Ad Hoc Committee of Equity Holders v. Wolford
| Decision Date | 21 May 2008 |
| Docket Number | Civil Action No. 06-665-GMS-MPT. |
| Citation | 554 F.Supp.2d 538 |
| Parties | AD HOC COMMITTEE OF EQUITY HOLDERS OF TECTONIC NETWORK, INC., Plaintiff, v. Arol WOLFORD; Sherwin Krug; Charles McRoberts; John McRoberts; Charles Pecchio, Jr.; Laura Rogers; and Theo VanderBoom, Defendants. |
| Court | U.S. District Court — District of Delaware |
Linda Richenderfer, Bifferato Gentilotti LLC, Joseph Kendall Koury, Bifferato Gentilotti Biden & Balick, Wilmington, DE, for Plaintiff.
Adam Wyatt Poff, Young, Conaway, Stargatt & Taylor, Wilmington, DE, for Defendants.
On October 27, 2006, the Ad Hoc Committee of Equity Holders of Tectonic Network, Inc. ("Ad Hoc Committee" or "the Committee") filed this action alleging its members suffered economic harm as the result of the purportedly improper conduct of certain former officers and directors of Tectonic Network, Inc. ("Tectonic Network").1 The conduct complained of occurred prior to Tectonic Network filing for protection under the Bankruptcy Code in 2005. The Complaint sets forth claims of: (1) fraud against Wolford and Krug; (2) breaches of fiduciary duties against Wolford; (3) breaches of fiduciary duties against Krug; and (4) breaches of fiduciary duties against the director-defendants.
Currently before the court is defendants' motion to dismiss, pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6).2 Defendants contend this matter must be dismissed for at least three reasons: (1) lack of subject matter jurisdiction under 28 U.S.C. § 1332; (2) the Committee's lack of standing to bring the asserted claims; and (3) failure to state a claim upon which relief may be granted and failure to plead fraud with particularity as required by Fed.R.Civ.P. 9(b).3
In 1990, Tectonic Network incorporated in Delaware with its principal place of business located in Georgia.4 Until February 2005, Tectonic Network had two primary operating subsidiaries: Tectonic Solutions, Inc. ("Tectonic Solutions") and GO Software, Inc. ("GO Software"). Go Software developed, marketed, and sold software and services for processing credit card, debit card, or check transactions.5 Tectonic Solutions was incorporated in Delaware in or about the second half of 2003 with its principal place of business in Georgia. Tectonic Solutions is, and has been since its incorporation, a wholly-owned subsidiary of Tectonic Network.6 Tectonic Solutions provided "custom software solutions to help building product manufacturers and distributors improve the way they organize, display and distribute their product information."7
In late 2003 and early 2004, Tectonic Network acquired three businesses which provided information and advertising for the construction industry: BBN Acquisition, Inc. ("BBN"); Construction Yellow Pages LLC ("CYP"); and SpecSource.com, Inc. ("SpecSource").8 Each of those businesses were combined into Tectonic Solutions.9
On November 18, 2003, Tectonic Network and BBN consummated a merger whereby BBN was merged with and into Tectonic Solutions pursuant to an agreement and plan of merger dated October 29, 2003. At the time of the agreement, Wolford was the principal and controlling shareholder of BBN and his daughter was a member of the BBN board of directors. As consideration for the merger, Tectonic Network conveyed 750,000 shares of its common stock to the BBN shareholders for all BBN stock. Wolford received 311,671 of the 750,000 shares for his 41.6% ownership interest in BBN.10
On November 26, 2003, Tectonic Network purchased the operating assets of CYP pursuant to an asset purchase agreement dated as of October 29, 2003. As consideration for the purchase, Tectonic Network conveyed 750,000 shares of common stock to the members of CYP and assumed certain CYP liabilities. Wolford was the majority equity owner-member of CYP and received 435,000 of the 750,000 shares for his 58% interest in CYP.11
On January 2, 2004, Tectonic Network purchased substantially all of the operating assets of SpecSource, pursuant to an asset purchase agreement dated October 29, 2003 (the "SpecSource Agreement"), in return for a non-interest bearing note in the amount of $533,000 payable to Spec-Source and 1,450,000 shares of Tectonic Network common stock. Wolford was the majority shareholder of SpecSource and his daughter was a SpecSource employee. Wolford was entitled to receive approximately 980,000 shares of the Tectonic Network common stock upon the dissolution of SpecSource and 67.6% of any and all payments on the note.12 In connection with the SpecSource transaction, Tectonic Network entered into a non-compete agreement with SpecSource's only other shareholder, John White ("White"). In exchange for White entering into the non-compete agreement, Tectonic Network gave White a $360,000 non-interest bearing note.13
During the first three quarters of 2004, Wolford urged the development of a Virtual Model Business ("VMB") whereby Tectonic Network would offer the service of converting two-dimensional building construction plans into three-dimensional models to expedite building construction by eliminating the additional time necessary to analyze two-dimensional plans and envision them in a three-dimensional framework.14 Wolford informed Tectonic Network's Board of Directors (the "Board") that VMB would be the foundation of an overall strategy to move Tectonic Network into the construction information business, and that VMB would be highly profitable.15 When Wolford first urged the development of VMB, Tectonic Network did not have the funds, staff, or management time to develop the business. Consequently, Wolford turned over development of the project to an outside contractor, RCMS. RCMS was a competitor with Tectonic Network for the targeted customers of VMB, but RCMS did not enter into a non-compete agreement before being retained. Wolford's nephew was employed by RCMS. Tectonic Network paid more than $500,000 to RCMS for the project.16
GO Software was the largest generator of revenue for Tectonic Network and the only profitable business among those it owned. For the year ending June 30, 2004, GO Software was responsible for $8,917,666 of the total revenues of $10,586,034 of Tectonic Network and its subsidiaries on a consolidated basis.17 In the summer of 2004, Wolford began a campaign to convince the Board that Tectonic Network should sell GO Software in order to generate funds to support the recently-acquired BBN, CYP, and SpecSource businesses, as well as, VMB. To finance those businesses, the Board approved procuring substantial loans to Tectonic Network, including loans given in return for secured convertible notes issued by Tectonic Network in August and November 2004, on the basis that GO Software would be sold to repay those loans.18
On December 6, 2004, Tectonic Network entered into an asset purchase agreement with VeriFone, Inc. ("VeriFone") by which VeriFone purchased substantially all of GO Software's assets. The sale closed on February 28, 2005, with VeriFone paying $13 million in cash at closing and having the obligation to pay GO Software up to an additional $2 million contingent upon future events.19
In early January 2005, Tectonic Network gave two notes to a lender in exchange for a loan of $5.5 million, of which $2,300,000 was to pay the secured convertible notes procured in August and November 2004 and $1,500,000 was used to pay other loans it procured in 2004 to finance the three acquired businesses and VMB.20
The Board deemed the sale of GO Software to be a change of control of Tectonic Network. That change in control triggered certain obligations on the part of Tectonic Network under the terms of its employment agreement with Pecchio; the note given by Tectonic Network to SpecSource; and the note given by Tectonic Network to White, obligating the company to pay $360,000 in monthly installments to Pecchio; to pay the $533,000 note to SpecSource; and to pay the $360,000 note to White.21
Following the sale of GO Software, Tectonic Network's financial situation worsened.22 For the year ending June 2005, Tectonic Network had gross revenues of approximately $1.22 million and made payments within the prior year to insiders exceeding $1,572 million, including salary, bonuses, and note payments.23
On October 3, 2005, Tectonic Network and Tectonic Solutions filed voluntary petitions in the United States Bankruptcy Court for the Northern District of Georgia ("Bankruptcy Court") under Chapter 11 of the Bankruptcy Code. By the First Amended Joint Plan of Reorganization ("Reorganization Plan" or "the Plan") approved in a July 11, 2006 order of the Bankruptcy Court, Tectonic Network, as reorganized, continues to operate.24 Pursuant to the Reorganization Plan, all issued and outstanding shares of Tectonic Network stock were cancelled and 100,000 shares of common stock of Tectonic Network were issued. Wolford owns all of those shares.25
On April 12, 2006, the Bankruptcy Court approved a stipulation and consent order ("Stipulation and Consent Order" or "the Order") by which, inter alia, "the automatic stay of 11 U.S.C. Section 362 shall be terminated to permit the members of the Committee as shareholders of Network to pursue the Claims ... against the Debtors' directors and officers in a forum outside of the within chapter 11 proceedings."26
The Complaint avers that this court has subject matter jurisdiction over this action by virtue of 28 U.S.C. § 1332. Defendants contend that there is not complete diversity between the members of the Committee and defendants and, therefore, the suit must be dismissed for lack of subject matter jurisdiction, pursuant to Fed.R.Civ.P. 12(b)(1).27 The Committee disputes that contention. Alternatively, the Committee argues that, regardless whether there is complete diversity in...
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