Islet Scis., Inc. v. Brighthaven Ventures, LLC, 2017 NCBC 4.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION COUNTY OF WAKE 15 CVS 16388
ISLET SCIENCES, INC. ) Plaintiff, ) ) v. ) OPINION AND ORDER ON ) GREEN AND WILKISON’S ) MOTIONS BRIGHTHAVEN VENTURES, LLC, ) JAMES GREEN, WILLIAM WILKISON, ) OFSINK LLC, and DARREN OFSINK, ) Defendants, ) ) and ) ) BRIGHTHAVEN VENTURES LLC, ) Third-Party Plaintiff, ) ) v. ) ) JOHN F. STEEL, IV, EDWARD T. ) GIBSTEIN, and COVA CAPITAL ) PARTNERS, LLC, ) Third-Party Defendants. )
THIS MATTER comes before the Court on Defendants James Green and
William Wilkison’s Motion for Judgment on the Pleadings (“Motion for Judgment”)
pursuant to Rule 12(c) of the North Carolina Rules of Civil Procedure (“Rule(s)”) and
their Motion to Dismiss First Amended Complaint (“Motion to Dismiss Amended
Complaint”) pursuant to Rule 12(b)(6) (collectively “Motions”).
THE COURT, having considered the Motions, the briefs in support of and in
opposition to the Motions, the oral arguments of counsel presented at the hearing,
and other appropriate matters of record, concludes that the Motion for Judgment should be GRANTED, in part, and DENIED, in part, and the Motion to Dismiss
Amended Complaint should be GRANTED, in part, and DENIED, in part, for the
reasons set forth below.
McGuireWoods LLP by Michael F. Easley, Jr, Esq., Irving M. Brenner, Esq., Michael L Simes, Esq., for Plaintiff Islet Sciences, Inc and for Third-Party Defendants John F. Steel, IV, Edward T. Gibstein, and COVA Capital Partners, LLC.
Parry Tyndall White by K. Allan Parry, Esq., for Defendants James Green and William Wilkison.
Jerry Meek, PLLC by Gerald F. Meek, Esq. for Defendant Brighthaven Ventures, LLC.
Young Moore and Henderson, P.A. by Walter E. Brock, Jr., Esq. for Defendants Offsink LLC and Darren Offsink.
McGuire, Judge.
FACTUAL AND PROCEDURAL BACKGROUND
1. The Court does not make findings of fact on a motion for judgment on
the pleadings; rather, “[a]ll allegations in the nonmovant’s pleadings, except
conclusions of law, legally impossible facts, and matters not admissible in evidence
at trial, are deemed admitted by the movant for the purposes of the motion.” Ragsdale
v. Kennedy, 286 N.C. 130, 137, 209 S.E.2d 494, 499 (1974).
2. Plaintiff Islet Sciences, Inc. (“Islet” or “Plaintiff”) is a public corporation
organized and existing under the laws of the State of Nevada with its headquarters
in Raleigh, North Carolina. Islet is in the business of developing and commercializing
new medicines and technologies to treat patients suffering from metabolic disease. 3. Defendant Brighthaven Ventures, LLC (“BHV”) is a privately-owned
pharmaceutical research and development company headquartered in Raleigh, North
Carolina. BHV develops pharmaceutical products to treat obesity-related health
complications. Defendants James Green (“Green”) and William Wilkison (“Wilkison”)
own BHV.
4. At all times relevant to this lawsuit, BHV was developing the SGLT2
inhibitor remoglifozin etzbonate (“Remo”) to treat type 2 diabetes and nonalcoholic
steatohepatitis. At the time the complaint was filed, Remo was in phase IIb clinical
development. In or about 2010, BHV entered into a licensing agreement with Kissei
Pharmaceuticals (“Kissei”), the original creator and developer of Remo, for exclusive
worldwide rights to Remo excluding the territory of Japan (“Kissei License”). The
Kissei License required BHV to pay “‘milestone’ payments based on the progress of
Remo through the various clinical stages,” equaling approximately $67,500,000. (Am.
Compl. ¶ 14.)
5. On or around September 2013, Islet, through its investment banker
COVA Capital Partners (“COVA”) and its principal and CEO Edward Gibstein
(“Gibstein”), approached Green and Wilkison about joining Islet’s management team
and about Islet and BHV jointly developing Remo. On October 25, 2013, Islet’s board
appointed Green as CEO and Wilkison as COO of Islet. On October 30, 2013, Islet
executed written Employment Agreements with Green and Wilkison (“Employment
Agreements”). 6. Islet and BHV thereafter negotiated the terms of a license for Remo from
BHV to Islet. Plaintiff alleges that “[b]ecause Green and Wilkison were both officers
of Islet and joint owners of BHV, they were negotiating on both sides of the
transaction” and “committ[ed] Islet to terms that were favorable to the defendants
and directly against Islet’s interests.” (Id. ¶ 19.)
7. On January 25, 2014, COVA suggested to Islet’s board of directors that
Islet acquire BHV instead of licensing Remo from BHV. Subsequently, the parties
discussed Islet’s acquisition of BHV in exchange for an “upfront minority share grant
plus additional milestone payments related to Remo’s development” to be paid to
Green and Wilkison. (Id. ¶ 22.) During the same period, Green negotiated a reduction
of the amount of the milestone payments to be made by BHV to Kissei from
$67,500,000 to $25,000,000. (Id. ¶¶ 23–25.) Plaintiff alleges that the more than $40
million in payment reductions should have inured to the benefit of Islet, but Green
and Wilkison subsequently engaged in “self-dealing” to “steal the benefit” of reduced
milestone payments for the benefit of Green, Wilkison, and BHV. (Id. ¶ 26.)
8. On or about February 9, 2014, the parties agreed on the “key terms” of
a merger pursuant to which Islet was to acquire a 100% membership interest in BHV
“in exchange for Islet issuing 30 million shares of Islet common stock to Green and
Wilkison and the potential for up to $71 million of additional purchase price
payments based on the achievement of certain milestones.” (Id. ¶ 27.) Plaintiff alleges
that the decision as to whether the milestone payments would be made in cash or in shares of Islet stock was to be made exclusively by the Islet board of directors. (Id. ¶
31.)
9. Islet was in need of capital, so on or about February 11, 2014, Green and
Wilkison, along with Gibstein, met with Richard Schoninger (“Schoninger”) to solicit
investments from Schoninger and others. Schoninger agreed to invest $1 million in
Islet in exchange for Green’s and Wilkison’s agreement to sell BHV to Islet on the
terms described above. In exchange for his $1 million, Schoninger received 4 million
common shares of Islet common stock. Plaintiff alleges that “Green and Wilkison
diverted some or all of [Schoninger’s investment] to the benefit of [ ] BHV in violation
of their fiduciary duties to Islet and its shareholders.” (Id. ¶ 34.)
10. On March 7, 2014 Islet’s board was presented with a letter of intent to
merge with BHV that contained terms that were “materially different” from the terms
that Green and Wilkison had agreed to with Schoninger and COVA, and more
favorable to Green and Wilkison. For example, the letter of intent removed Islet’s
discretion to make milestone payments to Green and Wilkison in cash and required
Islet to make the payments in shares of Islet stock. The letter of intent also changed
the method of valuing the stock to one much more favorable to Green and Wilkison.
Plaintiff alleges that “Green and Wilkison . . . made the changes to the merger
structure in order to benefit themselves at the expense of Islet and its [ ]
shareholders.” (Id. ¶ 37.) Plaintiff also alleges that Green and Wilkison delayed the
public disclosure of the new merger terms until after Schoninger and other investors signed their subscription agreements and made their investments in Islet on March
10, 2014. (Id. ¶ 44.)
11. A year later, on March 9, 2015, Islet terminated the merger agreement
with BHV. Instead, Green and Wilkison “forced” Islet to execute a licensing
agreement with BHV for the rights to Remo that required an upfront payment of $5
million from Islet to Green and Wilkison, $112 million in additional milestone
payments, royalties on net sales, a forced minimum capital raise of $10 million, and
the exclusion of the territories of Latin America and Asia. (Id. ¶¶ 57–58.)
Subsequently, some of the directors who voted in favor of terminating the merger
agreement expressed concerns that Green and Wilkison had conflicts of interest in
entering into the licensing agreement, and several members of the board of directors
resigned. After the resignations, Green and Wilkison entered Islet into a bridge
financing transaction that increased Islet’s debt. The value of Islet’s stock dropped
significantly throughout this period.
12. Plaintiff also alleges that during their tenure as officers and directors of
Islet, Green and Wilkison diverted Islet funds for the benefit of BHV, including
obligating Islet to a lease it was unable to pay, failing to pursue valuable assets for
Islet, missing payments of licensing obligations, and failing to maintain Islet’s
compliance with federal securities regulations. (Id. ¶¶ 47–51.)
13. In June, 2015, Islet’s shareholders filed a petition in the Nevada District
Court for Clark County, Nevada, asking the court to compel Islet to call a
shareholders meeting to elect a board of directors. The Court subsequently issued an order granting a writ of mandamus, compelling a shareholders meeting to elect
directors. (Id. ¶¶ 75–77.) The shareholders meeting was set for September 3, 2015.
14. On July 23, 2015, Green and Wilkison resigned as officers of Islet, but
maintained their positions as directors.
15. On August 25, 2015, Islet entered into written release agreements with
Green and Wilkison. (Id. ¶ 87; Green and Wilkison’s Answer & Countercl., Exs. A and
B, “Executive Releases”). In relevant part, these Executive Releases provided as
follows:
In lieu of payment of the Separation Benefits, which the Company represents that it is presently unable to pay to Executive, and in consideration of the release . . . the Company . . . releases, waives, and discharges Executive . . . from all claims, debts, liabilities, demands, obligations, promises, acts, agreements, costs, expenses, damages, actions, and causes of action, whether in law or equity, whether known or unknown, suspected or unsuspected, arising from Executive’s employment, termination from employment with Company and/or service on the Company’s board of directors. . . .
(Executive Releases ¶ 2.) The Executive Releases were signed for Islet by directors
Antonio O’Ferral and James Snapper.
16. Plaintiff alleges that Green and Wilkison “used their positions on the
board of directors to have fellow directors—all of whom knew that they were about to
be removed as Islet directors—expressly insulate Green and Wilkison from liability”
by executing the Executive Releases. (Am. Compl. ¶ 87). On or about September 24,
2015, Islet shareholders removed Green, Wilkison, Snapper, and O’Ferral as directors
by written consent. 17. On December 11, 2015, Plaintiff initiated this lawsuit by filing a
Complaint. On December 14, 2015, this case was designated a mandatory complex
business case by Order of the Chief Justice of the North Carolina Supreme Court,
pursuant to N.C. Gen. Stat. § 7A-45.4(b) (hereinafter, references to the North
Carolina General Statutes will be to “G.S.”), and assigned to the undersigned Special
Superior Court Judge for Complex Business Cases by Order of Chief Judge James L.
Gale on December 14, 2015.
18. On February 19, 2016, Green and Wilkison filed their Answer and
Counterclaims. As counterclaims, Green and Wilkison allege that Plaintiff breached
their respective Employment Agreements by, inter alia, refusing to advance them
their legal fees and costs in defending this lawsuit and other lawsuits in which they
are involved. Green and Wilkison also seek a declaratory judgment declaring that
Islet is required to advance them attorneys’ fees and costs and indemnify them under
the Employment Agreements and Nevada law.
19. On February 19, 2016, Green and Wilkison also filed a Motion to
Dismiss pursuant to Rule 12(b)(6), seeking dismissal of Plaintiff’s claims against
them.
20. On March 31, 2016, Plaintiff filed a motion for leave to amend the
Complaint. On April 19, 2016, Plaintiff filed a Consent Motion to File Amended
Complaint, and on April 20, 2016, the Court entered an Order granting Plaintiff leave
to file its First Amended Complaint. 21. In the First Amended Complaint, Plaintiff makes claims against Green
and Wilkison for breach of fiduciary duty, constructive fraud, unjust enrichment, and
for imposition of a constructive trust.
22. On May 20, 2016, Green and Wilkison filed their Answer to the First
Amended Complaint. By stipulation of the parties, Green and Wilkison’s
counterclaims, filed as part of their original Answer and Counterclaims, were
incorporated by reference.
23. On May 20, 2016, Green and Wilkison filed the Motion for Judgment.
Green and Wilkison contend that Plaintiff’s claims against them in this action are
barred by the Executive Releases. They also seek judgment in their favor on their
counterclaim for declaratory judgment. The Motion for Judgment was fully briefed,
the Court has heard oral arguments, and it is now ripe for disposition.
24. On May 20, 2016, Green and Wilkison also filed the Motion to Dismiss
Amended Complaint seeking dismissal of this action on the grounds that Plaintiff has
failed to allege sufficient facts to establish each cause of action. The Motion to Dismiss
Amended Complaint was fully briefed, the court has heard arguments, and it is now
ripe for disposition.
ANALYSIS
25. “A motion for judgment on the pleadings is the proper procedure when
all the material allegations of fact are admitted in the pleadings and only questions
of law remain. When the pleadings do not resolve all the factual issues, judgment on
the pleadings is generally inappropriate.” Ragsdale v. Kennedy, 286 N.C. 130, 137, 209 S.E.2d 494, 499 (1974). “A complaint is fatally deficient in substance, and subject
to a motion by the defendant for judgment on the pleadings if it fails to state a good
cause of action for plaintiff and against defendant[.]” Bigelow v. Town of Chapel Hill,
227 N.C. App. 1, 3, 745 S.E.2d 316, 319 (2013) (citation omitted). The Court may only
consider “the pleadings and exhibits which are attached and incorporated into the
pleadings.” Davis v. Durham Mental Health/Dev. Disabilities/Substance Abuse Area
Auth., 165 N.C. App. 100, 104, 598 S.E.2d 237, 240 (2004). The Court must “view the
facts and permissible inferences in the light most favorable to the nonmoving party.”
Ragsdale, 286 N.C. at 137, 209 S.E.2d at 499. “All well pleaded factual allegations in
the nonmoving party’s pleadings are taken as true and all contravening assertions in
the movant’s pleadings are taken as false. All allegations in the non-movant’s
pleadings, except conclusions of law, legally impossible facts, and matters not
admissible in evidence at the trial, are deemed admitted by the movant . . . .” Id. Thus,
a Rule 12(c) motion for judgment on the pleadings should be denied “unless it is clear
that plaintiff is not entitled to any relief under any statement of the facts.” Praxair,
Inc. v. Airgas, Inc., 1999 NCBC LEXIS 5, at *8 (N.C. Super. Ct. 1999).
26. When ruling on a Rule 12(b)(6) motion to dismiss, the Court must
determine “whether the complaint when liberally construed states a claim . . . upon
which relief can be granted on any theory.” Benton v. W. H. Weaver Constr. Co., 28
N.C. App. 91, 95, 220 S.E.2d 417, 420 (1975). Such a motion should be granted only:
“(1) when the complaint on its face reveals that no law supports plaintiff's claim; (2)
when the complaint on its face reveals the absence of fact sufficient to make a good claim; (3) when some fact disclosed in the complaint necessarily defeats plaintiff's
claim.” Jackson v. Bumgardner, 318 N.C. 172, 175, 347 S.E.2d 743, 745 (1986). The
Court treats the well-pleaded allegations in a complaint as true and admitted in
analyzing a Rule 12(b)(6) motion to dismiss. Sutton v. Duke, 277 N.C. 94, 98, 176
S.E.2d 161, 163 (1970). While facts and permissible inferences set forth in the
complaint are analyzed in a light most favorable to the plaintiff, un-warranted
conclusions of law or deductions of fact will not be deemed admitted. Sutton, 277 N.C.
at 98, 176 S.E.2d at 163; Ford v. Peaches Entm’t Corp., 83 N.C. App. 155, 156, 349
S.E.2d 82, 83 (1986). “The general standard for civil pleadings in North Carolina is
notice pleading. Pleadings should be construed liberally and are sufficient if they give
notice of the events and transactions and allow the adverse party to understand the
nature of the claim and to prepare for trial.” Radcliffe v. Avenel Homeowners Ass’n,
789 S.E.2d 893, 913, 2016 N.C. App. LEXIS 824, *52 (2016) (citation omitted).
27. “When documents are attached to and incorporated into a complaint,
they become part of the complaint and may be considered in connection with a Rule
12(b)(6) motion[.]” Schlieper v. Johnson, 195 N.C. App. 257, 261, 672 S.E.2d 548, 551
(2009). The trial court may reject allegations in the complaint that are contradicted
by the incorporated documents. Id. at 265, 672 S.E.2d at 553.
28. The Court will first address Green and Wilkison’s Motion for Judgment,
and then the Motion to Dismiss Amended Complaint. Motion for Judgment
A. Issues of Fact Preclude Judgment based on Executive Releases.
29. Green and Wilkison contend they are entitled to judgment on the
pleadings because Plaintiff’s claims against them are barred by the Executive
Releases. The Amended Complaint expressly references the Executive Releases, and
Green and Wilkison attached copies of the agreements to their Amended Answer.
Accordingly, the Court can consider the question on a motion under Rule 12(c). See
Reese v. Charlotte-Mecklenburg Bd. of Educ., 196 N.C. App. 539, 546, 676 S.E.2d 481,
486 (2009) (trial court appropriately considered a document attached to defendant’s
answer in ruling on defendant’s motion for judgment on the pleadings, when the
plaintiff’s complaint made clear reference to the events memorialized in that
document).
30. Green and Wilkison contend that the releases are “unambiguous” and
“clearly broad enough to encompass all claims asserted by Islet against Green and
Wilkison in this action.” (Green and Wilkison Mem. Supp. Mot. Partial Judgment 5.)
Plaintiff does not make any counter argument or contend that the releases, if
enforceable, would not cover the claims raised in this action against Green and
Wilkison. Instead, Plaintiff contends that (1) Snapper and O’Ferral were not
disinterested directors under Nevada law, and (2) that there are facts in dispute as
to whether the releases were considered by Islet’s board at a meeting that was
“properly convened.” (Pl.’s Mem. Opp. Mot. Partial Judgment 4–6.)1
1 Both parties contend that the law of Nevada applies to the question of whether Snapper
and O’Ferral were disinterested directors for purposes of entering into the Executive Releases 31. Green and Wilkison argue that the Executive Releases are valid because
they were entered into on behalf of Islet by allegedly “disinterested” directors,
Snapper and O’Ferral. (Green and Wilkison Mem. Supp. Mot. Partial Judgment 6–
7.) Green and Wilkison further contend that “Nevada law is clear that a contract is
not void or voidable simply because it is between a corporation and one or more of its
directors, even if the interested director is present when the contract is authorized,
provided that the fact of the director’s interest is known to the disinterested directors
who approve the contract in good faith,” and that Plaintiff’s allegation that Snapper
and O’Ferral “knew that they were about to be removed as Islet directors” is not
sufficient to invalidate the releases. (Id. at 7, citing Nev. Rev. Stat. § 78.140.)
32. In this case, however, the pleadings establish that there is a dispute of
fact regarding whether Snapper and O’Ferral were disinterested directors. In the
Amended Complaint, Plaintiff alleges that Green and Wilkison “used their positions
on the board of directors to have fellow directors” enter into the Executive Releases,
and that the Executive Releases are “evidence of the transparent bad faith with which
[ ] Green and Wilkison operated Islet. . . .” (Am. Compl. ¶ 87.) In their counterclaims
Green and Wilkison allege, and Plaintiff in its answer to the counterclaim denies,
that Snapper and O’Ferral were acting as “independent board members” when they
entered into the Executive Releases with Green and Wilkison. (Green and Wilkison’s
Countercl. ¶ 15; Pl.’s Answer to Countercl. ¶ 15.). Viewed in the light most favorable
to Plaintiff, there exist disputes of fact and the pleadings in this action do not support
with Green and Wilkison. (Pl.’s Mem. Opp. Mot. Partial Judgment 4–6; Green and Wilkison Mem. Supp. Mot. Partial Judgment 7.) dismissal of Plaintiff’s claims based upon the Executive Releases at this stage of the
proceedings. Green and Wilkison’s motion for judgment on the pleadings seeking
dismissal of Plaintiff’s claims should be DENIED.
B. Declaratory Judgment.
33. Green and Wilkison also seek judgment in their favor on their
counterclaim for a declaratory judgment that “with regard to the Schoninger
Complaint, the COVA Complaint2 and this action: (i) Green and Wilkison are entitled
to indemnification and advancement under Nevada law; (ii) Green and Wilkison are
entitled to indemnification and advancement under the Islet by-laws and/or other
corporate organizational documents; (iii) Green and Wilkison are entitled to
indemnification and advancement under the Employment Agreements; and/or (iv)
Green and Wilkison are entitled to indemnification and advancement under the
Termination Agreement.” (Green and Wilkison’s Countercl. ¶ 36.)
34. Under the Uniform Declaratory Judgment Act, G.S. §§ 1-253 through 1-
267, a court has the power to “declare rights, status, and other legal relations,
whether or not further relief is or could be claimed.” G.S. § 1-253. Section 1-254
expressly provides that “[a]ny person . . . whose rights, status, or other legal relations
2 In Paragraph 22 of their counterclaims, Green and Wilkison identify the lawsuits, other
than this action, in which they seek advancement and indemnification as “(i) a Complaint filed on March 24, 2015 and styled Richard Schoninger, Jacqueline Schoninger, Scott Schoninger, Gerald Allen and COVA Capital Partners, LLC v. James Green and William Wilkison, 15 CV 2233, United States District Court for the Southern District of New York (the “Schoninger Complaint”); and (ii) a Complaint filed on August 28, 2015 and styled COVA Capital Partners, LLC v. James Green, William Wilkison, James Snapper, Antonio O’Ferral, Larry Hutchison, and Islet Sciences, Inc., 15 CV 06834, in the United States District Court for the Southern District of New York (the “COVA Complaint”).” are affected by a statute . . . may have determined any question of construction or
validity arising under the . . . statute . . . and obtain a declaration of rights, status, or
other legal relations thereunder.” The complaint must demonstrate the existence of
an actual controversy. Wendell v. Long, 107 N.C. App. 80, 82, 418 S.E.2d 825, 826
(1992).
35. Under Nevada law,3 a corporation has discretion to
indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding . . . by reason of the fact that the person is or was a director, officer, employee or agent of the corporation . . . against expenses, including attorneys’ fees . . . actually and reasonably incurred by the person in connection with the action, suit or proceeding if the person: (a) Is not liable pursuant to NRS 78.138; or (b) Acted in good faith and in a manner in which he or she reasonably believed to be in or not opposed to the best interests of the corporation . . . .
Nev. Rev. Stat. § 78.7502(1). The corporation has the same discretion to provide
indemnification even where, as here, the director or officer is defending an action “by
or in the right of the corporation to procure a judgment in its favor.” Id. § 78.7502(2).
This indemnification is permitted by law except where the person seeking
indemnification “has been adjudged by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, to be liable to the corporation.” Id.
3 Green and Wilkison cite Nevada law in support of their claim for a declaratory judgment
that they are entitled to advancement and indemnification. Plaintiff makes no argument regarding the declaratory judgment claim. The Court concludes that an officer’s or director’s right to indemnification is a matter of corporate governance to which Nevada’s laws, as the state of Islet’s incorporation, should apply. Bluebird Corp. v. Aubin, 188 N.C. App. 671, 680– 81, 657 S.E.2d 55, 62–63 (2008) (“States normally look to the State of a business’ [sic] incorporation for the law that provides the relevant corporate governance general standard of care,” quoting Atherton v. F.D.I.C., 519 U.S. 213, 224 (1997)). 36. The statute further provides that discretionary indemnification may be
made “only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances,” which determination is made by the company’s stockholders, board
of directors or independent legal counsel. Id. § 78.751(1). That threshold
determination, however, is not required if indemnification is “advanced pursuant to
subsection 2” of the statute. That sub-section provides as follows with regard to the
type of advancement that is permitted under Nevada law:
The articles of incorporation, the bylaws or an agreement made by the corporation may provide that the expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding must be paid by the corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that the director or officer is not entitled to be indemnified by the corporation.
Id. § 78.751(2). This statute further provides that the director or officer’s right to
advancement as authorized by law pursuant to this section “[c]ontinues for a person
who has ceased to be a director, officer, employee or agent.” Id. § 78.751(3)(b).
37. Under Nevada law, directors and officers are entitled to advancement of
defense costs, even in actions brought against them by or on behalf of the corporation,
with no precondition other than the statutory requirement that they agree to repay
any costs if it is later established, by final adjudication, that they are not entitled to
indemnification. See, e.g., Envirokare Tech, Inc. v. Pappas, 420 F. Supp.2d 291, 295
(S.D.N.Y. 2006) (granting CEO’s motion for partial summary judgment on cost of defense counterclaim against Nevada corporation that sued CEO for breach of
fiduciary duty); Orion Ethanol, Inc. v. Evans, 2009 U.S. Dist. LEXIS 65555, *8–9 (D.
Kan. 2009) (granting summary judgment and requiring advancement of defense costs
from Nevada corporation and pointing out that Nevada law makes a clear distinction
between indemnification and advancement of defense costs and provides no
precondition for the latter other than execution of a signed undertaking).
38. The Employment Agreements provide, in relevant part, as follows:
The Company and each of its subsidiaries shall, to the maximum extent provided under applicable law, indemnify and hold Executive harmless from and against any expenses, including reasonable attorney’s fees, judgments, fines, settlements and other legally permissible amounts (“Losses”) incurred in connection with any proceeding arising out of, or related to, Executive’s employment by the Company, other than any such Losses incurred as a result of Executive’s negligence or willful misconduct. The Company shall, or shall cause a third party to, advance to Executive any expenses, including attorney’s fees and costs of settlement, incurred in defending any such proceeding to the maximum extent required by applicable law.
(Employment Agreements ¶ 11.1.)
39. In its Memorandum in Opposition, Plaintiff made no argument in
opposition to Green and Wilkison’s motion for judgment on the pleadings regarding
the counterclaim for declaratory judgment, but claimed that it would request
coverage for Green and Wilkison from Islet’s insurance carrier. (Pl.’s Mem. Opp. Mot.
Partial Judgment 2, n.1.) Plaintiff’s counsel reiterated this claim at the hearing, but
added that if coverage was declined, Plaintiff would not have sufficient cash to provide the advancement. Green and Wilkison correctly point out that such claimed
inability to pay does not excuse Islet’s obligation to make the advancement.
40. The terms of the Employment Agreements are unambiguous and
require Islet to advance Green and Wilkison their attorneys’ fees subject to their
providing of an undertaking as required by statute, and subject to reimbursement
upon a finding of negligence or willful misconduct. Green and Wilkison’s motion for
judgment on the pleadings seeking a declaratory judgment as requested in their
counterclaims should be GRANTED.
Motion to Dismiss Amended Complaint
C. Breach of Fiduciary Duty.
41. Since Islet is a Nevada corporation, Nevada law applies to Plaintiff’s
claim for breach of fiduciary duty. Nev. Rev. Stat. § 78.015; Bluebird, 188 N.C. App.
at 680, 657 S.E.2d at 63. Nevada law provides that “[d]irectors and officers shall
exercise their powers in good faith and with a view to the interests of the corporation.”
Nev. Rev. Stat. § 78.138(1). “Pursuant to Nev. Rev. Stat. § 78.138(7), to show that a
director breached his or her fiduciary duty, a shareholder must prove that the
director’s act or failure to act constituted a breach of his or her fiduciary duties and
that the breach of those duties involved intentional misconduct, fraud, or a knowing
violation of the law.” Kahn v. Dodds (In re AMERCO Derivative Litig.), 127 Nev. 196,
223, 252 P.3d 681, 700 (2011); see also Morefield v. Bailey, 959 F. Supp. 2d 887, 903
(E.D. Va. 2013) (claim for breach of fiduciary duty against corporate officer or director under Nevada law requires allegations of “intentional misconduct, fraud, or knowing
violation of the law.”).4
42. Green and Wilkison served as directors and officers of Islet at all times
relevant to this claim and owed a fiduciary duty to Islet and its shareholders. Nev.
Rev. Stat. § 78.138(1); In re AMERCO, 127 Nev. at 223, 252 P.3d at 700–01.
43. Plaintiff has alleged, in some detail, that Green and Wilkison engaged
in self-dealing and other intentional misconduct in breach of their fiduciary duties to
Islet including: (1) taking the benefits of the reduced milestone payments negotiated
with Kissei for themselves and BHV (Am. Compl. ¶¶ 24–26); (2) diverting to BHV
“some or all” of the $1 million investment raised from Schoninger (Id. ¶¶ 32–34); (3)
unilaterally changing the terms of the Islet–BHV merger (Id. ¶¶ 36–39); (4) usurping
other Islet corporate opportunities and diverting Islet funds to BHV (Id. ¶¶ 45–47);
(5) negotiating the termination of the merger “with . . . themselves” on terms highly
unfavorable to Islet (Id. ¶¶ 55–59); and, (6) incurring $200,000 in debt for Islet but
diverting those funds to the benefit of themselves. (Id. ¶¶ 66–68.) Plaintiff also alleges
that “[t]he actions taken by these Defendants were intentional, with aggravating
factors that entitle Islet to punitive damages, including willful and wanton conduct
[and] [a]t all times, Defendants knew that their actions could irreparably damage
[Islet] and its shareholders.” (Id. ¶ 95.) The Court finds that these statements are
4 To the extent a plaintiff alleges fraudulent conduct in support of a claim for breach of fiduciary duty, such allegations must be stated “with particularity” as required by the applicable pleading requirements. In re AMERCO, 127 Nev. at 223, 252 P.3d at 700 (Nevada Rule of Civil Procedure 9(b)); Morefield, 959 F. Supp. 2d at 903 (Federal Rule of Civil Procedure 9(b)). Accordingly, to the extent Plaintiff alleges that Green’s and Wilkison’s conduct was fraudulent, it must plead those allegations with particularity under Rule 9(b). more than conclusory in nature and are sufficiently specific to support a claim for
breach of fiduciary duty. See In re AMERCO, 127 Nev. at 223, 252 P.3d at 700
(“[Plaintiffs’] first and second causes of action in the amended complaint contained
allegations that [defendants] breached the fiduciary duty of loyalty by self-dealing
and usurping corporate opportunities[.]”). Accordingly, Green and Wilkison’s motion
to dismiss Plaintiff’s claim for breach of fiduciary duty should be DENIED.
D. Constructive Fraud.
44. The parties do not expressly address the question of whether Nevada or
North Carolina law applies to Plaintiff’s claim for constructive fraud. For purposes of
determining the Motion to Dismiss Amended Complaint, however, the Court need not
decide this issue since both Nevada and North Carolina recognize such a claim and
both require the existence of a confidential (fiduciary) relationship between the
parties and breach of that relationship by the defendant. Perry v. Jordan, 900 P.2d
335, 337, 111 Nev. 943, 946–47 (1995) (“Constructive fraud is characterized by a
breach of duty arising out of a fiduciary or confidential relationship.”); Watts v.
Cumberland Cty. Hosp. Sys., Inc., 317 N.C. 110, 115–16, 343 S.E.2d 879, 884 (1986)
(“Constructive fraud arises where a confidential or fiduciary relationship exists[.]”)
45. The Court already has concluded that Green and Wilkison owed Islet a
fiduciary duty and that Plaintiff has alleged sufficient facts to support a breach of
fiduciary duty. In addition, Plaintiff has adequately alleged that Green and Wilkison
sought to benefit themselves by their misconduct and caused injury to Islet. White v.
Consol. Planning, Inc., 166 N.C. App. 283, 294, 603 S.E.2d 147, 156 (2004) (“The primary difference between pleading a claim for constructive fraud and one for breach
of fiduciary duty is the constructive fraud requirement that the defendant benefit
himself.”). Accordingly, Green and Wilkison’s motion to dismiss Plaintiff’s claim for
constructive fraud should be DENIED.
E. Unjust Enrichment.
46. As a Sixth Cause of Action, Plaintiff alleges that “BHV, Green, and
Wilkison unjustly enriched themselves by negotiating agreements, purportedly on
behalf of Islet, that served to benefit the Defendants’ personal pecuniary interests”
and “resulted in substantial benefits to [ ] BHV.” (Am. Compl. ¶¶ 120–21.) The Court
has dismissed Plaintiff’s unjust enrichment claim against BHV in its Opinion and
Order on Brighthaven Ventures, LLC’s Motion to Dismiss issued contemporaneously
with this Opinion and Order, and for the same reasons concludes that the claim for
unjust enrichment against Green and Wilkison should be dismissed.
47. Accordingly, Green and Wilkison’s motion to dismiss Plaintiff’s claim for
unjust enrichment should be GRANTED.
F. Constructive Trust.
48. As a Seventh Cause of Action, Plaintiff has requested that the Court
impose a constructive trust “with respect to any transfer of funds, assets, benefits,
corporate opportunities, or property from Plaintiff, as well as any benefits received
by Defendants in the past or on a going forward bases. . . .” (Am. Compl. ¶ 127.)
49. A constructive trust is an equitable remedy. “Courts of equity will
impose a constructive trust to prevent the unjust enrichment of the holder of the legal title to property acquired through a breach of duty, fraud, or other circumstances
which make it inequitable for him to retain it against the claim of the beneficiary of
the constructive trust.” Cline v. Cline, 297 N.C. 336, 343–44, 255 S.E.2d 399, 404
(1979). “[A] constructive trust ordinarily arises out of the existence of fraud, actual or
presumptive—usually involving the violation of a confidential or fiduciary relation—
in view of which equity transfers the beneficial title to some person other than the
holder of the legal title.” Leatherman v. Leatherman, 297 N.C. 618, 621–22, 256
S.E.2d 793, 795–96 (1979), superseded by statute on other grounds (quoting Bowen
v. Darden, 241 N.C. 11, 13–14, 84 S.E.2d 289, 292 (1954)). A constructive trust “arises
purely by construction of equity independently of any contract or of any actual or
presumed intention of the parties to create a trust. . . .” Teachey v. Gurley, 214 N.C.
288, 292, 199 S.E. 83, 87 (1938).
50. The Court has denied the motions to dismiss Plaintiff’s claims for breach
of fiduciary duty and constructive fraud, and the remedy of a constructive trust
remains available to Plaintiff. Accordingly, Green and Wilkison’s motion to dismiss
Plaintiff’s claim for constructive trust should be DENIED.
THEREFORE, IT IS ORDERED that:
51. Green and Wilkison’s Motion for Judgment as to Plaintiff’s claims for
breach of fiduciary duty, constructive fraud, unjust enrichment and constructive trust
is DENIED. 52. Green and Wilkison’s Motion for Judgment as to Green and Wilkison’s
counterclaim for declaratory judgment regarding Islet’s duty to advance defense costs
is GRANTED.
53. Green and Wilkison’s Motion to Dismiss Amended Complaint as to
Plaintiff’s claims for breach of fiduciary duty, constructive fraud, and constructive
trust are DENIED.
54. Green and Wilkison’s Motion to Dismiss Amended Complaint as to
Plaintiff’s claim for unjust enrichment is GRANTED.
This the 12th day of January, 2017.
/s/ Gregory P. McGuire Gregory P. McGuire Special Superior Court Judge for Complex Business Cases