Judge: Kevin C. Brazile, Case: BC642062, Date: 2023-03-09 Tentative Ruling
Case Number: BC642062 Hearing Date: March 9, 2023 Dept: 20
Tentative Ruling
Judge Kevin C. Brazile
Department 20
Hearing Date: Thursday, March 9, 2023
Case Name: West v. Access Control Related
Case No.: BC642062
Motion: Motion for Summary Judgment/Adjudication
Moving Party: Defendants Access Control Related Enterprises, LLC, LLR Equity Partners IV, L.P., LLR Equity Partners Parallel IV., L.P., Seth Lehr, David Stienes, Joseph Grillo (collectively, “Defendants”)
Responding Party: Plaintiff William West (“Plaintiff”)
Notice: OK
Ruling: The Motion for Summary Judgment/Adjudication is DENIED.
Defendants to give notice.
If counsel do not submit on the tentative, they are strongly encouraged to appear by LACourtConnect rather than in person due to the COVID-19 pandemic.
BACKGROUND
Procedural Background
On October 15, 2020, Plaintiff William West (“Plaintiff”) filed a first amended complaint against Defendants Access Control Related Enterprises, LLC (“ACRE”), LLR Equity Partners, IV, L.P. (“LLR EP”), LLR Equity Partners Parallel IV, L.P. (“LLR EPP”), Seth Lehr (“Lehr”), David Stienes (“Stienes”), Greg Case (“Case”), Robert Chefitz (“Chefitz”), and Joseph Grillo (“Grillo”) (collectively “Defendants”) for (1) wrongful termination, (2) breach of fiduciary duty, (3) breach of written contracts, (4) tortious interference with contractual relations, and (5) tortious interference with prospective economic advantage.
On May 23, 2022, a related civil action between the parties (the “Delaware Action”) was tried in Superior Court in Wilmington, Delaware on a breach of contract cause of action. That was William West v. Access Control Related Enterprises, LLC, et al., Case No. N17C-11-137-MMJ CCLD. On June 2, 2022, the jury returned a defense verdict on Plaintiff’s claim for breach of contract arising from the termination of Plaintiff’s employment. On July 1, 2022, Plaintiff filed a Notice of Appeal in the Delaware Supreme Court, and the Delaware appeal is pending.
On September 19, 2023, in reaction to the Delaware Action, Plaintiff voluntarily dismissed the first, third, fourth, and fifth causes of action, as well as the portion of the second cause of action set forth in paragraph 76(iii) of the FAC. What remains of the second cause of action is the following: “Defendants LLR, Lehr, Stienes, Case, Chefitz, and Grillo acted improperly, and not as reasonably careful directors of the Board and majority shareholders should have, including by: (i) taking action to silence [Plaintiff] and to prevent fair consideration of his management buyout proposal; [and] (ii) pursuing their own self-interest in a dividend recapitalization to the detriment of [Plaintiff].” (FAC ¶ 76.) The parties agreed that Plaintiff could refile the causes of action that were dismissed in the event that the Delaware Supreme Court reversed the judgment or jury verdict.
On December 23, 2022, Defendants filed this motion for summary judgment/adjudication, a separate statement, and a request for judicial notice. On February 23, 2023, Plaintiff filed an opposition, objections, and a separate statement. On March 2, 2023, Defendants filed a reply to Plaintiff’s opposition.
JUDICIAL NOTICE
Defendants request that the Court take judicial notice of the following two exhibits pursuant to California Evidence Code §§ 452 and 453, and California Rules of Court 3.1306:
1. Plaintiff’s Notice of Voluntary Dismissal of Fourth Cause of Action filed on July 24, 2018, in the Superior Court of the State of Delaware in William West v. Access Control Related Enterprises, LLC, et al., Case No. N17C-11-137-MMJ CCLD.
2. Verdict Form signed by Foreperson and filed on June 2, 2022, in the Superior Court of the State of Delaware in William West v. Access Control Related Enterprises, LLC, et al., Case No. N17C-11-137-MMJ CCLD. The verdict form states the jury’s finding that Plaintiff was properly terminated for cause.
Defendants’ requests are granted. Both documents are court records of the Superior Court of the State of Delaware, and as such, judicial notice is proper pursuant to Cal. Evid. Code §§ 452 and 453.
EVIDENTIARY OBJECTIONS
Plaintiff’s evidentiary objections are overruled.
DISCUSSION
Undisputed Facts
In May 2012, Plaintiff William West (“Plaintiff”) and co-Defendant Joseph Grillo (“Grillo”) founded Access Control Related Enterprises (“ACRE”). In June 2013, Grillo and Plaintiff sold a majority of their ownership in ACRE to co-Defendants LLR Equity Partners, IV, L.P., and LLR Equity Partners Parallel IV, L.P. (“LLR”) and the other investors for an infusion of $52 million into ACRE’s business (the “June 2013 Transaction”).
The $52 million investment allowed ACRE to purchase its second company, Mercury Security Products, LLC (“Mercury”), from Mercury’s founders, Frank Gasztonyi and Hing Hung. As part of the June 2013 Transaction, Grillo would continue on as the Chief Executive Officer (“CEO”) of ACRE, while Plaintiff would continue on as the Chief Financial Officer (“CFO”) and Chief Operating Officer (“COO”) of ACRE.
The ACRE Board was composed of Plaintiff, Grillo, Defendant Seth Lehr (“Lehr”), Defendant David Stienes (“Stienes”), Defendant Greg Case (“Case”), Defendant Robert Chefitz (“Chefitz”), and Paul Meiring. Lehr was the Board’s Chairman. Mercury’s President, Steve Wagner (“Wagner”), was not on the Board.
The Board, as well as other officers from ACRE’s subsidiaries, held a three-day meeting in Europe from November 9-11, 2015. The parties dispute the specifics of what was covered at that meeting, but do not dispute that the Board discussed ACRE’s financial performance and business strategy, including when the time would be right to sell Mercury and whether to refinance ACRE’s existing debt and distribute the remaining proceeds as a dividend to equity holders (a “dividend recapitalization”). At the November Board Meeting, by Plaintiff’s own admission, the Board made a decision to proceed with recapitalization, though Plaintiff contends that the decision was not to the complete exclusion of pursuing a management buyout.
In August 2015, Plaintiff approached an investment banker to assist him in putting together financing and a proposal for a management buyout of Mercury. In doing so, Plaintiff disclosed ACRE’s information to the investment banker as well as to third-party financial institutions.
Defendants eventually learned that Plaintiff had been meeting with third parties about an MBO. On December 10, 2015, Plaintiff met with Lehr and claimed that he had every right to pursue the MBO and had done nothing wrong. The Board instructed Plaintiff to cease discussions with others regarding an MBO.
On December 17, 2015, the Board voted to terminate Plaintiff’s employment for cause.
The same day, Plaintiff was notified of the termination of his employment. However, while he was still a member of ACRE’s Board, Plaintiff submitted a Letter of Intent (“LOI”) to purchase Mercury for $230 million, consisting of $170 million in cash and equity owned by West, Wagner, Hung, and Gasztonyi. Plaintiff stated in his proposal that he valued the management equity at approximately $60 million. There is dispute about whether or not Plaintiff had Wagner, Hung, and Gasztonyi’s approval to offer their equity.
A special committee was created to consider Plaintiff’s LOI regarding the MBO, though Plaintiff alleges the committee never truly intended to genuinely consider his offer. On December 22, 2015, the Special Committee received an information package, consisting of West’s LOI, financial analyses, meeting minutes of the Board’s meeting from November 2015, and two strategic business documents that had been discussed at that Board meeting: ACRE’s Growth Strategy & Exit Planning and a 39- month Business and Technical Roadmap for Mercury. On January 6, 2016, the Special Committee received additional financial analysis of West’s LOI.
Though Defendants claim they sent Plaintiff followup questions regarding his MBO offer, Plaintiff never responded or made any attempt to communicate with the Special Committee at any time after it was formed. On January 26, 2016, the Special Committee sent Plaintiff a letter outlining the steps taken to review Plaintiff’s LOI. The letter also explained the reasons for which Defendants were rejecting Plaintiff’s MBO offer.
In 2016, ACRE successfully executed a dividend recapitalization, in which the funds were distributed to every participating owner on a pro rata basis, including Plaintiff. Mercury was sold in October 2017 for about $400 million.
Legal Standard
In reviewing a motion for summary judgment, courts must apply a three-step analysis: “(1) identify the issues framed by the pleadings; (2) determine whether the moving party has negated the opponent’s claims; and (3) determine whether the opposition has demonstrated the existence of a triable, material factual issue.” (Hinesley v. Oakshade Town Center (2005) 135 Cal.App.4th 289, 294.)
“A party may move for summary adjudication as to one or more causes of action within an action, one or more affirmative defenses, one or more claims for damages, or one or more issues of duty, if that party contends that the cause of action has no merit or that there is no affirmative defense thereto, or that there is no merit to an affirmative defense as to any cause of action, or both, or that there is no merit to a claim for damages . . . or that one or more defendants either owed or did not owe a duty to the plaintiff or plaintiffs. A motion for summary adjudication shall be granted only if it completely disposes of a cause of action, an affirmative defense, a claim for damages, or an issue of duty.” (Code Civ. Proc., § 437c, subd. (f)(1).) A motion for summary adjudication shall proceed in all procedural respects as a motion for summary judgment. (Code Civ. Proc., § 437c, subd. (f)(2).)
“[T]he initial burden is always on the moving party to make a prima facia showing that there are no triable issues of material fact.” (Scalf v. D. B. Log Homes, Inc. (2005) 128 Cal.App.4th 1510, 1519.) A defendant moving for summary judgment or summary adjudication “has met his or her burden of showing that a cause of action has no merit if the party has shown that one or more elements of the cause of action . . . cannot be established, or that there is a complete defense to the cause of action.” (Code Civ. Proc., § 437c, subd. (p)(2).) A moving defendant need not conclusively negate an element of plaintiff’s cause of action. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 854.)
To meet this burden of showing a cause of action cannot be established, a defendant must show not only “that the plaintiff does not possess needed evidence” but also that “the plaintiff cannot reasonably obtain needed evidence.” (Aguilar, supra, 25 Cal.4th at p. 854.) It is insufficient for the defendant to merely point out the absence of evidence. (Gaggero v. Yura (2003) 108 Cal.App.4th 884, 891.) The defendant “must also produce evidence that the plaintiff cannot reasonably obtain evidence to support his or her claim.” (Ibid.)¿ The supporting evidence can be in the form of affidavits, declarations, admissions, depositions, answers to interrogatories, and matters of which judicial notice may be taken. (Aguilar, supra, 25 Cal.4th at p. 855.)
“Once the defendant . . . has met that burden, the burden shifts to the plaintiff . . . to show that a triable issue of one or more material facts exists as to the cause of action or a defense thereto.” (Code Civ. Proc., § 437c, subd. (p)(2).) The plaintiff may not merely rely on allegations or denials of its pleadings to show that a triable issue of material fact exists, but instead, “shall set forth the specific facts showing that a triable issue of material fact exists as to the cause of action.” (Ibid.) “If the plaintiff cannot do so, summary judgment should be granted.” (Avivi v. Centro Medico Urgente Medical Center (2008) 159 Cal.App.4th 463, 467.)
Analysis
“The equitable tort for breach of fiduciary duty has only two formal elements: (i) the existence of a fiduciary duty and (ii) a breach of that duty.” (Basho Technologies Holdco B, LLC v. Georgetown Basho Investors, LLC (Del. Court of Chancery 2018) 2018 WL 3326693, *23.) Additionally, however, like all torts, the cause of action also requires a showing “of harm to the beneficiary or, alternatively, the wrongful taking of a benefit by the fiduciary” and “a sufficiently convincing causal linkage exists between the breach of duty and the remedy sought that makes the remedy an apt means of addressing the breach.” (Id. at *24.) “A court may award nominal damages if a breach existed but does not warrant a meaningful remedy.” (Ibid.)1
Defendants move for summary judgment as to Plaintiff’s claim for breach of fiduciary duty based on two issues: 1) Plaintiff’s allegations do not rely on any cognizable fiduciary relationships, and, 2) even if Plaintiff can show he was owed fiduciary duty, he cannot establish that the individual Defendants or LLR breached any such duty.
1. Cognizable Fiduciary Relationships
First, Defendants argue that Plaintiff’s claim fails as a matter of law because he cannot prove a cognizable fiduciary relationship. (Motion, 16: 7-9.)
The law is clear that majority shareholders or shareholders that exercise control over business affairs owe fiduciary duties to their corporation and its minority shareholders. Juran v. Bron, No. CIV. A. 16464, 2000 WL 1521478, at *9 (Del. Ch. Oct. 6, 2000). Furthermore, in managing business affairs of a corporation, directors owe fiduciary duties of care and loyalty to shareholders. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 179 (Del. 1986).
The key inquiry here—given that Plaintiff has played all three roles—is whether Plaintiff brings this claim as an employee under an employment contract, as a third party potential buyer, or as a minority shareholder claiming injury caused by mismanagement of majority shareholders and officers. If the Court were to determine Plaintiff were bringing this claim solely as a third party offerer, Defendants would not owe Plaintiff any fiduciary duties and Plaintiff’s claim would fail for inability to prove a cognizable fiduciary relationship. Likewise, if Plaintiff were bringing this claim based on termination under an employment contract, he would have contract causes of action but not a cause of action for the tort of breach of fiduciary duty.
Defendants argue that the breach of fiduciary duty claim is based on Plaintiff’s personal capacity as a potential buyer of Mercury. (Motion, 15:11-13.) In opposition, Plaintiff argues that his claim arises from his rights as a shareholder and not from any contractual rights derived from his employment contract. (Opposition, 15: 27-28.) Plaintiff argues that his interests in the Board fairly considering the MBO and his concerns over the dividend recapitalization are tethered to his position as the shareholder of ACRE because he wanted his ownership in the company to be protected and to thrive. (Opposition, 16: 5-8.)
Defendants rely on Manchester v. Narragansett Capital, Inc., where the court rejected a claim for breach of fiduciary duty arising from a squeeze out. Manchester v. Narragansett Capital, Inc., No. 10822, 1989 WL 125190 (Del. Ch. Oct. 19, 1989). In Manchester, the plaintiff filed a complaint against defendants, including the corporation for which he was a director and stockholder, for breach of fiduciary duty as a result of wrongful termination, alleging that it was the specific intent of defendants to “squeeze out” the plaintiff from the management and control of corporation assets. Id. Here, Plaintiff is distinct from the plaintiff in Manchester. Plaintiff does not argue that Defendants breached a fiduciary duty solely by terminating him or squeezing him out. Rather, Plaintiff argues that Defendants owed him a duty as majority shareholders to a minority shareholder and breached that duty by failing to properly consider the MBO offer.
Furthermore, it is undisputed that Plaintiff is not bringing the fiduciary duty claim as an employee. Defendants admit that Plaintiff’s “claim for breach of fiduciary duty does not rely on any fiduciary duties allegedly owed to him as an employee.” (Motion, 14.) Defendants also admit that Plaintiff could challenge the decision to proceed with recapitalization as a minority stockholder: “a claim that a proposed merger, recapitalization, redemption, or similar transaction unfairly affects minority stockholders” can be brought as a direct shareholder claim for breach of fiduciary duty. (Motion, 15.)
Accordingly, the Court finds that Plaintiff’s claim is a direct shareholder claim based on injury to Plaintiff as a shareholder due to Defendants’ alleged mismanagement. Although Plaintiff made an offer to purchase Mercury, and Defendants would not typically owe fiduciary duties to third party offerors, Plaintiff is also a minority shareholder and the decision whether or not to accept that offer affected Plaintiff’s interests as a shareholder. It is settled law that board members owe fiduciary duties to their company and its minority shareholders. Therefore, in deciding whether to accept Plaintiff’s offer to purchase Mercury, Defendants did owe Plaintiff fiduciary duties in his capacity as a shareholder.
Therefore, the Court agrees with Plaintiff that Defendants’ first ground for denying summary judgment lacks merit. Defendants’ request for summary judgment on this ground is denied.
2. Breach of Fiduciary Duties
Second, Defendants allege that summary judgment is merited because there is no genuine dispute of material fact as to whether Defendants breached any fiduciary duties. Specifically, Defendants argue that, based on the evidence presented regarding the reasoning and consideration that went into Defendants’ decisions, Plaintiff cannot overcome the business judgment rule (“BJR”) presumption, which protects the actions of board members from challenges to business decisions made in good faith. For the following reasons, the Court disagrees with Defendants.
The “business judgment rule” is a powerful presumption that, in making a business decision the directors of a corporation act on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company. Cede & Co. v. Technicolor, Inc. (Del. Supreme Ct. 1993) 634 A.2d 345. This presumption can be challenged by evidence of self-dealing, bad faith, or failure to exercise due care. Id.
Defendants puts forth the following facts in support of their contention that their decisions were made in good faith:
Plaintiff contends that summary judgment is not appropriate because there are disputed issues of material fact as to whether Defendants breached their duties of care and loyalty, their duty to avoid self-dealing, and their duty to ensure all shareholders are treated alike. In particular, Plaintiff points to four different actions that he alleges constitute breach: 1) Plaintiff argues that Defendants pursued a dividend recapitalization in self-interest without fair consideration of the MBO; 2) Plaintiff argues that his removal from the Board was coerced by threats of litigation in Defendants’ self-interest; 3) Plaintiff argues that the duty of loyalty was breached by Defendants’ differential treatment of Plaintiff and Wagner, who were similarly situated stockholders; and 4) Plaintiff argues that Defendants’ special committee did not properly vet the proposed MBO and relieved any breach of fiduciary duty by Defendants.
Plaintiff argues that Defendants violated their fiduciary duties by acting for the benefit of LLR and against Plaintiff. Plaintiff argues that these issues cannot be thrown out on summary judgment because Plaintiff’s fiduciary duty claim turns on the following highly factual questions.
The Court agrees with Plaintiff that there is a genuine factual dispute as to whether or not Plaintiff overcomes the BJR presumption. For instance, a reasonable jury could find that the ACRE Board was self-interested and did not evaluate Plaintiff’s MBO through a neutral lens. . Evidence shows that LLR may have been pretending to be willing to discuss whether an MBO proposal was viable when it had already made up its mind to oppose the MBO even before such discussions took place and before West and Wagner were able to submit their proposals. AMFs 18-19. The evidence further shows that Defendants insisted on pursuing a dividend recapitalization despite the concerns that such course of action will likely result in excessive debt and hinder ACRE’s acquisition efforts necessary for its long-term growth. AMFs 36-38. Furthermore, an inference could be made that LLR was self-dealing by favoring a dividend recapitalization because it had the most to gain from the cash dividends as the majority shareholder. AMFs 36-38.
On summary judgment, the Court must look at the weight of the evidence in the light most favorable to the nonmoving party. Plaintiff puts forth facts that could cause a reasonable jury to conclude that the Board had made up its mind not to accept the MBO from the outset, once it learned that Plaintiff had been planning an MBO without the entire Board’s knowledge.
CONCLUSION
The Motion for Summary Judgment/Adjudication is DENIED.
Moving Party to give notice.
If counsel do not submit on the tentative, they are strongly encouraged to appear by LACourtConnect rather than in person due to the COVID-19 pandemic.