Backus v. U3 Advisors, Inc.
| Decision Date | 18 August 2017 |
| Docket Number | 1:16-cv-8990-GHW |
| Parties | KAREN BACKUS, Plaintiff, v. U3 ADVISORS, INC., et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
In 2014, Plaintiff Karen Backus, a longtime consultant to universities and nonprofits, joined with Defendants Thomas Lussenhop and Omar Blaik to start a new company, Defendant U3 Advisors, Inc., which was to provide real estate and project management advisory services to institutional clients. In this lawsuit, Plaintiff brings a number of claims directly and derivatively against Blaik, Lussenhop and U3 Ventures, LLC, a separate company of which Blaik and Lussenhop are the sole members. Plaintiff alleges principally that Blaik, Lussenhop and U3 Advisors breached an agreement to repurchase her shares in the company, and that Blaik, Lussenhop and U3 Ventures unlawfully diverted resources from U3 Advisors to U3 Ventures.
Because the unambiguous terms of the stockholder agreement on which Plaintiff sues do not require repurchase of her shares, her claims seeking repurchase are dismissed. Plaintiff has not sufficiently pleaded her fraudulent inducement, conversion or waste claims, and has not complied with the procedure for bringing her derivative claim against Blaik and Lussenhop, which alleges that they breached a contractual obligation to devote all of their time to U3 Advisors. U3 Ventures must also be dismissed from this case for lack of personal jurisdiction. The Court finds, however, that Plaintiff has stated a claim for breach of fiduciary duty against Blaik and Lussenhop, although supplemental briefing will be ordered as to whether this claim may be brought directly, as opposed to derivatively. Accordingly, Defendants' motion to dismiss is GRANTED in part and DENIED in part. The Court grants Plaintiff leave to file an amended complaint, except as to her claims for repurchase of her shares and conversion (Counts One, Four and Seven), which are being dismissed with prejudice.
Since at least 1996, Plaintiff Karen Backus has made her career providing advisory and project management services to universities and nonprofit organizations. Amended Verified Complaint (Dkt. No. 17) (the "complaint" or "Compl.") ¶ 13. In 2012, she began exploring plans for her gradual retirement over the coming years, and sought to "transition her ownership interest" in K. Backus & Associates ("KBA"), the entity through which she had conducted her business since 1998, "to a successor entity or other interested party." Id. ¶ 14. Through KBA, Plaintiff served as an "advisor to some of the more prominent universities and nonprofit organizations throughout the United States." Id.
In late 2012 and 2013, Plaintiff met with Defendant Omar Blaik to discuss the formation of a new company, based upon the acquisition of KBA by Blaik's business and/or the merging of KBA with Blaik's business. Id. ¶ 15. The new company would provide real estate and project management advisory services to universities, foundations, and nonprofit organizations. Id. On January 1, 2014, Plaintiff, Blaik and Defendant Thomas Lussenhop "combined the respective resources from their companies" and formed a new company called U3 Advisors, Inc. Id. ¶ 20. In addition to being a co-founder of U3 Advisors, Plaintiff is a principal of the company and its formerchief executive officer. Id. ¶ 7.
The respective ownership interests of Plaintiff, Blaik and Lussenhop was memorialized in the Stockholder Agreement of U3 Advisors, Inc., dated January 1, 2014 (the "Stockholder Agreement"). Id. ¶ 21. Plaintiff received 42% of the outstanding shares, Blaik received 48% of the shares, and Lussenhop received 10% of the shares. Id. ¶ 16. Backus later agreed to sell two of her shares to Lussenhop, reducing her interest to 40% and increasing his interest to 12%. Id. Blaik also later came to acquire Lussenhop's shares, and as a result held a 60% interest in U3 Advisors. Id. ¶ 24.
In order to "induce [Plaintiff] to enter into this relationship, and as the basis for the bargain," Blaik and Lussenhop agreed with Plaintiff that "in exchange for obtaining the financial benefit" of her clientele and employees, "they would effectuate her retirement over a five-year period by having the new company: (1) buy 5% of [her] initial 40% interest annually for four years . . . and (2) purchase the remaining 20% of [her] interest . . . thereafter upon her decision to retire." Id. ¶ 3. Further, Plaintiff "advised Blaik and Lussenhop that one of the conditions for her joining the new company was that a portion of her shares had to be repurchased each year by the new company so as to allow her to retire, if she chose, in four years." Id. ¶ 17. Blaik and Lussenhop agreed that the new company would purchase 5% of her shares per year for each of the first four years, providing for the transfer of 20% of Plaintiff's 40% interest. Id. ¶ 18. Blaik and Lussenhop "acknowledged" that this annual share repurchase was a "critical condition" of Plaintiff's decision to join the new company and "that she would not have joined the new company if they had not agreed to this condition." Id. ¶ 19. In addition, with respect to Plaintiff's retirement plans, the Stockholder Agreement stated: "The Company and the Stockholders acknowledge that Karen may retire at any time after the 4th anniversary of the effective date (January 1, 2014)." Stockholder Agreement,Article 6(c) (annexed as Ex. 1 to Compl.).
The complaint also alleges that the "Stockholder Agreement also memorialized the agreement that Backus would sell and U3 Advisors would purchase 5% of her outstanding shares each year for the calendar years 2014 through 2018." Compl. ¶ 30. Article 3(b) of the Stockholder Agreement is the centerpoint of Plaintiff's contractual claim. She asserts that pursuant to that provision of the contract, U3 Advisors "was required to purchase . . . five (5) shares each year of the stock held by Backus." Id. ¶ 54. Article 3(b) provides:
During calendar years 2014-2018, Karen agrees to sell her Shares to the Company, for a price per Share equal to the Agreed Share Value as then in effect, payable at a lump sum at closing, on demand by the Company so that the Company may make those Shares available for purchase under the ESP [employee stock purchase plan] as contemplated by Section 3(a), but Karen will not be required under this Article 3(b) to sell to the Company Shares that represent more than 5% of the total issued and outstanding Shares of the Company in any given calendar year.
Although not cited in the complaint, the Stockholder Agreement contains several additional provisions regarding the acquisition of shares by the company to be made available for purchase under the ESP. Notably, Article 5(c) of the agreement provides that "unanimous board approval" will be required to, among other things, "[c]aus[e] the company to adopt an ESP" as well as "to purchase Shares from Karen pursuant to Section 3(b)."
The complaint alleges that the "shares were to be purchased at the 'Agreed Share Value' set forth in the Stockholder Agreement . . . ." Complaint ¶ 30. Pursuant to the Stockholder Agreement, the "Agreed Company Value" was an amount defined as being equal to the gross revenues of the company for the fiscal year, net of reimbursed income, bad debts, and sales discounts during the fiscal year. Id. ¶ 26. The Stockholder Agreement also defined the "Agreed Share Value" as being equal to the Agreed Company Value divided by the number of outstanding shares of U3 Advisors. Id. ¶ 27. During the calendar years of 2014 and 2015, the U3 Advisors gross revenues less reimbursed incomes, bad debts and sales discounts, exceeded $4,000,000 for each year,resulting in an Agreed Share Value of $40,000 for 2014 and $50,000 for 2015. Id. ¶ 32. Article 5(c) of the Stockholder Agreement requires unanimous board approval for "altering the methodology for computing Agreed Company Value." Id. ¶ 28. At no time since the relevant parties entered into the Stockholder Agreement has there been unanimous board approval to alter the Agreed Company Value. Id. ¶ 29.
Plaintiff has made "repeated requests and demands" for "U3 Advisors to honor its obligations to purchase her shares under the Stockholder Agreement," but "U3 Advisors, Blaik, and Lussenhop have denied all requests and refused to carry out the required annual purchase of [Plaintiff's] shares for the calendar years 2014 through 2016." Id. ¶ 34. In addition, Blaik and U3 Advisors "have attempted to force Backus to now accept less than the Agreed Share Value formula set in 2014." Id. ¶ 35. To that end, in January 2016, "Blaik, Lussenhop and U3 Advisors" attempted to amend the Stockholder Agreement "for the sole purpose of changing the methodology for calculating Agreed Share Value so as to now depress the value of the Backus shares to less than 30% of the value calculated in the methodology agreed upon by all Parties in 2014." Id. ¶ 36.
In addition to the allegations regarding the alleged failure of Defendants to repurchase Plaintiff's shares, the complaint also contains a set of allegations concerning the alleged "diversion and depletion" of U3 Advisors' resources by Blaik and Lussenhop. This section of the complaint opens with a citation to Article 6(a) of the Stockholder Agreement, which states:
The Stockholders hereby acknowledge that for at least two years following the Effective Date, all of the Principals are expected to be "Active Principals", meaning that each of them is expected to devote substantially all of their professional time to the Company, and to be involved in the day-to-day business operations and management of the Company.
Compl. ¶ 41. The complaint alleges that Plaintiff has discovered that from 2014 through 2016, Blaik and Lussenhop "diverted...
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