Narayanan v. Sutherland Global Holdings Inc.
Filing
116
DECISION AND ORDER granting in part and denying in part 67 Motion for Summary Judgment; and granting in part and denying in part 73 Motion for Summary Judgment consistent with this Decision and Order. (Clerk to close case.) Signed by Hon. Michael A. Telesca on 5/16/18. (JMC)-CLERK TO FOLLOW UP-
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
________________________________________
MUTHU NARAYANAN,
Plaintiff,
15-CV-6165 T
DECISION AND ORDER
v.
SUTHERLAND GLOBAL HOLDINGS, INC.,
Defendant.
________________________________________
INTRODUCTION
Plaintiff Muthu Narayanan (“Plaintiff”) commenced the instant
action on March 25, 2015, alleging claims for breach of contract
and unjust enrichment against defendant Sutherland Global Holdings,
Inc. (“Defendant”), a corporation of which Plaintiff is a former
director.
Docket No. 1.
On June 15, 2015, Defendant filed an
answer to Plaintiff’s complaint in which it asserted a counterclaim
for breach of fiduciary duty against Plaintiff.
Docket No. 12.
Currently pending before the Court are a motion for partial
summary judgment filed by Defendant (Docket No. 67) and a motion
for summary judgment filed by Plaintiff (Docket No. 73).
In
particular, Defendant seeks summary judgment in its favor as to
Plaintiff’s first and second causes of action and as to its
counterclaim, while Plaintiff seeks summary judgment in his favor
on all claims and counterclaims pending. For the reasons set forth
below, the parties’ respective motions are each granted in part and
denied in part.
BACKGROUND
The following facts are taken from the respective statements
of fact, affidavits, declarations, and exhibits submitted by the
parties.
I.
Relationship Between the
Individuals and Entities
A.
Parties
and
Other
Involved
Defendant
Defendant is a Delaware corporation with its headquarters in
Rochester, New York.
Defendant has approximately 40 direct and
indirect subsidiaries, including Sutherland Global Services Pvt.
Ltd. (“SGS-India”) and Sutherland Development Company Pvt. Ltd.
(“SDC”), both of which were formed under Indian law and are
headquartered in India.
SDC was formed in India in February 2010
and was originally named Sutherland Realties Pvt. Ltd.
SDC is
directly owned by Sutherland Global Services (Mauritius) Holding
Ltd. (“SGS-Mauritius”), which is in turn indirectly owned by
Defendant.
Dilip Vellodi (“Vellodi”) is the founder, controlling
shareholder, Chief Executive Officer (“CEO”) and Chairman of the
Board of Directors (the “Board”) of Defendant.
B.
Plaintiff
Plaintiff, a citizen and resident of India, is a chartered
accountant licensed to practice in India and has practiced in that
country for 36 years.
In or around March 2000, Vellodi engaged
Plaintiff to assist in the establishment of SGS-India. On April 1,
2004, SGS-India hired Plaintiff as Vice President - Finance.
Plaintiff was subsequently made Senior Vice President - Finance of
Page -2-
SGS-India in 2007.
Plaintiff also served as a member of the Board
of Directors of Defendant, SGS-India, SDC, and other subsidiaries
of Defendant.
Until October 2014, Plaintiff was Defendant’s most
senior finance employee in India, and was sometimes referred to as
the Chief Financial Officer (“CFO”) of Defendant’s Asia-Pacific
region.
C.
Kamalesh, Ramanan, and RJK Investments
Kamalesh Kumar Sheth (“Kamalesh”) is Vellodi’s brother-in-law
and
the
business
partner
of
S.
Ventkataramanan
(“Ramanan”).
Kamalesh and Ramanan co-own a land aggregation business, RJK
Investments, Inc. (“RJK Investments”). Plaintiff has known Kamalesh
since roughly 1979, when Plaintiff provided accounting services to
a company called Lalah Spices, where Kamalesh was a partner.
Plaintiff first met Ramanan in 2006.
The parties dispute whether
Plaintiff introduced Ramanan to Vellodi or Vellodi introduced
Plaintiff to Ramanan.
Anuradha
Sriram
At some point in 2006, Plaintiff introduced
(“Sriram”)
(“Subramanya”) to Kamalesh.
and
his
wife,
Sri
Ram
Subramanya
Sriram and Subramanya provided a loan
to RJK Investments to fund its land aggregation business.
Through
at least February 2017, this loan was not paid back in full, and
Plaintiff was in communication with Kamalesh regarding the money
owed.
Plaintiff also introduced Siva Ramakrishnan (“Siva”) to
Kamalesh.
Siva loaned RJK Investments between 20 and 30 million
rupees, which had not been paid back by at least October 2014.
In or about 2008, Plaintiff’s father and sister loaned eight
million rupees to RJK Investments.
RJK Investments required this
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money to fund its land aggregation business.
Plaintiff’s father
requested repayment of the loan in full sometime in 2009. Kamalesh
informed Plaintiff that RJK Investments’ financial situation was
“tight” and requested Plaintiff’s assistance in repaying the loan
from Plaintiff’s father.
Plaintiff agreed to pay the loan back,
and did so at some point in 2009.
RJK Investments in turn agreed
to pay Plaintiff back the full amount of the loan, plus 12%
interest, within six to eight weeks thereafter.
However, by
January 2016, RJK Investments had repaid Plaintiff only two million
rupees.
Also in or about 2009, Plaintiff made a second personal loan
of 300,000 rupees to RJK Investments.
Kamalesh had informed
Plaintiff that RJK Investments was in urgent need of money to make
a payment.
Plaintiff did not inquire as to whom the loan was
needed to pay, and issued the loan without any specific repayment
terms.
Plaintiff testified at deposition that he anticipated the
loan being returned in full within two weeks but, as of February
2017, the loan had not been repaid.
D.
Freed Maxick
Freed Maxick CPAs, P.C. (“Freed Maxick”) is an accounting firm
used by Defendant.
In 2014, Mark Russo (“Russo”) was a director at
Freed Maxick and a member of its executive committee.
Russo began
performing personal accounting services for Vellodi in the early
1980s and for Defendant’s predecessor, Sutherland Global Limited,
in 1986.
Russo has also been employed by Defendant as its Legal
Coordinator since April 2014, but is not a lawyer.
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As relevant to
this lawsuit, Samuel DiSalvo was the tax director at Freed Maxick
and Mark Forte was a staff accountant and supervisor.
II.
The Stock Option Agreement
On October 21, 2004, pursuant to Defendant’s Amended and
Restated 2004 Performance Equity Incentive Plan (the “Plan”),
Defendant and Plaintiff executed a Senior Management Performance
Equity Incentive Plan Stock Option Agreement (the “Stock Option
Agreement”) which granted Plaintiff the option to purchase 300,000
shares of Defendant’s stock (the “Option”). Plaintiff’s Option had
an expiration date of October 21, 2014, and had fully vested by
October
2008.
The
exercise
price
for
the
stock
underlying
Plaintiff’s Option was $1.6840 per share, for a total exercise
price of $505,062.00.
The Stock Option Agreement provides that in
the event Plaintiff is terminated for cause, the Option shall
terminate and cease to be exercisable immediately.
III. The India Land Acquisition
In or about 2009, SGS-India began a project (the “India Land
Acquisition”)
to
obtain
approximately
26
acres
of
land
in
Perumbakkam, a suburb of Chennai, India, to build a campus. In May
2009, in connection with the India Land Acquisition, K.S. Kumar
(“Kumar”), Defendant’s Chief Commercial Officer, entered into a
contract with Ramanan (the “Kumar-Ramanan Contract”).
The Kumar-
Ramanan Contract authorized the advance of 10 million rupees to
Ramanan, and required Ramanan to issue a “post dated cheque” and
execute a promissory note for the advance amount.
Other than this
advance, the Kumar-Ramanan Contract provided that money would be
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released to Ramanan only at the time of registration of land.
Under the terms of the Kumar-Ramanan Contract, the purchase price
of the land was to be 15 million rupees per acre.
Ramanan
Contract
further
required
that
Ramanan
The Kumarcomplete
the
registration of property within 120 days of the date of the
contract.
In contravention of the terms of the Kumar-Ramanan
Contract, Kumar approved two advances of 10 million rupees to
Ramaman, with the second advance occurring in June 2009.
Despite
these two advances, Ramanan did not acquire any land from May 2009
until after the formation of SDC in early 2010.
At some point in either 2009 or 2010 (the exact chronology is
disputed by the parties), Plaintiff was put in charge of the India
Land Acquisition.
Defendant also created SDC in February 2010 for
the sole purpose of acquiring the 26 acres of land in Perumbakkam.
Plaintiff and Vellodi were the initial directors of SDC.
SGS-
Mauritius funded SDC with 10 million dollars.
At a board meeting on March 1, 2010, SDC’s board unanimously
resolved
that
SDC
would
acquire
about
26
acres
of
land
in
Perumbakkam for a total estimated cost of about 500 million rupees
(which the Court notes equates to roughly 19 million rupees per
acre).
SDC’s board further authorized Plaintiff to negotiate and
finalize the terms of the purchase and to engage any necessary
agents for procuring the land and entering into sale agreements.
Plaintiff was further authorized to execute all necessary documents
and
deeds
and
to
“do
all
things
in
connection
there
with.”
Plaintiff maintains that his authority to oversee the India Land
Page -6-
Acquisition
derives
from
resolution
of
the
SDC
board
and
is
unrelated to the Kumar-Ramanan Contract, while Defendant contends
that Plaintiff
continued
to
operate
under
the
terms
of
that
agreement.
Between 2010 and August 31, 2013, approximately 11 acres of
land in Perumbakkam were registered to SDC, at an aggregate cost of
170 million rupees.
By August 31, 2013, SDC had also advanced
Ramaman approximately 324 million rupees for 16 acres in land sales
that had
Plaintiff.
not
been
completed or registered,
as
authorized by
In connection with these advances, employees of SGS-
India collected promissory notes and undated signed checks from
Ramanan in the amounts of money that were advanced.
Plaintiff did
not investigate whether Ramanan was financially capable of honoring
the
promissory
Plaintiff
notes
maintains
or
that
the
undated
he
believed
signed
Ramanan
checks.
was
However,
capable
of
honoring the promissory notes and undated signed checks because
Ramanan was in business with Vellodi’s brother-in-law and had
previously
performed
land
aggregation
for
Vellodi’s
personal
projects, had been engaged by Kumar to be a land aggregator for the
India Land Acquisition, and owned valuable properties, including
office spaces, in a prime area.
In July or August 2013, Ramanan was arrested and imprisoned
due to his activities on a separate land aggregation project.
Plaintiff and Vellodi subsequently had a conversation in which they
discussed
Ramanan’s arrest
and
the
status
of
the
India
Land
Acquisition. Also in August 2013, Vellodi, on behalf of Defendant,
Page -7-
engaged Freed Maxick to conduct an investigation into the India
Land Acquisition.
Russo was the lead Freed Maxick accountant involved in the
investigation
into
the
India
Land
Acquisition.
Mike
Ervin
(“Ervin”), a director at Freed Maxick, and Drew Pond (“Pond”), a
manager
at
Freed
investigation.
Maxick,
were
also
both
involved
in
the
On August 20, 2013, prior to the investigation
having been undertaken, Pond circulated a memorandum to Russo and
Ervin which included several allegations made by Vellodi against
Plaintiff.
The memorandum indicates that it has already been
concluded that Plaintiff engaged in impropriety - for example, the
memorandum states that Russo may have a discussion with Plaintiff
because “it is known that [Plaintiff] has done improper things” and
Plaintiff is being given “an opportunity to come clean on what
happened and how and any other improper acts [Plaintiff] may have
committed].”
Docket
No.
145
at
4.
The
memorandum
further
indicates that Defendant “most likely won’t terminate [Plaintiff],”
but will instead “make [Plaintiff] aware of the fact that they know
he has been doing improper things, then keep a close eye on him and
make his work life miserable.”
Id. at 3.
On September 6, 2013, Plaintiff drafted a “Land Action Plan”
that
outlined
steps
to
be
taken
Acquisition, and sent it to Russo.
to
complete
the
India
Land
The Land Action Plan describes
five steps to be taken, and includes taking steps to present the
undated signed checks and to collect on the promissory notes if
satisfactory progress is not made.
Page -8-
Freed Maxick issued a report on September 12, 2013 regarding
the India Land Acquisition (the “Freed Maxick Report”).
The Freed
Maxick Report concludes that Plaintiff failed to comply with the
terms of the Kumar-Ramanan Contract and that “a significant amount
[of] Sutherland resources have been disbursed for unapproved items,
for which recovery is uncertain.”
Docket No. 98 at 7.
The Freed
Maxick Report recommends that SDC considering negotiating a lower
per acre price for future purchases with Ramanan, as well as
insisting that the price for any future land purchases be reduced
by the advances that had already been made.
The Freed Maxick
Report further advises that SDC consider whether to terminate its
agreement with Ramanan.
Also in or about September 2013, Defendant engaged Rank &
Associates, an Indian law firm, to provide legal advice regarding
the India Land Acquisition.
Plaintiff never refused to provide
documents or to attend any meetings that he was asked to attend
regarding the India Land Acquisition.
Rank
&
Associates
to
meet
with
Plaintiff also arranged for
Ramanan.
In
November
2013,
Plaintiff, Ramanan, Russo, and an attorney from Rank & Associates
attended a meeting to discuss steps to take to complete the India
Land Acquisition.
Plaintiff,
Memorandum
on
Vellodi,
Land
November 13, 2013.
and
Kumar
Acquisition”
signed
(the
an
SDC
“Internal
“Internal
Memo”)
dated
The Internal Memo indicates that the price of
land in Perumbakkam had significantly increased, such that the
approximately
11
acres
of
land
held
Page -9-
by
SDC
was
then
worth
440 million rupees.
The Internal Memo further indicated that,
after discussions with Ramanan, Kumar had recommended that SDC
attempt to acquire land in Karunillam, a different village in
southern India. Kumar was authorized to oversee the acquisition of
land in Karunillam.
The land was to be acquired using the advances
already provided to Ramanan.
Ramanan subsequently provided SDC
with eight mortgage deeds for land in Karunillam, totaling 10.19
acres. The mortgage deeds were registered between December 2013 and
December 2014 and SDC has the ability to enforce the mortgages at
any time, such that it can either take full title of the land
securing the mortgages or sell the land and retain the proceeds up
to the amount of the mortgages.
As of November 25, 2015, the
mortgages had an approximate value of 385,300,000 rupees, which
exceeds the amount that SDC advanced to Ramanan.
IV.
The 2014 Option Exercise Program
In the fall of 2014, Defendant and TPG Capital entered into a
transaction whereby TPG acquired a roughly 30% stake in Defendant
for $342,587,651.78 (the “TPG Transaction”).
In connection with
the TPG Transaction, Defendant offered certain of its optionholders
the opportunity to participate in a program described as the
Sutherland Global Holding, Inc. Option Exercise and Stock Buy-back
Program (the “Option Exercise Program”).
The Option Exercise
Program was open to “service providers” (defined as employees,
directors, or consultants of Defendant and any of its subsidiaries)
who (i) had options granted in 2004, 2005, 2006, or 2007, or
(ii) had options granted in 2008, 2009, 2010, 2011, or 2012 and had
Page -10-
been employed by Defendant since September 30, 2004.
all
participants
permitted
to
in
sell
the
30%
Option
of
the
Exercise
shares
Essentially
Program
resulting
were
from
to
the
be
net
exercise1 of their stock options back to Defendant.
The parties dispute who was responsible for administering the
Option Exercise Program.
Defendant notes that its Amended and
Restated 2004 Performance Equity Incentive Plan (the “Plan”), under
which Plaintiff’s Option was granted, provides that the Plan shall
be
administered
by
the
board,
delegated to a committee.
unless
and
until
authority
is
However, Plaintiff contends that, in
practice, Freed Maxick administered the Option Exercise Program.
Plaintiff
further
argues
that
no
authorization
from
the
administrator of the Plan was required for Defendant to agree to
purchase 100% of his shares.
On October 7, 2014, DiSalvo, on behalf of Defendant, sent
Plaintiff all the documents necessary for him to exercise his
Option.
The cover letter accompanying these documents explained
that Plaintiff was being given the opportunity to exercise his
Option and to subsequently have Defendant purchase 30% of the
shares resulting from his net exercise.
explained
that
Plaintiff
was
required
The cover letter further
to
sign
the
documents
1
A “net exercise” occurs when the person who exercises an option is
permitted to surrender to the company a number of shares equal in value to the
exercise price and the withholding tax liability, rather than paying those sums
in cash.
Page -11-
included in the package on or before October 9, 2014.
One of the
enclosed documents was the Net Exercise and Share Sale Agreement
(the “30% Net Exercise Agreement”), which sets forth the terms on
which Plaintiff was permitted to exercise his Option and sell back
shares to Defendant.
DiSalvo testified at his deposition that an optionholder was
deemed to have successfully exercised his or her option when
DiSalvo received all the required signatures.
Plaintiff submitted
all the signature pages required to exercise his Option to DiSalvo
on October 9, 2014, with a copy to Russo, Forte, and Satish Raman
(“Raman”), Defendant’s Corporate Secretary.
Raman countersigned
the documents on behalf of Defendant on October 9, 2014.
As a
result of exercising his Option in a net exercise, Plaintiff
received 169,356 shares of Defendants’ stock, and surrendered
130,644 shares to Defendant to cover the exercise price and the tax
withholding. Pursuant to the terms of the Option Exercise Program,
Defendant had agreed to purchase 30% (50,807) of Plaintiff’s shares
upon the closing of the TPG Transaction.
The purchase price for
those shares was to be $590,885.41 (50,807 shares at $11.63 per
share).
Plaintiff testified at his deposition that at or about the
beginning
of
October
2014,
he
informed
Russo
that
he
was
experiencing health issues and requested that Russo tell Vellodi
that Plaintiff wanted to sell back 100% of his shares, rather than
Page -12-
30%.
Plaintiff states that Russo told him he would speak to
Vellodi about this request and that Plaintiff shouldn’t worry about
it.
Vellodi
acknowledged
at
his
deposition
that
Russo
had
communicated Plaintiff’s request to him, but denied having agreed
to it.
On
October
21,
2014,
Forte
emailed
Plaintiff,
several documents for Plaintiff’s signature.
enclosing
Forte’s email stated
in relevant part that the documents were being sent “in regards to
the Company buying back 100% of [Plaintiff’s] shares” and requested
that Plaintiff sign and return them “as soon as possible.”
One of
the enclosed documents was entitled Net Exercise and Share Sale
Election (the “100% Net Exercise Amendment”) and provided that
Plaintiff would sell all 169,356 of his shares to Defendant.
Plaintiff signed and returned the documents to Forte on October 22,
2014, with copies to DiSalvo, Russo, and Raman.
nor
Defendant
has
ever
produced
countersigned by Defendant.
a
copy
Neither Plaintiff
of
these
documents
Had Plaintiff sold 100% of his shares
to Defendant, the price would have been $1,912.164.72 (169,356
shares at $11.63 per share).
V.
The Redemption Agreement
Separate
and
apart
from
the
300,000
shares
underlying
Plaintiff’s Option, Plaintiff also owned 1000 shares of Defendant’s
common stock. On October 22, 2014, Plaintiff and Defendant entered
into an agreement under which Plaintiff would sell these additional
Page -13-
1000 shares to Defendant (the “Redemption Agreement”).
Under the
terms of the Redemption Agreement, Defendant was to purchase the
additional shares at a price of $11.2908 per share, for a total
purchase price of $11,290.80.
TPG
Transaction
closed.
The purchase was to close when the
Nothing
in
the
Redemption
Agreement
requires that Plaintiff be in good standing or have any role
whatsoever with Defendant in order for the purchase to close.
VI.
Closing of the TPG Transaction and Defendant’s Failure to
Pay
The TPG Transaction closed on October 23, 2014. Defendant did
not subsequently pay Plaintiff the amounts due to him under any of
the 30% Net Exercise Agreement, the purported 100% Net Exercise
Amendment, or the Redemption Agreement.
However, on November 7,
2014, Defendant paid 62,050,651 rupees (roughly $1 million at the
then-current exchange rate) of withholding tax to the Indian
government with regard to Plaintiff’s wage gain resulting from the
net exercise of his Option.
In August 2015, after Plaintiff
commenced the instant action, Defendant petitioned the Indian
taxing authority to reverse that withholding tax payment.
VII. Termination of the Parties’ Relationship and Indian Legal
Proceedings
The parties dispute the circumstances under which Plaintiff’s
relationship with Defendant ended. Defendant contends that Vellodi
terminated Plaintiff as a director and employee on October 18,
2014. However, the documentary evidence establishes that Plaintiff
Page -14-
remained a director until October 23, 2014, at which point he
resigned.
In particular, the Court notes that there was never any
corporate resolution or determination of Defendant’s board of
directors removing Plaintiff as a director; that Plaintiff’s email
account with Defendant continued to be active even after October
2014; that between October 18, 2014 and October 23, 2014 Plaintiff
continued to act in his capacity as a director including by
providing
necessary
signatures
at
the
request
of
Defendant’s
employees; and that Plaintiff (at Defendant’s request) signed the
documents necessary to close the TPG Transaction in his capacity as
a director of Defendant.
Moreover, Russo (in his capacity as
Defendant’s Legal Coordinator) signed a letter dated November 18,
2014 that states that “[Defendant] acknowledges that [Plaintiff’s]
employment with the Company ceased effective October 23, 2014.”
Docket No. 73-72 at 9.
On that same day, Russo sent an email to an
employee of SGS-India indicating that Plaintiff had stepped down
from his position with Defendant effective October 23, 2014.
SDC’s Directors Report for 2013-2014 also indicates that Plaintiff
resigned from the board (not that he was terminated) and SDC’s
board passed a resolution on November 24, 2014 that accepted
Plaintiff’s
resignation
Docket No. 73-76 at 2.
“with
effect
from
October
23,
2014.”
It is further undisputed that Defendant
requested in November 2014 that Plaintiff continue to perform
various
services
for
Defendant,
including
Page -15-
handling
some
of
Defendant’s bank accounts and acting as a signatory for various
entities associated with Defendant.
On or about September 12, 2015, SDC filed a criminal complaint
against Plaintiff, Kamalesh, and Ramanan in Chennai, India.
September
28,
2015,
the
Indian
court
granted
On
Plaintiff’s
application for bail. The criminal complaint against Plaintiff
apparently remains outstanding.
In June and September 2016, Defendant initiated civil legal
action against Ramanan in India. The parties have not provided the
Court with any information regarding the status or outcome of these
legal proceedings.
VIII.
Procedural History
Plaintiff commenced the instant action on March 25, 2015.
Docket No. 1. Plaintiff’s complaint alleges four causes of action:
(1) breach of contract as to Defendant’s failure to pay him for the
proceeds of his sale of shares in connection with the Option
Exercise Program; (2) unjust enrichment as to the same; (3) breach
of contract as to Defendant’s failure to pay him the proceeds of
the Redemption Agreement; and (4) unjust enrichment as to the same.
Defendant filed its answer and counterclaim on June 2, 2015
(Docket No. 12), and on July 24, 2015, Plaintiff moved to dismiss
the counterclaim and to strike Defendant’s second affirmative
defense (Docket No. 20).
The Court denied Plaintiff’s motion on
Page -16-
November 23, 2015.
Docket No. 37.
The parties thereafter engaged
in extensive discovery.
Defendant filed its motion for partial summary judgment on
November 14, 2017.
Docket No. 67.
In particular, Defendant seeks
judgment in its favor with respect to Plaintiff’s first and second
causes of action and with respect to its counterclaim for breach of
fiduciary
duty.
Plaintiff
also
filed
his
motion
for
summary
judgment on November 14, 2017, seeking judgment in his favor as to
all claims and counterclaims pending in this action.
Initial
briefing on the pending motions was completed on February 2, 2018.
During the pendency of the instant actions, Magistrate Judge
Marian W. Payson entered a Decision and Order granting a motion to
compel filed by Plaintiff.
Docket No. 91.
Plaintiff subsequently
requested that the parties be permitted to file additional briefing
based on the documents produced in response to Judge Payson’s
Decision and Order.
The Court granted Plaintiff’s request, and a
second round of briefing occurred.
The second round of briefing
was completed on April 6, 2018.
DISCUSSION
I.
Standard of Review
Pursuant
to
Rule
56(a)
of
the
Federal
Rules
of
Civil
Procedure, the Court will grant summary judgment if the moving
party demonstrates that there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of
Page -17-
law. When considering a motion for summary judgment, all genuinely
disputed facts must be resolved in favor of the party against whom
summary judgment is sought. See Tolan v. Cotton, 134 S.Ct. 1861,
1863 (2014).
If, after considering the evidence in the light most
favorable to the nonmoving party, the court finds that no rational
jury could find in favor of that party, a grant of summary judgment
is appropriate.
See Scott v. Harris, 550 U.S. 372, 380 (2007),
citing Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475
U.S. 574, 586-587 (1986).
II.
The Court
Shankar
Has
Disregarded
the
Declaration
of
Shiva
As a threshold matter, the Court notes that, in connection
with
his
motion
for
summary
judgment,
Plaintiff
submitted
a
declaration dated November 11, 2017, and signed by Shiva Shankar
(“Shankar”), an attorney licensed to practice law in Chennai,
India.
Docket No. 76 (the “Shankar Declaration”).
Defendant
argues that the Shankar Declaration must be disregarded because
(1) Plaintiff failed to comply with Federal Rule of Civil Procedure
44.1, which requires any party who intends to raise an issue
concerning the law of a foreign country to provide written notice,
whether by the pleadings or otherwise, and (2) Plaintiff failed to
identify Shankar as an expert witness or provide an expert report
as required by the Federal Rules of Civil Procedure and the case
management order. The Court agrees that Plaintiff failed to comply
with the Federal Rules of Civil Procedure’s expert disclosure
Page -18-
requirements with respect to the Shankar Declaration and has
accordingly disregarded it in deciding the instant motions.
“[A] party is entitled to discovery regarding its adversary's
foreign law expert, just as it is entitled to discovery regarding
any other kind of expert.”
Silberman v. Innovation Luggage, Inc.,
No. 01 CIV. 7109 GELDF, 2002 WL 31175226, at *2 (S.D.N.Y. Sept. 30,
2002).
Where a party, without explanation, submits an affidavit
from a previously undisclosed expert witness in connection with a
motion for summary judgment, it is appropriate for the Court to
disregard
that
affidavit.
See
Smith
v.
Target
Corp.,
No. 1:10-CV-1457 MAD/CFH, 2012 WL 5876599, at *8 (N.D.N.Y. Nov. 20,
2012).
Here, Shankar purports to act as an expert witness.
Indeed,
he states in his declaration that he has been asked to provide his
“professional opinion regarding matters of Indian law.”
No. 76 at ¶ 3.
Docket
Plaintiff’s failure to comply with the disclosure
requirements for expert witnesses or to provide any explanation for
why it did not previously disclose Shankar precludes any reliance
on
the
Shankar
Declaration,
and
therefore
it
has
not
been
considered by the Court in deciding the instant motions.
III. Plaintiff is Entitled to Summary Judgment on Defendant’s
Breach of Fiduciary Duty Counterclaim
Because the parties’ arguments related to Plaintiff’s breach
of contract claims turn in significant part on the resolution of
Defendant’s breach of fiduciary duty counterclaim, the Court will
Page -19-
consider the breach of fiduciary duty counterclaim first.
In its
counterclaim, Defendant alleges that Plaintiff breached his duty of
loyalty to Defendant because, in connection with the India Land
Acquisition, he “did not act consistent with his authorization and
in the best interests of [Defendant],” but instead “diverted
[Defendant’s] money for his personal benefit and then made repeated
misrepresentations regarding the true nature of those transactions
in order to conceal his conduct.”
Docket No. 12 at ¶¶ 101-102.
Defendant further alleges that Plaintiff failed to provide “his
full cooperation in good faith to collect the Missing Funds he
improperly exchanged for . . . promissory notes” in connection with
the SDC Land Acquisition, and that Defendant has been damaged, “at
a
minimum,
by
the
fact
that
it
now
possesses
promissory notes rather than land deeds.”
unenforceable
Id. at ¶¶ 103-104.
Defendant now seeks summary judgment in its favor on its
counterclaim,
entanglement”
conflict
of
arguing
with
that:
Ramanan
interest
that
and
(1)
RJK
breached
Plaintiff’s
investments
his
duty
“financial
represented
of
loyalty
a
to
Defendant; (2) Plaintiff breached his “duty of candor” by failing
to disclose his financial ties to Ramanan and RJK Investments to
Defendant’s board of directors, as well as by failing to disclose
“all of the information needed to determine how the [India] Land
Acquisition was proceeding”; and (3) Plaintiff breached his duty of
Page -20-
loyalty
to
Defendant
by
failing
Defendant’s best interest.
A.
to
run
its
subsidiaries
in
Docket No. 72 at 18-23.
Choice of Law
The Court has jurisdiction over the instant matter based on
the parties’ diversity of citizenship and as such, the substantive
law of New York applies.
See Shady Grove Orthopedic Assocs., P.A.
v. Allstate Ins. Co., 559 U.S. 393, 417 (2010) (“It is a longrecognized principle that federal courts sitting in diversity apply
state substantive law and federal procedural law.”) (internal
quotation omitted).
This includes New York’s choice of law rules.
See Cantor Fitzgerald Inc. v. Lutnick, 313 F.3d 704, 710 (2d Cir.
2002).
“Under New York law, issues relating to the internal
affairs of a corporation are decided in accordance with the law of
the state of incorporation. . . .
Consistent with the internal
affairs doctrine, a claim of breach of fiduciary duty owed to a
corporation is governed by the law of the state of incorporation.”
BBS Norwalk One, Inc. v. Raccolta, Inc., 60 F. Supp. 2d 123, 129
(S.D.N.Y. 1999), aff’d, 205 F.3d 1321 (2d Cir. 2000).
Defendant
was incorporated in Delaware, and as such, Delaware law governs its
claim against Plaintiff for breach of fiduciary duty.
Despite having applied Delaware law in both its memorandum of
law in support of its motion for summary judgment as to its
counterclaim (see Docket No. 72) and in opposition to Plaintiff’s
motion for summary judgment as to that same counterclaim (see
Page -21-
Docket 88), Defendant contends in its reply papers that “Delaware
law . . . is inapplicable” because “SDC is an Indian Corporation.”
Docket No. 99 at 7.
In addition to being inconsistent with
Defendant’s prior submissions, this argument lacks merit.
SDC is
not a party to this action. Defendant has expressly contended that
Plaintiff
breach
his
fiduciary
duties
“to
Sutherland
(Docket No. 72 at 30) (emphasis added), not to SDC.
Global”
See also
Docket No. 12 at ¶ 100 (Defendant’s counterclaim is premised on the
fact that Plaintiff was a director of Defendant and owed Defendant
fiduciary duties).
Moreover, and as Defendant correctly stated in
its own submissions, “‘[t]he fiduciary duties owed by directors of
a wholly[-]owned subsidar[y] run only to the parent.’” Docket No.
88 at 19 (quoting Hamilton Partners, L.P. v. Englard, 11 A.3d 1180,
1208 (Del. Ch. 2010)). Defendant has therefore failed to show that
Delaware
law
should
not
apply
to
its
counterclaim
against
Plaintiff.
B.
Delaware Law Regarding Duty of Loyalty
“Directors of a Delaware corporation owe two fiduciary duties
— care and loyalty.
act
in
good
faith,
The duty of loyalty includes a requirement to
which
is
a
subsidiary
element,
condition, of the fundamental duty of loyalty.”
i.e.,
a
In re Orchard
Enterprises, Inc. Stockholder Litig., 88 A.3d 1, 32–33 (Del. Ch.
2014) (internal quotation omitted).
“Essentially, the duty of
loyalty mandates that the best interest of the corporation and its
Page -22-
shareholders takes precedence over any interest possessed by a
director, officer or controlling shareholder and not shared by the
stockholders generally.” Cede & Co. v. Technicolor, Inc., 634 A.2d
345, 361 (Del. 1993), decision modified on reargument, 636 A.2d 956
(Del. 1994).
“When determining whether corporate fiduciaries have breached
their duties, Delaware corporate law distinguishes between the
standard of conduct and the standard of review. The standard of
conduct describes what directors are expected to do and is defined
by the content of the duties of loyalty and care.
The standard of
review is the test that a court applies when evaluating whether
directors
have
Howard-Anderson,
quotation
met
87
omitted).
the
A.3d
standard
648,
“Delaware
666
has
of
(Del.
three
conduct.”
Chen
Ch.
2014)
(internal
tiers
of
review
v.
for
evaluating director decision-making: the business judgment rule,
enhanced
scrutiny,
Strip–Casting
Corp.,
and
28
entire
A.3d
fairness.”
442,
457
Reis
v.
Hazelett
(Del.Ch.2011).
“Which
standard of review applies will depend initially on whether the
board members (i) were disinterested and independent (the business
judgment rule), (ii) faced potential conflicts of interest because
of the decisional dynamics present in particular recurring and
recognizable situations (enhanced scrutiny), or (iii) confronted
actual conflicts of interest such that the directors making the
Page -23-
decision did not comprise a disinterested and independent board
majority (entire fairness).”
C.
Chen, 87 A.3d at 666-67.
The Business Judgment Rule Applies
In assessing Defendant’s counterclaim against Plaintiff, the
Court must first determine the applicable standard of review.
Plaintiff contends that his actions should be judged in accordance
with the business judgment rule, while Defendant contends that
entire fairness review is appropriate, because Plaintiff had an
actual conflict of interest in the India Land Acquisition project,
and because the business judgment rule does not apply to conduct by
individual directors as opposed to decisions made by the board.
For the reasons set forth at length below, the Court finds
that the business judgment rule is applicable to Plaintiff’s
decision-making with respect to the India Land Acquisition Project.
On the current record, no rational factfinder could conclude that
Plaintiff engaged in self-dealing or was otherwise so interested in
the
success
of
RJK
Investments
that
his
independence
was
compromised.
i.
The Business
Inapplicable
Judgment
Rule
is
not
Per
Se
As a threshold matter, Defendant contends that the business
judgment rule
does
not
apply
to
actions
taken
by individual
directors, as opposed to actions taken by the board of directors as
a whole.
Defendant’s argument misapprehends the scope of the
business judgment rule.
Delaware courts have not hesitated to
Page -24-
apply the business judgment rule where a board of directors has
delegated a specific function to a smaller group of members.
See,
e.g., In re MFW Shareholders Litig., 67 A.3d 496, 518 (Del. Ch.
2013), aff'd sub nom. Kahn v. M & F Worldwide Corp., 88 A.3d 635
(Del. 2014) (business judgment rule applied to actions of special
committee in assessing proposed transaction).
Moreover, Delaware
courts have applied the business judgment rule in determining
whether the actions of individuals have violated their duty of
loyalty.
See, e.g., In re Walt Disney Co. Derivative Litig., 907
A.2d 693, 757 (Del. Ch. 2005), aff'd, 906 A.2d 27 (Del. 2006)
(applying business judgment rule in determining that president of
corporation did not breach duty of loyalty when he accepted a nonfault termination package).
In this case, the board of SDC
indisputably delegated to Plaintiff the authority to oversee the
India Land Acquisition, to negotiate and finalize the terms of the
purchase, and to engage any necessary agents for procuring the land
and entering into sale agreements.
Accordingly, the Court finds
that the business judgment rule is not, as Defendant contends, per
se inapplicable in this case.
ii.
Plaintiff did not Engage in Self-Dealing
Turning to the issue of Plaintiff’s alleged conflicts of
interest, Defendant contends that (1) Defendant was an “investor”
in RJK Industries and, as such, his advancement of funds to Ramanan
in connection with the India Land Acquisition amounted to self-
Page -25-
dealing; and (2) Defendant’s relationship with RJK Investments and
Ramanan “left him hopelessly compromised” and he therefore “lacked
independence.”
Docket No. 88 at 31.
These contentions are
unsupported by the record.
Under Delaware law, “[a] director is considered interested
where he or she will receive a personal financial benefit from a
transaction that is not equally shared by the stockholders.” Rales
v. Blasband, 634 A.2d 927, 936 (Del. 1993).
specific
claim
of
self-dealing,
With respect to the
“[t]raditionally,
the
term
‘self-dealing’ describes the situation when a [corporate fiduciary]
is on both sides of a transaction.” Cinerama, Inc. v. Technicolor,
Inc., 663 A.2d 1156, 1169 (Del. 1995) (internal quotation omitted).
Self-dealing occurs “when a director deals directly with the
corporation, or has a stake in or is an officer or director of a
firm that deals with the corporation.”
Id.
In this case, Plaintiff did not deal directly with Defendant
in connection with the India Land Acquisition, nor was he an
officer or director of any firm dealing with Defendant.
Moreover,
his position as a creditor of RJK Investments does not equate to
having a stake in a firm doing business with Defendant. No rational
factfinder could conclude on the record before the Court that RJK
Investments was a party to any transaction involved in the India
Land Acquisition.
To the contrary, the Kumar-Ramanan Contract was
entered
Ramanan
into
by
personally.
Page -26-
See
Docket
No.
70-15.
Moreover,
Defendant’s
own
documents
confirm
that
Ramanan
individually served as the land aggregator for the India Land
Acquisition and that the advances made by SDC in connection with
that project were made to Ramanan individually.
Nos. 70-17
at
12-14,
17,
70-19
at
3,
5,
See, e.g., Docket
10.
Ramanan
also
individually executed the promissory notes and checks collected as
security for the advances.
See Docket No. 73-126.
The parties
have presented no evidence that SDC ever advanced funds to RJK
Investments or entered into a contract or agreement with that
entity.
Accordingly, no rational factfinder could conclude that
RJK Investments (the entity in which Defendant contends Plaintiff
has a stake) was doing business with SDC or Defendant in connection
with the India Land Acquisition.
Based on the foregoing, Defendant’s argument that Plaintiff
engaged in self-dealing would require a factfinder to conclude that
Plaintiff’s status as a creditor to an entity partially owned by
Ramanan but uninvolved in the India Land Acquisition somehow imbued
Plaintiff with a personal stake in the outcome of the India Land
Acquisition.
That conclusion is unsupported by the evidence or by
the relevant case law.
See Orman v. Cullman, 794 A.2d 5, 26 (Del.
Ch. 2002) (stating that “[t]he law in Delaware is well-settled”
that “longstanding business relations” do not establish “interest
and/or lack of independence”); State of Wisconsin Inv. Bd. v.
Bartlett, No. C.A. 17727, 2000 WL 238026, at *6 (Del. Ch. Feb. 24,
Page -27-
2000) (evidence of personal or business relationship “does not
raise
an
inference
of
self-interest”).
Moreover,
Defendant
acknowledged in a letter to its auditor in November 2015 that it
did not have any knowledge regarding the disposition of the funds
advanced to Ramaman, including specifically whether those funds had
been provided to Plaintiff.
Defendant has also not presented any
evidence in support of its motion or in opposition to Plaintiff’s
motion that Plaintiff financially benefitted from the advances made
to Ramanan.
Defendant’s sole argument in this regard is that RJK
Investments paid back some (but not all) of the money it owed to
Plaintiff and that the money for this repayment may have come from
the
advances
made
speculation.
Investments
to
Ramanan.
This
is
nothing
more
than
There is no evidence in the record regarding RJK
other
sources
of
funding,
nor
has
Defendant
demonstrated that Ramanan turned over the advances (which were made
to him individually) to RJK Investments. The Court therefore finds
that Defendant cannot establish that Plaintiff engaged in selfdealing.
iii. Plaintiff’s Independence was not Compromised
Defendant
has
also
argued
that
Plaintiff’s
personal
and
business relationship with Ramanan compromised his independence.
However, this allegation is also unsupported by the record and
inconsistent with Delaware law, under which:
there is a presumption that directors are independent. To
show that a director is not independent, a plaintiff must
Page -28-
demonstrate that the director is ‘beholden’ to the
controlling party or so under [the controller’s]
influence that [the director’s] discretion would be
sterilized. [Delaware] law is clear that mere allegations
that directors are friendly with, travel in the same
social circles, or have past business relationships with
the proponent of a transaction or the person they are
investigating, are not enough to rebut the presumption of
independence.
In re MFW Shareholders Litig., 67 A.3d at 509; see also In re W.
Nat. Corp. Shareholders Litig., No. 15927, 2000 WL 710192, at *12
(Del. Ch. May 22, 2000) (director’s “close social and professional
ties” with interested parties insufficient to call into question
independence).
Moreover, “a plaintiff seeking to show that a
director was not independent must meet a materiality standard,
under which the court must conclude that the director in question's
material ties to the person whose proposal or actions she is
evaluating are sufficiently substantial that she cannot objectively
fulfill her fiduciary duties.”
A.3d at 509.
In re MFW Shareholders Litig., 67
Importantly, “the simple fact that there are some
financial ties between the interested party and the director is not
disqualifying.”
determine
Id.
materiality,
Delaware law further requires that, to
the
Court
“look
circumstances of the director in question.”
to
the
financial
Id.
In this case, no rational factfinder could conclude that
Plaintiff’s relationship with Ramanan was sufficient to rebut the
presumption of Plaintiff’s independence. There is no evidence that
Plaintiff and Ramanan had the kind of close, personal relationship
Page -29-
that Delaware courts have found may be disqualifying.
To the
contrary, the evidence shows that Plaintiff and Ramanan were
business acquaintances.
has
no
evidence
to
Plaintiff further contends, and Defendant
contradict,
that
he
loaned
money
to
RJK
Investments at the request not of Ramanan, but of Kamalesh, whom
Plaintiff had known for many years and who was Vellodi’s brotherin-law.
Kamalesh
Defendant acknowledges that Vellodi had previously used
and
Ramanan
as
land
aggregators
in
his
personal
transactions.
Defendant also cannot demonstrate that the loans Plaintiff
made
to
RJK
Investments
were
material
to
Plaintiff.
RJK
Investments owes Plaintiff just under eight million rupees, which
is the equivalent of roughly $120,000 at the current exchange rate.
Plaintiff has represented, and Defendant has produced no evidence
to rebut, that this amount of money is not material to his net
worth or his cash position.
A party moving for summary judgment
may meet its burden “by demonstrating to the Court that there is an
absence of evidence to support the nonmoving party’s case on which
that party would have the burden of proof at trial.”
Bentsen, 868 F. Supp. 581, 588 (S.D.N.Y. 1994).
Vergara v.
In this case,
because Defendant would have the burden of showing at trial that
the loans made by Plaintiff were material to his economic position,
and
because
Plaintiff
has
established
that
Defendant
has
no
evidence to support this contention, Plaintiff has met his burden
Page -30-
of
showing
that
his
independence
was not
compromised
financial ties to RJK Investments or Ramanan.
by
his
See In re MFW
Shareholders Litig., 67 A.3d at 509 (directors’ receipt of fees
between $100,000 and $200,000 from interested parties did not
compromise
independence
where
there
was
no
evidence
of
materiality).
iv.
Plaintiff did not Breach the Duty of Candor
Defendant has also argued that Plaintiff violated his duty of
candor (which Delaware courts also sometimes refer to as the “duty
of disclosure”) to his fellow directors in connection with the
India Land Acquisition. The Court finds that no rational factfinder
could reach such a conclusion on the instant record.
Under Delaware law, “[t]he duty of disclosure is not an
independent duty, but derives from the duties of care and loyalty.
Corporate fiduciaries can breach their duty of disclosure . . . by
making a materially false statement, by omitting a material fact,
or by making a partial disclosure that is materially misleading.”
Pfeffer v. Redstone, 965 A.2d 676, 684 (Del. 2009) (internal
quotations
omitted).
fiduciaries,
The
corporate
or
duty
of
otherwise,
candor
may
“dictates
not
use
that
superior
information or knowledge to mislead others in the performance of
their
own
fiduciary
obligations.”
Mills
Acquisition
Macmillan, Inc., 559 A.2d 1261, 1283 (Del. 1989).
Co.
v.
However, the
“duty to disclose is not a general duty to disclose everything the
Page -31-
director knows about transactions in which the corporation is
involved.
Rather,
the
director
disclosure
cases
decided
in
Delaware courts have implicated circumstances in which the director
is personally engaged in transactions harmful to the corporation,
but beneficial to the director.”
Big Lots Stores, Inc. v. Bain
Capital Fund VII, LLC, 922 A.2d 1169, 1184 (Del. Ch. 2006).
Here, Defendant cannot demonstrate that Plaintiff violated the
duty of candor.
In support of its motion for summary judgment on
its counterclaim, Defendant identifies the following facts that
Plaintiff allegedly failed to disclose to the other members of the
board: (1) funds were being advanced to Ramanan without land being
registered; (2) Plaintiff had procured promissory notes and signed
undated checks from Ramanan as security for the advances made to
Ramanan; (3) Plaintiff had not investigated Ramanan’s ability to
honor
the
promissory
notes
and
the
signed
undated
checks;
(4) Plaintiff had recruited individuals to loan money to RJK
Investments; (5) Plaintiff’s sister and father had loaned money to
RJK Investments; (6) Plaintiff paid back the loan to his father and
sister
and
thereby
became
a
creditor
of
RJK
Investments;
(7) Plaintiff made another loan to RJK Investments of 300,000
rupees; (8) Plaintiff was aware of the contents of RJK Investments’
tax returns; (9) Plaintiff knew that RJK Investments and Ramanan
were having financial difficulties; and (10) Plaintiff did not know
what Ramanan was doing with the advances from SDC.
Page -32-
The Court finds as an initial matter that Defendant has
failed to demonstrate that the majority of the facts allegedly
withheld by Plaintiff are material.
there
is
a
“substantial
circumstances,
the
A fact is material only if
likelihood
omitted
fact
would
that
have
under
all
assumed
the
actual
significance in the deliberations of the reasonable [individual].”
Gradient OC Master, Ltd. v. NBC Universal, Inc., 930 A.2d 104, 128
(Del. Ch. 2007). In this case, the majority of the facts allegedly
withheld by Plaintiff have nothing whatsoever to do with the India
Land Acquisition.
As discussed above, RJK Investments was not a
party to the India Land Acquisition, and there is therefore no
basis
to
conclude
that
the
details
of
Plaintiff’s
financial
relationship with RJK Investments was in any way material to the
challenged transactions (namely, the advances to Ramanan).
The
Court further notes that it was Kumar and not Plaintiff that
initially engaged Ramanan as the land aggregator in connection with
the India Land Acquisition, and that Vellodi had previously engaged
Ramanan as a land aggregator in connection with his personal
transactions.
likelihood
Accordingly, Defendant cannot show a substantial
that
a
reasonable
member
of
the board
would
have
considered Plaintiff’s prior interactions with Ramanan and RJK
Investments material.
Moreover, with respect to the few allegedly withheld facts
that do relate to the India Land Transaction, these amount to
Page -33-
nothing more than a disagreement with the manner in which Plaintiff
carried out his authority.
However, internal disagreements about
allocation of resources do not amount to a violation of the duty of
candor.
See OptimisCorp v. Waite, No. CV 8773-VCP, 2015 WL
5147038, at *62 (Del. Ch. Aug. 26, 2015), aff’d, 137 A.3d 970 (Del.
2016).
Additionally, the documentary record contradicts any assertion
that Plaintiff attempted to conceal the manner in which the India
Land Transaction was proceeding.
Plaintiff undisputedly provided
SDC’s audited financial statements to Defendant for fiscal years
2011 to 2014.
These financial statements show the advances that
were made to Ramanan, as well as the amounts expended for land
purchased.
See, e.g., Docket No. 73-114 at 12-13 (financial
statement for fiscal year 2012 showing approximately 320 million
rupees as “Capital Advances - Purchase of Land” and showing value
of freehold land held by SDC and change from previous year).
The
notes to the audited financial statements specifically stated that
advances for the purchase of land have been paid to a third party
to whom the acquisition of land from individual small landowners
has
been
outsourced.
Vellodi
signed
the
audited
financial
statements for fiscal years 2012 and 2013 showing that there had
been no increase in the land owned by SDC.
In order to show a lack
of candor (disclosure) that rose to the level of breach of the duty
of loyalty, Defendant must show that Plaintiff acted “in bad faith,
Page -34-
knowingly or intentionally.”
Crescent/Mach I Partners, L.P. v.
Turner, 846 A.2d 963, 987 (Del. Ch. 2000) (internal quotation
omitted).
No rational factfinder could find such bad faith or
knowing deceit here, because Plaintiff made available to Defendant
the information Defendant claims was not disclosed.
As such, the
Court finds that Defendant cannot show that Plaintiff breached the
duty of
candor,
and
therefore
cannot
show
that
the
business
judgment rule is inapplicable on this basis.
D.
Plaintiff’s Actions in Connection with the India
Land Acquisition Satisfy the Business Judgment Rule
Having determined for the reasons discussed above that the
business judgment rules applies to SDC’s advancement of funds to
Ramanan in connection with the India Land Acquisition, the Court
next considers whether Plaintiff can nonetheless establish a breach
of fiduciary duty.
The Court finds that no rational factfinder
could conclude that Plaintiff’s actions failed to satisfy the
business judgment rule.
The business judgment rule “is a presumption that in making a
business decision the directors of a corporation acted on an
informed basis, in good faith and in the honest belief that the
action taken was in the best interests of the company. Absent an
abuse of discretion, that judgment will be respected by the courts.
The burden is on the party challenging the decision to establish
facts rebutting the presumption.”
Aronson v. Lewis, 473 A.2d 805,
812 (Del. 1984) (internal citations omitted), overruled on other
Page -35-
grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
Pursuant to
the business judgment rule, “[c]ourts do not measure, weigh or
quantify directors’ judgments” and “do not even decide if they are
reasonable.” Brehm, 746 A.2d at 264. Instead, “[i]rrationality is
the outer limit of the business judgment rule. Irrationality may be
the functional equivalent of the waste test or it may tend to show
that the decision is not made in good faith, which is a key
ingredient
of
the
business
judgment
rule.”
Id.
at
264-65.
“Overcoming the presumptions of the business judgment rule on the
merits is a near-Herculean task.”
In re Tower Air, Inc., 416 F.3d
229, 238 (3d Cir. 2005).
In this case, Plaintiff’s actions with respect to the India
Land Acquisition do not rise to the level of irrationality.
As
discussed above, there is no evidence that Plaintiff’s actions with
respect to the India Land Acquisition were undertaken in bad faith.
To the contrary, the record shows that Plaintiff attempted to
achieve
Defendant’s
goal
of
obtaining
26
acres
of
land
in
Perumbakkam, and in fact succeeded in obtaining roughly 11 acres of
such land, the value of which substantially increased over time.
There is no evidence that Plaintiff diverted or misappropriated any
of the funds advanced to Ramanan for Plaintiff’s own use, and
Plaintiff provided to Defendant audited financial statements that
showed the advances made and the land acquired.
Page -36-
Additionally, and as set forth in the Court’s recitation of
the facts relevant to the instant motions, the evidence of record
demonstrates that SDC (and, in turn, Defendant) was not ultimately
financially harmed as a result of the India Land Acquisition
project.
The roughly 11 acres of land that SDC acquired in
Perumbakkam increased in value by roughly sixty percent from when
they were purchased in 2010 and 2011 to 2015.
Moreover,
the
promissory notes that SDC obtained from Ramanan are secured and
collateralized by eight mortgage deeds of land totaling 10.19 acres
in Karunillam.
The face amount of these mortgages, which SDC has
the ability to enforce at any time, exceeds the balance of the
funds advanced to Ramanan. Accordingly, Defendant cannot show that
Plaintiff’s actions were the equivalent of corporate waste, which
occurs only where an “exchange was so one sided that no business
person
of
ordinary,
sound
judgment
would
conclude
corporation has received adequate consideration.”
that
the
Freedman v.
Adams, 58 A.3d 414, 417 (Del. 2013) (internal quotation omitted).
For all the foregoing reasons, the Court concludes that, on
the record before it, no rational factfinder could conclude that
Plaintiff breached his fiduciary duties to Defendant. As such, the
Court
grants
Plaintiff’s
motion
for
summary
judgment
as
to
Defendant’s counterclaim and denies Defendant’s motion for summary
judgment as to the same.
Page -37-
IV. Plaintiff’s Breach of Contract and Unjust Enrichment
Claims
Having
determined
that
Plaintiff
is
entitled
to
summary
judgment on Defendant’s breach of fiduciary duty counterclaim, the
Court finds that Defendant’s argument that it is entitled to a
complete set-off to the moneys claimed by Plaintiff (see Docket No.
12 at ¶ 59)
is without merit.
Accordingly, the Court next
considers whether Plaintiff is entitled to summary judgment on his
claims for breach of contract or unjust enrichment.
A.
Choice of Law
As set forth above, because the Court’s jurisdiction in this
case is based on the parties’ diversity of citizenship, New York’s
choice of law rules govern.
“New York law is clear in cases
involving a contract with an express choice-of-law provision:
Absent fraud or violation of public policy, a court is to apply the
law selected in the contract as long as the state selected has
sufficient contacts with the transaction.”
Hartford Fire Ins. Co.
v. Orient Overseas Containers Lines (UK) Ltd., 230 F.3d 549, 556
(2d Cir. 2000).
Here, the Stock Option Agreement expressly provides that
“[t]he validity and enforceability of this Stock Option Agreement
shall be governed by and construed in accordance with the laws of
the State
of
New
York
without
regard
principles of conflicts of law.”
to
otherwise
governing
Docket No. 73-21 at ¶ 8.
Similarly, the 30% Net Exercise Agreement provides that it “shall
Page -38-
be governed by and construed in accordance with the laws of the
State of New York.”
Docket No. 73-20 at 24.
The Redemption
Agreement also provides that it “shall be governed by and construed
in accordance with the internal Laws of the State of New York.”
Docket No. 73-66 at ¶ 12(b).
There is no suggestion in the record
or any of the parties’ submissions that these choice of law
provisions were the result of fraud, and these contracts have
sufficient
contacts
with
New
York
to
warrant
application
of
New York law, inasmuch as Defendant’s headquarters are located in
this state.
As such, to the extent Plaintiff’s claims involve the
interpretation or enforcement of any of the Stock Option Agreement,
the 30% Net Exercise Agreement, or the Redemption Agreement, they
are governed by New York law.
With respect to whether or not the 100% Net Exercise Agreement
is a validly formed contract, Plaintiff’s arguments are based on
New York law (see Docket No. 78 at 33-40), while Defendant relies
upon the laws of Delaware (see Docket 72 at 15-22).
this conflict, the Court looks to New York law.
To resolve
“In New York,
. . . the first question to resolve in determining whether to
undertake a choice of law analysis is whether there is an actual
conflict of laws.”
1998).
Curley v. AMR Corp., 153 F.3d 5, 12 (2d Cir.
If there is “no actual conflict,” then the Court will
“dispense with a choice of law analysis” and apply New York law.
Id.
Here, the Court finds that there is no relevant conflict in
Page -39-
New York and Delaware law regarding contract formation.
“Like
Delaware, New York follows traditional contract law principles.”
In re IBP, Inc. Shareholders Litig., 789 A.2d 14, 54 (Del. Ch.
2001).
Under Delaware law, “a valid contract exists when (1) the
parties intended that the contract would bind them, (2) the terms
of the contract are sufficiently definite, and (3) the parties
exchange legal consideration.”
Osborn ex rel. Osborn v. Kemp, 991
A.2d 1153, 1158 (Del. 2010).
Similarly, under New York law,
“contract formation requires an objective meeting of the minds
regarding the material terms thereof.”
Inc.,
736
F.
Supp.
2d
528,
534
O’Brien v. Argo Partners,
(E.D.N.Y.
2010).
Moreover,
Defendant concedes in its reply brief that there are no “material
differences between Delaware and New York law” as to this issue.
See Docket No. 99 at 2 n.2.
Because the Court does not find that
an actual conflict exists, the Court will apply the law of New York
is assessing whether the 100% Net Exercise Amendment is a valid and
binding contract.
B.
Because
Plaintiff is Entitled to Summary Judgment on his
Claim for Breach of the Redemption Agreement
it
is
a
more
straightforward
claim,
the
Court
determines first that a rational factfinder could not find in
Defendant’s favor on Plaintiff’s claim for breach of the Redemption
Agreement.
“Under New York law, the elements of a cause of
action for breach of contract are (1) the existence of a contract;
(2) performance of the contract by one party; (3) breach by the
Page -40-
other party; and (4) damages suffered as a result of the breach.”
Transcience Corp. v. Big Time Toys, LLC, 50 F. Supp. 3d 441, 450
(S.D.N.Y. 2014).
In this case, Defendant concedes that it entered
into the Redemption Agreement on October 22, 2014 and that the
Redemption Agreement provided that, upon the closing of the TPG
Transaction, Defendant would repurchase 1000 shares of Defendant’s
common stock from Plaintiff.
Defendant further concedes that
nothing in the Redemption Agreement requires Plaintiff that have
any role with Defendant or otherwise be in good standing to
effectuate the sale. Finally, Defendant concedes that, despite the
closing of the TPG Transaction and repeated demands by Plaintiff,
it has refused to pay him the proceeds of the sale contemplated by
the Redemption Agreement.
In opposition to Plaintiff’s motion for summary judgment,
Defendant has failed to offer any substantive argument with respect
to its failure to honor the Redemption Agreement.
To the extent
that Defendant contends that it is entitled to set off the amount
owed to Plaintiff pursuant to the Redemption Agreement, as set
forth above, the Court’s resolution of Defendant’s counterclaim
forecloses that argument.
Accordingly, the Court finds that
Plaintiff is entitled to summary judgment on his favor with respect
to his claim for breach of the Redemption Agreement.
Page -41-
C.
Plaintiff is Entitled to Summary Judgment as to his
Claim that Defendant Breach the 30% Net Exercise
Agreement
The Court next considers whether Plaintiff has established
that a rational factfinder would be compelled to conclude that
Defendant violated the 30% Net Exercise Agreement.
Court
finds
that
Plaintiff
has
adequately
Again, the
established
his
entitlement to summary judgment on this point.
As set forth above, to prove a breach of contract claim under
New York, Plaintiff is required to show “(1) the existence of a
contract; (2) performance of the contract by one party; (3) breach
by the other party; and (4) damages suffered as a result of the
breach.” Transcience Corp., 50 F. Supp. 3d at 450. Here, Plaintiff
has easily met this standard.
Exercise
Agreement
(and
It is undisputed that the 30% Net
all
other
necessary
associated
documentation) was fully executed by both Plaintiff and Defendant.
It is equally clear from the record that despite full performance
by Plaintiff under the terms of that agreement, Defendant has
refused to
fulfill
its
end
of
the
bargain,
thereby
damaging
Plaintiff.
In its answer to Plaintiff’s complaint, Defendant raised
several defenses related to its breach of the 30% Net Exercise
Agreement. In particular, Defendant asserted that (1) any money it
owed to Plaintiff was subject to a set-off due to Plaintiff’s
alleged breach of fiduciary duty, (2) Plaintiff abandoned his
Page -42-
obligations to Defendant without notice or justification in or
around
July
2014,
which
was
“tantamount
to
a
for
cause
termination,” and thereby rendered his Option non-exercisable, and
(3) Plaintiff “withdrew” his exercise of the Option.
With respect
to the issue of set-off, as the Court has previously explained,
that defense is foreclosed by the Court’s grant of summary judgment
to Plaintiff on Defendant’s counterclaim.
Turning to Defendant’s other defenses, Defendant has not
supported these arguments in opposition to Plaintiff’s motion for
summary judgment. With respect to Defendant’s abandonment defense,
the record simply does not support the conclusion that Plaintiff
abandoned his duties to Defendant in July 2014.
To the contrary,
it is clear from the record that Plaintiff continued to work
throughout the summer and fall of 2014, including by being actively
involved in attempts to salvage the India Land Acquisition after
Ramanan’s arrest.
Defendant has failed to identify any evidence
from which a rational factfinder could conclude that Plaintiff’s
actions in 2014 were the equivalent of a “termination for cause,”
a phrase that is very specifically defined in the Plan.
With
respect
to
Defendant’s
final
defense,
Defendant
acknowledges in its response to Plaintiff’s motion that this
defense is “no longer relevant.”
Docket No. 88 at 10, n.3.
The
Court agrees, because no rational factfinder could conclude on the
current record that Plaintiff ever “withdrew” his exercise of his
Page -43-
Option.
To the contrary, the record is clear that Plaintiff
exercised his Option on October 9, 2014 and that his subsequent
communications with Defendant related not to the fact of the
exercise but to what percentage of his shares were to be sold back.
The fact that Defendant paid withholding tax to the Indian taxing
authority with respect to Plaintiff’s exercise of his Option is
confirmation that Defendant also did not understand Plaintiff to
have withdrawn his Option exercise.
For the foregoing reasons, the Court finds that Plaintiff has
established that no reasonable factfinder could find in Defendant’s
favor with respect to Plaintiff’s claim for breach of the 30% Net
Exercise Agreement.
As such, Plaintiff’s motion is granted and
Defendant’s motion is denied with respect to that claim.
D.
The
final
Defendant is Entitled to Summary Judgment as to
Plaintiff’s Claim that it Breached the 100% Net
Exercise Amendment
substantive
claim
the
Court
must
consider
is
Plaintiff’s claim for breach of the 100% Net Exercise Amendment.
The threshold and determinative issue in considering this claim is
whether a rational factfinder could conclude that the 100% Net
Exercise Amendment was a valid contract. For the reasons set forth
below, the Court holds that a rational factfinder could not reach
such a conclusion and that judgment in Defendant’s favor as to this
claim is therefore warranted.
Page -44-
As set forth above, under New York law, “contract formation
requires an objective meeting of the minds regarding the material
terms thereof.”
O’Brien, 736 F. Supp. 2d at 534.
In this case,
Plaintiff has failed to show that the 100% Net Exercise Amendment
is a valid contract because he cannot show that anyone with the
authority
to
bind
Defendant
ever
agreed
to
its
terms.
In
particular, the Court finds that, under the express terms of the
parties’ agreements, Defendant’s Board had the sole authority to
authorize the 100% Net Exercise Amendment and that there is no
evidence it ever did so.
The Plan expressly provides that it shall be administered by
the Board.
It further provides that the administrator (i.e. the
Board) “in its sole discretion may provide that the Company may
repurchase Shares acquired upon exercise of an Option. . . .”
Docket No. 70-2 at 10 (emphasis added). The Stock Option Agreement
makes it clear that Plaintiff has been granted his Option “pursuant
to [the] Plan.”
Exercise
Docket No. 73-21 at 2.
Agreement
states
that
the
Plan
Moreover, the 30% Net
is
“incorporated
by
reference and made a part” of the 30% Net Exercise Agreement and
that Plaintiff “acknowledges and agrees that the Shares delivered
pursuant to the exercise hereunder are subject to the provisions of
. . . the Plan.”
Docket No. 73-30 at 21.
The plain language of
the parties’ agreements therefore compels the conclusion that any
Page -45-
repurchase of Plaintiff’s shares was in the sole discretion of the
Board and required its authorization.
Plaintiff argues extensively that Freed Maxick was the entity
that administered the Option Exercise Program and that, as a
result, it had the authority to approve the 100% Net Exercise
Amendment.
This argument lacks merit.
Plaintiff conflates the
administration of the Option Exercise Program (i.e. the performance
of the various administrative tasks associated with organizing,
distributing
and
collecting
the
various
agreements
between
Defendant and its optionholders) and administration of the Plan
(i.e. determination of the terms and conditions on which previously
granted Options could be exercised).
There is no evidence in the
record that the Board ever delegated its authority under the Plan
to Freed Maxick, nor could it have done so.
The Plan provides that
such authority may be delegated only to a committee made up of “one
or more members of the Board.”
Docket No. 70-2 at 1.
Plaintiff also contends that Russo agreed to modify the 20%
Net Exercise Agreement and thereby bound Defendant to the 100% Net
Exercise Amendment.
As a threshold matter, this contention lacks
support in the record.
Plaintiff’s own testimony makes it clear
that he did not understand Russo to have the authority to ratify
the 100% Net Exercise Agreement on Defendant’s behalf.
Indeed,
Plaintiff acknowledged that he asked Russo to take his request to
Vellodi and that Russo told him he would speak to Vellodi about it.
Page -46-
These actions are wholly inconsistent with any understanding that
Russo had the authority to agree to a 100% buyback.
Moreover, and
as with Freed Maxick, there is no evidence that Defendant’s Board
ever delegated to Russo the authority to unilaterally modify the
terms and conditions of Plaintiff’s exercise of his Option and the
subsequent buyback of his shares by Defendant.
Plaintiff further claims that Russo told him that Vellodi had
approved the sale of 100% of Plaintiff’s shares to Defendant.
However, even crediting this statement as true, Plaintiff has
failed to demonstrate that Vellodi individually (as opposed to the
Board) had the authority to approve such a transaction.
As
discussed above, nothing in the record before the Court supports
the conclusion that Defendant’s Board ever delegated the authority
reserved to it under the unambiguous terms of the Plan to any other
individuals or entities.
Plaintiff’s claimed perception that Vellodi, Russo, and/or
Freed Maxick had the authority to bind Defendant to the 100% Net
Exercise Amendment fails to establish the existence of a genuine
issue of material fact.
Under New York law, to establish that an
agent had the apparent authority (as opposed to actual authority)
to engage in a transaction, a party “must establish two facts:
(1) the principal was responsible for the appearance of authority
in the agent to conduct the transaction in question, and (2) the
third party reasonably relied on the representations of the agent.”
Page -47-
Herbert Const. Co. v. Cont’l Ins. Co., 931 F.2d 989, 993–94 (2d
Cir. 1991) (internal citations and quotations).
cannot establish either of these facts.
Here, Plaintiff
As to the first element,
Plaintiff admits that he never spoke directly to Vellodi or any
other member of the Board regarding his request to sell back 100%
of his shares.
It is axiomatic that the Board cannot have created
the impression of agency where it had no communications with
Plaintiff regarding the transaction at issue.
As to the second element, the record does not support the
conclusion
that
any
of
Vellodi,
Russo,
or Freed
Maxick
ever
represented to Plaintiff that they had the authority to authorize
a 100% buyback. With respect to Vellodi, as noted above, Plaintiff
acknowledges that he never discussed his request that Defendant buy
100% of his shares with Vellodi.
Turning to Russo, as also
previously noted, Russo’s statements to Plaintiff that he would
take Plaintiff’s request to Vellodi are inconsistent with any
finding that Russo claimed to have the authority to approve a
modification to the 30% Net Exercise Agreement.
Finally, with
respect to Freed Maxick, its role in the Option Exercise Program
was ministerial, and none of its communications with Plaintiff
suggest that it has the authority to modify the terms of any
agreement between Plaintiff and Defendant. Moreover, Plaintiff was
a director of Defendant and an accountant, and was familiar with
the
terms
of
the
parties’
agreements;
Page -48-
a
sophisticated
and
knowledgeable individual such as Plaintiff should have been aware
that the Board had not made a delegation of its authority under the
Plan.
As such, no reasonable factfinder could conclude that
Vellodi, Russo, or Freed Maxick had the apparent authority to bind
Defendant with respect to the 100% Net Exercise Amendment.
Plaintiff’s inability to demonstrate that anyone with the
authority to do so ever agreed that Defendant would buy 100% of his
shares upon the closing of the TPG Transaction is fatal to his
claim for breach of the 100% Net Exercise Amendment.
Accordingly,
the Court finds that judgment in Defendant’s favor with respect to
this claim is warranted.
E.
Defendant is Entitled to Summary
Plaintiff’s Unjust Enrichment Claims
Judgment
on
In addition to his claims for breach of contract, Plaintiff
has also asserted two claims for unjust enrichment.
The Court
finds that Defendant is entitled to summary judgment as to each of
these claims.
“The basic elements of an unjust enrichment claim in New York
require proof that (1) defendant was enriched, (2) at plaintiff’s
expense, and (3) equity and good conscience militate against
permitting
defendant
to
retain
what
plaintiff
is
seeking
to
recover.” Briarpatch Ltd., L.P v. Phoenix Pictures, Inc., 373 F.3d
296, 306 (2d Cir. 2004).
“The theory of unjust enrichment lies as
a quasi-contract claim. It is an obligation the law creates in the
absence of any agreement.”
Beth Israel Med. Ctr. v. Horizon Blue
Page -49-
Cross & Blue Shield of New Jersey, Inc., 448 F.3d 573, 586 (2d Cir.
2006).
“As the New York Court of Appeals put it, ‘[t]he existence
of a valid and enforceable written contract governing a particular
subject matter ordinarily precludes recovery in quasi contract for
events arising out of the same subject matter.’” Digizip.com, Inc.
v. Verizon Servs. Corp., 139 F. Supp. 3d 670, 682 (S.D.N.Y. 2015)
(quoting Clark–Fitzpatrick, Inc. v. Long Is. R.R. Co., 70 N.Y.2d
382, 388 (1987)).
In this case, the subject matter of Plaintiff’s complaint is
governed by multiple valid and enforceable written contracts,
including
the
Stock
Option
Agreement,
the
30%
Net
Exercise
Agreement, and the Redemption Agreement. As such, Plaintiff cannot
maintain his unjust enrichment claims, and Defendant is entitled to
summary judgment in its favor.
V.
Damages
Having found that Plaintiff has established his entitlement to
summary judgment with respect to his claims for breach of the
Redemption
Agreement
and
for
breach
of
the 30%
Net
Exercise
Agreement, the Court must determine what damages Plaintiff has
established.
Under New York law, a party who prevails on a breach
of contract claim may recover “all the direct and proximate damages
which result
from
the
violation.”
Nat’l
Mkt.
Share,
Inc.
v.
Sterling Nat. Bank, 392 F.3d 520, 525 (2d Cir. 2004) (internal
quotation omitted). “Where the alleged breach of contract consists
Page -50-
only of a failure to pay money, remedy for the breach is limited to
the principal owed plus damages in the form of interest at the
prevailing legal rate.” Tevdorachvili v. Chase Manhattan Bank, 103
F. Supp. 2d 632, 641 (E.D.N.Y. 2000) (internal quotation omitted).
With respect to the issue of interest, “in diversity actions,
the awarding of prejudgment interest is considered a substantive
issue and is, therefore, governed by state law.”
Wechsler v. Hunt
Health Sys., Ltd., 330 F. Supp. 2d 383, 434 (S.D.N.Y. 2004).
Under
New York law, “[i]n an action at law [for breach of contract],
prejudgment
interest
is
recoverable
as
of
right.”
Trademark
Research Corp. v. Maxwell Online, Inc., 995 F.2d 326, 342 (2d Cir.
1993).
“New
York’s
prejudgment
interest
rate
for
breach
of
contract cases is 9% per annum, which accrues on a simple, rather
than a compound, basis.”
Wechsler, 330 F. Supp. 2d at 434–35; see
also N.Y. C.P.L.R. § 5004 (“Interest shall be at the rate of nine
per
centum
per
annum,
except
where
otherwise
provided
by
statute.”).
Here, Plaintiff’s damages consist of $590,885.41 for breach of
the 30% Net Exercise Agreement and $11,290.80 for breach of the
Redemption Agreement.
The Court therefore finds that Plaintiff is
entitled to judgment in the amount of $602,176.21, plus interest at
the rate of 9% per annum from October 23, 2014 (the date the TPG
Transaction closed and Plaintiff was to be paid).
Page -51-
CONCLUSION
For the reasons set forth above, the Court grants in part and
denies in part Defendant’s motion for partial summary judgment
(Docket No. 67) and grants in part and denies in part Plaintiff’s
motion for summary judgment (Docket No. 73).
In particular, it is
hereby
ORDERED
that
Plaintiff
is
granted
summary
judgment
with
respect to his claims for breach of the Redemption Agreement and
breach of the 30% Net Exercise Agreement and with respect to
Defendant’s breach of fiduciary duty counterclaim; and it is
further
ORDERED
that
Defendant
is
granted
summary
judgment
with
respect to Plaintiff’s claims for breach of the 100% Net Exercise
Amendment and for unjust enrichment; and it is further
ORDERED that judgment shall be entered in favor of Plaintiff
in the amount of $602,176.21, with prejudgment interest at a rate
of 9% per annum from October 23, 2014; and it is further
ORDERED that the Clerk of the Court shall close this case.
ALL OF THE ABOVE IS SO ORDERED.
S/Michael A. Telesca
MICHAEL A. TELESCA
United States District Judge
DATED:
Rochester, New York
May 16, 2018
Page -52-
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