Frank v. Lovetere

• Decision Date: 31 March 2005
• Docket Number: No. CIV. 3:03CV1014JBA.,CIV. 3:03CV1014JBA.
• Citation: 363 F.Supp.2d 327
• Court: U.S. District Court — District of Connecticut
• Parties: H. Jonathan FRANK and Frank Family Trust, Plaintiffs, v. Arthur LoVETERE, et al., Defendants.

363 F.Supp.2d 327

H. Jonathan FRANK and Frank Family Trust, Plaintiffs, v. Arthur LoVETERE, et al., Defendants.

No. CIV. 3:03CV1014JBA.

United States District Court, D. Connecticut.

March 31, 2005.

COPYRIGHT MATERIAL OMITTED

Patricia M. Canavan, Day, Berry & Howard, Stamford, CT, Richard M. Stassberg, Jeffrey Alan Simes, Goodwin Procter, New York City, for Plaintiffs.

James T. Shearin, Pullman & Comley, Bridgeport, CT, for Defendants.

RULING ON DEFENDANTS' MOTIONS TO DISMISS [DOCS. ## 40, 41, 42, 49, 68]

ARTERTON, District Judge.

On November 7, 2003, H. Jonathan Frank and the Frank Family 1996 Trust filed an amended complaint [doc. # 38] against Reflexite Corporation and individual defendants Arthur LoVetere, Cecil Ursprung, Louis Baccei, Worth Loomis, Theodore Patlovich, Stephen Raffay, William Rowland, and Peter Eio, alleging that: the individual defendants breached their fiduciary duty to Reflexite Corporation ( Count One); the individual defendants breached their fiduciary duty to the plaintiff (Count Two); defendant Rowland breached a 1979 contract and a 1986 Stockholder Agreement (Count Three); Rowland is liable on a promissory estoppel theory (Count Four); all defendants except Rowland tortiously interfered with contractual relations between Rowland and Frank (Count Five); and plaintiff is entitled to an accounting from all defendants (Count Six). The complaint invokes this Court's diversity jurisdiction under 28 U.S.C. § 1332. Currently before the Court are motions to dismiss all claims in the complaint. For the reasons that follow, the defendants' motions will be granted as to Counts One, Three, Four, Five and Six and denied as to Count Two.

I. FACTUAL BACKGROUND¹

Reflexite is a Connecticut corporation that "produces reflective products and display optics." Am. Compl. ¶ 21. It is a private corporation whose shares are not traded on any public stock exchange. Defendant Arthur LoVetere is Chairman of the Reflexite Board of Directors. Am. Compl. ¶ 8. Defendant Cecil Ursprung is the President and a Director of Reflexite. Id. ¶ 9. Defendant William Rowland is a founder of Reflexite and a member of the board of directors. Defendants Louis Baccei and Peter Eio are current members of Reflexite's Board of Directors, and, as was clarified at oral argument, Defendants Theodore Patlovich, Stephan Raffay, and Worth Loomis are former board members.

Jonathan Frank is a citizen of Nevada who began as an employee of a Reflexite predecessor corporation in 1972. Throughout the 1970s he had various business relationships with Reflexite, including an exclusive contractual arrangement to sell Reflexite in the "traffic control market," and he became "one of Reflexite Corporation's largest source[s] of sales." Am. Compl. ¶ 27.

In 1979, Hugh Rowland (William Rowland's brother and a co-founder of Reflexite) "approached Jon Frank and asked if he would be willing to purchase 10% of Reflexite Corporation. Mr. Frank indicated that he would do so on two conditions: first, he had to be able to purchase the shares in two installments over a two-year period; second, he had to be able to sell his shares if other insiders were able to sell theirs." Id. ¶ 29. He entered a written agreement with Hugh and William Rowland and Fritz Haffenreffer, another principal at Reflexite, providing: "Before actually selling stock ... that would result in a transfer of voting control to a third party" they would "use all efforts that are reasonable to assure [Frank] the opportunity of selling [his] shares at the same price." See id. ¶ 30; Rowland Mem. of Law [doc. # 41] Ex. A. Frank then purchased 8,471 Reflexite shares in 1979 and another 8,470 in 1980, representing 10% of the company. In 1997, Jonathan Frank transferred all of his Reflexite shares to the Frank Family 1996 Trust, and he no longer owns any Reflexite stock in his own name.

In approximately 1980, Jonathan Frank became "Vice President of Marketing and Sales for all operations [at Reflexite]. Mr Frank declined ... opportunities in 1982 and 1983 to become the President of Reflexite. Soon thereafter, Reflexite hired Defendant Cecil Ursprung to become its President." Id. ¶ 32.

In 1985, Reflexite terminated Frank's employment "without notice or explanation." Id. ¶ 33. Frank alleges that Reflexite engaged in "improper efforts to hold his termination benefits hostage" by conditioning payment of the benefits on his consent to the creation of an employee stock option plan ("ESOP"), which he opposed on grounds that it "would dilute the value of existing shareholdings." Id. ¶¶ 33-34.

Frank further alleges that after his departure from Reflexite, the directors "began to pursue a policy of permitting other insiders to sell shares, sometimes unlawfully, while denying the Franks and others a comparable opportunity to obtain liquidity." Id. ¶ 35. Frank alleges two instances where Hugh Rowland was allowed to sell Reflexite shares and the other shareholders were only informed after the fact. Id. ¶¶ 35-36. He also alleges one instance where Defendant Ursprung was allowed to "sell his shares and the other Defendants procured the necessary consents after his sale took place to permit this transaction." Id. ¶ 38. Additionally, Frank alleges that the Board permitted Defendant Loomis to purchase shares at discounted prices. Id. ¶ 39.

Frank's largest complaint is a stock redemption transaction involving William Rowland ("Rowland transaction"). In January 1998 "Reflexite spent some $8.1 million dollars to purchase shares from William Rowland and his family trust. Upon information and belief, Reflexite spent more than $3,000,000 of its own cash and borrowed $5,000,000 to bring about this purchase, at a price of $30 per share. Reflexite did not notify the Franks (and, on information and belief, other shareholders) of this transaction and, indeed, hid the reference to it in footnotes of a financial statement that the Franks did not receive." Id. ¶ 42. Frank alleges that this sale was injurious to the corporation, and that "it has denied the Franks and other shareholders comparable opportunities." Id. ¶ 44. In particular, Frank alleges that Reflexite's stock buyback arrangements in 1998-99 disadvantaged large stockholders. Id. ¶ 47. The complaint states that "Defendants' wrongful conduct continued when, in July of 2002, the Franks were informed that the buyback program was `postponed' but were never informed of its reinstatement in October, and thus were denied the opportunity to participate in the program." Id. ¶ 55. The complaint alleges that "Mr. Ursprung has stated that the Franks `will never get liquid as long as I am President of Reflexite' ..." Id. ¶ 57.

Between 1999 and 2001 plaintiffs raised their concerns with Defendant LoVetere and others in a series of letters that resulted in "tiny" buyback offers from Reflexite. Id. ¶ 53. In 2002, Morgan Frank on behalf of the Trust requested information from Reflexite concerning the ESOP, the "Strategic Minority Investor Program and records concerning the Corporation's repurchase of shares from its large shareholders, including Board members and insiders." Id. ¶ 58. Defendant Ursprung turned down the requests.

On February 10, 2003, plaintiffs sent Reflexite a formal demand letter pursuant to Connecticut General Statutes § 33-722 requesting that the Board investigate and remedy the failure to provide the requested information; the letter also demanded an investigation into allegations that "the Corporation has repurchased the shares of Board members and other insiders at terms favorable to those insiders while refusing to accord comparable treatment to the Franks or other non-insider shareholders." Demand Letter at 2, Mem. of Law in Support of Reflexite's Mot. to Dismiss [doc. # 69], Ex. A. In response to the demand letter, the Reflexite board formed a Special Litigation Committee ("SLC") consisting of directors Louis Baccei, Peter Eio, and Worth Loomis, although Loomis resigned when it was discovered that he had voted to approve the Rowland transaction. Report of Special Litigation Committee, 4/28/03, Reflexite Mem. of Law, Ex. B at 2. Between March 28, when the committee began its investigation, and April 28, when it approved the final report, the SLC and its counsel interviewed six witnesses: Defendants Ursprung, Rowland, Raffay and LoVetere; Plaintiff Jonathan Frank; and Reflexite Vice President of Finance Philip Ferrari. The report concluded that "the Rowland Transaction was properly approved by the Board in accordance with Connecticut law and was fair to the Corporation," and that "the Corporation was not, and is not, obligated to offer the Franks an opportunity to sell shares to the Corporation in a manner similar to the Rowland Transaction or the other redemptions" offered to Reflexite executives Seely, Smith, and McDonald. Id. at 15, 16.

In November 2003, defendants moved to dismiss the amended complaint on several grounds. After briefing on those issues had been completed, the Court permitted discovery on the further theory that the shareholder derivative count was barred under Connecticut General Statutes § 33-724 because the SLC had declined to pursue the litigation. Further briefing was submitted on the SLC issue and oral argument on all motions was heard on March 24, 2005.

II. STANDARD

Defendants' motions except those concerning the SLC are brought pursuant to Federal Rules of Civil Procedure 12(b)(6) and 12(b)(1). To survive such a motion to dismiss, the plaintiff must set forth "`a short and plain statement of the claim' that will give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests." Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957), quoting Fed.R.Civ.P. 8(a)(2), see also Swierkiewicz v. Sorema N.A., 534 U.S. 506, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002). A "complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff...