Quinn v. Knight et al

Filing 143

OPINION re: 97 Order. See for complete details. Signed by District Judge John A. Gibney, Jr. on 11/01/2016. (nbrow)

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
Richmond Division
JAMES QUINN, Derivatively on Behalf of
Nominal Defendant APPLE REIT TEN, INC.,
Plaintiff,

v.

Civil Action No. 3:16-cv-610

GLADE M. KNIGHT et al.,
Defendants.
OPINION
The plaintiff, James Quinn, brings this derivative lawsuit alleging the defendants'
breached their fiduciary duties to the shareholders of Apple REIT Ten, Inc. ("Apple Ten") in the
merger of Apple Ten and Apple Hospitality REIT, Inc. ("Apple Hospitality"). The Court heard
oral argument on Quinn's motion for a preliminary injunction and denied the motion. The
defendants filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 23.1, arguing
that Quinn cannot fairly and adequately represent Apple Ten. Subsequently, the Apple Ten
defendants 1 and the Apple Hospitality defendants 2 brought separate motions to dismiss for lack
of standing and for failure to state a claim. The Court finds that Quinn has standing to fairly and
adequately represent Apple Ten in this derivative action because he represents the interests of the
Apple Ten shareholders and owned stock in Apple Ten at the time of the alleged wrongdoing.
Additionally, neither the Apple Ten shareholder's vote in favor of the merger, the Virginia
Statute on Limitations of Remedies, nor Apple Ten's Articles of Incorporation bars this suit.

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The Apple Ten defendants are Glade Knight, Kent Colton, R. Garnett Hall, David Adams, and
Anthony Keating.
2
The Apple Hospitality defendants are David Buckley, Kristian Gathright, Justin Knight, David
McKenney, Bryan Peery, and Apple Hospitality.

Quinn also adequately pleads claims against the Apple Hospitality defendants for aiding and
abetting the Apple Ten defendants' breach of fiduciary duties.

I. BACKGROUND
The heart of the alleged misconduct involves Glade Knight, the Executive Chairman of
Apple Hospitality, and his son, Justin Knight, the President of Apple Ten and President and CEO
of Apple Hospitality. Quinn says that Glade and Justin Knight sought the merger of Apple Ten
and Apple Hospitality because it triggered a conversion of Apple Ten series B stock and made
Glade Knight close to sixty-five million dollars in the process. Glade Knight utilized the highly
overlapping executive boards of each company, fueled by millions of dollars in special
compensation to Apple Hospitality officers, to push through the merger.
Although Apple Ten established a Special Committee to consider the merger, its
members had long-time relationships with Glade Knight and had served on the boards of prior
Apple REIT companies. These considerations compromised the Special Committee's ability to
act independently on behalf of Apple Ten. Essentially, Quinn says that the Special Committee
members knew about Glade Knight's financial interests in the merger and had incentives to help
Knight, not to protect Apple Ten.

The Special Committee, therefore, engaged in superficial

negotiations in which they bowed to the desires of Apple Hospitality. The Committee members
failed to inform themselves as to Apple Ten's true value. They hired non-independent financial
and legal advisors with ties to the Knight family and refused to explore any third-party
acquisition options prior to signing a deal with Apple Hospitality. Further, the Committee failed
to provide full financial disclosures to Apple Ten's shareholders about the worth of Apple Ten
shares. These actions resulted in a severe under-valuation of Apple Ten by Apple Hospitality
and denied Apple Ten's shareholders fair compensation for their shares. Further, Quinn says that

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Apple Hospitality's officers and directors knew of the Apple Ten defendants' breaches of
fiduciary duty, but participated in the tainted negotiations because they stood to make millions of
dollars from the merger.
Following this Court's denial of the preliminary injunction motion, the Apple Ten
shareholders approved the merger. Quinn, who owned stock in both companies prior to the
merger, now seeks damages for the defendants' breach of fiduciary duties and injunctive relief
rescinding the merger.
II. DISCUSSION
A. Quinn Has Standing to Bring a Derivative Suit
A shareholder derivative suit deputizes shareholders to protect themselves "from the
designing schemes and wiles of insiders who are willing to betray their company's interests in
order to enrich themselves." Simmons v. Miller, 261 Va. 561, 573, 544 S.E.2d 666, 674 (2001)
(quoting Surowitz v. Hilton Hotels Corp., 383 U.S. 363, 371 (1966)). Virginia law requires that
"suits for breach of fiduciary duty against officers and directors must be brought derivatively on
behalf of the corporation and not as individual shareholder claims." Id at 576, 544 S.E.2d at
67 5. A plaintiff must satisfy a number of procedural hurdles in order to bring a derivative action.
First, the plaintiff must "fairly and adequately represent[] the interests of the corporation." Va.
Code Ann. § 13 .1-672.1.

Second, a plaintiff "shall not commence or maintain a derivative

proceeding unless the shareholder ... was a shareholder of the corporation at the time of the act
or omission complained of. " 3 Id

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Third, a plaintiff must make a written demand on the corporation, which the parties do not
dispute in this case. Va. Code Ann.§ 13.1-672.l(A).
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i. Quinn Adequately and Fairly Represents the Interests ofApple Ten
Although Quinn owns stock in in both Apple Ten and Apple Hospitality, he can
nonetheless fairly and adequately represent the interests of Apple Ten in this derivative lawsuit. 4
Virginia law and the Federal Rules of Civil Procedure require a plaintiff to fairly and adequately
represent the interests of shareholders in enforcing the rights of the corporation. See Fed. R. Civ.
P. 23.1; Va. Code Ann.§ 13.1-672.l(A)(4). When determining the adequacy of representation,
courts consider a number of factors including (1) the economic antagonisms between the
derivative claimant and the rest of the shareholders; (2) the remedies sought; (3) indications that
the plaintiff is not the driving force behind the litigation; and (4) the degree of support received
from the shareholders. See Argiropoulos v. Kopp, No. CBB-06-0769, 2007 U.S. Dist. LEXIS
22351, at *20-22 (D. Md. Mar. 26, 2007) (citing Davis v. Corned, Inc., 619 F.2d 588, 593-94 (6th
Cir. 1980)). Further, "a plaintiff is not necessarily disabled to bring suit simply because some of
his interests extend beyond that of the class .... " Davis, 619 F.2d at 593.
Neither party cited, nor did this Court find, caselaw stating that stock ownership in both
sides of a merger prevents a plaintiff from maintaining a derivative action. Despite the fact that
Quinn owned more Apple Hospitality stock than he owned of Apple Ten stock prior to the
merger, the parties have not submitted any evidence to show that Quinn does not stand to benefit,
overall, from winning this case. From a financial perspective, there is no evidence that if Apple
Hospitality paid more for Apple Ten's shares that it would harm Apple Hospitality's stock price.
Further, even if Apple Hospitality were to suffer some financial loss, there is no evidence that a

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The Court may properly consider this fact not mentioned in the complaint and courts have
determined that it is best to address issues of derivative standing early in an action. See Ryan v.
Aetna Life Ins. Co., 765 F. Supp. 133, 136 (S.D.N.Y. 1991). Ultimately, even in considering this
fact outside of the pleadings, the dual ownership fails to strip Quinn's derivative standing.
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favorable outcome for Apple Ten shareholders would not overcome any loss Quinn suffered as
an Apple Hospitality shareholder. Further, Quinn maintains that he brings this action as a check
on the Knights, who manage and direct Apple Hospitality. This interest aligns Quinn with the
Apple Ten shareholders who had their Apple Ten stock converted to Apple Hospitality stock
following the merger. Thus, Quinn's economic interests do not create conflicting economic
antagonisms which prevent him from adequately representing the interests of Apple Ten.
The rest of the factors also weigh in favor of Quinn's ability to fairly and adequately
represent the interests of Apple Ten. First, Quinn now seeks remedies to hold the defendants
accountable for the alleged breaches of fiduciary duty and to rescind the merger if the
shareholders voted without adequate financial disclosures. Next, Quinn has demonstrated that he
is in fact the driving force of this litigation, in which he sought out financial and legal counsel
concerning the deal and has committed substantial time and effort towards the prosecution of this
case. Finally, although other Apple Ten shareholders have not joined this suit, this fact alone
does not prevent Quinn from maintaining his derivative claims.

ii. Quinn Owned Apple Ten Stock at the Time of the Act Complained Of
Virginia law states that "a shareholder shall not commence or maintain a derivative
proceeding unless the shareholder ... was a shareholder of the corporation at the time of the act
or omission complained of." Va. Code Ann.§ 13.1-741.l(A). The Supreme Court of Virginia
has stated that it is "bound by the plain meaning" of statutory language when "the language is
clear and unambiguous." Cummings v. Fulghum, 261 Va. 73, 77, 540 S.E.2d 494, 496 (2001).
Canons of statutory interpretation counsel a plain-meaning interpretation of the statute which
does not require a plaintiff to maintain continuous stock ownership from the moment of the

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alleged wrong to the conclusion of litigation, and Quinn's ownership of stock at the time of the
alleged wrong satisfies the statute.

B. The Complaint States Claims Upon Which Relief Can be Granted 5
i. The Apple Ten Shareholder's Vote in Favor of the Merger Does Not Bar this Litigation

As a general rule, shareholder ratification can act as "a bar to the right of the plaintiff to
bring the suit for the benefit of the corporation." See Koch v. Seventh St. Realty Corp., 205 Va.
65, 70, 135 S.E.2d 131, 134 (1964). In Koch, the defendants acted in allegedly self-dealing
contracts, which a majority of shareholders then voted on and approved. Id The Supreme Court
of Virginia determined that the voter approval barred the derivative suit, but did not consider the
issue of whether the shareholders acted on an informed basis. Id Delaware courts addressing
this issue have highlighted that shareholder ratification only serves as a bar to litigation where
the majority of "fully informed" shareholders approved the actions.

Corwin v. KKR Fin.

Holdings LLC, 125 A.3d 304, 306 (Del. 2015); Gant/er v. Stephens, 965 A.2d 695, 714 (Del.

2009) ("[B]ecause we have determined that the complaint states a cognizable claim that the
Reclassification Proxy was materially misleading ... that precludes ruling at this procedural
juncture, as a matter of law, that the Reclassification was fully informed.

Therefore, the

approving shareholder vote did not operate as a 'ratification' of the challenged conduct in any
legally meaningful sense.").

In this case, the complaint alleges that defendants' actions

prevented shareholders from voting on an informed basis due to the missing information about
the defendants' financial interests in the merger and th.e alleged incomplete financial information
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To survive a 12(b)(6) motion to dismiss, a complaint must state facts that, when accepted as
true, "state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (quoting Bell At!. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A Rule 12(b)(6) motion
gauges the sufficiency of a complaint without resolving any factual discrepancies, testing the
merits of the claim or judging the applicability of any defenses raised by the non-moving party.
Republican Party ofN.C. v. Martin, 960 F.2d 943, 952 (4th Cir. 1992).
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in the proxy statements. At the motion to dismiss stage, Quinn has adequately alleged facts
demonstrating a plausible claim that the shareholders lacked access to pertinent facts when they
approved the merger, and their approval does not bar this derivative action.
ii. Quinn Can Maintain this Action Despite Virginia's Statute on Limitations of Remedies

Under Virginia law, "the legality of a proposed or completed corporate action described
in subsection A of§ 13.1-730 may not be contested, nor may the corporate action be enjoined,
set aside or rescinded, in a legal or equitable proceeding by a shareholder after the shareholders
have approved the corporate action." Va. Code Ann. § 13 .1-741.1 (A). The statute does not bar
lawsuits such as this one where the complaint seeks not only equitable relief declaring the
merger unlawful but also seeks damages resulting from the defendants' alleged breach of
fiduciary duties. Quinn can maintain his claim for breach of fiduciary duties even if he cannot
ultimately obtain one of the various remedies sought, and the Court will not dismiss a remedy at
the motion to dismiss stage. See Facchetti v. Vest, et al., Civ. Action No. 5:15-cv-49-EKD,
(W.D. Va. July 18, 2016) ("Rule 12(b)(6) does not provide a vehicle to dismiss a portion of relief
sought or a specific remedy, but only to dismiss a claim in its entirety." ) (collecting cases).
Further, the statute does not apply to corporate action "procured as a result of fraud, a material
misrepresentation, or an omission of a material fact necessary to make statements made, in light
of the circumstances in which they were made, not misleading." Id The Court need not decide
at this time whether this exception applies.

iii. Apple Ten's Articles of Incorporation Do Not Bar this Case
Virginia law allows for a corporation to limit or eliminate the liability of its directors and
officers so long as they do not engage "in willful misconduct or a knowing violation of the
criminal law or of any federal or state securities law, including, without limitation, any claim of

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unlawful insider trading or manipulation of the market for any security." Va. Code Ann. § 13.1692.1.

Neither party disputes that Apple Ten's Articles of Incorporation provide such

protections, and the Court may take judicial notice of those Articles. See Capital Associated

Indus., Inc. v. Cooper, 129 F. Supp. 3d 281, 289 (M.D.N.C. 2015).

An action constitutes

"willful misconduct if the actor commits an intentional act or omission that is wrongful,
regardless of whether the injury was intended." DCG&T ex rel. Battaglia/Ira v. Knight, 68 F.
Supp. 3d 579, 588 (E.D. Va. 2014) (citing In re LandAmerica Fin. Grp., Inc., 470 B.R. 759, 785
(Bankr. E.D. Va. 2012)). The complaint alleges that the defendants intentionally favored the
interests of corporate insiders, failed to inform themselves of the true value of Apple Ten's
shares, engaged in a conflicted negotiation and decision-making process, and failed to inform the
shareholders of the Apple Ten's real worth. Taking the allegations in the complaint as true, the
plaintiff states a plausible claim that the defendants acted willfully in the best interests of
themselves and the Knights instead of the best interests of Apple Ten and its shareholders.

iv. The Complaint States a Claim Against the Apple Hospitality Defendants
The Supreme Court of Virginia has not formally recognized a cause of action for aiding
and abetting a breach of fiduciary duties, but has stated that, were the cause of action to exist, it
would require that the defendant had "actual knowledge" of the other's breach of fiduciary duty
and that the defendant knowingly participated in the breach. Halifax Corp. v. Wachovia Bank,
268 Va. 641, 659-60 (2004). Further, "even if this claim is not to be treated as a separate tort, it
appears to be a viable alternative theory to secure joint liability." All. Tech. Grp. V. Achieve J,

LLC, Civ. Action, No. 3:12CV701-HEH, 2013 WL 143500, at *5 (E.D. Va. Jan. 11, 2013)
(determining that to state a claim for aiding and abetting, a plaintiff must plead that a defendant:
"(1) knows about another's duty and breach; (2) participated in or directs its commission; and (3)

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benefits from it"). The allegat ions in the complaint sati sfy these requi rements, alleging that the
Apple Hospitality defendants knew of Glade Knight's fi nancial interests in the merger, engaged
in sham negotiations regarding Apple Ten's purchase, and benefi ted either tlu·ough special
compensation from Glade Knight or by winning his favor. It is true, as the defendants' contend,
that the Apple Hospitality defend ants had fiduciary duti es of their own to Apple Hospi tality
shareholders, but this alone does not prevent them fro m meeting the elements of aiding and
abetting another's breach of duties. The Court will not dismi ss the claim at this stage of the
litigation.
III. Conclusion
For these reasons, the Court DENIES the defendants' motions to dismiss.
Let the Clerk send a copy of this Opinion to all counsel of record.

Isl
John A. Gibney, Jr.

Date: November 1. 20 16
Ri chmond, VA

United States Di

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