Kober v. Harrington
| Decision Date | 02 July 2018 |
| Docket Number | CASE No. : 1:17 CV 2491 |
| Parties | JANE KOBER, Plaintiff, v. DANIEL HARRINGTON Defendant. |
| Court | U.S. District Court — Northern District of Ohio |
MEMORANDUM OPINION AND ORDER
This matter is before the Court on Defendant, Daniel Harrington's Motion to Dismiss Plaintiff Jane Kober's Corrected First Amended Complaint. (ECF #12). Plaintiff, Jane Kober, filed a Memorandum in Opposition, Defendant filed a Reply in Support of his motion, and Plaintiff filed a sur-reply. (ECF #14, 16, 18). The matter is now fully briefed and ready for consideration.
Plaintiff, Ms. Kober, individually and derivatively on behalf of HTV Industries, Inc. shareholders, filed a verified Complaint for Injunction and Other Relief against Daniel Harrington and HTV Industries, Inc. on November 28, 2017. (ECF #1). The Defendants moved to dismiss the derivative claims for lack of standing, and filed a separate motion to dismiss the remaining claims for failure to state a claim. (ECF #5, 6). In response, Plaintiff filed an Amended Complaint, and then a Corrected First Amended Complaint. (ECF #9, 10). The Amended Complaint eliminated the derivative claims and dropped HTV Industries, Inc. from the lawsuit. Defendant, Mr. Harrington, filed a motion to dismiss the Corrected First Amended Complaint ("Complaint")2 for failure to state a claim upon which relief can be granted. (ECF #12).
The Complaint alleges that Ms. Kober, was a minority shareholder and one of two directors of HTV Industries, Inc. ("HTV"), a closely held corporation formed under Delaware law. Defendant, Mr. Harrington, was the other director as well as a controlling stockholder, president, and chief executive officer of HTV. HTV has two deferred compensation plans, a Directors' Deferred Compensation Plan, and an Officer and Key Employee Deferred Compensation Plan. Although not alleged in the Complaint, Plaintiff, in her sur-reply, indicates that she and the defendant were the only two plan participants. (ECF #18, fn. 2). Both plans, subject to certain exceptions, permit distributions only in stock, and prior to the amendments discussed below, only in a single distribution upon termination of employment or board service.
In October of 2015, Mr. Harrington was involved in divorce proceedings and needed a substantial amount of cash or other consideration to fund a divorce settlement. The settlement agreement approved by the Domestic Relations Court required Mr. Harrington to pay his ex-wife in seven installment payments using distributions from HTV's deferred compensation plans. Inorder to make these payments, the Defendant needed to amend the deferred compensation plans to permit early installment distributions prior to termination of employment. In order to amend the plans, he needed the vote of Plaintiff, the second board member. The Plaintiff was aware of the Defendant's divorce proceedings and his need for cash prior to the vote. She voted along with the Defendant to amend the plan documents to allow distributions to fulfill court orders, "wishing to support Defendant." (ECF #9, ¶ 24). According to the Complaint, the amendments that Ms. Kober voted on did not alter the fact that distributions from the Plans could only be made in stock. (ECF # 9, ¶ 27). Defendant argues that the amendment language permitted cash distributions if they were ordered by the divorce court, but at this stage of the proceedings the Court is bound to accept the factual allegations in the Complaint as true, and Ms. Kober is bound by the assertions in her pleadings. Therefore, the Court will accept for purposes of this motion that the Plan Amendments did not alter the requirement that distributions from the Plans be made in stock and not in cash.
HTV's first distribution to Mr. Harrington's ex-wife was made in cash rather than in stock. Because the Complaint alleges that amendments approved by Plaintiff did not permit the plans to make distributions in cash, she contends that the distributions were unauthorized under the plan documents and violated the Employee Retirement Income Security Act ("ERISA"). She did not, however, bring any claim for ERISA violations in her Complaint.
The cash payments made to Mr. Harrington's ex-wife were recorded by HTV as a compensation expense, resulting in ordinary business losses to the company. Defendant and his family were able to use their share of this loss on their income tax returns. Plaintiff, as a non-employee, passive investor, however, was prohibited by the "passive loss rules" of the Internal Revenue Code from using the loss on her taxes.
In 2016, after the deferred compensation plans had been amended and the first cash distribution had been made to Mr. Harrington's ex-wife, Mr. Harrington made a separate and distinct decision to direct the discontinuation of HTV's longstanding practice of making quarterly tax distributions, in lieu of ordinary distributions of profits, to cover shareholder's tax liabilities. At all times since 2001, HTV's decisions relating to stockholder distributions weremade at a management level, at the direction of the Defendant, without any board action or involvement. After the decision was announced to stockholders, the Defendant allegedly told Plaintiff that she would not need a tax distribution in 2016 to cover her taxes. She found this information to be incorrect.3
The Complaint alleges that the Defendant intended to make cash distributions to his ex-wife, count them as losses, and eliminate the tax distributions at the time he sought Plaintiff's approval of the Plan Amendments. It also alleges that he knew this course of action would provide tax benefits to him and his family. Based on these allegations, the Complaint asserts claims for breach of fiduciary duty allegedly owed Ms. Kober both as a minority shareholder and as a director, as well as for fraud. Ms. Kober seeks a declaratory judgment holding that the "HTV board resolution purporting to amend its Deferred Compensation Plans" and the "purported transfer of restricted HTV stock to the Sherri Herrington Trust without board authorization" were void ab initio. She also seeks judgment against Mr. Harrington in an amount in excess of $700,000.00, plus attorney fees, punitive damages and pre- and post-judgment interest. (ECF #9).
On a motion brought under Fed. R. Civ. P. 12(b)(6), this Court's inquiry is limited to the content of the complaint, although matters of public record, orders, items appearing in the record of the case, and exhibits attached to the complaint may also be taken into account. See Chester County Intermediate Unit v. Pennsylvania Blue Shield, 896 F.2d 808, 812 (3rd Cir. 1990). The Sixth Circuit has also held that a reviewing court may consider "exhibits attached to the defendant's motion to dismiss so long as they are referred to in the Complaint and are central to the claims contained therein." Bassett v. Nat'l Collegiate Athletic Ass'n, 528 F.3d 426, 430 (6th Cir. 2008). In evaluating a motion for dismissal under Rule 12(b)(6), the district court must"consider the pleadings and affidavits in a light most favorable to the [non-moving party]." Jones v. City of Carlisle, Ky., 3 F.3d. 945, 947 (6th Cir. 1993) (quoting Welsh v. Gibbs, 631 F.2d 436, 439 (6th Cir. 1980)).
Though construing the complaint in favor of the non-moving party, a trial court will not accept conclusions of law or unwarranted inferences cast in the form of factual allegations. See City of Heath. Ohio v. Ashland Oil. Inc., 834 F.Supp. 971, 975 (S.D. Ohio 1993). "A plaintiff's obligation to provide the 'grounds" of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atl' Corp. v. Twombly, 550 U.S. 544, 555 (2007)(quoting Papasan v. Allain, 478 U.S. 265, 286, 106 S. Ct. 2932, 92 L. Ed. 2d 209 (1986)). "Factual allegations must be enough to raise a right to relief above the speculative level." Twombly at 555. In deciding a Rule 12(b)(6) motion, this Court must determine not whether the complaining party will prevail in the matter but whether it is entitled to offer evidence to support the claims made in its complaint. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974).
The Complaint as well as the Plaintiff's brief in opposition to the Motion to Dismiss, and her sur-reply allege that Mr. Harrington breached his fiduciary duty to Ms. Kober, as a minority shareholder, by failing to provide her with full disclosure of his intent to issue plan distributions in cash and to forego tax distributions in future years, before she voted on the Plan Amendments. Aside from the fact that these allegedly intended future actions were not authorized by the Plan Amendments, nor necessarily dependent on them, the non-disclosed actions should not have been relevant to Ms. Kober's decision to adopt the Plan Amendments, because according to her own allegations, the Plan Amendments did not facilitate those decisions.4 Plaintiff tries to conflate three separate decisions, with separate decision making procedures and corporate obligations, into a single transaction for purposes of determining the applicable disclosureobligations and fiduciary laws. This not a tenable approach. The Court will therefore, look to each decision separately.
The fiduciary duties discussed by the Plaintiff throughout most of her Complaint and briefing apply to the ratification of the Plan Amendments. There are no factual allegations in the Complaint that would support a cause of action for breach of fiduciary duty or fraud in connection with that ratification under Delaware law.5 At the time of her vote on the amendments, Ms. Kober was a disinterested director, with equal power on the board. She has acknowledged in her Complaint that she had full knowledge of the content and purpose of the Plan Amendments, as well as the personal benefit th...
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