McPheely et al v. Adams et al
Filing
40
ORDER granting in part and denying in part 16 Motion to Dismiss as set out. Signed by Honorable G Ross Anderson, Jr on 12/16/13.(alew, )
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH CAROLINA
GREENVILLE DIVISION
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Plaintiffs,
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v.
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Edward S. Adams; Michael R. Monahan; )
Robert Linares; Theodorus Strous; and )
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Adams Monahan LLP,
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Defendants,
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and
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Scio Diamond Technology Corporation, )
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Inc., a Nevada corporation,
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Nominal Defendant.
________________________________ )
Bernard M. McPheely, Trustee for the
Bernard M. McPheely Revocable Trust
Dated May 25, 2012; Thomas P.
Hartness, Trustee for the Thomas P.
Hartness Revocable Trust Dated July
31, 2010; Brian McPheely; and Robert
Daisley,
C/A No.: 6:13-cv-02660-GRA
ORDER
(Written Opinion)
This matter comes before this Court on Defendants’ Motion to Dismiss all the
claims asserted by Plaintiffs in the Verified Shareholder Derivative Complaint1 filed in
the above-captioned action (the “McPheely Action”), or alternatively, to submit the
McPheely Action to arbitration.
For the reasons stated herein, this Court grants
Defendants’ Motion in part and submits the remaining claims to arbitration.
1
In this Court’s opinion, the Complaint is poorly edited. It appears that the Complaint is a nearly
identical copy of other complaints filed in prior lawsuits in the District of Minnesota. By way of
example, the Complaint references “Plaintiffs” who are not plaintiffs in the current lawsuit. This Court
cautions Plaintiffs’ counsel to read and edit their complaints prior to submitting them in this District.
This Court also directs counsel’s attention to Federal Rule of Civil Procedure 11(b).
Page 1 of 18
Background2
Plaintiffs are shareholders in the Nominal Defendant, Scio Diamond
Technology Corporation, Inc. (“Scio” or “the Company”), a publicly traded company
organized under the laws of the State of Nevada with its principle place of business
located in Greenville, South Carolina. Scio is a synthetic diamond manufacturer that
produces single-crystal diamonds for gemstone and industrial applications. Scio’s
predecessor was Apollo Diamond, Inc. (“Apollo Diamond”).
Apollo Diamond,
originally known as Linares Management Associates, was founded by Defendant
Linares in 1990. Linares’ son-in-law, Defendant Adams, was an officer of Apollo
Diamond’s subsidiary, Apollo Gemstone Corporation (“Apollo Gemstone”), and is now
a director of Scio. Defendant Monahan was an officer of Apollo Gemstone, and a
partner of Adams at Defendant Adams Monahan, LLP. Adams Monahan, LLP is a
law firm that provided legal services to Apollo Diamond and Scio.
In early 2011, Loblolly, Inc., previously known as Scio Diamond Technology
Corporation (“Private Scio”), was formed under the laws of Nevada for the purpose of
facilitating the restructuring of Apollo Diamond. Apollo Diamond entered into an asset
purchase agreement with Private Scio, whereby Private Scio would acquire the right
to purchase substantially all of Apollo Diamond’s assets.
Apollo Diamond
stockholders voted to approve the proposed transaction. In August 2011, Private
Scio sold to Scio substantially all of its assets, properties and rights, including the
right to acquire the assets of Apollo Diamond on the terms approved by its
shareholders. Scio exercised its right to acquire Apollo Diamond’s assets on August
2
The facts recited here are derived from the Complaint and from the parties’ submissions.
Page 2 of 18
31, 2011. As a result of these transactions, Scio held the assets of Apollo Diamond,
and Apollo Diamond’s common stockholders held the right to purchase Scio shares.
On July 26, 2013, Plaintiffs filed a shareholder derivative action suit on behalf
of Scio and its shareholders in the South Carolina Court of Common Pleas in
Greenville County.
This lawsuit, filed against certain former and current board
members of Scio and against Scio’s outside counsel, alleges that Defendants
engaged in acts and participated in a scheme to further their own personal interests
to the detriment of the Company and its shareholders. The Complaint alleges that
Defendants breached their fiduciary duties to Scio, engaged in corporate waste, were
involved in a civil conspiracy, and were unjustly enriched because Defendants
engaged in self-dealing and self-interested transactions. In particular, the Complaint
alleges that three legal entities—Apollo Diamond, Private Scio, and Scio—were
created and used by Defendants as part of their scheme. The Complaint further
alleges that Defendants Adams, Monahan, and their law firm, Adams Monahan, LLP,
solicited funds and used their position as controlling directors, controlling
shareholders, attorneys, and brokers to extract funds from Scio and to increase their
ownership interest in the Company through transactions which they engineered for
their own self-interest and at the expense of Scio and its other shareholders. As part
of their scheme, Defendants allegedly used the corporate form and their control of the
corporation to make distributions to themselves rather than Scio, to indemnify
themselves personally for unrelated matters, and to divert Scio’s revenues for their
own pecuniary gain.
Page 3 of 18
The Complaint further alleges that Plaintiffs became shareholders of Scio
stock between June 1, 2012 and September 27, 2012. To acquire Scio stock, each
Plaintiff entered into a “Subscription Agreement” with the Company, which detailed
the terms and conditions of stock acquisition.
The Subscription Agreement
incorporates by reference a “Warrant” entitling each Plaintiff to purchase a specified
number of Scio stock at a fixed price. The first page of the Subscription Agreement
provides in bold capital letters that it is subject to arbitration pursuant to state and
federal law. Additionally, Paragraph 8 of the Subscription Agreement contains the
following sentence:
The dispute resolution provisions set forth in Section 15 of the Warrant
attached hereto shall apply, mutatis mutandis, with respect to this
Agreement, including, without limitation, the Mandatory Arbitration and
the Exclusive Selection of Forum provisions thereof.
All
representations, warranties, and covenants contained in this Agreement
will survive the acceptance of this Agreement and the sale of the Units.
Moreover, the Dispute Resolution provision set forth in Section 15 of the Warrant
contains, in pertinent part, the following arbitration clause:
(E)
Mandatory Arbitration.
(i)
Upon demand of any Party (whether made before or after
institution of any judicial proceeding), any dispute shall be referred to
arbitration, and the final decision rendered shall be binding upon the
Parties to this Agreement. Disputes include, without limitation, tort
claims, counterclaims, securities law claims, contract claims, disputes
as to whether a matter is subject to binding arbitration, claims brought
as class actions, or claims arising out of or connected with any
transaction reflected by any Warrant.
After the Plaintiffs filed the Complaint in state court, Defendants filed a notice
of removal based on diversity jurisdiction under 28 U.S.C. § 1332 on September 27,
2013. ECF No. 1. On October 4, 2013, Defendants then filed their Motion to Dismiss
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Plaintiffs’ Complaint and Memorandum in Support of the Motion asserting that
dismissal is appropriate under Fed. R. Civ. P. 12(b)(6) because the Complaint fails to
state a claim upon which relief can be granted; that Plaintiffs have failed to plead with
particularity an acceptable reason for failing to make demand of the directors or
allege the futility of such demand, as required by Fed. R. Civ. P. 23.1; and that
Plaintiffs overlooked the mandatory arbitration provisions contained in their
Subscription Agreements. ECF Nos. 16–18. This Court held a status conference
hearing on October 17, 2013.
ECF No. 27.
Opposition on October 28, 2013.
Plaintiffs filed their Response in
ECF No. 29.
Defendants filed a Reply on
November 4, 2013. ECF Nos. 34–35.
Standard of Review
Defendants have moved to dismiss for failure to state a claim or, in the
alternative, to submit the case to arbitration, pursuant to the arbitration provision
contained in each of the Subscription Agreements. Motions to dismiss for failure to
state a claim are authorized by Federal Rule of Civil Procedure 12(b)(6). To be
legally sufficient, the Complaint must contain a “short and plain statement of the claim
showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). Specific facts
are unnecessary—the statement need only give the defendant “‘fair notice of what the
. . . claim is and the grounds upon which it rests.’” Erickson v. Pardus, 551 U.S. 89,
93 (2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). “To survive
a Rule 12(b)(6) motion to dismiss, the facts alleged ‘must be enough to raise a right
to relief above the speculative level’ and must provide ‘enough facts to state a claim
to relief that is plausible on its face.’” Robinson v. Am. Honda Motor Co., Inc., 551
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F.3d 218, 222 (4th Cir. 2009) (quoting Twombly, 550 U.S. at 555, 569). Accordingly,
a complaint does not require detailed facts; however, a “formulaic recitation of the
elements of a cause of action will not do.” Twombly, 550 U.S. at 555. Moreover, a
complaint is insufficient if it provides only bare assertions lacking additional factual
support. Ashcroft v. Iqbal, 556 U.S. 662, 681 (2009). Although its review is generally
limited to the contents of the complaint, when ruling on a motion to dismiss pursuant
to Rule 12(b)(6) the Court may consider “documents incorporated into the complaint
by reference, and matters of which a court may take judicial notice.” Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007); see Kensington Volunteer
Fire Dep’t, Inc. v. Montgomery Cnty., Md., 684 F.3d 462, 467 (4th Cir. 2012) (“[A]
court may consider documents attached to the complaint or the motion to dismiss so
long as they are integral to the complaint and authentic.”); see also Joyner v. GE
Healthcare, C.A. No. 4:08-2563-TLW-TER, 2009 WL 3063040, at *2 (D.S.C. Sept. 18,
2009) (“[T]he Court may consider materials outside the pleadings to determine
whether a valid arbitration agreement exists.”).
Discussion
I.
Contemporaneous Ownership Requirement
Federal Rule of Civil Procedure 23.1 requires that in a shareholder derivative
case the complaint must “allege that the plaintiff was a shareholder . . . at the time of
the transaction complained of.” Fed. R. Civ. P. 23.1(b)(1). Stock ownership at the
time of the challenged conduct—commonly referred to as the “contemporaneous
ownership” requirement of Rule 23.1—is a prerequisite to maintaining a derivative
action. 7C Charles Alan Wright, Arthur Miller & Mary Kay Kane, Federal Practice and
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Procedure Civil § 1828 (3d ed. 2007).
A plaintiff who fails to satisfy the
contemporaneous ownership requirement lacks standing to bring a shareholder
derivative suit. See id.; Aeronca, Inc. v. Style-Crafters, Inc., 499 F.2d 1367, 1373–74
(4th Cir. 1974); Kaliski v. Bacot, 320 F.3d 291, 299 (2d Cir. 2003); In re Verisign, Inc.,
Derivative Litig., 531 F. Supp. 2d 1173 (N.D. Cal. 2007) (“A derivative plaintiff has no
standing to challenge option transactions that occurred prior to the time that plaintiff
owned company stock.”).
In the Complaint, Plaintiffs allege that they first purchased shares of Scio
between June 1, 2012 and September 27, 2012. Further, none of the Plaintiffs allege
stock ownership of Apollo Diamond or Private Scio. The Complaint, however, is
largely based on alleged wrongdoing that occurred prior to June 2012. Very few of
the allegations concerning wrongdoing occurred after June 1, 2012, the earliest date
that a plaintiff became a shareholder of Scio.
Plaintiffs, however, argue that the “continuing wrong” doctrine excuses their
failure to satisfy the contemporaneous ownership requirement. Plaintiffs primarily find
support for their position from the Fifth Circuit. See Bateson v. Magna Oil Corp., 414
F.2d 128, 130 (5th Cir. 1969) (holding that wrongs complained of in stockholder’s
derivative suit occurring prior to plaintiff’s acquisition of stock were “continuing
wrongs” allowing plaintiff to meet the requirements of Rule 23.1); Palmer v. Morris,
316 F.2d 649 (5th Cir. 1963); In re Penn. Cent. Transp. Co., 341 F. Supp. 845, 846
(E.D. Pa. 1972) (granting standing to a plaintiff who did not own shares in the
corporation at the time that the wrongful transaction was undertaken because the
transaction was a continuing wrong). This Court is unable to find support in this
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Circuit that the continuing wrong exception is applicable. The “prevailing view” from
other Courts of Appeals is to construe the exception narrowly. 7C Wright, et al.,
Federal Practice and Procedure Civil § 1828 (3d ed. 2007); see also Kaliski v. Bacot,
320 F.3d 291, 298 (2d Cir. 2003); Blasband v. Rales, 971 F.2d 1034, 1046 (3d Cir.
1992) (“federal courts generally have rejected the contention that the entire series of
events constitutes a single transaction—the so-called “continuing wrong” notion—
entitling plaintiff to bring suit for injuries suffered by the corporation prior to plaintiff’s
acquisition of stock” (quoting 7C Wright, et al., Federal Practice and Procedure §
1828, at 65 (2d ed. 1986))); Herald Co. v. Seawell, 472 F.2d 1081, 1098 (10th Cir.
1972); Weinhaus v. Gale, 237 F.2d 197, 200 (7th Cir. 1956); Henis v. Compania
Agricola de Guatemala, 210 F.2d 950 (3d Cir. 1954); Silverstein v. Knief, 843 F.
Supp. 2d 441 (S.D.N.Y. 2012); Sprando v. Hart, No. 3:10-cv-415-ECR-VPC, 2011 WL
3055242 (D. Nev. July 22, 2011). Accordingly, Plaintiffs lack standing to challenge
any transaction prior to June 2012.
II.
Pre-Suit Demand Requirement
Under Federal Rule of Civil Procedure 23.1, a shareholder seeking to vindicate
the interests of a corporation through a derivative suit must either first make a
demand on the corporation’s directors, or plead particularized facts showing why
such a demand would have been futile. See Fed. R. Civ. P. 23.1(b)(3). “The director
demand requirement is premised on the ‘basic principle of corporate governance that
the decisions of a corporation—including the decision to initiate litigation—should be
made by the board of directors,’ not the shareholders.” In re Capital One Derivative
S’holder Litig., No. 1:12CV1100, 2013 WL 3242685, at *14 (E.D. Va. June 21, 2013)
Page 8 of 18
(quoting Kamen v. Kemper Fin. Servs., Inc., 500 U.S 90, 101 (1991)). Because
Plaintiffs’ claims in the McPheely Action are derivative, Plaintiffs were required to
make a demand on Scio’s board, or show with particularity that demand would have
been futile.
State law establishes the circumstances under which demand would be futile.
See Kamen, 500 U.S. at 108–09. Thus, because Scio is a Nevada corporation,
Nevada law governs the issue of whether Plaintiffs’ failure to make a pre-suit demand
on Scio’s board is excused. “Nevada courts look to Delaware law for guidance on
requirements for pleading demand futility.” Israni v. Bittman, 473 F. App’x 548, 549
(9th Cir. 2012) (unpublished); see also Brown v. Kinross Gold U.S.A., Inc., 531 F.
Supp. 2d 1234, 1245 (D. Nev. 2008). Where a board of directors is alleged to have
made a conscious business decision in breach of its fiduciary duties, under Delaware
law, plaintiffs must plead “particularized facts establishing a reason to doubt that ‘the
board of directors is disinterested and independent.’” Wood v. Baum, 953 A.2d 136,
140 (Del. 2008) (quoting Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984)); see also
Shoen v. SAC Holding Corp., 137 P.3d 1171, 1184 (Nev. 2006). “When pleading
demand futility, ‘plaintiffs are entitled to all reasonable factual inferences that logically
flow from the particularized facts alleged.’ . . . The pleader need not plead evidence,
but he must set forth ‘particularized factual statements that are essential to the
claim.’” Lynch v. Rawls, 429 F. App’x 641, 644 (9th Cir. 2011) (unpublished) (quoting
Brehm v. Eisner, 746 A.2d 244, 254–55 (Del. 2000)).
It is the plaintiff’s burden in a derivative action to overcome the “key principle”
that “directors are entitled to a presumption that they were faithful to their fiduciary
Page 9 of 18
duties.” Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d
1040, 1048 (Del. 2004) (emphasis in original). As a result, the shareholder plaintiff
must make this showing with respect to at least half the voting members of the board.
Aronson, 473 A.2d at 814–15; see also Shoen, 137 P.3d at 1175 (Under Nevada law,
“the demand requirement will be excused as futile only when particularized pleadings
show that at least fifty percent of the directors considering the demand for corrective
action would be unable to act impartially.”). “[T]he demand requirement is excused
without further inquiry if the complaint’s allegations, taken as true and with all fair
inferences drawn in favor of the plaintiff, show that the protection afforded by ‘the
business judgment rule is inapplicable to the board majority approving the
transaction’ because those directors are interested, or are controlled by another who
is interested, in the subject transaction. . . .” Shoen, 137 P.3d at 1182 (quoting
Aronson, 473 A.2d at 814–15).
“[A] plaintiff challenging a business decision and asserting demand futility must
sufficiently show that . . . the board is incapable of invoking the business judgment
rule’s protections (e.g., because the directors are financially or otherwise interested in
the challenged transaction). . . .” Shoen, 137 P.3d at 1181. Directorial “interest”
exists where the director “stands to gain or lose personally and materially from the
board’s decision.” Mercier v. Blankenship, 662 F. Supp. 2d 562, 575 (S.D.W. Va.
2009). Director “independence” exists when the decision by the director is based on
“the corporate merits of the subject before the board” and not on “extraneous
considerations or influences.” Aronson, 473 A.2d at 816. “For example, a director
who has divided loyalties in relation to, or who has or is entitled to receive specific
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financial benefit from, the subject transaction, is an interested director.” Shoen, 137
P.3d at 1182. “[T]he mere threat of personal liability for approving a questioned
transaction, standing alone, is insufficient to challenge either the independence or
disinterestedness of directors.” Aronson, 473 A.2d at 815. Instead, as the Delaware
courts have indicated, a shareholder plaintiff must demonstrate that the directors’
actions were so egregious that “a substantial likelihood of director liability” exists. Id.
“‘Control’ refers to the influences upon the directors’ performance of their
duties generally, and more specifically in respect to the challenged transaction.”
Shoen, 137 P.3d at 1182 (internal citation omitted). “Theoretically, a director can be
‘controlled’ by another, for purposes of determining whether the director lacked the
independence necessary to consider the challenged transaction objectively.
A
controlled director is one who is dominated by another party, whether through close
personal or familial relationship or through force of will.” Telxon Corp. v. Meyerson,
802 A.2d 257, 264 (Del. 2002) (internal citations omitted); see also In re Computer
Scis Corp. Derivative Litig., 244 F.R.D. 580, 586 (C.D. Cal. 2007) (asserting that
interestedness or a lack of independence may be shown by particularized facts in the
pleadings indicating “that the board is either dominated by an officer or director who is
the proponent of the challenged transaction, perhaps by a close personal or familial
relationship or by force of will, or that the board is so under the director[‘s] influence
that its discretion is ‘sterilized.’”).
In this case, Plaintiffs acknowledge that they did not make any demand of the
Scio board prior to filing the present lawsuit. Thus, in order for Plaintiffs to survive
Defendants’ Motion to Dismiss, this Court must find that Plaintiffs particularized
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factual allegations create a reasonable doubt as to the disinterestedness and
independence of at least two of Scio’s three board members. Plaintiffs allege, and
Defendants do not dispute, that Defendant Adams is an interested director, and thus
would not have been capable of impartially and objectively considering a demand.
However, Defendants argue that the remaining two members of the Scio Board,
Linares and Strous, have no disabling characteristics and can independently and
impartially consider a demand. Accordingly, to address the issue of demand futility,
this Court must determine whether the Complaint provides a reason to doubt the
impartiality of either Linares3 or Strous.
In their submissions to this Court, Plaintiffs and Defendants mainly argue over
the status of director Linares. Plaintiffs contend that Linares’ objectivity is in serious
doubt because of his familial and business relationships with Scio. Defendants argue
that Linares is not so obliged to Scio as to make it doubtful that Linares can
impartially consider a demand. Defendants argue that Linares’ legal relationship to
Adams does not compromise his ability to act impartially, and contend that Plaintiffs’
particularized pleadings fail to demonstrate why the relationship creates a reasonable
doubt as to Linares’ disinterestedness.
Defendants also argue that Linares’
appointment to the Scio board does not demonstrate partiality because he was
appointed due to his expertise in the diamond industry.
This Court harbors a reasonable doubt about Linares’ ability to impartially
consider a demand. Linares’ business relationship with Scio is the main reason this
3
In their Memorandum in Opposition to Defendants’ Motion to Dismiss, Plaintiffs allege that Defendant
Linares was improperly added to Scio’s Board. ECF 29 at 23. For purposes of this order, this Court will
consider Linares to be one of Scio’s directors.
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Court doubts Linares’ ability to consider a demand impartially. Linares’ ties to Scio
are such that it is unreasonable to believe that Linares could objectively consider the
approval of such a suit against Scio. Linares’ business relationship with Scio extends
back over 20 years. He founded Apollo Diamond, which developed the proprietary
technology acquired and utilized by Scio. In addition, Linares is the former chairman
and Chief Executive Officer of Apollo Diamond and Apollo Gemstone.
He was
involved in Scio’s asset purchases of Apollo Diamond and Apollo Gemstone. This
long-standing pattern of mutually advantageous business relations makes this Court
doubt that Linares could impartially evaluate Plaintiffs’ claims.
Furthermore, the fact that Linares also happens to be Adams’ father-in-law
makes this Court doubt Linares’ impartiality.
Family relationships can create a
reasonable doubt as to impartiality. See, e.g., Grimes v. Donald, 673 A.2d 1207,
1216 (Del. 1996) (noting that a “material financial or familial interest” may justify a
claim of demand futility), overruled in part on other grounds by Brehm v. Eisner, 746
A.2d 244 (Del. 2000); Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 889 (Del. Ch.
1999); In re Cooper Co., No. 12584, 2000 WL 1664167 (Del. Ch. Oct 31, 2000)
(noting that it was undisputed by the parties that the father-in-law/son-in-law
relationship created a reasonable doubt regarding the director’s impartiality); Chaffin
v. GNI Group, Inc., 1999 WL 721569 (Del. Ch. Sept 3, 1999) (“[M]ost parents would
find it highly difficult, if not impossible, to maintain a completely neutral, disinterested
position on an issue, where his or her own child would benefit substantially if the
parent decides the issue a certain way.”); Mizel v. Connelly, No. 16638, 1999 WL
550369, at *4 (Del. Ch. July 22, 1999) (“The existence of a very close family
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relationship between directors should, without more, generally go a long (if not the
whole) way toward creating a reasonable doubt.”) “The plaintiff bears no burden to
plead facts demonstrating that directors who are closely related have no history of
discord or enmity that renders the natural inference of mutual loyalty and affection
unreasonable.” Harbor Finance Partners, 751 A.2d at 889. Even if such a burden
were to exist, Plaintiffs have met it here. Adams and Linares have invested together,
engaged in several business transactions together, and worked diligently together for
several years. Their relationship clearly does not appear to be one of strife. “Even if
it were, many people swallow their actual views of their in-laws for the sake of their
spouses (and for the self-interested reason of avoiding marital strife).” Id. Moreover,
the fact that Linares’ daughter would be harmed if Linares considered a demand and
made a decision adverse to Adams provides further evidence as to his lack of
impartiality.
Because Plaintiffs have pled facts that cause this Court to harbor a reasonable
doubt about Linares’ ability to impartially consider a demand, and Defendants admit
that director Adams cannot impartially evaluate a demand, this Court holds that the
demand requirement under Rule 23.1 is excused. This Court will not address the
interestedness and independence of director Strous because Plaintiffs have
sufficiently pled demand futility as to a majority of the directors.
III.
Remaining Claims are Subject to Arbitration
The United States Supreme Court has made clear that federal policy favors
arbitration and that arbitration clauses should be enforced.
See, e.g., Mitsubishi
Motors Corp. v. Selex Chrysler-Plymouth, 473 U.S. 614, 626 (1985) (“The Arbitration
Page 14 of 18
Act establishes that, as a matter of federal law, any doubts concerning the scope of
arbitrable issues should be resolved in favor of arbitration . . . .”). Similarly, the
Fourth Circuit has repeatedly compelled arbitration where, as here, the arbitration
clause applies to any dispute “arising from or related to” the agreement. Long v.
Silver, 248 F.3d 309, 316 (4th Cir. 2001); Kvaerner ASA v. Bank of Tokyo-Mitsubishi,
Ltd., 210 F.3d 262, 265–66 (4th Cir. 2000); Am. Recovery Corp. v. Computerized
Thermal Imaging, Inc., 96 F.3d 88, 93 (4th Cir. 1996). In doing so, the Fourth Circuit
has followed Mitsubishi Motors, where the clause in question provided for the
arbitration of all disputes “which may arise between [the parties] out of or in relation
to” the parties agreement. 473 U.S. at 617. This type of arbitration language is
considered “broad.” See Am. Recovery Corp., 96 F.3d at 93; J.J. Ryan & Sons, Inc.
v. Rhone Poulenc Textile, S.A., 863 F.2d 315, 321 (4th Cir. 1988).
This Circuit
follows the rule that “a broadly-worded arbitration clause applies to disputes that do
not arise under the governing contract when a ‘significant relationship’ exists between
the asserted claims and the contract in which the arbitration clause is contained.”
Long, 248 F.3d at 316 (citing Am. Recovery Corp., 96 F.3d at 93). Section 15 of the
Warrant, which is incorporated by reference into the Subscription Agreement signed
by Plaintiffs entitling them to purchase a specified number of shares of Scio stock,
encompasses “any” dispute “arising out of, connected with, or relating to” the
Plaintiffs’ acquisition of Scio stock. ECF No. 17-7. A review of the record clearly
reflects the existence of a significant relationship between the claims in this dispute
and the Subscription Agreements.
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Plaintiffs assert claims for breach of fiduciary duty, aiding and abetting a
breach of fiduciary duty, corporate waste, civil conspiracy, and unjust enrichment
against Defendants.
Plaintiffs’ first and second causes of action request
compensatory damages from Defendants for breaching, or aiding and abetting a
breach of, their fiduciary duties of care and loyalty. Count three asks this Court to
create a constructive trust in favor of Scio as a result of Defendants alleged
usurpation of corporate opportunities. Count four alleges that Defendants Adams and
Monahan conspired together to injure Scio.
The fifth cause of action requests
recovery of the amount Defendants were unjustly enriched as a result of their selfdealing and self-interested transactions and demands restitution, return of Scio
shares, and the creation of a constructive trust.
Counts six and seven call for
compensatory damages from Defendants for breaching, or aiding and abetting the
breach of, their fiduciary duties of controlling shareholders. The final cause of action
requests compensatory damages from Defendant Adams Monahan, LLP for breach
of fiduciary duty. The record, viewed in its entirety, reflects the significance of the
parties’ relationship as directors and shareholders of Scio and the purchase of Scio
stock in 2012. This Court finds the evidence clearly establishes that each claim is
significantly related to the Subscription Agreement. The current derivative claims
arise out of the Subscription Agreements because these agreements made possible
Plaintiffs’ ownership of Scio stock and standing to bring their case; thus, the
Subscription Agreements are significantly related to the present dispute.
To avoid this conclusion, Plaintiffs contend that they should not be required to
arbitrate because the moving Defendants are not parties to the Subscription
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Agreements. “A court may compel arbitration of a particular dispute only when the
parties have agreed to arbitrate their dispute and the scope of the parties’ agreement
permits resolution of the dispute at issue.” Muriithi v. Shuttle Express, Inc., 712 F.3d
173, 179 (4th Cir. 2013). In general, “arbitration is a matter of contract [interpretation]
and a party cannot be required to submit to arbitration any dispute which he has not
agreed so to submit.” Int’l Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH,
206 F.3d 411, 416 (4th Cir. 2000) (quoting United Steelworkers v. Warrior & Gulf
Navigation Co., 363 U.S. 574, 582 (1960)). “It is well-established, however, that a
non-signatory to an arbitration clause may, in certain situations, compel a signatory to
the clause to arbitrate the signatory’s claims against the non-signatory despite the
fact that the signatory and non-signatory lack an agreement to arbitrate.”
Am.
Bankers Ins. Group, Inc. v. Long, 453 F.3d 623, 627 (4th Cir. 2006). Furthermore,
the Fourth Circuit has held, in a derivative claim brought by a plaintiff against nonsignatories to a contract, that non-signatory officers and directors may utilize a
corporation’s agreement to arbitrate where, as here, those officers and directors
control the activities of the corporation. Long, 248 F.3d at 319–21; see also Arnold v.
Arnold Corp., 920 F.2d 1269, 1281 (6th Cir. 1990) (holding that non-signatory
corporate officers sued in their individual capacity could, under agency principles,
invoke the arbitration agreement between the plaintiff and the corporate defendant for
conduct that occurred during their official corporate duties and capacities); Benefits in
a Card, LLC v. TALX Corp., No. 6:06-cv-03655-GRA, 2007 WL 750638, at *10
(D.S.C. Mar. 7, 2007) (noting that “a non-signatory officer of a signatory corporation
may compel arbitration when the disputed actions are intertwined with his duties to
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the corporation”); Collie v. Wehr Dissolution Corp., 345 F. Supp. 2d 555, 562
(M.D.N.C. 2004) (concluding non-signatories to an arbitration agreement may be
bound by or enforce an arbitration agreement executed by other parties under
principles of contract and agency law).
Defendants are former and current Scio
directors and outside counsel. Because the claims against Defendants stem from
their actions taken as directors, officers, or agents of Scio, Defendants may invoke
the arbitration provision in the Subscription Agreement to compel Plaintiffs to
arbitrate.
Conclusion
This Court has reviewed the parties’ filings and carefully considered their
arguments and the relevant legal authority. For all of the foregoing reasons, this
Court finds that (1) Plaintiffs lack standing to challenge any event prior to June 2012,
(2) Plaintiffs adequately pled demand futility, and (3) Plaintiffs are bound by the
arbitration provision in the Subscription Agreement.
IT IS THEREFORE ORDERED that Defendants’ Motion is GRANTED in part
and DENIED in part. Plaintiffs shall be required to pursue the McPheely Action by
way of arbitration.
IT IS FURTHER ORDERED that the McPheely Action be DISMISSED without
prejudice to the right of either party to refile following arbitration in order to enforce
the award of the arbitrators.
IT IS SO ORDERED.
December 16, 2013
Anderson, South Carolina
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