Neil et al v. Foster-Bey
MEMORANDUM OPINION. Signed by District Judge James C. Cacheris on 05/10/2017. (mpha)
IN THE UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF VIRGINIA
CSR, INCORPORATED, in its
corporate capacity and in its
capacity as fiduciary of the
CSR, Incorporated Employee
Stock Ownership Plan.
M E M O R A N D U M
O P I N I O N
This matter is before the Court on Plaintiff CSR,
Incorporated’s Motion to Dismiss [Dkt. 77] Defendant John
Foster-Bey’s Amended Counterclaims.
For the reasons that
follow, the Court will deny Plaintiff’s Motion.
The following allegations of fact from Foster-Bey’s
Counterclaims are taken as true for purposes of Plaintiff’s
See E.I. du Pont de Nemours & Co. v. Kolon Indus.,
Inc., 637 F.3d 435, 440 (4th Cir. 2011).
Foster-Bey has served as CEO and President of CSR, as
well as Trustee of CSR’s Employee Stock Ownership Plan (ESOP),
since December of 2011.
Am. Counterclaim [Dkt. 75] ¶ 8.
2012, he was made a member of CSR’s Board of Directors.
Under Foster-Bey’s leadership, CSR returned from near-insolvency
to “profitability and a strong balance sheet.”
Id. ¶¶ 12-13.
In 2013, Foster-Bey appointed Thomas Edgar and Robert
Neil to CSR’s Board.
the Board in 2015.
Id. ¶ 16.
He appointed Cynthia Marsden to
The terms of Neil and Edgar were, by
resolution, set to expire on September 30, 2016, while Marsden’s
term is due to expire September 30, 2017.
Id. ¶ 17.
From 2013 on, Foster-Bey “spent a significant amount
of time on business development” and successfully grew CSR’s
Id. ¶¶ 18-20.
In April of 2015, however, Foster-Bey
became ill and was forced to take a leave of absence for several
weeks, during which he worked from the hospital.
Id. ¶ 23.
Upon being discharged from the hospital, Foster-Bey’s doctor
cautioned him that he should work from home to the extent
possible – a practice Foster-Bey had generally permitted among
Id. ¶¶ 24-25.
Upon learning of Foster-Bey’s
plans to work from home, Neil and Edgar first suggested that
Foster-Bey retire, then insisted that he take another month away
from the office, during which Foster-Bey worked from home.
After this incident, Foster-Bey became concerned that
Neil and Edgar were attempting to pressure him to quit – a
concern that grew acute after those two Board members attempted
to reduce Foster-Bey’s annual bonus by half without good cause.
Id. ¶¶ 29-36.
Foster-Bey’s suspicions were substantiated when
the other Board members attempted to oust him from his various
positions at CSR.
After meeting in secret, the outside Board members
sent Foster-Bey an email on September 7, 2016 asking him to
attend a special Board meeting regarding “Business Development
and Corporate governance.”
Id. ¶¶ 38-39, 47-52.
cryptic email exchange, Foster-Bey grew concerned about the
meeting and sought advice from CSR’s legal counsel regarding the
process for dissolving the Board.
Id. ¶¶ 49-54.
CSR, however, declined to provide legal advice, as he deemed the
issue a dispute between management and the Board.
Id. ¶¶ 54-56.
Foster-Bey attended the special Board meeting on
September 12, 2016, and was surprised to learn that the subject
of the meeting was the Board’s decision to remove him from his
various positions at CSR over “business development” concerns.
Id. ¶¶ 57-60.
Foster-Bey pointed out his successes in business
development and suggested that the Board provide him with
specific benchmarks for business development.
Id. ¶¶ 63-64.
The Board agreed to provide a memo outlining their expectations,
and the meeting concluded without the Board taking any action or
setting a future meeting date.
Id. ¶¶ 65-67.
The Board sent Foster-Bey the promised memorandum
several days later.
Id. ¶ 69.
Among other things, it required
that Foster-Bey reappoint Edgar and Neil as Board members upon
the expiration of their membership terms – a provision FosterBey deemed a bridge too far.
Id. ¶¶ 72-73.
In light of this
and the Board’s other irregular activities, Foster-Bey appointed
two new Board members to replace Edgar and Neil – Garland Yates
and James Hymen.
Id. ¶¶ 74-75.
Meanwhile, Foster-Bey thought it best in light of the
September 12 meeting to cancel an appointment scheduled for
September 19, 2016, during which Foster-Bey was to meet with
“two newly retained business development consultants.”
Upon learning that the meeting was cancelled, Edgar
protested and asked in an email dated September 18, 2016, that
Foster-Bey meet with the entire Board the following day.
Foster-Bey was not provided with any notice regarding what
the topic of the meeting would be.
Id. ¶ 80.
In light of all
that had come before, Foster-Bey retained independent counsel
and wrote letter informing Edgar and Neil that they would be
replaced as Board members, mistakenly believing their terms to
have already run.
Id. ¶¶ 82-84.
Foster-Bey appeared at the September 19, 2016 meeting
with counsel and provided Edgar and Neil with the letters he had
Id. ¶¶ 85-86.
At the meeting, counsel for Foster-Bey
discussed the situation with counsel for Plaintiff, but they
were unable to reach a resolution and agreed to speak again at a
Id. ¶ 86.
having taken any action.
The meeting ended without the Board
Id. ¶¶ 88-89.
On September 21, 2016, the Board sent Foster-Bey
notices of termination regarding his positions as CEO and Board
member of CSR through counsel.
Id. ¶ 96.
Several days later,
on September 26, 2016, the Board communicated that those notices
had become effective, and that Foster-Bey would additionally be
terminated from his position as Trustee of CSR’s ESOP.
At no point was a Board meeting formally convened at
which Foster-Bey’s termination from his various positions was
discussed and decided upon.
Id. ¶¶ 99-105, 112-14.
time, Foster-Bey has been effectively frozen out of CSR’s
Id. ¶¶ 141-45.
On October 14, 2016, after the expiration of Edgar’s
and Neil’s terms as Board members, Foster-Bey convened a Board
meeting with Hymen and Yates.
Id. ¶¶ 115-18.
At the meeting,
which Marsden did not attend, the Board members present voted to
rescind the various actions of the previous Board with respect
to Foster-Bey’s employment as a precaution.
Id. ¶¶ 119-25.
November 22, 2016, Marsden, Neil, and Edgar held a competing
Board meeting at which they purported to remove Hymen and Yates
from the Board.
Id. ¶¶ 132-40.
II. Legal Standard
“The purpose of a Rule 12(b)(6) motion is to test the
sufficiency of a complaint; importantly, [a Rule 12(b)(6)
motion] does not resolve contests surrounding the facts, the
merits of a claim, or the applicability of defenses.”
v. City of Goldsboro, 178 F.3d 231, 243-44 (4th Cir. 1999)
In reviewing a motion to dismiss for
failure to state a claim under Rule 12(b)(6), the Court “must
accept as true all of the factual allegations contained in the
complaint,” drawing “all reasonable inferences” in the nonmoving
E.I. du Pont de Nemours & Co., 637 F.3d at 440
Generally, the Court may not look beyond
the four corners of the complaint in evaluating a Rule 12(b)(6)
See Goldfarb v. Mayor & City Council of Baltimore, 791
F.3d 500, 508 (4th Cir. 2015).
A. Jurisdiction over Foster-Bey’s Counterclaims
Although neither party raises the issue, the Court
must first satisfy itself that it may exercise jurisdiction over
See Ruhrgas AG v. Marathon Oil Co.,
526 U.S. 574, 583 (1999) (“subject-matter delineations must be
policed by the courts on their own initiative”).
All of Foster-
Bey’s counterclaims arise under state law – specifically, breach
of contract related to CSR’s various governing documents.1
Foster-Bey brought these claims in a freestanding lawsuit, this
Court would lack subject matter jurisdiction over them, as there
is not complete diversity of citizenship and Foster-Bey’s claims
do not arise under federal law.
“In cases such as this one, where neither diversity
nor federal question jurisdiction exists over defendant’s
counterclaims, the counterclaims’ status as ‘compulsory’ or
‘permissive’ determines whether the court has jurisdiction over
Williams v. Long, 558 F. Supp. 2d 601, 602–03 (D. Md.
The Court may exercise supplemental jurisdiction over a
compulsory state-law counterclaim, but “a permissive
counterclaim that lacks its own independent jurisdictional basis
is not within the jurisdiction of the court.”
Id. at 603.
Having reviewed Foster-Bey’s counterclaims, the Court
is satisfied that they are compulsory rather than permissive,
and thus that the Court may exercise jurisdiction over them.
The Fourth Circuit has “suggested four inquiries to determine if
a counterclaim is compulsory: (1) Are the issues of fact and law
raised in the claim and counterclaim largely the same? (2) Would
The fact that Foster-Bey invokes the Declaratory
Judgment Act does not mean that his counterclaims arise under
federal law. Schilling v. Rogers, 363 U.S. 666, 677 (1960)
(“[T]he Declaratory Judgments Act is not an independent source
of federal jurisdiction; the availability of such relief
presupposes the existence of a judicially remediable right.”)
res judicata bar a subsequent suit on the party’s counterclaim,
absent the compulsory counterclaim rule? (3) Will substantially
the same evidence support or refute the claim as well as the
counterclaim? and (4) Is there any logical relationship between
the claim and counterclaim?”
331 (4th Cir. 1988).
Painter v. Harvey, 863 F.2d 329,
Here, the answer to each inquiry is self-
The Court therefore does not belabor the
B. Foster-Bey’s Claims for “Injunction” and
Plaintiff moves to dismiss Foster-Bey’s requests for
injunctive and declaratory relief.
The Court declines to reach
the issue of what remedies might be appropriate at this stage in
First, the question of whether Foster-Bey is entitled
to an injunction is not at this time properly before the Court.
When evaluating a Complaint under Rule 12(b)(6), the Court asks
only whether the Complaint’s allegations, if assumed to be true
and drawing all reasonable inferences in favor of the non-moving
party, state a claim upon which relief can be granted.
du Pont de Nemours & Co., 637 F.3d at 440.
The Court does not,
in ruling on such a motion, require more of a Complaint.
if a party does ultimately seek injunctive relief, the Complaint
need not demonstrate that injunctive relief is warranted at the
motion to dismiss stage by showing, for example, a likelihood of
success on the merits or that the party in question will suffer
That simply is not the standard under Rule
Whether an injunction may appropriately issue is a
bridge to cross if and when an injunction is sought.
Of course, “injunctive relief is a remedy and not a
cause of action and it is improper to frame a request for an
injunction as a separate cause of action, as the complaint does
in this case.”
Dwoskin v. Bank of Am., N.A., 850 F. Supp. 2d
557, 573 (D. Md. 2012).
The Court, however, declines to confuse
the issue by dismissing Foster-Bey’s “claim” for injunctive
relief merely because it is set out in the wrong portion of his
To do so would work, at best, a cosmetic change
to Foster-Bey’s counterclaims.
Similarly, “[t]he Declaratory Judgment Act . . . does
not create a substantive cause of action.” Dallas Cty., Tex. v.
MERSCORP, Inc., 2 F. Supp. 3d 938, 945 (N.D. Tex. 2014), aff’d
sub nom. Harris Cty. Texas v. MERSCORP Inc., 791 F.3d 545 (5th
Cir. 2015); see also id (citing cases).
Whether and to what
extent Foster-Bey is entitled to declaratory relief will turn
largely on the degree of his success with respect to his
substantive breach of contract claims.
Regardless, as Plaintiff
appears to acknowledge, at least some aspects of this case are
amenable to declaratory relief.
Plaintiff itself seeks a
declaratory judgment that Foster-Bey was validly terminated from
his various positions at CSR and no longer serves as CEO, Board
Member, or Trustee.
See Compl. [Dkt. 1] ¶¶ 40-45.
therefore difficult to see how Plaintiff can contend it is
improper for Foster-Bey to seek a declaratory judgment that he
was not validly terminated from his various positions at CSR and
remains CEO, Board Member, and Trustee.
The Court notes, however, that many of the remedies
Foster-Bey seeks may be unavailable to him should he proceed in
this matter without joining Neil, Edgar, and Marsden as
Plaintiff correctly points out that
Foster-Bey’s counterclaims seek relief directly against those
individuals, who at this point are not before the Court.
Foster-Bey requests, for example, an injunction that forbids
“purported Trustee Neil from purporting to appoint Neil and
Edgar as directors to the CSR Board.”
75] at 45.
Am. Counterclaims [Dkt.
Similarly, he seeks a declaratory judgment that
addresses the lawfulness of the actions undertaken by Neil,
Edgar, and Marsden, and that declares what positions, if any,
are held by these individuals at CSR.
See id. at 41-42.
unclear how the Court would be justified in enjoining the
behavior and declaring the rights of these individuals who are
not before the Court.
See, e.g., Provident Tradesmens Bank &
Trust Co. v. Patterson, 390 U.S. 102, 110 (1968) (“[S]ince the
outsider is not before the court, he cannot be bound by the
Foster-Bey insists these individuals may be bound
through a judgment against CSR itself.
This argument is
puzzling, particularly in light of Foster-Bey’s insistence that
neither Neil nor Edgar holds any lawful position at CSR.
Foster-Bey attempts to justify his position by reference to
Wencoast Restaurants, Inc. v. Chart Capital Partners, L.P., No.
2:05-1650-18, 2006 WL 490101 (D.S.C. Feb. 28, 2006).
agrees that Wencoast appears quite similar to this case, but the
comparison does little to shed light on Plaintiff’s reasoning.
As in this case, both parties in Wencoast maintained that they
retained rightful control of the company at issue.
See id. at
For that reason, however, “[b]oth parties . . . filed . . .
actions in the name of” the company against the alleged usurper.
Id. at *1.
Neither maintained the action against the company
they claimed to control.
It remains unclear to the Court why
Foster-Bey has not done the same.
While the Court does not at
this time sua sponte order that Neil, Edgar, and Marsden be
joined pursuant to Federal Rule of Civil Procedure 19, it does
note the possibility that it may become apparent at some stage
of this litigation that “the court cannot accord complete relief
among existing parties” absent those parties.
Fed. R. Civ. P.
C. Foster-Bey’s Claims for Breach of Contract
“It is well established that the formal bylaws of an
organization are to be construed as a contractual agreement
between the organization and its members, since the continuing
relationship between the organization and its members manifests
an implicit agreement by all parties concerned to abide by the
Meshel v. Ohev Sholom Talmud Torah, 869 A.2d 343, 361
(D.C. 2005); see also Rosenberg v. AT & T Employees Fed. Credit
Union, 726 F. Supp. 573, 578 (D.N.J. 1989) (“It is well settled
under common law that bylaws generally act as a contract between
a corporation and its shareholders. Thus, a breach of a
corporation’s bylaws gives rise to an action for breach of
“To prevail on a claim of breach of contract”
under DC law, which governs CSR’s bylaws, “a party must
establish (1) a valid contract between the parties; (2) an
obligation or duty arising out of the contract; (3) a breach of
that duty; and (4) damages caused by breach.”
Co. v. Mendez, 984 A.2d 181, 187 (D.C. 2009).2
The elements of breach of contract under Virginia law,
which governs CSR’s Employee Stock Ownership Agreement, are
essentially the same. See Informatics Applications Grp., Inc.
v. Shkolnikov, 836 F. Supp. 2d 400, 418 (E.D. Va. 2011) (“In
Virginia, the elements of a claim for breach of contract are (1)
a legally enforceable obligation of a defendant to a plaintiff,
(2) the defendant’s violation or breach of the obligation, and
(3) an injury or harm to the plaintiff caused by the defendant's
Plaintiff first contends that Foster-Bey’s breach of
contract counterclaim should be dismissed because it seeks
reinstatement – a remedy not available under DC law.
Hopkins v. Price Waterhouse, 920 F.2d 967, 980 (D.C. 1990).
Foster-Bey’s counterclaims do in fact request an order
“reinstating” Foster-Bey to his various positions, which would
not be proper.
Foster-Bey first contends that reinstatement is an
available remedy here because “there is no employment contract
in this case.”
Opp. [Dkt. 81] at 10.
It is not clear, however,
why reinstatement would be available as a remedy for breach of a
contract claim as long as the contract in question is not
formally an “employment contract,” but merely a contract
Regardless, Foster-Bey’s request for
“reinstat[ement]” appears to reflect an inartful choice of words
rather than the remedy Foster-Bey actually seeks.
understands the gravamen of Foster-Bey’s counterclaim to be that
he was not properly terminated, and that members of CSR’s Board
improperly and ineffectively purported to remove him from his
Foster-Bey therefore does not seek
reinstatement but rather recognition that he was not removed,
and that CSR’s Board violated CSR’s bylaws.
barred by DC law.
Such relief is not
Evidently conceding that Foster-Bey has plausibly
alleged that CSR’s bylaws constitute a binding contract giving
rise to a duty on the part of CSR’s officers and Board members,
Plaintiff argues next that Foster-Bey has not plausibly alleged
that the outside Board members violated CSR’s bylaws.
true the allegations of Foster-Bey’s counterclaims, however, the
Court finds that Foster-Bey has in fact plausibly alleged a
breach of CSR’s bylaws.
Pursuant to Section 4.3 of CSR’s bylaws, “[t]he act of
the majority of the directors present at a meeting at which a
quorum is present shall be the act of the board of directors.”
Mot. Exh. A [Dkt. 4-2] at 4.
regular or special meeting.
A Board meeting may be either a
See id. at 3-4.
A special meeting
requires “written notice delivered to each director not less
than three (3) days before such meeting.”
Id. at 4.
waives the notice requirement by attending a meeting unless he
or she does so “for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully
called or convened.”
Section 4.11 of CSR’s Bylaws states that “[a] director
may be removed by a majority vote of the remaining directors at
a regular meeting of the board or a specially called meeting
where the purpose is clearly published to all directors.”
Similarly, section 5.2 provides that “[a]ny officer or
agent elected or appointed by the board of directors may be
removed by the board of directors whenever in its judgment the
best interests of the Corporation will be served thereby.”
Foster-Bey alleges that, after the September 12, 2016
meeting at which the outside Board members raised the issue of
Foster-Bey’s future with CSR, Foster-Bey felt it necessary to
cancel a meeting with “business development consultants”
scheduled to take place September 19, 2016. Am. Counterclaim
[Dkt. 75] ¶¶ 77-79.
On September 18, 2016, Board member Edgar
objected and, after an email exchange, requested that Foster-Bey
meet with the full board the following day.
Id. ¶ 79.
purpose of this meeting was not made known to Foster-Bey in
Id. ¶¶ 79-80.
Foster-Bey alleges further that, at the
September 19 meeting, the Board did not resolve to terminate
Foster-Bey from his various positions.
Id. ¶¶ 87-89.
Taking the above as true, the Board’s subsequent
decision to remove Foster-Bey from his various positions without
a further meeting was not “[t]he act of the majority of the
directors present at a meeting at which a quorum is present,” in
violation of section 4.3 of CSR’s bylaws.
Without a meeting,
the Board was not able to take any action pursuant to that
Foster-Bey has therefore plausibly alleged that
CSR’s outside Board members failed to adhere to CSR’s bylaws by
purporting to remove him from his positions with the company on
September 26, 2016, and by thereafter preventing him from
carrying out his roles at CSR.3
Moreover, taking the above as
true, and drawing all reasonable inferences in Foster-Bey’s
favor, the purpose of the September 19 meeting was not “clearly
published” to Foster-Bey, such that he could be removed from his
position on CSR’s Board under Section 4.11 of CSR’s bylaws
during that meeting.
Mot. Exh. A [Dkt. 4-2] at 5.
director may waive any objection to the notice afforded of a
special Board meeting by attending that meeting under Section
The Court notes further that it is unclear whether
CSR’s bylaws are lawful insofar as they permit the Board to
remove a director. CSR is incorporated in Washington, DC, and
its bylaws are governed by DC law. DC law provides that
directors may be removed before the expiration of their term in
two ways: (1) a vote of the corporation’s shareholders, or (2)
an action brought in DC Superior Court. See D.C. Code § 29306.08; 29-306.09. Courts construing similar laws have found
that, unless specifically permitted by statute, a corporation’s
director may not otherwise be removed by a vote of the remaining
directors. See, e.g., Murray v. Conseco, Inc., 795 N.E.2d 454,
456–57 (Ind. 2003) (“[M]ost jurisdictions reserve the power to
remove a member of the board to the shareholders who elected the
director.”); Kurz v. Holbrook, 989 A.2d 140, 157 (Del. Ch. 2010)
(“For 89 years, Delaware law has barred directors from removing
other directors.”); Laughlin v. Geer, 121 Ill. App. 534, 539
(Ill. App. Ct. 1905) (“If the board of directors of a
corporation organized under the laws of this state have not the
power to remove a director duly elected and serving, it has no
power to adopt a by-law for that purpose.”). While Plaintiff
argues that CSR’s contrary bylaw may be upheld as a Shareholder
agreement pursuant to D.C. Code § 29-305.42, the record does not
clearly establish whether the bylaw meets the requirements of
that provision. Regardless, as Plaintiff’s allegations standing
alone are sufficient to state a claim, the Court need not reach
the issue at this point.
4.3 of CSR’s bylaws, that does not mean the director waives any
objection to a failure to publish the purpose of the meeting
under Section 4.11 – a separate provision of CSR’s bylaws with
Similarly, Foster-Bey has plausibly alleged that the
outside Board Members breached CSR’s Trust Agreement in
purporting to terminate him from his position as Trustee of
Section 5.2 of CSR’s Employee Stock Ownership Trust
Agreement states that “[t]he Company may remove the Trustee by
giving (30) days’ advance written notice to the Trustee, subject
to providing the removed Trustee with satisfactory written
evidence of the appointment of a successor Trustee and of the
successor Trustee’s acceptance of the trusteeship.”
B. [Dkt. 4-3] at 8.
The notice of termination here purported to
be effective immediately, failing to provide Foster-Bey with the
required 30 days’ notice.
Moreover, Foster-Bey alleges that the
outside Board members sent him a notice of termination without
having voted on the issue at the September 19 meeting, see Am.
Counterclaim [Dkt. 75] ¶¶ 112-14, and thus the notice was again
not the product of a proper corporate action under Section 4.3
of CSR’s bylaws.
In light of the above, Foster-Bey has
plausibly alleged that CSR, Incorporated – through Neil, Edgar,
and Marsden – breached both CSR’s bylaws and CSR’s Employee
Stock Ownership Trust Agreement.
D. Foster-Bey’s Claims for Indemnification
Finally, Plaintiff contends that Foster-Bey’s claim
for indemnification should be dismissed because it has not yet
Specifically, Plaintiff argues that Foster-Bey must
show that he has already paid his attorney’s fees before he is
entitled to indemnification.
Plaintiff’s argument fails to recognize the difference
between indemnification against loss and indemnification against
Where a contractual term, such as the provision of
the Trust Agreement at issue in this case, indemnifies a party
against liability, the indemnification cause of action accrues
when the indemnified party becomes subject to liability and the
indemnifying party has not paid the amount due.
Inc. v. Diamond, No. 1:15-CV-01631-GBL, 2016 WL 4445470, at *5
(E.D. Va. Aug. 19, 2016).
The case upon which Plaintiff relies,
Virginia International Terminals, Inc. v. Ceres Marine
Terminals, Inc., 879 F. Supp. 31 (E.D. Va. 1995), is, as one
Virginia Court has explained, inapposite where the indemnity
against liability doctrine applies and the claim for indemnity
is just one among several claims.
See Jackson v. Quantrex
Integrated Tech. Grp., Inc., 57 Va. Cir. 368, 2002 WL 220340, at
Here, Foster-Bey has incurred legal expenses that
are fixed and owed.
He need not pay any portion of those
expenses before his cause of action for indemnity accrues.
For the above reasons, the Court will deny Plaintiff’s
Motion to Dismiss Foster-Bey’s Amended Counterclaims.
will further require Plaintiff to file an answer to Defendant’s
Amended Counterclaims within fourteen (14) days.
An appropriate order will issue.
May 10, 2017
James C. Cacheris
UNITED STATES DISTRICT COURT JUDGE
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