Burt v. Maasberg

• Decision Date: 28 March 2014
• Docket Number: Civil Action No.: ELH-12-0464
• Parties: DAVID R. BURT, et al., Plaintiffs, v. WOLFGANG MAASBERG, et al., Defendants.
• Court: U.S. District Court — District of Maryland

DAVID R. BURT, et al., Plaintiffs, v. WOLFGANG MAASBERG, et al., Defendants.

Civil Action No.: ELH-12-0464

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND

Date: March 28, 2014

MEMORANDUM OPINION

Plaintiffs David R. Burt ("Burt"), a former Chief Executive Officer ("CEO") of Lyris, Inc. ("Lyris" or the "Company"), and his wife, Janet Burt, shareholders of Lyris, filed suit against nine defendants, alleging that, between April 2007 and December 2012 (the "Fraud Period"), the defendants engaged in a fraudulent scheme to take control of Lyris. See Amended Complaint ("Am. Comp.," ECF 33) ¶ 1. In particular, plaintiffs allege that defendants, who are officers, directors, and/or stockholders of Lyris, amassed 95 percent of Lyris's stock through various manipulative actions, without disclosing their plan to other stockholders or to the Securities and Exchange Commission ("SEC"). Plaintiffs claim, inter alia, that, as a result, they sold a significant percentage of their Lyris stock to defendants at artificially depressed prices.

Of the nine defendants named in the suit, five served as officers and/or directors of Lyris during the Fraud Period (collectively, the "O&D Defendants"). They are Wolfgang Maasberg, former CEO and former director of Lyris, id. 30; William T. Comfort, III ("Ty Comfort"), the former Chairman of the Lyris Board of Directors, id. 24-25; James Urry, a former Lyris director, id. ¶ 26; A. Richard Blair, a former Lyris director and the "exclusive stock broker" for several other defendants, id. ¶ 32; and Richard McDonald, the Director of Investor Relations atLyris since approximately 2005, id. ¶ 31. Four defendants are alleged to be Lyris stockholders (collectively, the "SH Defendants"). They are William T. Comfort, Jr. ("Bill Comfort"), id. ¶ 22; Stuyvesant ("Stuyvie")¹ Pierpont Comfort, who served as a director of Lyris between 2000 and 2002, id. ¶ 27; LDN Stuyvie Partnership ("LDN Stuyvie"), an Oklahoma partnership in which Stuyvesant and Ty Comfort are partners, id. ¶ 28;² and Meudon Investments Partnership ("Meudon"), a New York partnership allegedly controlled by Urry, id. ¶ 29.

Bill Comfort, Ty Comfort, Stuyvesant Comfort (collectively, the "Comforts"), and Urry are members of the same family. In particular, Ty and Stuyvesant Comfort are brothers and the sons of Bill Comfort; Urry is Bill Comfort's son-in-law and the brother-in-law of Ty and Stuyvesant Comfort. See id. ¶¶ 24-27.

Plaintiffs filed their initial Complaint on February 14, 2012. ECF 1. Both groups of defendants filed motions to dismiss, ECF 13-14, which were fully briefed.³ By a Memorandum Opinion ("Memo Op.," ECF 29) and Order (ECF 30), I granted the motions to dismiss, without prejudice and with leave to amend. Thereafter, plaintiffs filed an Amended Complaint, containing seven claims. ECF 33. The first two claims allege violations of federal securities laws and regulations.⁴ In Count I, plaintiffs allege that defendants, by engaging in a scheme to take control of Lyris and misrepresenting or failing to disclose their plan to do so, violated §10(b) of the Exchange Act of 1934 ("§ 10(b)"), 15 U.S.C. § 78j(b), and SEC Rule 10b-5 ("Rule 10b-5"), 17 C.F.R. § 240.10b-5. See Am. Comp. ¶¶ 118-120. Count II alleges that the O&D Defendants violated § 14(a) of the Exchange Act of 1934 ("§ 14(a)"), 15 U.S.C. § 78n(a), and SEC Rules 14a-3 and 14a-9 ("Rule 14a-3" and "Rule 14a-9"), 17 C.F.R. §§ 240.14a-3 & 240.14a-9, by causing Lyris to issue false proxy statements that failed to disclose the defendants' plan. Am. Comp. ¶¶ 121-124.

The remaining five counts allege violations of Maryland and Delaware law.⁵ In Count III, plaintiffs allege that defendants violated the Maryland Securities Act, § 11-703 of the Corporations & Associations Article ("C.A.") of the Maryland Code (2007 Repl. Vol., 2012 Supp.). Am. Comp. ¶¶ 125-127. Count IV alleges that the O&D Defendants breached their duty of loyalty under Delaware law. Id. ¶¶ 128-131. In Count V, plaintiffs allege that the O&D Defendants engaged in self-dealing, by purchasing shares of Lyris stock at artificially depressed prices, in violation of their fiduciary duties under Delaware law. Id. ¶¶ 132-142. Count VI alleges that the O&D Defendants breached their duty of care under Delaware law. Id. ¶¶ 143-146. In Count VII, plaintiffs allege that Bill Comfort, Ty Comfort, Urry, Blair, and McDonald are liable for intentional infliction of emotional distress, based on their purchase of Lyris stock from plaintiffs at artificially depressed prices, when they knew that the Burts needed the proceeds for Janet Burt's medical care. Id. ¶¶ 147-154. Plaintiffs claim damages "in excess of$1,000,000" for each of Counts I through VI, id. ¶¶ 120, 124, 127, 131, 142, 146, and an unspecified amount of damages for Count VII. Id. ¶ 154.⁶

The SH Defendants and the O&D Defendants filed motions to dismiss, see ECF 36 ("SH Motion"); ECF 37 ("O&D Motion"), along with supporting memoranda. See ECF 36-1 ("SH Memo"); ECF 37-1 ("O&D Memo"). They claim that, pursuant to Fed. R. Civ. P. 12(b)(6) and the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b)(3)(A), plaintiffs have failed to state a claim as to each count. The defendants also argue that, because plaintiffs have failed to state a claim under the federal securities laws, this Court lacks personal jurisdiction over defendants as to the remaining state law claims.⁷ And, defendants argue that, even if personal jurisdiction exists as to the state law claims, those claims are defective.

Plaintiffs filed a consolidated response in opposition ("Burt Memo" or "Opp.," ECF 45), to which the SH Defendants and the O&D Defendants replied. See ECF 51 ("SH Reply"); ECF48 ("O&D Reply"). No hearing is necessary to resolve the motions. See Local Rule 105.6. For the reasons set forth below, I will deny defendants' motions, in part, and will grant defendants' motions, in part. To summarize, plaintiffs may proceed with their federal securities claims against all defendants; they may proceed with their state law securities claim against Bill Comfort, Ty Comfort, Urry, Meudon, and Blair; and they may proceed with their state law breach of fiduciary duties claims, as pled. However, I will dismiss plaintiffs' claim for intentional infliction of emotional distress.

Factual Background

The Company

Lyris is a technology company that "develops and sells Internet marketing technology and services to small- and medium-sized businesses in the United States and around the world." Am. Comp. ¶ 33. Lyris was acquired in 2005 by a healthcare company operating under the name NovaCare, Inc. Id. ¶ 36. Prior to that acquisition, NovaCare had gradually sold off its healthcare businesses and accumulated cash reserves through litigation and claims activities, as well as sales of its business assets. Id. ¶¶ 34-35. NovaCare also "had" a valuable asset, consisting of a "net operating loss ['NOL'] carry-forward of approximately $180 million," which "would allow NovaCare to buy a company and not pay federal corporate income tax" on $180 million dollars of federal income. Id. ¶ 35. After NovaCare acquired Lyris, the combined company was renamed "Lyris, Inc." and sold the brand name "NovaCare" to another company. Id. ¶ 36.

The Parties

David Burt served as CEO of NovaCare, and then Lyris, from approximately June 2000 to January 2007. Am. Comp. ¶ 18. During his tenure as CEO, Burt oversaw much ofNovaCare's transition to its present business, including identifying and acquiring Lyris. Id. ¶ 36. Lyris's proxy statements reflect that, as part of Burt's compensation package as CEO, he acquired 20,850,000 shares of Lyris common stock in 2002. See Ex. 12 to ECF 1. Janet Burt "has been receiving treatment for severe depression and other mental illnesses since at least 2000," and the Burts have incurred "more than $1 million in medical expenses to treat these illnesses." Am. Comp. ¶ 19.

Bill Comfort is the Managing Partner of Court Square Capital Partners ("Court Square"), a private equity investment firm, and the former Chair of Court Square's predecessor, Citicorp Venture Capital. Id. ¶ 22. His son, Ty Comfort, "was Chairman of the Board of Directors of Lyris from 2003 through August 2012. At the end of the Fraud Period, Ty Comfort personally owned 10% of Lyris's outstanding stock, or approximately 17 million shares." Id. ¶ 24. Ty Comfort also "directly controls at least two investment vehicles that acquired substantial amounts of Lyris stock during the Fraud Period," including 65 BR Trust and Lyr, Ltd. ("Lyr"), which, at the end of the Fraud Period, owned 13% and approximately 17% of Lyris's outstanding stock, respectively. Id. ¶ 25. He is also the general partner of defendant LDN Stuyvie, which, at the end of the Fraud Period, owned 25% of Lyris's outstanding stock, making it the largest single shareholder of Lyris stock. Id. ¶ 28.

Urry, Bill Comfort's son-in-law, is a "professional investor" and was a member of Lyris's Board of Directors during the Fraud Period. Id. ¶ 26. He also "controls" defendant Meudon, which is a New York partnership that owns "approximately 6% of the common stock of Lyris, or just over 10 million shares." Id. ¶ 29. Stuyvesant Comfort, Bill Comfort's "youngest son," is a "professional investor and partner of Stirling Square Capital Partners, a private equitybuyout firm." Id. ¶ 27. He served on the Lyris Board of Directors from "approximately 2000 until 2002," and "shares voting and dispositive power over [LDN Stuyvie's] common stock with Ty Comfort" and Urry's wife, Nathalie Comfort Urry, who is Bill Comfort's daughter. Am. Comp. ¶ 28.

Maasberg served as CEO of Lyris and was a member of its Board of Directors from August 2010 to March 2013. In February 2011, Maasberg "acquired approximately 625,000 shares of Lyris stock at $0.19 per share." Id. ¶ 30. McDonald "became Lyris's Director of Investor Relations" in 2005. Id. ¶ 31. In February 2011, McDonald acquired approximately 200,000...