Agar v. Judy

• Decision Date: 19 January 2017
• Docket Number: C.A. No. 9541–VCL
• Citation: 151 A.3d 456
• Parties: Dorothy AGAR, et al., Plaintiffs, v. Michael JUDY, et al., Defendant.
• Court: Court of Chancery of Delaware

151 A.3d 456

Dorothy AGAR, et al., Plaintiffs,

v.Michael JUDY, et al., Defendant.

C.A. No. 9541–VCL

Court of Chancery of Delaware.

Date Submitted: November 17, 2016

Date Decided: January 19, 2017

Evan O. Williford, Andrew Huber, THE WILLIFORD LAW FIRM LLC, Wilmington, Delaware; Counsel for Edward Trujillo, Rachel Coughlin, Ted Kampen, James Solic, Joseph Washington, and the Preferred Investors Association

Catherine A. Gaul, F. Troupe Mickler, ASHBY & GEDDES, Wilmington, Delaware; Counsel for Roman Kitka and J. Barclay Knapp.

Sean T. Kelly, Ryan M. Ernst, George Pazuniak, O'KELLY ERNST & BIELLI, LLC, Wilmington, Delaware; Counsel for Carole Downs.

OPINION

LASTER, Vice Chancellor.

On June 22, 2015, Preferred Communications Systems, Inc. ("PCSI" or the "Company") held an annual meeting of stockholders. The Preferred Investors Association (the "Association") opposed the reelection of the incumbent members of the Company's board of directors. In advance of the annual meeting, five members of the Association signed a letter that the Association distributed to the Company's investors (the "Fight Letter"). Three of the incumbent directors lost their seats.

The former directors brought a claim for defamation against the Association and the members who signed the Fight Letter. Their lawsuit has been consolidated with a plenary proceeding that involves a variety of claims and counterclaims in which various parties appear in multiple capacities. This decision addresses the defamation claim. It refers to the former directors as the "Libel Plaintiffs." It refers to the Association and the five signatories as the "Libel Defendants."

The Libel Defendants have moved to dismiss the defamation claim pursuant to Rule 12(b)(6) for failure to state a claim on which relief can be granted. They argue that the claim constitutes a Strategic Lawsuit Against Public Participation (a "SLAPP") within the meaning of Delaware's anti–SLAPP statute. 10 Del. C. §§ 8136 –8138. The anti–SLAPP statute imposes additional burdens on a plaintiff who pursues a SLAPP at each stage of the litigation process, including a more onerous standard for surviving a motion to dismiss. This decision concludes that anti–SLAPP statute does not apply.

The Libel Defendants separately argue that the Libel Plaintiffs are limited-purpose public figures. If they are, then the Libel Plaintiffs bear the burden of proving that the statements in the Fight Letter were not true and were made with actual malice. This decision holds that the Libel Plaintiffs are limited-purpose public figures.

The Libel Defendants finally argue that based on the allegations in the complaint, it is not reasonably conceivable that the statements in the Fight Letter were defamatory and, to the extent they could be, were made with actual malice. This decision finds it reasonably conceivable that a subset of the statements was defamatory and made with actual malice. The motion to dismiss is denied as to these statements. Otherwise it is granted.

I. FACTUAL BACKGROUND

The facts are drawn from the Amended and Supplemental Complaint (the "Complaint") and the documents it incorporates by reference. For purposes of the motion to dismiss, the well-pled allegations of the Complaint are assumed to be true, and the Libel Plaintiffs receive the benefit of all reasonable inferences. This decision takes judicial notice of previous proceedings in related actions, including Judy v. Preferred Communication Systems Inc. , Consol. C.A. No. 4662–VCL (the "Judy Litigation"). This decision also takes judicial notice of matters of public record. See D.R.E. 201(b).

A. The Company's Origins

The Company was formed in 1998 as the vehicle for a scheme in which Pendleton Waugh, Charles Austin, Jay Bishop, and Charles Guskey planned to assemble a critical mass of specialized mobile radio licenses, then flip them to another company where Waugh was president. Because of how the Federal Communications Commission (the "FCC") historically distributed rights to wireless spectrum, the licenses were held by individuals having varying degrees of sophistication. Judy v. Preferred Comm'cn Sys. Inc. , 2016 WL 4992687, at *2 (Del. Ch. Sep. 19, 2016).

Waugh and Bishop were convicted felons. Both had pled guilty to crimes involving fraud or dishonesty based on their activities in the cellular telephone industry. Austin previously worked to acquire licenses for one of Waugh's companies. Evidencing his own regard for legal compliance, Austin never bothered to file a state or federal income tax return between 1997 and 2010. Guskey had worked as one of Bishop's accountants at Continental Wireless Cable Television, Inc. ("Continental"), another company that acquired wireless licenses. In 1994, the SEC filed an enforcement action against Continental for defrauding investors, obtained a restraining order against Continental, seized its assets, and froze the bank accounts of the company and its principals.¹

Austin served as the front man for the Company. In the Judy Litigation, after trial, this court made the following finding of fact:

[B]ecause Bishop and Waugh were convicted felons, and because the FCC looks askance at felons and fraudsters controlling (directly or indirectly) cellular communications licenses, Waugh, Bishop, Guskey, and Austin sought to conceal Waugh and Bishop's involvement. To that end, Austin always acted as the front man for the group, and Waugh and Bishop never held any official positions with PCSI. Despite foregoing any official roles, Waugh and Bishop in fact acted as principals of PCSI, participated in its operations, and made decisions on behalf of PCSI.

Judy Litigation, Dkt. 432, ¶ 4.

B. The Company's Strategy Changes.

Beginning in 1998, the Company assembled a group of licenses in Puerto Rico and the U.S. Virgin Islands. The Company largely acquired them from individuals in return for packages of consideration that typically included securities in the Company. The Company also obtained a set of licenses predominantly clustered in Virginia and California. Judy, 2016 WL 4992687, at *3.

In 1999, the plan to flip the licenses foundered after Waugh encountered further legal difficulties. The FCC described them as follows:

In 1999, Waugh was convicted of securities fraud, a felony, in a case brought by the State of Texas, arising from his failure, in 1993, to disclose to a potential investor that he was under investigation by federal authorities for activities relating to his involvement in Express. Waugh was sentenced to four years in state prison, all of which were suspended pending successful completion of probation. He also was ordered to pay $72,000 in restitution and to complete 500 hours of community service.

Later in 1999, Waugh was determined to have violated the terms of his parole from federal prison and his probation on his state conviction by traveling to Puerto Rico to engage in activities relating to cellular telephone securities. As a result, Waugh was sentenced to six additional months in federal prison and four years in state prison.²

With the assemble-and-flip strategy no longer viable, the four founders pivoted towards the more challenging task of turning the Company into a full-service wireless telecommunications provider.

Ostensibly to fund this plan, the Company raised money from outside investors by issuing a variety of poorly documented securities. In the Judy Litigation, this court made the following finding of fact after trial:

To use a technical corporate term, [the Company] was a mess. Its founders did not follow corporate formalities and took dramatically different positions regarding the [C]ompany's capital structure depending on whether they were dealing with regulatory authorities like the FCC, potential investors, or the Court. It is not possible to reconcile all of the conflicting evidence into a single coherent account, nor is it possible to harmonize all of the various transactions in which [the Company] engaged or the types of securities that ostensibly were issued.

Judy Litigation, Dkt. 433, ¶ 5.

It is not clear what progress, if any, the Company made during this period toward becoming a full-service wireless telecommunications provider. Its primary business activity appears to have been inducing individuals to buy its securities.

C. The Order To Show Cause

In July 2007, after conducting a preliminary investigation, the FCC issued an Order to Show Cause to Waugh, Austin, Bishop, the Company, and the Company's wholly-owned subsidiary that owned the licenses. The FCC summarized its reasoning as follows:

The record before us indicates that these individuals, two of whom are convicted felons, and the referenced entities, individually and collectively, among other things, apparently (1) failed to disclose a real-party-in-interest and engaged in unauthorized transfers of control of Commission licenses; (2) misrepresented material facts to the Commission; (3) lacked candor in their dealings with the Commission; (4) failed to disclose the involvement of convicted felons in ownership and control of the licenses; (5) failed to file required forms and information and respond fully to Enforcement Bureau letters of inquiry; and (6) discontinued operation of certain licenses. Evidence of such misconduct raises material and substantial questions requiring further inquiry at hearing as to whether the referenced licenses should be revoked and whether forfeitures should issue against one or more of the persons and/or entities identified above.

Waugh , 22 F.C.C.R. at 13364.

The Order to Show Cause posed an existential threat to the Company. If the FCC revoked the licenses, then the Company no longer would have any valuable assets.

By late 2007, the Order to Show Cause had driven "a wedge between Waugh and Austin." Judy Litigation, Dkt. 432, ¶ 4. Before the enforcement proceeding, Waugh was "the principal decision-maker for [the Company], with Austin acting as a figurehead." Id. Afterwards, Austin tried to distance the Company from...