whether the guaranty has been
withdrawn, there is no dispute that Mr. Geist would be within
his rights to do so and the threatened fiscal crisis appears to
have been averted.
As no shareholder has noted an objection to
the dismissal of these claims, there appears to be no reason why
the requested relief should not be granted.3
In sum, the court finds no evidence of fraud or collusion
in the parties’ agreement to settle this case, and further finds
that the proposed settlement is fair, reasonable, and adequate.
IV.
Conclusion
For
the
foregoing
reasons,
the
voluntary dismissal will be granted.
parties’
motion
for
A separate order will
follow.
________/s/_________________
DEBORAH K. CHASANOW
United States District Judge
3
Because the substantive claims in this action appear to no
longer be viable, the appointment of a receiver or courtappointed
attorney,
as
requested
in
the
complaint,
is
unnecessary.
10
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