Opinion
07-CV-1471-BR.
October 5, 2009
JEFFREY V. HILL, VICKI M. SMITH, Bodyfelt Mount, LLP, Portland, OR, Attorneys for Plaintiffs. MARK E. FRIEDMAN, JOHN C. ROTHERMICH, Garvey Schubert Barer, Portland, OR, Attorneys for Defendants.
OPINION AND ORDER
This matter comes before the Court on Plaintiffs' Motion For Leave To File Third Amended Complaint (#101) pursuant to Federal Rule of Civil Procedure 15(a)(2). For the reasons that follow, the Court GRANTS in part and DENIES in part Plaintiffs' Motion.
FACTUAL BACKGROUND
The facts set forth are undisputed unless otherwise noted. In 2006 Plaintiffs Frederick Buckman, Sr.; Frederick Buckman, Jr.; Bruce Landrey; and Joseph Socolof (collectively referred to herein as Buckman) offered their management services to Defendants for the purpose of pursuing the siting, licensing, and development of nuclear-power energy plants in various United States locations and, secondarily, to research the development of coal reserves, a water desalination plant, and a utility mutualization venture in which the utility's stock would be converted to customer ownership. Defendants are Delaware entities operating out of Houston, Texas, and comprise Quantum Energy Partners IV, LP, a private equity firm; Quantum Energy Management IV, LP, the general manager of Quantum Energy Partners IV, LP; and QEM Management, LP, and QEM Management, LLC, two management entities that employed Quantum's employees and were later merged into a single entity (collectively referred to herein as Quantum). Quantum and its affiliates invest in energyrelated businesses as fiduciaries on behalf of institutional investors.
On October 22, 2006, after seven months of negotiations, Buckman, Sr., and Toby Neugebauer, one of Quantum's founders and managing partners, reached a tentative agreement in which Buckman's management team was to be hired by a new entity created by Quantum. The following day, the proposed business relationship was memorialized in a nonbinding letter of intent that the parties agree is an accurate reflection of their October 22, 2006, oral agreement.
The letter of intent is characterized by the parties as a term sheet and provides the term sheet is subject to the parties' "due diligence" and expires on November 30, 2006, unless extended in writing by both parties. It outlines material aspects of the proposed venture including Quantum's $50 million in funding, the amount of Buckman's capital contribution, the salaries for each of the Buckman Plaintiffs, profit distributions (called "the promote"), corporate governance, terms and terminations, fees, and expenses. The unambiguous language of the term sheet reflects the agreement is provisional and nonbinding on either party until the parties complete due diligence reviews and both parties sign final agreements. The parties, however, never signed the employment agreements. Although Q-Power, LLC, was eventually formed on December 28, 2006, it never hired Buckman or became operational because the parties did not sign the operating agreement for it. Buckman, Sr., intended to create ArcWest, a second entity that would be a Q-Power subsidiary and used for the nuclear-power business, but it also never became operational.
Part I of the term sheet contains the following relevant language:
The matters set forth in Part I of this letter constitute an expression of our mutual intent only and do not constitute a binding agreement between the parties with respect to the proposed transaction. Any such binding agreement would only result from the negotiation, execution and delivery of written definitive agreements having terms and conditions satisfactory to the parties to such agreements. No party may bring any claim or action against any other party as a result of a failure to agree on or enter into any definitive agreement as contemplated in Part I. The matters set forth in Part II of this letter, however, constitute binding agreements between the parties.
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1.2 Conditions. The closing of the proposed transaction, should there be one, would be subject to the following conditions:
(a) the completion of due diligence reviews by Quantum and Buckman, the results of which are satisfactory to each of Quantum and Buckman;
(b) the negotiation, execution and delivery of definitive agreements mutually acceptable in form and substance to Quantum and Buckman; and
(c) such other conditions as may be agreed to by the parties.
Part II of the term sheet provides:
2.2 Termination. If definitive agreements have not been executed by the parties on or before November 30, 2006, this letter shall terminate in its entirety without any further notice being necessary unless extended in writing by both parties; provided, however, that such termination shall not impair or otherwise affect the rights or remedies of the parties for any prior breach of the obligations set forth in Part II of this letter.
Exhibit A, attached to the term sheet, contains material details of the proposed venture and provides in relevant part:
THE FOLLOWING PROPOSED TERMS ARE FOR DISCUSSION PURPOSES ONLY. NO AGREEMENT TO ENTER INTO A TRANSACTION SHALL EXIST OR BE DEEMED TO EXIST UNTIL A DEFINITIVE AGREEMENT IS EXECUTED BY ALL PARTIES INVOLVED.
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Legal Entity: A Delaware limited liability company (the "Company"), to be governed by a limited liability company agreement (the "LLC Agreement").
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Fees and Expenses: The Company will reimburse Quantum and Buckman for their reasonable expenses related to the transaction, including but not limited to due diligence expenses and all related professional expenses (including but not limited to legal fees).
Notwithstanding the term sheet's automatic termination date of November 30, 2006, Quantum and Buckman continued to engage in extensive due diligence throughout November and December 2006, including researching the nuclear-licensing process and regulatory framework; researching water availability and cooling options for nuclear-power facilities; attending meetings or conferences in Atlanta, New York, Washington, D.C., Wilmington, and Houston; meeting with nuclear-industry experts; engaging engineers to conduct site surveys; and otherwise proceeding as if the term sheet had not expired. Buckman also arranged introductions for Quantum personnel to energy industry leaders. Expenses for these activities were paid, at least in part, by Quantum and characterized as consultant fees and expenses.
On November 22, 2009, draft employment agreements and the operating agreement for Q-Power began circulating among the parties.
On December 6, 2006, Buckman, Sr., wrote to Neugebauer expressing frustration with the slow progress of finalizing the contract documents. Neugebauer responded: "Sorry about the slow pace. I guess the way I see it is we are partners already. I gave you my word."
On December 12, 2006, Quantum's managing director, Scott Soler, wrote to an energy attorney and described Buckman, Sr., as "CEO of Arcwest, our nuclear power business."
On December 15, 2006, Neugebauer sent an email to several Buckman Plaintiffs regarding the status of the agreements.
Plaintiff Joseph Socolof responded as follows:
T.N.: [W]here are we on comments to agreement.
J.S.: Michael is going to talk to our lawyer and then turn around a final draft. I was hoping to have somrthing [ sic] this week. I am following up. Joe.
T.N.: Would like to wrap up Monday.
J.S.: [M]e too. I will push to get it done.
In early January 2007, Quantum informed Buckman that Quantum no longer wished to invest in the high-risk nuclear-energy business and terminated all further due diligence and negotiations. Neugebauer agreed Quantum would pay Buckman's fees during the due diligence period. Buckman submitted an invoice for consultant fees and expenses totaling $220,000.
PROCEDURAL HISTORY
Buckman filed its Complaint on October 2, 2007, alleging four state-law claims against Quantum including (1) breach of partnership agreement, (2) breach of fiduciary duties, (3) breach of employment contract, and (4) unjust enrichment. On March 6, 2009, Buckman filed a Second Amended Complaint adding a fifth claim for equitable estoppel. On March 11, 2009, Quantum filed its Answer, including a Counterclaim for breach of contract in the event the Court found a contract existed between the parties.
On March 16, 2009, Buckman filed a Motion for Summary Judgment against Quantum's Counterclaim, and Quantum filed a Motion for Summary Judgment against all of Buckman's claims. On March 30, 2009, Quantum filed a Motion (#73) to Voluntarily Dismiss its Counterclaim for breach of contract without prejudice.
At the July 2, 2009, oral argument on these Motions, the Court denied Buckman's Motion for Summary Judgment and granted Quantum's Motion for Summary Judgment in its entirety as to Buckman's Second Amended Complaint. The Court dismissed Buckman's claims for breach of employment contract without prejudice and dismissed Buckman's claims for breach of partnership agreement, breach of fiduciary duties, unjust enrichment, and equitable estoppel with prejudice. The Court also denied Quantum's Motion to Voluntarily Dismiss their Counterclaim for breach of contract pending the Court's ruling on Buckman's Motion.
The Court granted Buckman leave to file a motion to amend its Complaint for the third time as to possible claims for breach of employment contract and quantum meruit. On July 23, 2009, Buckman filed their Motion for Leave to File Third Amended Complaint.
STANDARDS
After a responsive pleading has been filed, Federal Rule of Civil Procedure 15(a) provides parties may amend a pleading "only by leave of the court or by written consent of the adverse party; and leave shall be freely given when justice so requires."
When determining the propriety of a motion for leave to amend, courts consider five factors. Manzarek v. St. Paul Fire Ins. Co., 519 F.3d 1025, 1034 (9th Cir. 2008). These factors include (1) undue delay, (2) bad faith or dilatory motive on the part of the movant, (3) repeated failure to cure deficiencies by amendments previously allowed, (4) undue prejudice to the opposing party by virtue of allowance of the amendment, and (5) the futility of amendment. Id. at 1034. The presence of such factors weigh against granting leave to amend. Schlacter Jones v. Gen. Tel. of CA, 936 F.2d 435, 443 (9th Cir. 1991). Denial of leave to amend is acceptable if any amendment would be futile. Leadsinger, Inc. v. BMG Music Publ'g, 512 F.3d 522, 532 (9th Cir. 2008) (citing DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987)). Refusal to grant leave to amend without a justifying reason is, however, an abuse of discretion. Leadsinger, 512 F.3d at 532.
DISCUSSION
Buckman seeks leave to file a Third Amended Complaint in which they allege claims against Quantum for breach of employment contract and quantum meruit. Based on the scope of the Court's inquiry at the July 2, 2009, hearing, Quantum opposes Buckman's Motion on the ground that amending the Complaint to assert a claim for breach of employment contract is futile. Quantum also opposes as futile Buckman's quantum meruit claim for six months of lost productive time following the termination of the parties' relationship in January 2007.
"When a federal court sitting in diversity hears state law claims, the conflicts laws of the forum state are used to determine which state's substantive law applies." 389 Orange Street Partners v. Arnold, 179 F.3d 656, 661 (9th Cir. 1999). Under Oregon conflict-of-law rules, the court must determine as a threshold issue whether there is a material difference between Oregon substantive law and the law of the other forum. Weller v. Auto-Owners Ins. Co., 174 Or. App. 471 (2001). The parties do not dispute Oregon law applies and, in any event, agree the outcome will be the same whether Oregon or Texas law is applied.
I. The Five Factors Under Manzarek.
Under the five factors enumerated in Manzarek, factors two (bad faith or dilatory motive) and three (repeated failure to cure deficiencies by amendments previously allowed), are not material to this analysis. Factor one (undue delay), is relevant in that this case is already two years old and the parties have not moved past the pleadings stage. While not determinative as to whether Buckman should be allowed to further amend, this Court is mindful of the need for the litigation to move forward. Factor four (undue prejudice to the opposing party) is also a consideration here in that Quantum has already filed one Motion for Summary Judgment as to Buckman's claims, and may incur the expense of doing so a second time.
It is factor five, however, (futility of amendment), that the Court finds is the most relevant consideration, and on which Quantum focuses its arguments. If Buckman is to defeat Quantum's challenge to its Motion to amend, based on futility, Buckman must plead material facts that support their contention that Quantum intended to disregard the express language of the term sheet and to create an employment relationship with Buckman without the executed contracts. In the alternative, Buckman must plead facts that support their contention under a theory of quantum meruit that they have incurred unpaid fees and expenses arising from the parties' due diligence.
II. Buckman's Claim for Breach of Employment Contract.
A. The Hiring Entity.
At the July 2, 2009, hearing, the Court requested Buckman to identify which Quantum Defendants allegedly employed them and under what terms. Buckman appears to argue that the employment agreement was created with all of the Quantum Defendants during the October 22, 2006, telephone conversation with Neugebauer in which the parties agreed on the material terms of the contract. Buckman contends Neugebauer, as a managing partner of the Quantum Defendants, acted as an authorized agent to bind Quantum to the proposed employment terms that Quantum allegedly ratified subsequently. Quantum, however, contends the parties mutually agreed that Quantum was not to be the employing entity and that the term sheet merely created a vehicle for the parties to perform due diligence before entering into formal agreements if mutually agreeable.
The parties do not dispute Buckman was offering its management services to Quantum and Neugebauer was authorized by Quantum to negotiate the letter of intent. The parties also do not dispute both parties continued their due diligence into December 2006 notwithstanding the term sheet's expiration date of November 30, 2006. In addition, it is undisputed that the parties never signed the employment agreements.
The enforceability of a contract or agreement does not depend on whether it is preliminary or an agreement to agree or an agreement to negotiate. It is the contents of the agreement and the parties' intentions that are important. Logan v. D.W. Sivers Co., 343 Or. 339, 347 (2007) (internal punctuation omitted). Here the express language of the term sheet clearly reflects the parties intended a new limited-liability company to be the employing entity rather than Quantum. The email communications exchanged between the parties in December 2006 address the need to finalize the employment and operating agreements which reflect the parties' understanding that there would be a new employing entity created for this purpose. Buckman has not alleged the employment or operating agreements being circulated were to be signed by the Quantum Defendants.
Based on the parties' unambiguous intent, there is not sufficient evidence in this record for the Court to conclude that any of the Quantum Defendants intended to employ Buckman.
B. The Existence of an Employment Contract.
Buckman argues all material terms of the contract were agreed to by Neugebauer on October 22, 2006, and Quantum's actions amounted to a unilateral offer of employment that it subsequently ratified verbally and through its actions. According to Buckman, Quantum, therefore, is estopped from denying the existence of a contract. Specifically, Buckman points to Neugebauer's statement that "I guess the way I see it we are partners already" and Soler's reference to Buckman, Sr., as "CEO of our nuclear power subsidiary" as evidence that Quantum intended to disregard the term sheet and to create an enforceable contract without executed agreements.
Whether a contract exists is a question of law in Oregon. Ken Hood Constr. Co. v. Pac. Coast Constr., Inc., 201 Or. App. 568, 577 (2005). Oregon follows the objective theory of contracts; that is, the existence of a contract does not depend on the parties' uncommunicated subjective understanding but on their objective manifestations of mutual intent to agree to the same express terms. Sollaris v. City of Milwaukie, 222 Or. App. 384, 388 (2008) (internal citations omitted). The enforceability of a contract depends on the contents of the agreement and the parties' intentions. Logan v. D.W. Sivers Co., 343 Or. 339, 347 (2000).
1. Unilateral Contract.
Buckman contends Quantum made a unilateral offer of employment that Buckman accepted by their partial performance. Buckman relies on Slate v. Saxon, 166 Or. App. 1 (2000), to support its contention that a contingent offer of employment that is later withdrawn after commencement of the work may be enforceable. The court in Slate, however, found there was not a unilateral offer of employment despite the contingencies being met because the offer was withdrawn pre-employment.
Unlike in Slate, the contingencies here were never met because the employment contracts and the operating agreement for Q-Power were never executed. Although Buckman and Quantum devoted time and money during the due-diligence period to determine whether these projects were feasible and whether Buckman should work for this new entity, either party explicitly was permitted to terminate the arrangement prior to execution of the binding agreements. It is undisputed Quantum chose to terminate its due diligence and negotiations in the precise manner contemplated by the parties' term sheet, and, therefore, Buckman's Motion to amend their Complaint as to the theory of unilateral contract is futile.
2. Promissory Estoppel.
Although the Court dismissed with prejudice Buckman's claim for equitable estoppel at the July 2, 2009, hearing, Buckman, nevertheless, alleges that because they relied on Quantum's promises of employment to their detriment, Quantum is estopped from denying the validity of the employment contracts.
Under Oregon law, the elements of promissory estoppel include (1) a promise, (2) which the promisor, as a reasonable person, could foresee would induce conduct of the kind which occurred, and (3) actual reliance on the promise, (4) which results in a substantial change in position. Neiss v. Ehlers, 135 Or. App. 218, 223 (1995).
The issue here is whether the statements and representations of Quantum's personnel would lead a reasonable person to conclude that Quantum wished to set aside the conditions of the term sheet and to create a binding employment agreement without signed contracts. Based on the parties' actions and stated intent, especially the mid-December email communications between the parties regarding the need to finalize the employment agreements, this Court concludes these statements and representations by Quantum are insufficient to defeat a motion for summary judgment and, therefore, Buckman's Motion to amend is futile to the extent that it is based on this theory. See Roth v. Garcia Marquez, 942 F.2d 617, 628-29 (9th Cir. 1991) (citing Gabrielson v. Montgomery Ward, 785 F.2d 762 765-66 (9th Cir. 1986)).
3. Ratification.
Buckman relies on Summit Properties, Inc. v. New Technology Electrical Contractors, Inc., Nos. CV-03-748-ST and CV-03-6394-ST, WL 1490327 (D. Or. July 2, 2004), to support its contention that Quantum created an employment relationship because it ratified the actions of its partners and/or officers by failing to repudiate their actions. In Summit, a subsidiary of an electrical company that had not been authorized to do so signed a seven-year lease, paid rent for five months, had identifying signage placed on the building and the company's vans, had a telephone-book listing, and entered into multiple contracts. All of these actions were done with the knowledge or express authority of the officers of the parent company. Notwithstanding the parent company's denial of responsibility, the court found it had ratified the acts of its agents.
Here Quantum's acts do not approach the level of ratification present in Summit or even suggest Quantum ratified the statements of Neugebauer or Soler in a manner that set aside the provisions of the term sheet. Although Quantum encouraged Buckman to take appropriate steps necessary to research certain investment opportunities, that is precisely the purpose of due diligence.
Buckman also relies on Logan v. Sivers Co., 343 Or. 339, 349 (2007), in which the Oregon Supreme Court found an otherwise nonbinding letter of intent contained three binding provisions and Defendant's breach of those binding provisions was actionable. Here Part II of the term sheet contains four binding provisions, but Buckman does not seek to enforce them. Accordingly, Logan is inapplicable.
Buckman further cites several Oregon cases in which the courts found contracts were enforceable, but these cases differ factually from those of this case. In Ken Hood Construction, an enforceable contract was created when a construction bid was accepted in writing notwithstanding the need to formalize the agreement. 201 Or. App. at 579. In Hughes v. Misar, 189 Or. App. 258, 265-66 (2003), the court found enforceable a signed settlement agreement that the parties intended to be final notwithstanding the need for additional documents. In Dalton v. Robert Jahn Corp., 209 Or. App. 120, 131-32 (2006), the court found enforceable a written settlement agreement to divide the family's closely-held corporation despite the mother's subsequent withdrawal of consent because there was evidence that she intended to be bound by the agreement at the time of signing. In all of these cases, the parties manifested a mutual intent to be bound by the terms of an agreement notwithstanding a subsequent change in position. Here the parties agreed Quantum was not to be the hiring entity and there was not a contract until certain conditions were met, due diligence was completed to both parties' satisfaction, and final agreements were executed. See Roth v. Garcia Marquez, 942 F.2d 617, 626 (9th Cir. 1991).
On this record, therefore, the Court finds it would be futile for Buckman to allege a claim for breach of employment contract against Quantum on the theory of ratification.
III. Buckman's Claim for Quantum Meruit.
The purpose of quantum meruit is to prevent unjust enrichment at the expense of another. Hahn v. Oregon Physician's Serv., 786 F.2d 1353, 1355 (9th Cir. 1985). The elements of the claim are a benefit conferred, awareness by the recipient that a benefit has been received, and judicial recognition that, under the circumstances, it would be unjust to allow retention of the benefit without requiring the recipient to pay for it. Safeport, Inc. v. Equip. Roundup Mfg., Inc., 184 Or. App. 690, 706 (2002).
In Kashmir Corp. v. Patterson, the Oregon Court of Appeals noted:
Quantum meruit is a form of restitution where the plaintiff has performed services for defendant and seeks to recover their fair value. The law, in appropriate situations, will imply a quasi-contract. It is not consensual. It is not a contract. It is a remedial device which the law affords to accomplish justice and prevent unjust enrichment. Quantum meruit presupposes that no enforceable contract exists.
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Ultimately, however, there cannot be a valid legally enforceable contract and an implied contract covering the same services.43 Or. App. 45, 47-48 (1979), aff'd, 289 Or. 589, (1980) (internal citations omitted). See also L.H. Morris Elec., Inc. v. Hyundai Semiconductor Am., Inc., 203 Or. App. 54, 66 (2005).
To recover in quantum meruit under Oregon law, Buckman must establish it conferred a real benefit to Quantum. Hazelwood Water Dist. v. First Union Mgmt., 78 Or. App. 226, 230 (1986). This record reflects the due-diligence process was vigorously pursued by both parties, and Buckman's industry contacts and subject-matter expertise rendered a benefit to Quantum. The fact that Quantum ultimately decided not to pursue nuclear-energy investments does not mean it did not gain something valuable from its association with Buckman.
Although extension of the term sheet was not reduced to writing, a jury could find it was extended by the express actions and mutual consent of both parties until it was explicitly terminated by Quantum in January 2007. In addition, a jury could find Buckman incurred certain unpaid fees and expenses in reliance on this mutual agreement to extend the time. Indeed, following the termination, Buckman submitted a bill to Quantum for consultant fees and expenses totaling $220,000 as provided for by the term sheet and as confirmed by Neugebauer's promise to pay. To this limited extent, therefore, Buckman's proposed claim is not futile.
Quantum does not dispute Buckman incurred fees and expenses during the due-diligence period, but Quantum correctly asserts the appropriate measure of damages under quantum meruit is the reasonable value of the work performed. See City of Portland ex rel. Donohue Fleskes Corp. v. Hoffman Constr. Co., 286 Or. 789, 802-03 (1979). See also B D Inv. Corp. v. Petticord, 61 Or. App. 585, 589 (1983). Accordingly, Buckman's claim for six months of "lost productive time" rather than for work actually performed is futile.
Although the Court concludes Buckman's claim for breach of employment contract is futile, the Court believes the interests of justice within the context of Rule 15 warrants permitting Buckman to amend their Complaint to prove under quantum meruit that they should be able to recover their unpaid fees or expenses, including attorneys' fees, for the period until Quantum's termination of due diligence in January 2007.
CONCLUSION
For these reasons, the Court DENIES in part and GRANTS in part the Motion (#101) for Leave to File Third Amended Complaint filed by Plaintiffs Frederick Buckman, Sr.; Frederick Buckman, Jr.; Bruce Landrey; and Joseph Socolof as follows:
1. DENIES the Motion to amend their Complaint as to their claim for breach of employment contract.
2. GRANTS the Motion to amend their Complaint as to their claim for quantum meruit only to the extent that they seek unpaid consultant fees and expenses, including attorneys' fees, accrued during the due-diligence period and DENIES the remaining parts of their Motion as to the quantum meruit claim.
Buckman's Third Amended Complaint consistent with this Opinion and Order shall be filed no later than October 13, 2009.
Based on this Opinion and Order, the Motion (#73) for Voluntary Dismissal of Counterclaim for breach of contract filed by Defendants Quantum Energy Partners IV, LP; Quantum Energy Management IV, LP; QEM Management, LP; and QEM Management, LLC, is moot.
Finally, the parties shall confer and submit to the Court no later than October 20, 2009, a joint proposal for a schedule to bring this matter to conclusion.
IT IS SO ORDERED.
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF OREGON QUANTUM TECHNOLOGY PARTNERS 08-CV-376-BR II, L.P., a Delaware limited partnership, OPINION AND ORDER Plaintiff, v. ALTMAN BROWNING AND COMPANY, an Oregon corporation; BAKER GROUP LLP; KAY E. ALTMAN, an individual; MICHAEL J. BAKER, an individual; DAVID M. BROWNING, an individual; and DOES 1 through 20, Defendants, and APEX DRIVE LABORATORIES, INC., a Delaware corporation, Nominal Defendant. JOHN S. STEWART, ROBERT B. COLEMAN, TYLER J. STORTI, Stewart Sokol Gray, LLC, Portland, OR, Attorneys for Plaintiff.DAVID W. AXELROD, DEVON ZASTROW NEWMAN, Schwabe Williamson Wyatt, PC, Portland, OR, Attorneys for Defendants Altman Browning and Company, Kay E. Altman, and David M. Browning.
GARY I. GRENLEY, PAUL H. TRINCHERO, DAVID E. DEAN, Grenley Rotenberg Evans Bragg Bodie PC, Portland, OR, Attorneys for Defendants Baker Group LLP and Michael J. Baker.
This matter comes before the Court on the Motion (#77) to Dismiss filed by Defendants Baker Group LLP and Michael J. Baker and the Motion (#79) to Dismiss and Joinder in the Corresponding Motions Filed by the Baker Group LLP of Defendants Altman Browning and Company (ABCO), Kay E. Altman, and David M. Browning.
For the reasons that follow, the Court GRANTS Defendants' Motions.
BACKGROUND
The Court takes the following facts from Plaintiff Quantum Technology Partners II, L.P.'s Third Amended Complaint and from the parties' previous filings in this matter, and, accordingly, the Court accepts as true the allegations in the Third Amended Complaint and construes those facts in favor of Quantum.
At some point before 2004, Quantum purchased shares in Primotive Corporation for $590,000. At the time Quantum purchased its shares, Primotive was named Motile Corporation.
On February 25, 2004, Primotive's Board of Directors (BOD) and a majority of its shareholders voted to sell substantially all of Primotive's assets to Apex. In exchange for Primotive's assets, Apex issued 51% of its stock to the former shareholders of Primotive. Through this transaction, Quantum became an Apex shareholder.
On February 25, 2004, Apex also entered into a Services Agreement with ABCO in which Apex agreed ABCO would develop Primotive's technology. Pursuant to the Services Agreement, Apex issued the remaining 49% of its outstanding stock to the Baker Group. "[I]n exchange for the services ABCO agreed to perform for Apex," the Baker Group assigned 8.9% of its shares to Laughlin LLC. Laughlin is not identified or further described in the parties' filings.
Under the terms of the Services Agreement, ABCO was required to accomplish specifically enumerated "milestones" by January 1, 2006, on which date the Services Agreement terminated. If ABCO did not accomplish the milestones, the Apex shares that were transferred to the Baker Group were subject to repurchase by Apex.
Baker, Altman, and Browning signed the Services Agreement on behalf of Apex in their capacities as Apex's President and Chief Executive Officer (CEO), Chief Financial Officer (CFO), and Chief Technical Officer (CTO) respectively. Baker, Altman, and Browning also signed the Services Agreement on behalf of ABCO acting in their capacities as ABCO's President and CEO, CFO, and CTO respectively.
In September 2004, Apex billed Holjeron Company $50,000 for a prototype project completed for Holjeron. Apex then paid the $50,000 to ABCO pursuant to the Services Agreement.
ABCO did not accomplish all of the milestones set out in the Services Agreement before January 1, 2006. As a result, Quantum delivered to the Baker Group and Laughlin a written consent of the majority of "non-interested shareholders" and the funds required for Apex to repurchase its shares.
At an Apex shareholder meeting on February 16, 2006, Quantum moved to affirm Apex's repurchase of the shares of the Baker Group and Laughlin, and "[t]he motion carried based upon a count of shares owned by a majority of the disinterested stockholders." Also at that meeting, Quantum noted the Services Agreement had expired by its own terms on January 1, 2006. Baker, however, asserted the directors of Apex ( i.e., Baker, Altman, and Browning) previously had extended the Services Agreement at a BOD meeting in December 2005.
In December 2006 Porteon Electric Vehicles, Inc., made a "substantial investment" in Apex and became Apex's largest shareholder. On January 25, 2007, Brad Hippert, President of Porteon, was elected to Apex's BOD.
On February 15, 2007, Quantum filed a complaint in Multnomah County Circuit Court in which it brought claims for fraudulent inducement, breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment against the same individuals and entities that are defendants in this action based on the same facts underlying this action. On May 23, 2007, Quantum voluntarily dismissed the state-court action without prejudice.
On June 5, 2007, Quantum submitted to Apex a Demand for Investigation by Independent Directors of Apex Corporation in which Quantum demanded an investigation as to whether ABCO met the milestones of the Services Agreement; whether the Services Agreement deadline had been validly extended; when the notes of the December 2005 BOD meeting were created; whether the actions taken at the February 16, 2006, stockholder meeting were "valid"; whether Apex received $50,000 from Holjeron and paid those funds to ABCO; and whether Defendants committed fraud, were self-dealing, breached their fiduciary duties, abused their control of Apex, grossly mismanaged Apex, wasted the corporate assets of Apex, violated Delaware corporate law, illegally converted the assets of Apex, and/or misrepresented ABCO's experience and skill to carry out the Services Agreement.
On July 10, 2007, Porteon's CEO Ken Montler and CFO James Boehlke met with Barry Dickman, Quantum's owner and manager, to discuss the possibility of Porteon purchasing Quantum's shares of Apex. After the meeting, Dickman sent Boehlke an email in which he rejected Porteon's suggestion, noted the settlement offer in the state-court action before Quantum voluntarily dismissed that case, advised he anticipated extensive legal fees if Quantum were to renew its action against Defendants, predicted discovery in such an action to be "monumental," and stated he did not "see how Apex survives past about October" due to the costs of such an action and the fact that no one would invest in Apex under a cloud of litigation.
On September 6, 2007, the BOD formed a Special Investigative Committee (SIC) to investigate Quantum's June 5, 2007, Demand for Investigation.
On January 15, 2008, Hippert issued a report to Apex's shareholders regarding Quantum's June 2007 Demand. Hippert advised Apex's SIC hired independent outside counsel, Peter Glade, to investigate Quantum's Demand for Investigation and stated the SIC concluded pursuant to the investigation that "Quantum's claims have a tenuous foundation based on the facts." Hippert conceded Apex's BOD "could have kept better records of its deliberations" and "may have stretched the boundaries of its authority in some of its decisions." Hippert concluded, however, even though the BOD "may have made decisions that affected its own interests, the ultimate outcome of its management of [Apex] during the time in question was fair to [Apex]." Finally, Hippert noted "the diversion of resources to pursue litigation rather than advancing the core business of Apex would surely cripple [Apex] and inhibit the progress we are making." Hippert concluded, therefore, Apex would not take further action on Quantum's Demand for Investigation.
On January 23, 2008, Dickman emailed Glade to express his dissatisfaction with the investigation and to question Glade's objectivity. Glade forwarded Dickman's email to Hippert, expressed his discomfort with responding directly to Dickman, and reiterated the "scope and design" of the investigation "were free from outside influence." Specifically, Glade stated "Browning, Altman and Baker played no role in limiting or expanding the investigation, and neither did anyone else."
On March 25, 2008, Quantum filed a Complaint in this Court against Defendants in which it brought derivative claims for (1) breach of fiduciary duty, (2) abuse of control, (3) gross mismanagement, (4) waste of corporate assets, (5) specific performance, and (6) unjust enrichment. Quantum also brought direct claims for (a) conspiracy to violate the Racketeering Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961, et seq.; (b) violation of RICO, 18 U.S.C. § 1962(a), (b), and (c); and (c) fraudulent inducement.
On May 8, 2008, Quantum filed its First Amended Complaint to include more factual allegations to support its RICO claims.
On May 9, 2008, Defendants filed Motions to Dismiss Quantum's First Amended Complaint. After initial briefing, the Court permitted the parties to file supplemental briefs by September 26, 2008, to ensure the parties had an adequate opportunity to make their record as to the issues raised in Defendants' Motions. On September 26, 2008, Plaintiff filed a supplemental brief in opposition to Defendants' Motions. Defendants declined to file supplemental materials.
On October 3, 2008, the Court issued an Opinion and Order in which it granted Defendants' Motions to Dismiss and granted Quantum leave to amend its First Amended Complaint to cure the deficiencies as to Quantum's derivative and fraudulent-inducement claims. The Court declined to allow Quantum to amend its First Amended Complaint as to its RICO claims.
On November 1, 2008, Quantum filed a Second Amended Complaint in which it asserted derivative claims against Defendants for (1) breach of fiduciary duty, (2) abuse of control, (3) gross mismanagement, (4) waste of corporate assets, (5) specific performance, (6) unjust enrichment, and (7) a direct claim for fraudulent inducement.
On December 30, 2008, Apex filed a Motion to Dismiss the derivative claims in the Second Amended Complaint. On that same day, the remaining Defendants filed Motions to Dismiss or in the Alternative for Summary Judgment as to all of Quantum's claims.
On January 15, 2009, Quantum filed a Motion for Leave to File a Third Amended Complaint to add a claim for breach of contract. Defendants objected on the grounds that, among other things, (1) under Delaware there is not a cause of action for damages for breach of contract between shareholders for violation of a corporation's bylaws; (2) Delaware law provides other remedies to contest a board of directors or shareholder vote; and (3) even if a breach of contract cause of action exists, it is a derivative rather than a direct claim and, therefore, should be dismissed for the same reasons the Court dismissed Quantum's other derivative claims.
On May 7, 2009, the Court heard oral argument on the parties' Motions and took them under advisement. On June 24, 2009, the Court issued an Opinion and Order in which it granted Defendants' Motions to Dismiss. The Court concluded it could not fairly decide the issues raised by Defendants as to Quantum's proposed Third Amended Complaint as it had been submitted and, therefore, granted Quantum leave to file a Third Amended Complaint limited to a putative claim for breach of contract as set out by Quantum in its Motion for Leave to File Third Amended Complaint and granted Defendants leave to move to dismiss the Third Amended Complaint.
On July 7, 2009, Quantum filed a Third Amended Complaint in which it asserted a claim for breach of contract. On July 28, 2009, Defendants filed Motions to Dismiss Quantum's Third Amended Complaint.
STANDARDS
Dismissal under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim is proper only if the pleadings fail to allege enough facts to demonstrate a plausible entitlement to relief. Bell Atlantic v. Twombly, 550 U.S. 544, 555 (2007).
While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the "grounds" of his "entitle[ment] to relief" requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level on the assumption that all the allegations in the complaint are true (even if doubtful in fact).Id. The court accepts as true the allegations in the complaint and construes them in favor of the plaintiff. Intri-Plex Tech., Inc. v. Crest Group, Inc., 499 F.3d 1048, 1050 n. 2 (9th Cir. 2007). "The court need not accept as true, however, allegations that contradict facts that may be judicially noticed by the court, and may consider documents that are referred to in the complaint whose authenticity no party questions." Shwarz v. United States, 234 F.3d 428, 435 (9th Cir. 2000) (citations omitted).
DISCUSSION
Quantum asserts a claim for breach of contract in its Third Amended Complaint as follows:
Defendants breached their contractual obligations to Plaintiff under Article 3.12 of the Apex Bylaws by voting in favor of and ratifying approval of a transaction in which Defendants had an interest.
As a direct and proximate result of the Defendants' breaches of their contractual obligations under the Apex Bylaws, Plaintiff has sustained significant damages as alleged herein. Specifically, but for Defendants breaches of their contractual obligations to Plaintiff under the Apex Bylaws, Apex would have purchased Defendants shares in Apex back from Defendants according to the terms of the services agreement, and Plaintiff's percentage share in Apex would be increased.
Third Am. Compl. ¶¶ 27-28.
Defendants Baker and Altman move to dismiss Quantum's Third Amended Complaint on the grounds that (1) under Delaware law there is not a cause of action for damages for breach of contract between shareholders for violation of a corporation's bylaws; (2) Delaware law provides other remedies to contest a board of directors or shareholder vote; and (3) even if a breach of contract cause of action exists, it is a derivative rather than a direct claim, and, therefore, should be dismissed for the same reasons the Court dismissed Quantum's other derivative claims.
I. Quantum has not established a cause of action exists under Delaware law for damages for breach of contract between shareholders based on violation of a company's bylaws.
As noted, Defendants contend Delaware law does not recognize a cause of action for damages between shareholders for breach of a corporation's bylaws.
Quantum, however, relies on Centaur Partners, IV v. National Intergroup, Inc., 582 A.2d 923 (Del. 1990), to support its contention that Delaware law allows such a claim. Specifically, Quantum points out that the court in Centaur Partners stated "[c]orporate . . . by-laws are contracts among the shareholders of a corporation and the general rules of contract interpretation apply." Id. at 929. Centaur Partners, however, was not an action for breach of contract but instead centered on the plaintiff's request for a declaratory judgment as to the percentage of shares required to amend the corporation's bylaws. The Court notes the Delaware court made this statement in the context of applying "general rules of contract interpretation" to resolve the dispute. Id. at 928. In addition, the cases the Delaware court cited to support the statement all arise in a similar posture: i.e., all are cases in which the courts resolved requests for declaratory judgment and concluded rules of contract interpretation applied to interpret the provisions of corporate bylaws. See Berlin v. Emerald Partners, 552 A.2d 482, 488 (Del. 1988), and Hibbert v. Hollywood Park, Inc., 457 A.2d 339, 342-43 (Del. 1983). The Delaware courts' interpretation of bylaws using the principles of contract construction, however, does not establish that the Delaware courts intended to recognize a cause of action for damages for breach of contract between shareholders for violations of corporate bylaws. Accordingly, the Court concludes neither Centaur nor the cases on which that court relied establish a shareholder may bring a breach-of-contract action under Delaware law for damages against other shareholders for violations of corporate bylaws.
Quantum also relies on Kidsco, Inc. v. Dinsmore, 674 A.2d 483 (Del. 1995). In that case, however, the plaintiffs sought preliminary injunction and "adjudication of the invalidity of [a] by-law amendment as a matter of law." Id. at 490. Although the court noted the plaintiffs challenged the amendment of the bylaws "as a violation of their contract rights and as a breach of fiduciary duty," the court did not analyze the plaintiffs' claims as those for breach of contract nor did it address whether a breach-of-contract claim is permitted under Delaware law. Finally, in Kidsco, the plaintiffs did not seek damages, but rather equitable relief in the form of "an undoing" of the amendment.
Finally, Quantum relies on two cases from states other than Delaware to support its position. See Procopio v. Fisher, 83 A.D.2d 757 (N.Y.A.D. 1981) and Leeds v. Harrison, 72 A.2d 371 (N.J. Super. 1950). These cases, however, do not specifically recognize a cause of action for breach of contract between shareholders as for violation of a corporation's bylaws, and they were resolved under the laws of New York and New Jersey. Accordingly, they do not support Quantum's position.
In summary, the cases on which Quantum relies do not establish a shareholder may bring under Delaware law an action for damages for breach of contract against another shareholder for violations of a corporation's bylaws. In the absence of Delaware authority to establish this premise, this Court concludes Quantum has not established that Delaware recognizes a cause of action for damages for breach of contract between shareholders for violations of a corporation's bylaws. Accordingly, the Court grants Defendants' Motions to Dismiss Quantum's Third Amended Complaint.
Because the Court concludes Quantum has not established that Delaware law recognizes a cause of action for damages for breach of contract between shareholders as to violation of a corporation's bylaws, the Court does not address Defendants' other contentions.
CONCLUSION
For these reasons, the Court GRANTS the Motion (#77) to Dismiss filed by Defendants Baker Group LLP and Michael J. Baker and the Motion (#79) to Dismiss and Joinder in the Corresponding Motions Filed by the Baker Group LLP of Defendants Altman Browning and Company, Kay E. Altman, and David M. Browning.
The Court DIRECTS Defendants to submit an appropriate judgment dismissing this matter with prejudice.
IT IS SO ORDERED.