Strunk v. Advent International Corporation

• Court: Superior Court of Maine
• Decided: March 27, 2006
• Docket: CUMcv-05-457
• Status: Unpublished

Opinion

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STATE OF MAINE . . - --J. . '-"- SUPERIOR COURT CUMBERLAND, ss. -* .-+- , : - - .-: . 1, - :x ': CIVIL ACTION 31 DOCKET NO. CV-05-457 -r .;Ii , b - / 7 . /' JUSTIN R. STRUNK f:,-n

ORDER ON DEFENDANTSf MOTION TO DISMISS

ADVENT INT'L COW., STEVEN COLLINS, BENJAMIN GOMEZ, RICHARD WILLIS, CARL LABBE, JEFFREY DUMAIS, and RESORT SPORTS NETWORK, INC.

BEFORE THE COURT

Before the court is defendants Advent Intfl Corp., Steven Collins,

Benjamin Gomez, Richard Willis, Carl Labbe, Jeffrey Dumais, and Resort Sports

Network, Inc.'s ("Defendants") motion to dismiss plaintiff Justin R. Strunk, III's

("Plaintiff") complaint.

BACKGROUND

The facts recited herein are based on the allegations of the complaint, and

are recited for purposes of deciding Defendantsf motion to dismiss. Plaintiff is a

minority shareholder (28.27%)of Resort Sports Network, Inc., ("RSN"), a private

Delaware corporation headquartered in Portland, Maine. Plaintiff founded RSN

in 1985 as a company providing "outdoor lifestyle" television and online content

to mountain and beach resorts. In late 1999 and early 2000, RSN issued, infey alia,

Series C preferred stock to various investors. Many of these investors were limited partnerships whose general partner is a corporation b37 the name of

Advent international ("Advent").

As pled, Advent thereby obtained effective control of RSN, and used this

c-,ntrol t-, i z f l ~ e ~ $,e ~f the S o z d ~f ciirect~rs.Dzring the 5me of c e c~mp~sit;U-,lnl

Advent's control, Plaintiff states that RSN's board of directors prevented h m

from fulfilling his duties as a director of the corporation, resulting in his

resignation from the board in June, 2005. The complaint then alleges acts of

fraud and mismanagement on the part of RSN's other officers and directors.

Plaintiff provides the following details: (1) Defendant Labbe, RSN's Vice

President of sales, instructed his staff to falsify a year-end statement to Toyota,

an RSN advertising client, claiming to have run commercials on its affiliate

networks that it did not in fact run, (2) Defendant Dumais, President and CEO of

RSN, negligently failed to finalize and execute a renewal of a previously

exclusive agreement with an affiliate station in Aspen, Colorado, a "crown jewel"

affiliate station, (3) RSN also allowed agreements with two other critical affiliates

in Vail, Colorado and Park City, Utah, to lapse, resulting in an "at will"

relationship with these affiliates in w h c h RSN advertising clients cannot be

assured of having their advertisements run.

Plaintiff claims these acts have led to a significant decline in the value of

RSN stock, and have driven the company into insolvency. Accordingly, Plaintiff

has brought this action against Advent, RSN, and several of its officers and

directors seekng damages for the value by w h c h Plaintiff's interest in RSN has

declined, and requesting judicial appointment of a receiver for RSN to dissolve

the corporation and liquidate its assets. Plaintiff's complaint is presented in three counts, (I) Dissolution and Appointment of a Receiver pursuant to the

Delaware General Corporation Act, (11) Dissolution and Appointment of a

Receiver pursuant to the Maine Business Corporation Act and (111) a derivative

claim cn behalf sf XSN against the Defendants for Gross Ne$igence, Bad Faith

and Breach of Fiduciary Duty.

Defendants seek to dismiss all counts of Plaintiff's claim pursuant to

M.R.Civ.P. 12(b)(l),for lack of subject matter jurisdiction, and 12(b)(6),for failure

to state a claim upon which relief can be granted. The court ill first address

Defendant's claim that tlus court lacks subject matter jurisdiction over Plaintiff's

suit, as well as the question implicitly raised by Plaintiff in Counts I and I1 of his

complaint: if the court does have subject matter jurisdction over t h s case, which

state's corporations law applies, Delaware's or Maine's? Counts I and I1 request

the same action from this court, but pursuant to Delaware law under Count I,

and pursuant to Maine law under Count 11.

DISCUSSION

I. SUBJECT MATTER JURISDICTION AND CHOICE OF LAW

Defendants claim that t h s court lacks subject matter jurisdiction over

Plaintiff's complaint pursuant to the "internal affairs" doctrine. Defendants

describe tlus doctrine as a judicial recognition that disputes implicating the

internal management of a corporation are best resolved by the courts of the

incorporating state. See M a d d e n v. P e n n Elec. Light Co., 37 A. 817 (Pa. 1897).

Defendants point out that RSN is a Delaware corporation and that this is a case concerning the internal management of RSN.' They conclude on this basis that

this court lacks subject matter jurisdiction over Plaintiff's complaint.

This assertion is mystifying. Whle some courts may decline to entertain a - -- case cencerzing L5e internal atfzrs ~f a f o r z i p corporat;,or, LhLiscbLoicedoes not

speak to the court's jurisdiction over such claims. Moreover, what Defendants

refer to as the internal affairs doctrine is not the doctrine as it has developed over

the past century. See e.g. Vantagepoint Venture Partners 1996 v. Exanzen, Inc., 871

A.2d 1108, 1112 (Del. 2005). The internal affairs doctrine, far from being a

jurisdiction-stripping doctrine, is a choice-of-law doctrine. See id. (stating, "the

internal affairs doctrine is a long-standing choice of law principle which

recognizes that only one state should have the authority to regulate a

corporation's internal affairs - the state of incorporation.")

Moreover, many states, including Maine, have codified it. See 13-C

M.R.S.A. § 1505(3). This provision states, "This Act [Maine's Business

Corporation Act] does not authorize this State to regulate the organization or

internal affairs of a foreign corporation authorized to transact business in this

State." In other mrords: the State of Maine may not impose its corporation law on

the internal affairs of a foreign corporation operating in Maine; rather, the law of the incorporating state must be applied. Nowhere in this provision is there any

language removing the jurisdiction of Maine courts to resolve disputes involving

internal affairs of foreign corporations. See id., see also Restatement 2d, Conflict of

Laws 313 (stating, "A court will exercise jurisdiction over an action involving

'Plaintiff's claims against Defendants stem solely from h s position as a shareholder of RSLT, thus making ttus an "internal affairs" case. By way of contrast, had Toyota, RSN's client, brought a complaint against RSN for fraud, it would not be an internal affairs case. 4 the internal affairs of a foreign corporation unless it is an inappropriate or an

inconvenient forum for the trial of the action.")

No doubt Delaware's Chancery Court is better equipped to resolve this

dispute m d vantage psint, being expert ifi 'Jie2 p p ~ c z ~ a l e0 ofG n De!~ware1~

General Corporation law. However, other considerations support adjudication

of Plaintiff's complaint here in Maine. See Restatement 2d, Conjlict of Laws 5 313.

The complaint indicates that RSN's headquarters is located in Portland, Maine,

that the Plaintiff is domiciled in Maine, and that two of the individual

defendants, Dumais and Labbe, have a place of business in Portland, Maine. The

other defendants, with the exception of defendant Willis, who has a place of

business in Chicago, Illinois, have a place of business in Boston, Massachusetts.

It appears from these recitations that the institution of suit in Maine is practical,

and almost certainly more convenient to the individual defendants excepting

Willis, than a suit in Delaware would be. See id.

§ 1505(3),however, does require dismissal of Count I1 of the complaint, as

it requests dissolution and appointment of a receiver pursuant to Maine's

Business Corporation Act, and the court must apply Delaware law to Plaintiff's

claim.2

11. PLAINTIFF'S CLAIMS UNDER DELAWARE LAW

The court will now address Plaintiff's remaining counts, Count I for

dissolution and appointment of a receiver pursuant to Delaware's General

Plaintiff claims that Count LT alleges corporate acts affecting RSN's creditors, and that these third parties are not "internal" to the corporation. However, none of the t h r d parties allegedly affected by RSN's actions has brought a claim against RSN in this case, and Plaintiff does not have standing to bring such claims on their behalf. - Corporabons statute, and Count 111, a derivative claim on behalf of RSN for gross

negligence, bad faith, and breach of fiduciary duty.

A. Count I: Dissolution and Appointment of a Receiver Pursuant to Delaware's General Corporations statute

8 Del. C. § 291 provides the Delaware Court of Chancery with the power

to appoint a receiver if the corporation is insolvent, and if this action would be in

the best interests of the corporation's shareholders and creditors. Plaintiff alleges

in his complaint that RSN is insolvent, and requests on t h s basis that the court

dissolve RSN under § 291. Under § 291, however, insolvency is a necessary but

not sufficient condition for appointment of a receiver and dissolution. See Noble

v. European Mtg. & Inv. Corp., 165 A. 157, 157 (1933) (stating that a "showing of

insolvency alone will not result in the appointment of a receiver as a matter of

course.") In order to invoke t h s remedy, the plaintiff must also demonstrate

some other fraudulent or inequitable conduct by the defendants. See Drob v.

National Mem. Park, 41 A.2d 589,597 (Del. Ch. 1945) (stating, "a receiver is merely

a remedy of an auxiliary and incidental nature and cannot be the sole object of

the bill.") Here, Plaintiff's primary cause of action for fraud and mismanagement

of RSN is contained in Count I11 of Plaintiff's claim. Plaintiff's request for the

remedy of appointment of a receiver and dissolution of RSN depends upon the

survival of Count ID.

B. Count 111: Gross Negligence, Bad Faith and Breach of Fiduciary Duty

Plaintiff's primary claim in t h s case is that Defendants mismanaged RSN

and engaged in acts of fraud, resulting in a decline in the value of RSN stock.

Defendants claim that, under Delaware law, Plaintiff lacks standing to bring t h s 6 claiin as a direct claim, and that he has not follo~redthe law which ~ o u l d allow

hiin to bring it as a derivative claim. See Tooley v. Donaidson, iufiin, G jenretfe, Inc., 845 A.2d 1031, 1036 (Del. 2004) (explaining the difference between direct and

deli~;)tix.7e Defendanrs claim,

12(b)(6),Plaintiff's complaint fails to state a claim for which relief can be granted,

and must be dsmissed.

Plaintiff appears to agree that he cannot bring t h s as a direct claim. He

asserts instead that he has met the legal requirements for bringing a derivative

claim by pleading facts in the complaint that demonstrate that a demand on

RSN's board of directors to pursue the corporation's claim would have been

futile. See Delaware Chancery Rule 23.14;Brehm 71. Eisner, 746 A.2d 244,256 (Del.

2000) (detailing Delaware's demand futility exception, i.e. a demand will be

excused if either (1)under the particularized facts alleged, a reasonable doubt is

created that the directors are disinterested or independent or (2) the pleading

creates a reasonable doubt that the challenged transaction5 was otherwise the

product of a valid exercise of business judgment.)

Plaintiff claims that he has alleged facts sufficient to meet not just one but

both of the demand futility tests. As to the first test, Plaintiff states that the

A direct suit requires specific allegations that the c o m p l a i ~ n gshareholder individually suffered damage, unrelated to harm to the corporation. See Toolaj v. Donaldson, Lufkilz, & Jenrette, Inc., 845 A.2d 1031,1033 (Del. 2004). N o h n g in Plaintiff's complaint suggests this scenario. Under Delaware law, t h s rule is one of substantive right, not simply a technical rule of pleading. See Leu~isv. Aronson, 466 A.2d 375, 380 (Del. Ch. 1983). It is therefore appropriately followed by this court as part of Delaware's corporation law. T h s second test is, in the present case, more properly stated as: whether the pleading creates a reasonable doubt that the Board's approval of the challenged transaction was otherwise the product of a valid exercise of business judgment. See Groboui v . Perot, 539 A.2d 180, 186 (Del. 1988) (overruled on other grounds by Breizm). Brehm's formulation of the second test is a product of the "challenged transaction" itself being a vote of the Board. Here, Plaintiff does not challenge any action of the Board other than its acquiescence in the mismanagement and fraud perpetrated by RSN officers. 7 complaint alleges the director defendants knowingly acquiesced in a pattern of

lying and misrepresentation by RSX to important advertisers regarding fhe

status of its contracts with various affiliates, and that the court must accept these

allegations as true for purposes of a motion to dismiss. Plaintiff concludes thai

the only proper inference from the above is that the director defendants were

directly implicated in the alleged improper conduct, and that, accordingly, he

has created a reasonable doubt that the directors are disinterested and

independent.

In fact, Plaintiff's complaint falls woefully short of the particularized

pleading requirements under Delaware Chancery Rule 23.1, w h c h requires that

Plaintiff raise a reasonable doubt as to the independence of RSN's board of

directors. See Brehm, 746 A.2d at 257, Lewis v. Aronson, 466 A.2d 375, 381 (Del.

Ch. 1983). First, Plaintiff's complaint fails to allege the composition of RSN's

board of directors at the time Plaintiff would have made a demand on the board.

Plaintiff's complaint does identify Collins, Gomez, and Willis as directors of

RSN, and thereafter refers to them as "Director Defendants." However, without

being told the identity of every member of the board at the time the demand

would have been made, the court cannot begin to evaluate Plaintiff's allegations

concerning their lack of independence. Second, in reciting particular allegations

of mismanagement and fraud, Plaintiff names only two of the individual

defendants: Labbe and Dumais. Neither of these defendants is identified by

Plaintiff as a member of the board of directors. Therefore, even if Plaintiff's

allegations concerning these two defendants are enough to create reasonable

doubt as to their independence, there is n o h n g in Plaintiff's complaint which alleges that these two defendants would h-ave been able to control a vote of the

board of directors on whether or not to pursue an action against them on behaif

of RSN.

in Fsrt L A . LULL, 3s c-rrer\Ltjydrafted, Plaintiff's cGFLp!zirLtdses 33: facts

against Dumais that would raise a reasonable doubt as to his independence.

Plaintiff's specific factual allegations against Dumais are merely that he

negligently failed to finalize and execute an important affiliate station renewal

contract. Even if h s action constitutes gross negligence, it is not enough under

Delaware law and the corporation's charter, for RSN to be able to hold Dumais

personally liable. See 8 Del. C. ,€102(b)(7) j (allowing corporations to shield

directors and officers from liability for any breach of fiduciary duty except

breach of the duty of loyalty or good faith);RSN Corporate Charter, Defendants'

Exhbit 1 at Article IX (limiting director and officer liability in accordaizce with 5

102(b)(7).)

The only allegation in Plaintiff's complaint that begns to raise a question

as to the independence of any of the defendants is Plaintiff's allegation against

Labbe, that he instructed his staff to falsify a year-end advertising account

reconciliation. As alleged by Plaintiff, this knowing misconduct ended in

creation of a corporate liability greater than the benefit obtained from the action.

On the facts alleged, it is permissible to infer that this misconduct was motivated

by Labbe's desire to cover up a mistake for which he ~~17ould otherwise have been

held responsible, thus malung it a breach of the duty of loyalty. However,

Plaintiff has alleged neither that Labbe is a member of the board of directors and

in that role capable of preventing the board from independently considering a demand, or otherwise in control of the board of directors. Nor ~7oulda bald

allegation of Labbe's control, witJ~outspecific factual allegations supporting ~ t ,

satisfy the requirement of particularity. See Bergstein v. Texan Iizt'l Co., 453 A.2d

467, 47'3 (zh. 1982) (Stlt-ncr0' ''A= of dcxi~at-on apLd cor,ks!,

unsupported by underlying facts, does not satisfy the requirement of

particularity.")

Plaintiff's assertion in his brief i n opposition to Defendant's motion to

dismiss, that the mere allegation of Board acquiescence in the mismanagement of

RSN raises a reasonable doubt as to their independence, ignores Rule 23.1's mandate to "allege with particularity.. . the reasons for the plaintiff's failure to

obtain the action or for not malung the effort." For the reasons stated above,

Plaintiff has not raised a reasonable doubt that any of the directors, much less a

majority required to refuse a demand, were either interested or otherwise lacked

independence. See B~ehm,746 A.2d at 257, Lewis, 466 A.2d at 381.

Under the second demand futility test, Plaintiff need not make a demand

if he can raise a reasonable doubt that the Board's approval of the challenged

transaction(s) was not the product of a valid exercise of business judgment.

Plaintiff asserts that the business judgment rule cannot protect the director

defendants from liability for gross negligence or bad faith in approving the

challenged transactions. As already stated, however, pursuant to Delaware law

and RSN's corporate charter, the directors are protected from personal liability

for acts amounting to gross negligence. See 8 Del. C. § 102(b)(7);RSN Corporate

Charter, Defendants' Exhibit 1 at Article IX. Therefore, Plaintiff's complaint

n~ouldonly meet the second demand futllity test if it contains particularized

10 allegations of the Board's bad faith in approving the challenged transactions. l l ~ only TL. e corporate transactions alleged with particuiarij, for which the Board

could have given approval in bad faith, are Dumais's and Labbe's actions,

described a b o ~ e .Plaintiff has f d e d te a!!e-e0 ar,y 82rt;lcr;!x ffacts d e m o ~ s t r a t i ti n-

that any of the Board members were even aware of the challenged transactions,

much less that they approved of them in bad faith. Although the Board is

generally charged with keeping itself reasonably informed of corporate activities,

failure to meet this aspirational charge does not equate with director liability,

especially in cases where the corporate charter protects directors from personal

liability for acts of gross negligence. See Brekm, 746 A.2d at 256. The complete

absence of particularized allegations showing the Board's knowledge of

Dumais's and Labbe's actions, much less their approval thereof in bad faith,

requires the court to reject Plaintiff's assertion of demand futility. See id.

In sum, Brekm states: "there is a very large-though not insurmountable-

burden on stockholders who believe they should pursue the remedy of a

derivative suit instead of selling their stock or seekng to reform or oust these

directors from office." 746 A.2d at 267. Plaintiff's complaint falls well short of

meeting this burden. Accordingly, as demand is neither excused, nor has it been

made, Count 111 of Plaintiff's complaint must be dismissed. See id., see also Manzo

v. Rite '4id Corp., 2002 Del. Ch. LEXIS 147, (stating, "The breach of fiduciary duty

claim against the director defendants is dismissed.. . because the.. . complaint

does not state a direct claim and... plaintiff has not made demand on the board

of directors and has not pled facts sufficient to show why demand should be

excused.") (afd, Manzo v. lbte Aid Corp., 825 A.2d 239 (Del. 2003)). Finally, as appointment of a receiver and dissolution is a remedy

dependent upon a showing of fraudulent or inequitable conduct by the

defendants, and Plaintiff's claim of fraudulent and inequitable conduct is dismissedf P!cn~ff's rzquzst for ;.zli2f ilnd2r Co-ci-L:I l T L - ~ ~ : a:SZ, be disaissed.

The entry is:

Defendants' motion to dismiss plaintiff's complaint is GRANTED. Plaintiff's complaint is dismissed without prejudice.

Dated at Portland, Maine t h ~ s 2 7&day of

Justice, Superior court 'COURTS nd County ;ox 287 ~e04112-0287

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:COURTS 7d County ox 287 e 04112-0287

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