Galaxy Computer Services, Inc. v. Baker
| Decision Date | 27 May 2005 |
| Docket Number | No. 1:04CV1036 (JCC).,1:04CV1036 (JCC). |
| Court | United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | GALAXY COMPUTER SERVICES, INC., Plaintiff, v. Lara BAKER, et al., Defendants. |
Lawrence Philip Block, Janet M. Nesse, Stinson Morrison Hecker LLP, Washington, DC, for Plaintiff.
Alan Rosenblum, Rosenblum & Rosenblum LLC, H. Bradley Evans, Jr., Redmon Peyton & Braswell LLP, Thomas Patrick Gorman, Tyler Bartl Gorman & Ramsdell PLC, Alexandria, VA, Craig Benson Young, Connolly Bove Lodge & Hutz LLP, Washington, DC, Randall Brater, Barbara Susan Wahl, Arent Fox PLLC, Washington, DC, for Defendants.
This matter comes before the Court on: (1) Defendant Sullivan's Motion In Limine Regarding Evidence of Indemnification; (2) Defendants' Joint Motion for De Novo Review and Jury Trial on Portions of Bankruptcy Court Summary Judgment Order; (3) Plaintiff's Motion In Limine Pursuant to Federal Rule of Civil Procedure 403 to Exclude Evidence of the Defendants' Alleged "National Security Motive" in Breaching their Fiduciary Duties; (4) Defendants' Motion In Limine to Exclude Evidence of the Deposition Testimony of Meredith Mouer of Andrews Kurth; (5) Defendants' Motion In Limine to Exclude Testimony of Charles Lundelius; (6) Defendants' Motion In Limine to Exclude Testimony of Charles Taylor; and (7) Plaintiff's Motion In Limine Pursuant to Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993) and Federal Rules of Evidence 702, 703 and 403, to Exclude the Testimony and Opinions of Alan S. Zipp.
For the following reasons, the Court will deny Defendant Sullivan's Motion In Limine Regarding Evidence of Indemnification, deny Defendants' Joint Motion for De Novo Review and Jury Trial on Portions of Bankruptcy Court Summary Judgment Order, deny Plaintiff's Motion In Limine Pursuant to Federal Rule of Evidence 403 to Exclude Evidence of the Defendants' Alleged "National Security Motive" in Breaching their Fiduciary Duties, partially grant and partially deny Defendants' Motion In Limine to Exclude Evidence of the Deposition Testimony of Meredith Mouer of Andrews Kurth, deny Defendants' Motion In Limine to Exclude Testimony of Charles Lundelius, deny Defendants' Motion In Limine to Exclude Testimony of Charles Taylor, and partially grant and partially deny Plaintiff's Motion In Limine Pursuant to Daubert and Federal Rules of Evidence 702, 703 and 403, to Exclude the Testimony and Opinions of Alan S. Zipp.
This is an action by a Chapter 11 debtor in possession against two of its former officers, a company that purchased a portion of the debtor's assets, and the parent of the company that purchased the assets.1 All the Defendants made a timely demand for a jury trial. Since no bankruptcy judge in the Eastern District of Virginia has been authorized to conduct a jury trial, the referral of this case to the bankruptcy court was withdrawn under 28 U.S.C. § 157(d).
The debtor in possession, Plaintiff Galaxy Computer Services, Inc. ("Galaxy,") is in the business of providing computer security services to various government agencies and commercial customers. Defendants Gary Sullivan and Dr. Lara Baker founded Galaxy. They sold their ownership interest in Galaxy to a company named DOLFIN.COM ("Dolfin") in June 2000 in exchange for Dolfin stock and a promissory note. Sullivan and Baker remained officers and directors of the company after the sale.
Some of Galaxy's government contracts were highly sensitive. The U.S. Government would not permit Galaxy to be merged into Dolfin, which is part-owned by non-U.S. citizens. The Government required that a barrier be established between Dolfin and Galaxy to prevent unauthorized access to classified information and influence over Galaxy's business or management by Dolfin. This barrier took the form of two Proxy Holder Directors with high level security clearances who joined Galaxy's Board.
Sullivan and Baker entered into employment contracts with Dolfin. The agreements contained restrictions on:Sullivan and Baker's post-termination employment with companies engaged in the provision of security services similar to those offered by Galaxy; their promotion to existing Galaxy customers of services similar to or competitive with Galaxy's services; and their inducing customers or employees of Galaxy to alter or terminate their relationship with Galaxy. All three restrictions applied if the employee voluntarily resigned unless the employee had been constructively terminated, in which event only the last of the three restrictions applied. The restrictions were limited in time to twelve months following the termination of employment, but had no geographical limitation.
After acquiring Galaxy, Dolfin sought out potential investors and merger partners. Defendant MCJM, LLC, d/b/a Pinnacle Financial Strategies ("Pinnacle") expressed an interest and was permitted to review Galaxy's financial records after signing a non-disclosure and non-solicitation agreement dated January 15, 2003. Dolfin ultimately rejected an offer by Pinnacle.
Galaxy had three loans with Los Alamos National Bank totaling approximately $668,000, the largest of which was due to mature on March 15, 2003. Baker and Sullivan were personally liable on the loans as guarantors. Galaxy had been experiencing severe cash-flow problems for some time, and often had difficulty meeting payroll.
Baker and Sullivan were unhappy that Dolfin had repeatedly failed to deliver on its promised cash infusions to Galaxy or to pay the purchase-money notes for their stock. In early March 2003, they began discussing ways for Pinnacle to acquire Galaxy.
Soon thereafter, without telling the Proxy Holder Directors or Dolfin, Baker and Sullivan advised the Bank that Galaxy would be unable to pay the largest of the three notes when it matured. Baker and Sullivan waived any cure periods and consented to the bank's immediate foreclosure on Galaxy's assets.
Shortly before the foreclosure, Pinnacle caused a limited liability company known as Galaxy CSI, LLC ("CSI") to be formed. CSI is a Defendant in this suit. On March 25, 2003, Sullivan told the Bank's general counsel that Galaxy's contract receivables were "very perishable" and that an expedited sale to Pinnacle would realize the Bank the greatest return on the collateral. On March 31, 2003, the Bank accepted Pinnacle's bid of $430,000, executed a Bill of Sale to Pinnacle of Galaxy's accounts receivable and contracts receivable. None of this was disclosed by Baker and Sullivan either to the Proxy Holder Directors or to Dolfin.
On March 31, 2003, Sullivan called an "all hands" meeting of Galaxy's employees. A representative of Pinnacle offered Galaxy's employees new employment contracts with CSI. All of the employees resigned that day from Galaxy and accepted employment with CSI, which carried on Galaxy's business at the same location and used Galaxy's phone numbers and Internet web site.
On April 3, 2003, Sullivan advised the Proxy Holders that he and Baker had resigned two days earlier and that Galaxy's assets had been purchased by CSI. A week later, Dr. John Fox, formerly the president of Dolfin, became Galaxy's president. Galaxy filed a voluntary Chapter 11 petition on May 7, 2003.
The present litigation was commenced by Galaxy on May 15, 2003. The First Amended Complaint is pleaded in 18 counts. Several of these counts are no longer at issue. The bankruptcy court granted partial summary judgment with respect to two counts as they pertain to the individual Defendants. The counts still at issue are as follows, annotated as to whether they remain pending against Defendants CSI ("C"), Pinnacle ("P"), Baker ("B"), and Sullivan ("S").
Count Description C P B S
II Avoidance of Fraudulent X
Transfer (11 U.S.C. § 548)
III Accounting X X X X
IV Injunctive Relief X X X X
V Breach of Fiduciary Duty X X
VI Aiding and Abetting X X
Breach of Fiduciary Duty
VII Fraudulent Conveyance X
(Va.Code § 55-80)
VIII Breach of Contract X X X X
IX Civil Conspiracy X X X X
XII Tortious Interference with X X X X
Contractual Rights
XIII Tortious Interference with X X X X
at-will contracts
XIV Business Conspiracy (Va. X X X X
Code §§ 18.2-499 & 500)
The parties' motions in limine are now before the Court.
Pursuant to Rule 4032 of the Federal Rules of Evidence, Defendant Sullivan seeks to exclude testimony and evidence relating to the indemnification section of his employment agreement with Defendant CSI. The employment agreement contains as a "Key Term and Condition," a provision stating:
[CSI] agrees to indemnify, hold harmless, and defend [Sullivan] against any and all claims, suits, and demands of any kind ("Claims") that may be brought against [CSI] and/or [Sullivan] for the actions or inactions arising both before and after this Agreement is executed, including but not limited to, any Claims, if any, brought by any entity or person as a result of the purchase of the assets of Galaxy Computer Services, Inc. by Galaxy CSI, LLC., and/or Galaxy Holdings, LLC, and/or the employment of [Sullivan] and any and all matters related thereto. As part of this indemnity agreement, the Company also agrees to pay in full any final judgments entered against [Sullivan] and/or any settlements agreed to by [Sullivan] that are the direct result of the sale/purchase transaction, along with all reasonable attorney's fees incurred by [Sullivan's] counsel of choice in the defense...
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