Natale v. The Espy Corporation et al
Filing
36
Judge Michael A. Ponsor: MEMORANDUM AND ORDER entered. As follows: For the reasons stated. Defendants Motion to Dismiss (Dkt. No. 8 ) is hereby ALLOWED as to Counts III, V, VI, VII and VIII, and DENIED as to Counts I, II, and IV. Defendants Alternat ive Motion to Transfer Venue is also DENIED. The case is hereby referred to Magistrate Judge Kenneth P. Neiman for a pretrial scheduling conference pursuant to Fed. R. Civ. P. 16. It is So Ordered. See the attached memo and order for complete details. (Lindsay, Maurice)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
SUZANNE M. NATALE, as
Administratrix of The
ESTATE OF RICHARD NATALE,
Plaintiff
v.
THE ESPY CORPORATION,
WHITNEY E. HARRIS,
MARK E. SMITH, and
THOMAS W. POTTHAST, Jr.,
Defendants
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) C.A. NO. 13-cv-30008-MAP
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MEMORANDUM AND ORDER REGARDING
DEFENDANTS’ MOTION TO DISMISS
OR, IN THE ALTERNATIVE, TO TRANSFER VENUE
(Dkt. No. 8)
March 10, 2014
PONSOR, U.S.D.J.
I.
INTRODUCTION
Plaintiff, administratrix of her deceased husband’s
estate, brought suit against Defendants for, inter alia,
diluting the value of the estate’s stock in Defendant Espy
Corporation (“Espy”).
Defendants are Mark E. Smith, a
resident of Texas and President and Treasurer of Espy;
Thomas W. Potthast, Jr., a resident of Florida and Vice-
President of Espy; Whitney E. Harris, a resident of Texas
and Secretary of Espy; and Espy, a closely held Scorporation incorporated in Texas with its principal place
of business in Austin, Texas.
Plaintiff has asserted six common law claims against
Defendants -- unjust enrichment, breach of fiduciary duty,
conversion, civil conspiracy, fraud, and theft -- and two
counts under the federal civil RICO statute.
1961-1965.
18 U.S.C. §§
Defendants have moved to dismiss the complaint.
(Dkt. No. 8.)
In the alternative, Defendants request that
the case be transferred to the Western District of Texas.
Because Plaintiff successfully crosses the
“plausibility” threshold with respect to her breach of
fiduciary duty, unjust enrichment, and civil conspiracy
claims, but fails to do so with respect to the others, the
court will allow Defendants’ Motion to Dismiss in part.
Given the hardship a change of venue would create for
Plaintiff, the court will also deny Defendants’ Motion to
Transfer Venue.
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II.
BACKGROUND1
Plaintiff Suzanne M. Natale, widow of Richard Natale
(“Richard”), was the administratrix of her deceased
husband’s estate.
She was also the representative for
Richard’s two beneficiaries, their sons.
While he was
alive, Richard helped develop Espy Corporation and served as
its Chief Software Engineer.
He worked from his home in
Massachusetts.
On July 26, 2006, Richard unexpectedly died in a car
accident.
At the time of his death, he owned 300 shares of
common stock in Espy, or roughly 24% of all issued and
outstanding shares.
The remainder of the company was owned
by Defendants Smith, Potthast, and Harris.
Richard’s shares
in Espy were the only asset in his estate.
Since Richard’s death, Defendants have allegedly
engaged in a pattern of wrongful conduct.
First, Defendants
deliberately diluted Plaintiff’s ownership in Espy by
1
As with all motions to dismiss, the court accepts the
well-pleaded factual allegations contained in the complaint,
drawing reasonable inferences in Plaintiff’s favor. Gargano
v. Liberty Int’l Underwriters, Inc., 572 F.3d 45, 48 (1st
Cir. 2009). The facts are therefore drawn from Plaintiff’s
complaint. (Dkt. No. 1).
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issuing new stock to every other shareholder.
In 2008 and
2009, the individual Defendants provided themselves new
shares, but they failed to distribute any additional ones to
the estate.
Further, Defendants refused to turn over
minutes of the “rump” meeting where this decision was made.
As a result of that dilution, Defendants have allegedly
misrepresented the estate’s share of ownership in yearly IRS
Schedule K-1 filings.
(“K-1s”)
After the issuance of the
new stock, the 2009 K-1s incorrectly valued the estate’s
ownership at 12%.
The K-1s were sent to Plaintiff via U.S.
mail.
Finally, Defendants have failed to pay any dividends to
Plaintiff since Richard’s death.
They also have failed to
provide Plaintiff advance notice that no dividends would be
paid.
This occurred at the same time Defendants decided to
reward themselves with increased salaries and bonuses.
The absence of any payments burdened Richard’s estate
severely.
The K-1s allocated income to its shares and thus
created a substantial tax burden.
In total, the estate has
been responsible for over $227,000 in taxes for the years
2006, 2009, 2010, and 2011, despite the absence of any
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financial distribution from the corporation during this
time.
The K-1s for those years were also distributed via
U.S. mail.
Given these events, Plaintiff has asserted two federal
claims against Defendants: a violation of civil RICO, 18
U.S.C. §§ 1961-1965 (Count VII), and a claim for injunctive
relief under RICO, 18 U.S.C. § 1964(a) (Count VIII).
She
has, as noted above, also raised six common law claims:
unjust enrichment (Count I); breach of fiduciary duty (Count
II); conversion (Count III); civil conspiracy (count IV);
fraud (count V); and, theft (Count VI).
The case falls
under both federal question, 28 U.S.C. § 1331, and diversity
jurisdiction, 28 U.S.C. § 1332.
III.
A.
DISCUSSION
Motion to Dismiss
A motion to dismiss will be denied if Plaintiff’s
complaint contains “sufficient factual matter” to sustain a
claim for relief that is actionable as a matter of law and
“plausible on its face.”
Ashcroft v. Iqbal, 556 U.S. 662,
668 (2009) citing Bell Atl. Co. v. Twombly, 550 U.S. 544,
570 (2007); Fed. R. Civ. P. 12(b)(6).
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If a complaint fails
to set forth “factual allegations, either direct or
inferential, respecting each element necessary to sustain
recovery under some actionable legal theory,” then dismissal
is appropriate.
Centro Medico del Turabo, Inc. v. Feliciano
de Melecio, 406 F.3d 1, 6 (1st Cir. 2005)(internal citations
omitted).
For claims where “fraud lies at the core of the
action,” Rule 9(b) renders the pleading requirement more
stringent.
In these cases, the plaintiff must usually
specify the “who, what, where and when of the allegedly
false or fraudulent representation.”
Alt. Sys. Concepts,
Inc. v. Synopsis, Inc., 374 F.3d 23, 29 (1st Cir.
2004)(citations omitted).
Plaintiff must also plead
specific facts establishing intent –- that is, evidence
demonstrating that the defendant knew the alleged
representation was false or misleading.
N. Am. Catholic
Educ. Programming Found., Inc. v. Cardinale, 567 F.3d 8, 13
(1st Cir. 2009).
The parties spend a significant amount of their effort
disputing Plaintiff’s federal RICO claims.
Given this, the
court will first address those claims, before turning to
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Plaintiff’s common-law contentions.
1.
Federal RICO claims: Counts VII and VIII
Plaintiff brings one substantive count under RICO, 18
U.S.C. §§ 1961-1965, and seeks injunctive relief under 18
U.S.C. § 1964.2
Civil RICO is a “quasi-criminal” remedy
that permits a plaintiff to recover from defendants who
commit particularly reprehensible acts.
Figueroa Ruiz v.
Alegria, 896 F.2d 645, 650 (1st Cir. 1990).
To plead a
cause of action under RICO successfully, it is not enough
merely to allege a conspiracy.
Instead, a plaintiff must
offer sufficient allegations demonstrating: “(1) conduct;
(2) of an enterprise; (3) through a pattern; (4) of
racketeering activity.”
Efron v. Embassy Suites (Puerto
Rico), Inc., 223 F.3d 12, 21 (1st Cir. 2000).
A plaintiff
must also establish that the RICO violation was a cause-infact and proximate cause of any alleged injuries.
Holmes v.
Sec. Investor Prot. Corp., 503 U.S. 258, 268 (1992).
Defendants, in Plaintiff’s view, conspired to commit
mail fraud, 18 U.S.C. §§ 1341 & 1343, and conspired to
2
In order to obtain injunctive relief, a party must
establish a substantive violation. § 1964(a). These two
claims can therefore by analyzed in one discussion.
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violate the state extortion law, Mass. Gen. Laws ch. 271, §
79(b).
For the reasons set forth below, however, the
complaint fails adequately to plead either of these criminal
law violations as predicate offenses for RICO purposes.
Moreover, the complaint fails to show how these violations
amounted to a “pattern” of racketeering activity.
As a
result, the RICO claims must be dismissed.
a.
Racketeering Activity
“Racketeering activity” can take many forms, including:
counterfeiting, embezzlement, witness tampering,
trafficking, and mail and wire fraud.
1961(1)(B).
18 U.S.C. §
Certain state criminal offenses, such as
“murder, kidnaping, gambling, arson, robbery, bribery, [and]
extortion,” can also constitute predicate offenses.
Id.
The first predicate offense Plaintiff alleges is a
violation of the federal mail and wire fraud statute.
To
succeed on this claim, Plaintiff must demonstrate: (1) a
scheme to defraud or obtain money or property by means of
false or fraudulent pretenses; (2) the defendant’s knowing
and willful participation in this scheme with the intent to
defraud, or to obtain money or property by means of false or
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fraudulent pretenses; and (3) the use of the U.S. mail in
furtherance of this scheme.
McEvoy Travel Bureau, Inc. v.
Heritage Travel, Inc., 904 F.2d 786, 790 (1st Cir. 1990).
Plaintiff anchors her mail fraud claim on the allegedly
fraudulent K-1s.
By using the U.S. mail to distribute these
documents, Defendants, according to Plaintiff, committed
mail fraud.
This theory is not only insufficient under the
heightened Rule 9(b) pleading standard triggered in a RICO
offense grounded in fraud, Feinstein v. Resolution Trust
Co., 942 F.2d 34, 42 (1st Cir. 1991), but cannot even
overcome the meeker “plausibility” threshold of Rule
12(b)(6).
First, Plaintiff cannot show that any of Defendants’
“statements” were false or misleading.
Plaintiff contends
that her stock was diluted and that the K-1s documenting
this dilution were misrepresentations.
However, Plaintiff
cannot have it both ways –- if her stock was diluted, which
the court takes as true, then the K-1s were necessarily
accurate.
This alone is enough to undermine Plaintiff’s
mail fraud claim.
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Second, Plaintiff fails to present facts suggesting
that Defendants had any specific intent to defraud.
Plaintiff contends that Defendants’ goal was to put
financial pressure on her by mailing her the K-1s.
She does
not, however, dispute Defendants’ legal obligation to
distribute the documents.
26 U.S.C. § 6037(b).
No facts in
the complaint suggest that Defendants, by mailing the K-1s,
were doing anything more or less than complying with their
obligations under federal law.
Plaintiff presents an additional predicate racketeering
offense: extortion under state law.
The extortion law
penalizes any communication that “threatens an economic
injury to another, or threatens to deprive another of an
economic opportunity, with intent to compel that person to
do any act, involving the use or disposition of anything of
value against his will.”
Mass. Gen. Laws ch. 271, § 39(b).
Defendants violated this statute, according to
Plaintiff, “knowing that the Estate was unable to pay
federal and state taxes, interest and penalties, and
deprive[d] it of benefits of its ownership in Espy.”
(Compl. 14, Dkt. No. 1.)
In other words, they sent the K-1s
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to put pressure on the estate and squeeze it out of the
company.
While this conduct may have been unfair, it does
not constitute extortion as a matter of law.
To begin with, the K-1s cannot in themselves be
construed as a threat.
Plaintiff argues that the K-1s were
“implicit” threats aimed at placing financial pressure on
Plaintiff.
As noted above, however, Espy is required to
issue annual K-1s to its shareholders as a matter of federal
law.
26 U.S.C. § 6037(b).
Defendants cannot suffer
liability for distributing a communication they were
required to mail.
Moreover, even if the K-1s were false, nothing about
the documents were extortionate.
Plaintiff does not present
facts illustrating an attempt by Defendant to gain
“something of value from another with his consent induced by
the wrongful use of force, or fear of threats.”
Scheidler
v. Nat’l Org. for Women, Inc., 537 U.S. 393, 409 (2003)
(citations omitted).
As the Supreme Court has made clear,
an extortion claim will only serve as a basis for a RICO
violation when it is “capable of being generically
classified as extortionate.”
Id.
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Even if the claim
technically falls into the language of a state’s law, a RICO
offense grounded in extortion necessarily requires a
defendant to make a threat to obtain something of value.
At best, Plaintiff can show that Defendants were trying
to decrease her ownership interest in the company.
She
cannot, however, show that Defendants employed any “threats”
to obtain something from her.
Indeed, she fails even to
allege what Defendants were purportedly attempting to gain.
In sum, Plaintiff’s failure to plead two predicate
offenses is fatal to her RICO claims.
118 F.3d 886, 889 (1st Cir. 1997).
Ahmed v. Rosenblatt,
Even if this were not
the case, Plaintiff’s RICO claims would fail for a second
reason.
b.
Pattern of Activity
To differentiate single acts of wrongdoing from
consistent reprehensible conduct, civil RICO includes a
“pattern” requirement.
Two predicate offenses are required
to establish a pattern, and they must be connected to one
another and “amount to or pose a threat of continued
criminal activity.”
N. Bridge Assoc., Inc. v. Boldt, 274
F.3d 38 (1st Cir. 2001).
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The First Circuit has provided helpful guidance in this
area.
In Efron v. Embassy Suites (Puerto Rico), Inc., a
minority partner in an LLP filed a RICO suit against his
four partners for intentionally diluting the minority’s
interest in the corporation.
223 F.3d 12 (1st Cir. 2000).
The plaintiffs accused the defendants of committing
seventeen acts of mail fraud.
The Court of Appeals found
that each alleged incident of mail fraud was aimed at one
single goal: to transform the partnership by diluting the
minority interest.
Id. at 18.
The court said, “RICO claims
premised on mail or wire fraud must be particularly
scrutinized because of the relative ease with which a
plaintiff may mold a RICO pattern from allegations that,
upon closer scrutiny, do not support it.”
(citations omitted).
Id.
at 20
Though Plaintiff described a number of
different incidents, no pattern was ultimately established.
To reach that conclusion, the Efron court listed a
number of factors to consider when determining whether a
broad, continuous pattern of criminal activity exists.
These include: (a) whether there was a single victim or
multiple victims; (b) whether the defendant’s acts were
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limited to a single scheme or multiple schemes; (c) the
duration of the scheme; and (d) whether the scheme had a
singular, fixed objective and finite end point, or whether
it threatened to continue indefinitely.
Id. at 18.
Collectively, the factors suggest that the term “pattern”
represents a broad scheme, spanning a significant period of
time, continuing into the future, and targeting a number of
individuals.
See, e.g., Sys. Mgmt., Inc. v. Loiselle, 303
F.3d 100 (1st Cir. 2002)(multiple acts of mail fraud in
connection with a single set of state contracts did not
create a “pattern” for RICO purposes)
Like the plaintiff in Efron, Plaintiff here cannot
establish a “pattern” of racketeering activity.
At best,
Plaintiff’s complaint alleges a single scheme, aimed at a
single victim, with a single goal –- to dilute Plaintiff’s
interest in the company.
No facts suggest that the alleged
conspiracy included any other victims, that it was a
standard part of Defendants’ business, or that it would
continue into the future.
Absent such facts, Efron requires
dismissal.
In sum, because Plaintiff fails to establish any RICO
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predicate offense and cannot show a pattern of behavior, her
RICO claims cannot survive Defendants’ motion.3
2.
Common Law Claims: Counts I-VI
On claims arising under diversity jurisdiction, a
district court will generally apply the choice-of-law
provisions of the state in which the court sits.
Mariasch
v. Gillette Co., 521 F.3d 68, 71 (1st Cir. 2008)(citations
omitted).
In most cases Massachusetts relies on the
“functional approach” to determine which state’s law
applies.
Bushkin Assoc., Inc. v. Raytheon Co., 393 Mass.
622, 631 (1985).
Under this analysis, the court applies the
law of the state with the most significant relationship to
the underlying events.
The general choice-of-law rules in Massachusetts may be
supplanted, however, by the “internal affairs doctrine.”
Harrison v. NetCentric Corp., 433 Mass. 465, 471-72 (2001).
Under this analysis, a court shall apply the law of the
state of incorporation “in matters relating to the internal
3
Defendants also allege that Plaintiff fails the
causality prong of the RICO analysis. Given the court’s
finding on the other, predominant RICO requirements, a
discussion on that argument is unnecessary.
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affairs of a corporation . . . such as the fiduciary duty
owed to shareholders.”
Id. at 470; see, e.g., In re
Verisign Inc. Derivative Litig., 531 F. Supp. 2d 1173, 1215
(N.D. Cal. 2007)(finding that the internal affairs doctrine
can cover claims for: breach of fiduciary duty; accounting;
unjust enrichment; recession; constructive fraud; waste;
breach of contract; gross management; and restitution.)
This rule allows a corporation to conform its internal
affairs to the laws of one state, rather than the demands of
multiple, potentially conflicting, sets of laws.
Here, Defendant Espy is a Texas corporation.
All of
the claims stem from a disagreement among shareholders and
thus arise from an internal dispute of the corporation.
This is precisely the type of case the “internal affairs
doctrine” was designed for.
See, e.g., 380544 Canada, Inc.
v. Aspen Tech., Inc., 544 F. Supp. 2d 199, 233 (S.D.N.Y.
2008).
Texas law will therefore govern Plaintiff’s common
law claims.4
4
Even if the “functional approach” applied, Texas law
would still govern this case. The matter involves a Texas
corporation, and the underlying events emanated from Texas.
For purposes of the choice-of-law analysis, Texas has a
stronger relationship to the underlying events than
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a.
Count I and II: Unjust Enrichment and Breach of
Fiduciary Duty
To plead a breach of fiduciary duty, Plaintiff must
show: (1) a fiduciary relationship between the parties; (2)
a breach of the duty; and (3) either an injury to Plaintiff
or a benefit to Defendants.
Jones v. Blume, 196 S.W. 3d 440
(Tex. App. 2006).
Defendants contend that Plaintiff’s allegations fail to
satisfy any of the elements for a claim of breach of
fiduciary duty.
First, Plaintiff does not assert that the
company received inadequate consideration for the additional
shares provided to the Defendants.
Nor does Plaintiff argue
that the decision to award the new shares to the individual
Defendants was somehow illegal.
The issuance of shares
alone, in Defendants’ view, cannot establish a breach of
fiduciary duty.
See, e.g., Gentile v. Rosette, 906 A.2d 91,
102 (Del. 2006).
Second, Defendants argue that they had no obligation to
issue dividends to Plaintiff.
See Argo Data Res. Corp. v.
Shagrithaya, 380 S.W.3d 249, 270 (Tex. App. 2012).
Massachusetts.
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Merely
stating that dividends were not distributed is insufficient
to show that any officer breached his or her duty.
Finally, according to Defendants, Plaintiff has failed
to show that any bonuses or salaries were improper.
Specifically, Plaintiff does not allege that the officers
lacked the authority to grant or receive the salary, that
the money was not commensurate with their services, or that
the salaries and bonuses were not competitive within the
marketplace.
Defendants are correct that each accusation, on its
own, would not necessarily constitute a breach of fiduciary
duty with respect to their good faith obligations to the
corporation itself.
However, another theory, one respecting
Defendants’ duty to minority shareholders, allows Plaintiff
to move past the plausibility hurdle.
In Texas, a plaintiff may bring a claim for breach of
fiduciary duty by way of oppressive conduct.5
5
Under this
Although Defendants are correct that a claim for
“oppressive conduct” can be asserted as an independent cause
of action, a breach of fiduciary duty claim “by way of
oppressive conduct” is also recognized. For example, in
Redmon v. Griffith, 202 S.W.3d 225, 238 (Tex. App. 2006),
the court considered both a claim of shareholder oppression
and a separate breach of fiduciary duty claim. However, it
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theory, majority shareholders who have control of the
company, particularly in the context of a close corporation,
may have a duty of fair dealing to minority owners.
Specifically, majority shareholders must avoid oppressive
conduct, which includes any actions “that substantially
defeat the minority’s expectations that, objectively viewed,
were both reasonable under the circumstances and central to
the minority shareholder’s decision to join the venture.”
Redmon, 202 S.W.3d at 234, citing Willis v. Bydalek, 997
S.W.2d 798, 801 (Tex. App. 1999).
Majority shareholders
must also avoid “burdensome, harsh or wrongful conduct; a
lack of probity and fair dealing in the company’s affairs to
the prejudice of some members; or a visible departure from
the standards of fair dealing and a violation of fair play
on which each shareholder is entitled to rely.”
Id.
Oppressive conduct can manifest itself in a number of
conflated the two in the discussion of the fiduciary claim
and allowed that count to proceed by way of the oppressive
conduct. Id. What matters “is not terminology; rather, it
is the realization that minority shareholders are especially
vulnerable in close corporations, and that, as a
consequence, the majority has special duties.” 20 Tex. Prac.
Bus. Org.-30:32 (3d. ed.).
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forms.
It may include denying a shareholder reasonable
access to information, or utilizing corporate funds to the
detriment of minority shareholders.
238.
Redmon, 202 S.W.3d at
It can also include the malicious suppression of
dividends.
See, e.g., Patton v. Nicholas, 154 Tex. 385, 394
(1955)(“Undoubtedly the malicious suppression of dividends
is a wrong akin to breach of trust, for which the courts
will afford a remedy.”)
one specific act.
A plaintiff need not rely on any
Instead, a court must examine the general
conduct of the majority shareholders and consider whether
minority owners are permitted to participate in the
management of the corporation.
The court may also
scrutinize the reasonableness of any returns provided on a
minority shareholder’s investment and whether their
reasonable expectations were satisfied.
See also Duncan v.
Lichtenberger, 671 S.W. 2d 948 (Tex. App. 1984).
At this nascent motion-to-dismiss stage, Plaintiff has
presented enough evidence to make it “plausible” that
Defendants, who have majority control of the company, acted
to freeze Plaintiff out of the corporation.
Defendants
awarded themselves increased shares in the company, thereby
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shrinking Plaintiff’s ownership interest by half.
Simultaneously, Defendants paid themselves substantial
salaries and bonuses, but neglected to provide any
dividends, or any other benefit whatsoever, to Plaintiff.
As a result, Plaintiff’s role in the corporation has
diminished, while any return based on her ownership has been
eliminated.
Defendants have, by their unilateral action,
inflated their authority in the corporation at the expense
of Plaintiff’s rights.
Defendants may have legitimate business reasons for
their decisions.
Given the scrutiny Texas courts require
for these types of claims, however, Plaintiff may well prove
that Defendants’ actions were unfair, unreasonable, and in
violation of their duties as majority shareholders.
Her
claim for breach of fiduciary duty therefore survives.
Since Plaintiff must be permitted to proceed to
discovery on her breach of fiduciary duty claim, her count
for unjust enrichment is also entitled to move forward.
To
recover on a theory of unjust enrichment, Plaintiff must
show that the “party sought to be charged (has) wrongfully
secured a benefit or (has) passively received one which
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would be unconscionable for that party to retain.”
RDG Ltd.
P’ship & RDG Partners v. Gexa Co., No. 14-04-00679, 2005 WL
949171 (Tex. App. April 26, 2005).
The claim for unjust
enrichment is not an independent cause of action, Mowbray v.
Avery, 76 S.W. 3d 663, 679 (Tex. App. 2002), but is a theory
of recovery against a party who has “obtained a benefit by
fraud, duress, or the taking of an undue advantage.”
RDG,
2005 WL 949171 at *3, citing Heldenfels Bros., Inc. v. City
of Corpus Christi, 832 S.W. 2d 39, 41 (Tex. 1992).
In breaching their fiduciary duty, Plaintiff contends,
Defendants have unjustly received an increased ownership in
the corporation.
See Friddle v. Fisher, 378 S.W.3d 475, 485
(Tex. App. 2012)(noting that the unjust enrichment claim,
among others, was anchored on a breach of fiduciary duty
count).
Whether Defendants breached that duty, and
therefore whether it is unconscionable for Defendants to
retain their increased share of ownership at Plaintiff’s
expense, is a question of fact not resolvable at this
juncture.6
6
Defendants argue that the claim for unjust enrichment
must be raised derivatively on behalf of the corporation.
This argument is unpersuasive. The fiduciary duty asserted
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b.
Count III: Conversion
Plaintiff must establish four elements to succeed on a
claim of conversion: (1) Plaintiff was owed or had
possession of property or entitlement to posses it; (2)
Defendant unlawfully, and without authorization, exercised
control of that property; (3) Plaintiff demanded return of
the property; and (4) Defendant refused to return the
property.
Tex. Integrated Conveyer Sys. Inc. v. Innovative
Conveyor Concepts, Inc., 300 S.W.3d 348, 366 (Tex. App.
2009).
Here, Plaintiff accuses Defendants of converting
money in the form of bonuses, salaries, and stock advantages
that Defendants provided to themselves.
In her view, she
had a right to this property.
Two problems undermine this claim.
First, Plaintiff
does not present facts to satisfy each element of a
conversion claim.
Specifically, she fails to state that she
demanded return of any property, or that Defendants refused
to return the property.
See Fields v. Keith, 174 F. Supp.
is owed to the Plaintiff, the minority shareholder.
Therefore, the claim for breach of this duty, and for
recovery of funds obtained through unjust enrichment, may be
asserted by Plaintiff personally.
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2d 464, 482 (N.D. Tex. 2001).
Moreover, the complaint does not address the
complication that the chattel allegedly converted is money.
It is well established that if a debt can be discharged by
payment alone, it is not considered “property” that can form
the basis of a claim for conversion.
Bobby Smith Brokerage,
Inc. v. Bones, 741 S.W.2d 621, 623 (Tex. App. 1987).
Here, all Plaintiff alleges is that Defendants “removed
and otherwise converted funds.”
(Compl. 9, Dkt. No. 1.)
Since Plaintiff merely seeks to recover a general debt, she
fails adequately to identify a specified piece of property
and cannot make out this claim.
For all these reasons, Defendants’ motion to dismiss
Plaintiff’s count for conversion will be allowed.
c.
Count IV: Civil Conspiracy
To succeed on a claim of civil conspiracy Plaintiff
must offer allegations sufficient to satisfy five elements.
A plaintiff must plead: (1) that there were two or more
people; (2) with an object to be accomplished; (3) a meeting
of the minds; (4) an unlawful overt act; and (5) damages
that resulted from the conspiracy.
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Tri v. J.T.T., 162
S.W.3d 552, 556 (Tex. 2005).
A plaintiff must also show
that the defendants specifically intended to cause the
alleged injury.
Triplex Commc’ns Inc. v. Riley, 900 S.W. 2d
716, 719 (Tex. 1955).
This cause of action penalizes a
joint effort “to accomplish an unlawful purpose or to
accomplish a lawful purpose by unlawful means.”
Firestone
Steel Prods. Co. v. Barajas, 927 S.W.2d 608, 614 (Tex.
1996).
Defendants’ only argument in support of dismissal of
this claim is that the complaint lacks an adequate
allegation of any unlawful, overt act.
However, in
successfully pleading a claim for breach of fiduciary duty,
as discussed above, Plaintiff has met that requirement.
See
Lesikar v. Rappeport, 33 S.W. 3d 282, 302 (Tex. App.
2000)(noting that breach of fiduciary duty can constitute
the underlying tort for civil conspiracy claims).
Plaintiff, at least at this stage of the case, has also
satisfied the other elements of the claim.
She presents
facts that, viewed as a whole, illustrate a nefarious motive
–- Defendants intended to work together, and then did
jointly engage in an effort, to freeze Plaintiff out of the
-25-
company.
Specifically, she alleges that there was a secret
“rump” meeting of majority stockholders where relevant
decisions were made, and the parties either explicitly or
tacitly agreed to proceed with their scheme.
See, e.g.,
Bourland v. State, 528 S.W.2d 350 (Tex. App. 1975).
As a
result, Plaintiff’s ownership share has decreased and her
ability to sustain the burdens of ownership, such as paying
taxes, has been severely compromised.
Whether Plaintiff can assemble a sufficient record to
move her case past the summary judgment threshold is an
issue for a later day.
Since the facts now, taken as true,
can plausibly sustain this claim, it cannot be dismissed.
d.
Count V: Fraud
Plaintiff, in her opposition to the motion to dismiss,
argues that Defendants are liable on a theory of
constructive fraud.
Texas Integ. Conveyor Sys. Inc., 300
S.W.3d at 366 (“Constructive fraud encompasses those
breaches that the law condemns as fraudulent merely because
they tend to deceive others, violate confidences, or cause
injury to public interests. . . .”)
However, in her
complaint, Plaintiff only asserts a claim for traditional
-26-
fraud.
Plaintiff can adequately plead a claim for traditional
fraud if she can prove four elements: (1) that Defendants
made a material representation that was false; (2)
Defendants knew the representation was false, or made it
recklessly; (3) the statement was made with the intent to
induce reliance; and (4) there was actual and justifiable
reliance.
Ernst & Young, LLP v. Pac. Mut. Life. Ins. Co.,
51 S.W. 3d 573, 577 (Tex. 2001).
A claim of constructive fraud would likely have moved
forward in tandem with the breach of fiduciary duty claim.
However, Plaintiff cannot now recast her claim as a charge of
traditional, explicit fraud, as the two theories of fraud are
clearly
independent
causes
of
action
under
Texas
law.
Phillips v. United Heritage Corp., 319 S.W. 3d 156, 167-68
(Tex. App. 2010).
For the reasons discussed in the RICO
analysis, Plaintiff’s traditional fraud claim has no merit.
No
specific
facts
establish
that
Defendants
made
any
misrepresentations, or that they had the necessary fraudulent
intent.
Supra 8-10.
Though the court must dismiss this claim, Plaintiff can
-27-
still obtain the remedy she seeks through her breach of
fiduciary duty cause of action.
See, e.g., Patton, 154 Tex.
at 392.
e.
Count VI: Theft
Plaintiff’s final common law claim is for theft.
To
succeed under the Texas Theft Liability Act, Tex. Civ. Prac.
& Rem. § 134.001, she must show that: (1) she had a possessory
right to some property; (2) Defendants unlawfully appropriated
that property; and (3) Plaintiff incurred damages as a result.
Wellogix, Inc. v. Accenture, 788 F. Supp. 2d 523, 542 (S.D.
Tex. 2011).
Plaintiff
concedes
that,
if
she
can
obtain
relief
elsewhere -- which, for the reasons set forth above, she can
-- this claim may be dismissed without prejudice. (Pl’s Resp.
at 14, Dkt. No. 16.)
Even absent this concession, the court would dismiss this
claim, with prejudice, as Plaintiff has not shown a possessory
interest that would permit any recovery.
At best, Defendants
may be liable for breaching their fiduciary duty to Plaintiff
by,
among
other
corporation.
things,
minimizing
her
interest
in
the
However, even if such allegations were true,
-28-
Plaintiff still cannot show that she had a possessory right to
some
specified
appropriated.
chattel
She
vaguely
that
Defendants
alleges
that
wrongfully
Defendants
have
“unlawfully appropriated property” without establishing her
interest in any particular item.
This is insufficient to
sustain a claim for theft. See, e.g., Mid-Town Surgical Ctr.,
LLP v. Blue Cross Blue Shield of Tex., No. H-11-2086, 2012 WL
3028107 at *4 (S.D. Tex. July 24, 2012).
As a result, this
final common law claim must also be dismissed.
B.
Motion to Transfer Venue
Section 1404(a) of chapter 28 permits a district court,
in its discretion, to transfer a case to another venue where
a case could have originally been filed.
While a plaintiff’s
choice of forum is accorded significant deference, certain
circumstances may call for a shift in location.
Factors a
court should consider include: the convenience of the parties
and witnesses, the interests of justice, and the availability
of documents.
Cianbro Corp. v. Curran-Lavoie, Inc., 814 F.2d
7, 11 (1st Cir. 1987).
Defendants argue that Plaintiff’s choice of forum should
receive minimal deference because: the matter involves a Texas
-29-
Corporation; all relevant meetings occurred in Texas; the
relevant documents are in Texas; and the company has had
insignificant ties with Massachusetts since 2006. Given these
facts, according to Defendants, Plaintiff’s choice is entitled
to less weight.
Atari v. United Parcel Serv., 211 F. Supp. 2d
360, 363 (D. Mass. 2002).
Furthermore, Defendants say, the Western District of
Texas
is
a
individual
more
convenient
Defendants
forum.
reside
regularly travel there.
in
First,
Austin,
most
and
the
of
the
others
Second, the key evidence in the case
is likely to be in Texas.
Finally, the common law claims are
governed by Texas law, and thus Texas has a strong interest in
the matter.
Though it would be more convenient for Defendants to move
the case, that incidental benefit is significantly outweighed
by the inconvenience the transfer would create for Plaintiff.
That fact alone strongly militates against transferring venue.
Plaintiff
resides
in
Massachusetts,
works
in
Massa-
chusetts, and her children attend school in Massachusetts.
She has not been to Texas since 2004, and the burden of
requiring
her
to
pursue
litigation
-30-
there
would
be
considerable.
Moreover, the estate is being probated in
Massachusetts, underlining the Commonwealth’s interest in this
litigation.
Thus,
Plaintiff’s
choice
of
forum
will
be
respected, and the court will retain the matter.
IV.
CONCLUSION
Although the federal RICO counts are unsupported by
adequate allegations, three meritorious common law claims
survive Defendants’ motion.
Under Texas law, a court must
carefully examine actions by majority shareholders that may
encroach on the rights of a minority shareholder.
Where, as
here, the facts plausibly suggest oppressive conduct, the
court must allow the case to proceed.
Therefore, Defendants’ Motion to Dismiss (Dkt. No. 8) is
hereby ALLOWED as to Counts III, V, VI, VII and VIII, and
DENIED as to Counts I, II, and IV.
Defendants’ Alternative
Motion to Transfer Venue is also DENIED.
The case is hereby referred to Magistrate Judge Kenneth
P. Neiman for a pretrial scheduling conference pursuant to
Fed. R. Civ. P. 16.
-31-
It is So Ordered.
/s/ Michael A. Ponsor
MICHAEL A. PONSOR
U. S. District Judge
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