James v. Paton et al

Filing 90

ORDER Granting the Sheehan Defendants' 35 Motion for Summary Judgment, by Judge Robert S. Lasnik. Plaintiff's claims are barred by the business judgment rule and are hereby DISMISSED as to the Sheehan defendants. (KERR)

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UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON
AT SEATTLE
_______________________________________
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NANCY L. JAMES, Chapter 7 Trustee
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Plaintiff,
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v.
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JAMES C. PATON, et al.,
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Defendants,
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v.
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CLARK NUBER, P.S.,
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Third Party Defendant.
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_______________________________________)

Civil Case No. C15-1914RSL

ORDER GRANTING THE SHEEHAN
DEFENDANTS’ MOTION FOR
SUMMARY JUDGMENT

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This matter comes before the Court on the “Sheehan Defendants’ Motion to Dismiss on

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Summary Judgment” in the above-captioned matter. Dkt. # 35. Plaintiff, the Chapter 7 Trustee

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for the Breast Cancer Prevention Fund (“BCPF”), alleges that defendant James Sheehan was a

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director of BCPF from 2008 to 2012 and that he violated various duties owed to BCPF. The

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Trustee asserts negligence, breach of fiduciary duty, and breach of charitable trust claims against

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Sheehan and his wife based on Sheehan’s failure to investigate, discover, and prevent the alleged

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self-dealing of another BCPF director. Defendants seek dismissal of all claims against them,

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arguing that the allegations are insufficient to state a claim upon which relief can be granted

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and/or are barred by the statute of limitations.

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ORDER GRANTING THE SHEEHAN DEFENDANTS’
MOTION FOR SUMMARY JUDGMENT - 1

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Summary judgment is appropriate when, viewing the facts in the light most favorable to
the nonmoving party, there is no genuine issue of material fact that would preclude the entry of
judgment as a matter of law. The party seeking summary dismissal of the case “bears the initial
responsibility of informing the district court of the basis for its motion” (Celotex Corp. v.
Catrett, 477 U.S. 317, 323 (1986)) and “citing to particular parts of materials in the record” that
show the absence of a genuine issue of material fact (Fed. R. Civ. P. 56(c)). Once the moving
party has satisfied its burden, it is entitled to summary judgment if the non-moving party fails to
designate “specific facts showing that there is a genuine issue for trial.” Celotex Corp., 477 U.S.
at 324. The Court will “view the evidence in the light most favorable to the nonmoving party . . .
and draw all reasonable inferences in that party’s favor.” Krechman v. County of Riverside, 723
F.3d 1104, 1109 (9th Cir. 2013). Although the Court must reserve for the jury genuine issues
regarding credibility, the weight of the evidence, and legitimate inferences, the “mere existence
of a scintilla of evidence in support of the non-moving party’s position will be insufficient” to
avoid judgment. City of Pomona v. SQM N. Am. Corp., 750 F.3d 1036, 1049 (9th Cir. 2014);
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986). Summary judgment should be
granted where the nonmoving party fails to offer evidence from which a reasonable jury could
return a verdict in its favor. FreecycleSunnyvale v. Freecycle Network, 626 F.3d 509, 514 (9th
Cir. 2010).

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Having reviewed the Second Amended Complaint1 and the memoranda, declarations, and
exhibits submitted by the parties and having heard the arguments of counsel, the Court finds as
follows:

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Plaintiff amended her complaint on March 1, 2016, after these motions were fully briefed. The
relevant allegations are unchanged.

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ORDER GRANTING THE SHEEHAN DEFENDANTS’
MOTION FOR SUMMARY JUDGMENT - 2

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A. EXCULPATORY PROVISIONS OF BCPF’S BYLAWS
At least one version of BCPF’s bylaws provides that its “directors shall not be personally
liable for the debts, liabilities, or other obligations of the corporation” and that “[t]he directors
and officers of the corporation shall be indemnified to the fullest extent permissible under the
laws of this state.” To the extent Sheehan is relying on these provisions to immunize him from
suit, the Court finds the argument unpersuasive. With regards to the first provision, the Trustee is
not seeking to hold defendants liable for a corporate debt or obligation. Rather, the Trustee
alleges that defendants are liable to the corporation for their own breach of duties. The fact that
any recovery obtained may ultimately be used to pay BCPF’s creditors does not convert the
claim into a debt, liability, or obligation of the corporation. As for the indemnification provision,
it does not, on its face, immunize the directors from suit. If defendants were to be held liable in
this case, they might have a claim for indemnification against the debtor. A claim for
indemnification is not, however, an immunity from suit in the first instance.
To the extent Sheehan challenges the adequacy of the pleadings in the context of the
“laws of this state,” namely the business judgment rule, the argument is discussed below.
B. BUSINESS JUDGMENT RULE
The Trustee alleges that BCPF’s founder and president, James Paton, personally and
improperly benefitted from the charitable organization by causing BCPF to contract with Legacy
Telemarketing, a fundraising company controlled by Paton. The Trustee seeks to hold Sheehan
liable for damages caused by Paton’s alleged malfeasance on the ground that Sheehan failed to
oversee the request for proposal process that resulted in the selection of Legacy as BCPF’s
telemarketer. In Washington, corporate officers and directors are immunized from liabilities
arising from corporate transactions as long as the decision to engage in the transaction was an
appropriate exercise of business judgment. For the reasons stated in the Order Dismissing
Claims Against Bottenberg, Vincent, and Wood, plaintiff failed to plead facts giving rise to a

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ORDER GRANTING THE SHEEHAN DEFENDANTS’
MOTION FOR SUMMARY JUDGMENT - 3

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plausible inference that the directors acted outside their authority, failed to exercise reasonable
care, and/or acted in bad faith without an honest belief that the action was in the best interests of
the corporation. Potter v. Hughes, 546 F.3d 1051, 1059 n.3 (9th Cir. 2008). In the context of this
motion for summary judgment, the Trustee argues that Sheehan knew of Paton’s relationship
with Legacy Telemarketing, that he allowed himself to be hoodwinked by Paton, and that
Sheehan should have distrusted Paton more and excluded him from the request for proposal
process. Sheehan, on the other hand, has submitted evidence that Paton’s relationship with
Legacy was not a secret, that he relied on his fellow board member and an outside accounting
firm for financial information, and that he had no reason to doubt them. Dkt. # 36 at 2-3. The
record also shows that Sheehan had known Paton for 35-40 years and had never been given any
reason to mistrust his judgment, honesty, or motives. Dkt. # 61 at 13.
The Trustee has not come forward with evidence that raises a genuine issue of fact
regarding the applicability of the business judgment rule. There is no evidence from which one
could reasonably infer subjective bad faith, disloyalty, or intentional wrongdoing on Sheehan’s
part. The Trustee relies solely on the argument that Sheehan should have been more distrustful,
should have suspected Paton of self-dealing, and should have rejected his expertise and
recommendations on all fundraising matters. Under Washington law, however, a director is
entitled to rely on facts and information provided to the board as long as the director reasonably
believes the source is reliable and competent. RCW 23B.08.300. There is no evidence that
Sheehan subjectively distrusted Paton or that he did not reasonably believe that Paton was a
reputable businessman who started BCPF for altruistic reasons and was using his expertise and
connections for the benefit of the organization. The accounting firm BCPF hired to conduct
audits and verify BCPF’s financials did not raise any concerns. Even if the Court assumes that
Sheehan was wrong to trust Paton, an error in judgment does not strip him of the protections of
the business judgment rule.

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ORDER GRANTING THE SHEEHAN DEFENDANTS’
MOTION FOR SUMMARY JUDGMENT - 4

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C. STATUTES OF LIMITATIONS
The parties agree that the claims asserted in this litigation are governed by a three year

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statute of limitations. Sheehan argues that any claim based on actions that occurred before July

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2, 2010, was barred by the time BCPF filed its bankruptcy petition on July 2, 2013, and cannot

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now be pursued. The Trustee argues that the discovery rule and the analogous doctrine of

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adverse domination toll the limitations period in this case. For the reasons set forth in the “Order

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Granting Defendant Tomanka’s Motion for Summary Judgment,” in the absence of any evidence

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that Sheehan was aware of Paton’s alleged self-dealing or took any steps to conceal information

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regarding the misconduct, BCPF’s claims against Sheehan accrued at the time of his alleged

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malfeasance. Thus, any claim arising from actions prior to July 2, 2010, are time-barred.

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For all of the foregoing reasons, Sheehan’s motion for summary judgment (Dkt. # 35) is

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GRANTED. Plaintiff’s claims are barred by the business judgment rule and are hereby

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DISMISSED as to the Sheehan defendants.

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Dated this 19th day of April, 2016.

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A

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Robert S. Lasnik
United States District Judge

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ORDER GRANTING THE SHEEHAN DEFENDANTS’
MOTION FOR SUMMARY JUDGMENT - 5