Byelick v. Vivadelli
| Decision Date | 20 December 1999 |
| Docket Number | No. CIV.A. 3:98CV787.,CIV.A. 3:98CV787. |
| Citation | 79 F.Supp.2d 610 |
| Court | U.S. District Court — Eastern District of Virginia |
| Parties | James D. BYELICK, Plaintiff, v. John H. VIVADELLI, Stephany C. Vivadelli and V Technologies International Corporation, jointly and severally, Defendants. |
Bruce E. Arkema, Cantor, Arkema & Edmonds, Richmond, VA, Michael B. Butler, Atlanta, GA, for Plaintiff.
David D. Hopper, Mezzullo & McCandlish, Richmond, VA, Mark W. Ryan, Andrew J. Morris, Mayer, Brown & Flatt, Washington, D.C., for Defendants.
This multi-count action presents claims of insider trading, securities fraud under state and federal law, common law fraud, breach of fiduciary duty, conspiracy, aiding and abetting, and breach of an employment contract. The facts giving rise to those claims are somewhat complex, and are set forth below.
On July 26, 1994, V Technologies International Corporation ("VTIC") was incorporated in the State of Virginia. VTIC was in the business of developing and selling computer software for "hoteling," the practice of managing limited office space by coordinating the schedules of employees and other users of space with the space available in a particular office or building.
VTIC has two shareholders: James D. Byelick and John Vivadelli ("Vivadelli"). Byelick paid $4,800 for 40% of VTIC's shares, and Vivadelli paid $1,800 for 60% of the company's shares. Byelick served as Secretary, Treasurer and Chief Financial Officer of VTIC from August 1994 until December 18, 1995, when he ceased working for the company and moved to California.
Shortly after VTIC was incorporated, the Board of Directors, then consisting of Vivadelli and Byelick, set the compensation level for certain employees, including an annual salary of $50,000 for Byelick, and $50,000 to Vivadelli, who was the company's President. During the 18 months of his employment with VTIC, Byelick was never paid any salary.1
Because VTIC had paid him no salary at all, Byelick decided in late 1995 that he would pursue work in California. At the time, Byelick still owned 40% of the stock of VTIC, and Vivadelli expressed a desire to acquire some or all of the shares owned by Byelick. The facts surrounding the eventual transfer of 900 shares from Byelick to Vivadelli are in dispute: Byelick alleges that Vivadelli demanded return of all stock, contending that Byelick was entitled to retain it only if he continued in the employment by VTIC, while Vivadelli characterizes his overtures as an offer to purchase the stock. The minutes of a December 19, 1995 Board meeting reflect this disagreement, because they set out Vivadelli's position that Byelick's 40% ownership was intended to be his sole compensation until such time as VTIC was able to pay his salary, and Byelick's contrary position that he is entitled to his unpaid salary.
On March 13, 1996, Byelick was removed as director of VTIC and was replaced by Vivadelli's wife, Stephany Vivadelli ("S. Vivadelli"). Byelick's removal was accomplished by the Board of Directors, which was then comprised of Vivadelli and Byelick, although Byelick abstained from voting on this matter and raised no claim respecting notice of the Board meeting at which his removal was accomplished. Immediately upon Byelick's removal, the Board of Directors, now consisting solely of Vivadelli, voted to install S. Vivadelli as Byelick's successor. Later, on March 27, Vivadelli and his wife, as directors, caused VTIC to revoke the resolution that had set Byelick's salary at $50,000.
On April 25, 1996, Vivadelli sent a letter to Byelick outlining the terms of an agreement respecting the sale of Byelick's stock to Vivadelli and providing a space for Byelick's signature. The letter provided that, in consideration of the transfer of 900 shares of Byelick's 1200 shares, Vivadelli was to indemnify Byelick from personal liability on a $100,000 VTIC note held by Cambria Medical Supply Company and guaranteed by Byelick. Byelick signed the letter in the space provided and faxed it back to Vivadelli on May 17, 1996. Some three and a half months later, on September 13, 1996, following the exchange of correspondence respecting whether Vivadelli was to release or to indemnify Byelick, Byelick executed what the pleadings refer to as the "Byelick September Stock Sale" by which Byelick sold 900 shares to Vivadelli.
Byelick's stock was originally issued subject to VTIC's right to repurchase that stock in the event that it was offered for sale. On May 23, 1996, Vivadelli and his wife, as directors of VTIC, voted to waive the company's right of first refusal on Byelick's stock, apparently to enable Vivadelli to purchase that stock. Following the transaction, Byelick owned only 10% of VTIC.
On November 1, 1996, VTIC's Board of Directors — by then comprised of Vivadelli and S. Vivadelli — eliminated the shareholders' preemptive rights which were provided for in the company's by-laws. Then, on December 30, 1996, Vivadelli and his wife, as VTIC directors, approved and authorized the sale by VTIC of 50,000 additional shares of stock to Vivadelli, referred to in the pleadings as the "December 1996 Stock Sale." That transaction effectively reduced Byelick's ownership interest in the company from 10% to 1%.
During the early months of 1996 and continuing until December 18, 1997, Byelick and Vivadelli engaged in at least two dozen telephone conversations. According to Byelick's Amended Complaint (¶ 29), five representations made by Vivadelli during these conversations were fraudulent and caused Byelick to rely on them in his eventual sale of stock to Vivadelli. Byelick contended that the representations violated the Securities Exchange Act of 1934, 15 U.S.C. § 77a et seq., and the Rules promulgated under the Act, as well as the parallel provisions of the California Corporate Code. The same allegations also formed the predicate for the common-law fraud, breach of fiduciary duty, and conspiracy and aiding and abetting claims. As pleaded, the representations are:
a. "that the Corporation's proprietary software was not working."
b. "that the engineering staff of the Corporation were working desperately to re-write the source code of the software to get the product to work, and that because of this fact, the engineers were unable to respond to customer requests for services."
c. "that old customers of the Corporation were refusing to pay the Corporation's invoices for products and services previously provided by the Corporation and such customers were refusing to expand past initial, small-scale pilot programs," and that "no new customers had signed agreements or contracts for the Corporation's products and services."
d. "that the Corporation was experiencing extreme cash flow problems and a continuing liquidity crunch which had prevented the Corporation from paying its bills as they came due which brought the Corporation to the `end of the road.'"
e. "that [Vivadelli] expected the Corporation to be forced to go out of business in the near future because of the problems set forth above."
In addition to these alleged affirmative misrepresentations, Byelick claims that Vivadelli and his wife, S. Vivadelli, failed to disclose certain financial information during 1996 which they, as corporate directors were required to disclose. The allegedly undisclosed information includes the existence of certain contracts between VTIC and its clients which Byelick contends increased the value of his stock in VTIC.
Byelick contends that he did not become fully aware of the falsity of Vivadelli's representations or of the alleged omissions until January 1998, when Byelick first reviewed financial records for 1995 and 1996, which were first made available to him at the end of December 1997. In January of 1998, Byelick unsuccessfully asked Vivadelli to rescind the September Stock Sale and made a written demand for inspection of the corporation's books.
On August 28, 1998, VTIC received a written offer from Edison Venture Fund, in which Edison offered to invest $2 million in exchange for 25% ownership. The offer, which was subsequently revoked, was based on Edison's independent valuation of VTIC at $6 million.
Byelick filed this action on December 17, 1998. The Counts in the Amended Complaint can be summarized as follows:
Count I alleges that the Vivadellis and VTIC violated section 10(b) and Rule 10b-5 by making the 5 enumerated representations set forth, supra, and by omitting to disclose material facts which their duties required them to disclose. This count was previously dismissed as to S. Vivadelli by Order issued on September 29, 1999.
Count II alleges misrepresentations, omissions, and fraudulent devices in violation of the California Corporations Code. This count named the Vivadellis and VTIC as defendants, but was previously dismissed as to S. Vivadelli by Order issued on September 29, 1999.
Count III alleges that the same conduct alleged in Count I and II, violates an unspecified state's common law. Count III named the Vivadellis and VTIC as defendants, but was previously dismissed as to S. Vivadelli by Order issued June 7, 1999.
Count IV alleges breach of fiduciary duty, again without specifying the applicable law. The Vivadellis and VTIC are named as defendants.
Count V, alleging conspiracy and aiding and abetting, was previously dismissed without prejudice by Order issued June 7, 1999.
Count VI alleges breach of employment contract, naming only VTIC as defendant. VTIC admits that it breached the contract but disputes the amount of damages due as a result.
Byelick has moved for summary judgment on Counts I, IV and VI.
The defendants have moved for summary judgment on Counts I, II, III and IV.
Rule 56(c), Fed.R.Civ.P., provides that summary judgment is to be rendered "if the pleadings, depositions, answers to interrogatories,...
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