Kneebinding, Inc. v. Howell, No. 17-239

• Docket Nº: No. 17-239
• Citation: 201 A.3d 326
• Case Date: October 05, 2018
• Court: United States State Supreme Court of Vermont

201 A.3d 326

KNEEBINDING, INC., John Springer-Miller, Tina Springer-Miller and ACL Investments, LLC
v.
Richard HOWELL

No. 17-239

Supreme Court of Vermont.

February Term, 2018
October 5, 2018
Reargument Denied October 31, 2018

Peter G. Anderson of Anderson & Associates, Stowe, for Plaintiffs-Appellants/Cross-Appellees.

Richard J. Howell, Pro Se, Stowe, Defendant-Appellee/Cross-Appellant.

PRESENT: Reiber, C.J., Skoglund, Robinson, Eaton and Carroll, JJ.

ROBINSON, J.

¶ 1. This case comes to us after a lengthy bench trial between appellants/cross-appellees Kneebinding, Inc. (Kneebinding) and Kneebinding company directors John and Tina Springer-Miller (the Springer-Millers), and appellee/cross-appellant Richard Howell (Howell) that resulted in a series of interlocutory decisions before final judgment. Kneebinding and the Springer-Millers appeal the trial court's decisions regarding: (1) a stipulated fine for Howell's alleged violations of an injunction prohibiting him from speaking in certain settings about Kneebinding or the Springer-Millers; (2) termination of the injunction; (3) other contempt sanctions for Howell's alleged violations of the injunction; (4) defamation damages; (5) Kneebinding's claim of tortious interference with contract; and (6) attorney's fees. With respect to their appeal, we affirm in part, reverse in part, and remand for further proceedings consistent with this opinion. Howell appeals the trial court's denial of his third-party shareholder derivative and direct claims against the Springer-Millers for fraud in the inducement and various alleged breaches of fiduciary duties. We affirm the trial court's judgment on these claims.¹

¶ 2. The saga underlying these disputes, as found by the trial court, and the procedural history of this case are as follows. Kneebinding was incorporated in Delaware and has its principle place of business in Stowe, Vermont. The company manufactures ski bindings that feature a special, patented heel release designed to mitigate knee injuries—especially those to the anterior cruciate ligament—that are common in downhill skiing.

¶ 3. Howell invented and patented the binding in 2003, formed Kneebinding shortly thereafter, and began to look for investors. He has an extensive personal and professional background in the ski industry, having been an accomplished ski racer as a youth, a marketing director of a major ski binding company, and an active participant in the international community of ski professionals and academics.

¶ 4. At some point in his quest to raise capital, Howell met John Springer-Miller,

201 A.3d 335

who had previous business success and was positioned to be a significant investor. The two began negotiations in the spring of 2007 and continued through that summer. These negotiations quickly became strained. Howell wanted a significant investment, but he also wanted to remain in control of the company. For his part, John Springer-Miller had reservations about Howell's business experience and ability to build the project into a highly valuable company.

¶ 5. The issue of company control became a sticking point in the negotiations, which reached an apparent impasse in the fall of 2007. In October of that year, Howell wrote an email to John Springer-Miller requesting a formal end to the negotiations. Springer-Miller responded by stating how sorry he was that the deal would not go through, noting, "with your invention and my business savvy, [we] could have made a whole lot of money." (Emphasis omitted.) Howell responded by lamenting that Springer-Miller continued to underestimate his business savvy and that he brought more to the table than just his invention. Springer-Miller's reply stated that he did not want to run the company; rather his "goal in [the] negotiations ha[d] been to lock [Howell] into a business plan that [would] really work—that [would] allow [Howell] to focus all [his] time on building the business—and to protect [Springer-Miller's] investment if [Howell] [did] not succeed."

¶ 6. The two continued to negotiate over the next few days, but on October 17, John Springer-Miller wrote to Howell seeking to once again cease negotiations; he explained that the two were "on completely different planets" and that Howell "deserve[d] an investor who believes in [him] as much as the product." That same morning, however, Howell appeared at Springer-Miller's residence and they resumed negotiations. By the end of their meeting, the two agreed to a deal that would give Springer-Miller control over the board of directors, with Howell retaining minority ownership and his leadership of the company as president and CEO.

¶ 7. Howell and John Springer-Miller signed transaction documents on November 1, 2007, including an employment agreement, a Series A-stock-purchase agreement (stock-purchase agreement), an amended and restated certificate of incorporation of Kneebinding, a noncompetition and nonsolicitation agreement, an invention and nondisclosure agreement, a company voting-rights agreement, and an investor-rights agreement. After the closing, Springer-Miller owned 1,065,000 shares of Series A preferred stock in return for an investment of $1,065,000. Howell was a minority shareholder with 641,772 shares of common stock, with two other minority shareholders owning 36,321 and 3279 shares of common stock, respectively.

¶ 8. Pursuant to the voting-rights agreement, the board of directors could consist of five total members. Howell, as the "founder," was allowed to select one director, the holders of the Series A preferred stock could select three directors, and Howell and the Springer-Millers could select a fifth director together. Initially, the board was comprised of the Springer-Millers and Howell.

¶ 9. Pursuant to the parties' agreement, Howell was to serve as president, CEO, secretary, and treasurer with duties and responsibilities ultimately controlled by the board. His employment, however, was "at-will." John Springer-Miller was to serve as the company's chief financial officer (CFO). The Springer-Millers, as the Series A preferred shareholders, had control over the company funds, including an investment account that could not be accessed without their permission. Howell

201 A.3d 336

was in control of the day-to-day company operations—including production and marketing—but had no control over company funds until they were transferred from the investment account to the operating account. John Springer-Miller, on the other hand, "invested the funds and in all major respects had final control over everything of financial importance that was to happen in the Company."

¶ 10. Howell and John Springer-Miller's working relationship began to deteriorate almost immediately. By December 2007—a little over a month after the closing—Howell wrote to corporate counsel looking for a way to remove Springer-Miller as CFO due to what Howell perceived as his overly controlling nature. Howell began to purposefully withhold company information from the Springer-Millers, and he directed others in the company to do the same. Communication was a problem between Howell and Springer-Miller throughout Howell's employment at Kneebinding.

¶ 11. By February 2008, their relationship had become such that Howell would communicate only through his personal attorney. This attorney wrote first to John Springer-Miller, and then to Springer-Miller's attorney, alleging that Springer-Miller had violated the parties' agreement by: threatening to remove Howell; failing to hold board meetings; interfering with potential customers; failing to provide necessary financing; providing for an inadequate company website; failing to deliver engineering support; and failing to inform Howell of his intended amendments to the business plans.² John Springer-Miller responded by relaying through his attorney that if Howell wanted to communicate about these matters, then he preferred to do so face-to-face rather than through counsel.

¶ 12. In addition to the communication issues, the Springer-Millers grew unhappy with Howell's general job performance. The original business and financial plan—drafted by Howell and pitched to John Springer-Miller to entice his investment—projected that the company would complete binding production molds by April 2008 and subcomponent binding parts by June or July, and would sell 30,000 pairs of bindings from July 2008 through June 2009. The plans described that a specific local vendor "who ‘[was] enthusiastic about being engaged in another successful project with [Howell]’ " would do the injection molding. The trial court found that this manufacturing forecast was "overly optimistic" and "[a]s a sales pitch to an investor, it was a borderline misrepresentation." In reality, the computer-aided design of the bindings was not yet in place to allow the vendor to complete the production molds—a process that would take months to complete. Due to this, and Howell's contentious working relationship with the company's plastics vendor, the company fell seriously behind its projected schedule. The production molds that were supposed to be ready by the spring of 2008 were not completed as of that summer, which meant that there was no binding to demonstrate for potential customers. By the end of the summer of 2008, Kneebinding was nowhere close to its sales projections for the

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