Opinion
Nos. 98-20602-11, 00-2109-KHV
July 20, 2000.
MEMORANDUM AND ORDER
Plaintiff Cynthia Grimes filed suit on behalf of Stoico Restaurant Group, Inc. ("SRG") alleging that defendants breached their fiduciary duties as directors and officers of SRG. This matter comes before the Court on Defendant James Ash's Motion To Dismiss Or, In The Alternative, Motion For A More Definite Statement (Doc. #6) filed April 13, 2000 and Defendants Martsolf and Jeffrey's Motion To Dismiss Or, In The Alternative, Motion For A More Definite Statement (Doc. #14) filed May 25, 2000. For reasons stated below, the Court finds that both motions should be sustained with leave to amend.
Motion to Dismiss Standards
In ruling on a motion to dismiss under Fed.R.Civ.P. 12(b)(6), the Court must assume as true all well pleaded facts in plaintiff's complaint and view them in a light most favorable to plaintiff. Zinermon v. Burch, 494 U.S. 113, 118 (1990). The Court must make all reasonable inferences in favor of plaintiff, and liberally construe the pleadings. See Fed.R.Civ.P. 8(a); Lafoy v. HMO Colo., 988 F.2d 97, 98 (10th Cir. 1993). The issue in reviewing the sufficiency of the complaint is not whether plaintiff will prevail, but whether she is entitled to offer evidence to support her claims. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974).
The Court may not dismiss a cause of action for failure to state a claim unless it appears beyond a doubt that plaintiff can prove no set of facts in support of her theories of recovery that would entitle her to relief. See Jacobs, Visconsi Jacobs, Co. v. City of Lawrence, 927 F.2d 1111, 1115 (10th Cir. 1991). Although plaintiff need not precisely state each element of her claims, plaintiff must plead minimal factual allegations on those material elements that must be proved. See Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir. 1991).
Factual Background
The following is a summary of the allegations in plaintiff's complaint. SRG is a Delaware corporation with corporate headquarters formerly located in Wichita, Kansas. From 1996 to 1998, Tim Jeffrey, Cathy Martsolf and James Ash were shareholders of SRG and officers on its board of directors. Ash was also securities counsel for SRG.
In 1996, Jeffrey, Martsolf and Ash participated in an initial public offering of SRG stock ("the IPO"). As directors, they had primary responsibility for choosing underwriters and preparing a prospectus for potential investors in SRG. The prospectus consisted of a business plan to open 10 to 12 restaurants, requiring capital expenditures of $2.9 million in 1996 and $4.7 million in 1997. In mid-1996, defendants were warned that an IPO at a market capitalization value of less than $50 million was questionable and that the proposed underwriter, Primeline Securities Corporation, lacked experience and recognition in the field. Before the IPO closed in December 1996, it became apparent or should have become apparent to SRG directors that the public financing revenue would be inadequate to fully fund and operate the restaurants according to the business plan. Plaintiff contends that defendants disseminated false and misleading information to potential investors with respect to the marketability of the stock, the identity of the management company, the availability of IPO proceeds to fund construction of new restaurants, and the identity of the person who would become the majority shareholder of SRG. Because of the deficit created by the unsuccessful IPO, SRG began borrowing hundreds of thousands of dollars in connection with the construction and outfitting of new restaurants.
By June 1997, SRG had to close six newly-opened restaurants because it lacked the capital necessary to operate them. In August, investors who had purchased stock in the IPO filed a class action suit against SRG, Jeffrey and Louie Stoico for securities law violations and misfeasance. Michael Thompson, a law partner of James Ash, represented the defendants in the class action, which settled out of court. On March 6, 1998, SRG sought bankruptcy protection under Chapter 11 and the bankruptcy court appointed Grimes to represent the corporation with specified powers of a trustee.
Grimes filed the present suit against the former officers and directors of SRG, seeking damages for breach of fiduciary duties to the company and its other shareholders.
Analysis
Defendants' motions to dismiss will be considered jointly as they present nearly identical arguments regarding the sufficiency of plaintiff's complaint. Before evaluating the merits of defendants' motions, the Court must question what state law governs the suit. Plaintiff contends that the law of Delaware, Stoico's state of incorporation, should apply. Defendants do not address the choice of law issue, but generally rely on the state tort law of Kansas. The Court discerns no material difference between the applicable substantive law in Kansas and Delaware and, accordingly, it need not resolve the choice of law issue at this time. See Avedon Eng'g, Inc. v. Seatex, 126 F.3d 1279, 1284 (10th Cir. 1997).
Plaintiff alleges that defendants breached their fiduciary duties to SRG by failing to inform shareholders about financial decisions, failing to "act in good faith to monitor and adequately inform her- or himself about corporate finances," acting in their own self interest, and being "grossly misfeasant in planning, executing and overseeing consummation of the IPO and other parts of the business plan." Complaint (Doc. #1) ¶ 30 filed March 6, 2000. In evaluating defendants' motions to dismiss, the Court must analyze these allegations in light of the legal presumption that defendants acted within the boundaries of business judgment. See Brehm v. Eisner, 746 A.2d 244, 251 (Del. 1999). Absent fraud, the business judgment rule precludes the courts from interfering with the discretion of corporate directors on "questions of corporate management, policy or business." Sampson v. Hunt, 233 Kan. 572, 584 (1983); see also Brehm, 746 A.2d at 260 (court will not interfere with board's decision absent conduct so egregious that board approval cannot meet business judgment test). To rebut the presumption that defendants are protected by the business judgment rule, plaintiff must allege facts which create a reasonable doubt as to defendants' good faith motive. See Brehm, 746 A.2d at 255. Though plaintiff is entitled to "all reasonably factual inferences that logically flow from the particularized facts alleged, conclusory allegations are not considered as expressly pleaded facts or factual inferences." Id.
Plaintiff's allegations that defendants "failed to act in good faith" and were "grossly misfeasant" are conclusory statements that are not supported by expressly pleaded facts. In her complaint, plaintiff does not aver any facts from which a jury could find that defendants acted with an improper motive. Plaintiff's factual allegations are equally consistent with lawful, unfortunate business decisions. Allegations of risky decisions are insufficient. Plaintiff does not allege facts to rebut the presumption that defendants acted properly in consummating the IPO and overseeing construction of SRG restaurants. Defendants' motions to dismiss are therefore granted with leave for plaintiff to amend her complaint to include such factual allegations.
Defendants also contend that plaintiff has not adequately pled the element of causation in her claim for breach of fiduciary duty. The Court agrees. Defendants are entitled to a more definite statement on this element. Plaintiff must allege facts in her complaint which are sufficient to withstand dismissal on each element of her claim, including "but for" causation. Plaintiff attempts to plead causation by including conclusory assumptions, i.e. "the breach of fiduciary duties by defendants directly resulted in monetary losses to SRG," Complaint ¶ 32. Such statements do not inform defendants how they allegedly caused monetary losses to SRG. In fact, plaintiff alleges that IPO underwriters, as well as defendants, were deliberately misleading SRG. See Complaint ¶ 13. Plaintiff does not rule out the possibility that Primeline Securities Corporation may have caused the SRG monetary losses. See id. at ¶ 13. In her amended complaint, plaintiff should provide a more definite statement on causation in her breach of fiduciary claim.
IT IS THEREFORE ORDERED that Defendant James Ash's Motion To Dismiss Or, In The Alternative, Motion For A More Definite Statement (Doc. #6) filed April 13, 2000 and Defendants Martsolf and Jeffrey's Motion To Dismiss Or, In The Alternative, Motion For A More Definite Statement (Doc. #14) filed May 25, 2000 be and hereby are SUSTAINED with leave to amend. On or before August 7, 2000, plaintiff may file an amended complaint.