Labovitz v. Washington Times Corp.

• Decision Date: 20 April 1999
• Docket Number: Nos. 97-7203,97-7204,s. 97-7203
• Citation: 335 U.S.App.D.C. 296,172 F.3d 897
• Parties: Peter C. LABOVITZ and Sharon M. Labovitz, Appellants/Cross-Appellees, v. The WASHINGTON TIMES CORPORATION and News World Communications, Inc., Appellees/Cross-Appellants.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 897

172 F.3d 897

335 U.S.App.D.C. 296

Peter C. LABOVITZ and Sharon M. Labovitz, Appellants/Cross-Appellees, v.The WASHINGTON TIMES CORPORATION and News World Communications, Inc., Appellees/Cross-Appellants.

Nos. 97-7203, 97-7204.

United States Court of Appeals District of Columbia Circuit.

Argued Dec. 7, 1998.

Decided April 20, 1999.

Appeals from the United States District Court for the District of Columbia(No. 95cv00138).

Stacy A. Feuer argued the cause for appellants/cross-appellees.With her on the briefs was Alan B. Croft.Eric L. Lewis entered an appearance.

Lee T. Ellis, Jr. argued the cause and filed the briefs for appellees/cross-appellants.

Before: GINSBURG, HENDERSON and ROGERS, Circuit Judges.

Opinion for the Court filed by Circuit Judge ROGERS.

ROGERS, Circuit Judge:

Peter and Sharon Labovitz, shareholders, directors, and officers of DCI Publishing, Inc., appeal the dismissal of several counts of their complaint alleging that the Washington Times, ¹ a daily metropolitan newspaper, attempted to acquire DCI at a "distressed price."The Labovitzes alleged that the Times' dealings with them and DCI substantially reduced the value of their interests in DCI, triggered their personal guarantees of loans to DCI, and resulted in the seizure of personal property that they had pledged as collateral for DCI's obligations.Because, in their view, these injuries represent individual claims, the Labovitzes contend that the district court erred in dismissing them under Delaware and Virginia law on the ground that they were derivative of losses suffered by DCI.On cross appeal, the Times contends that the district court erred in excluding evidence relevant to its setoff defense that any injury Mr. Labovitz suffered from the alleged breach of the Times' contract with him was "set off" by his failure to make certain payments on behalf of DCI to a third-party bank.

Because a personal guarantor is sufficiently similar to a creditor of a corporation, and because the Labovitzes' complaint does not allege facts showing a special injury to themselves, we affirm the dismissal of their claims for breach of fiduciary duty, fraud, and negligent misrepresentation as derivative under Delaware law.Because, further, the Labovitzes are not the real parties in interest to pursue claims of damage to their property interests in DCI under the Virginia Conspiracy Act, we affirm the dismissal of their claim under that statute.Finding no abuse of discretion by the district court in excluding evidence proffered as part of the Times' setoff defense, we affirm the orders and judgment of the district court.

I.

In reviewing the order dismissing seven counts of the Labovitzes' complaint, this court views the allegations in the complaint as true, although it need not accept "purely legal conclusions masquerading as factual allegations."Maljack Prods., Inc. v. Motion Picture Ass'n of America, Inc., 52 F.3d 373, 375(D.C.Cir.1995).DCI, incorporated in Delaware, operated several suburban community newspapers in Maryland and Virginia.The Labovitzes and another individual, John Hanes, apparently each owned one-half of DCI prior to 1991.²According to the complaint, in January 1991, the Times began discussions with the Labovitzes and Hanes about acquiring DCI.During the course of their negotiations, the Times provided cash and printing services to DCI worth over $2 million.After several months, the Times decreased its financial contributions to DCI but told the Labovitzes that it would fully fund DCI after they executed several loan agreements.Under these agreements, which the parties signed in August 1991, the Times acquired a fifty-percent ownership interest in DCI in exchange for providing several million dollars in cash and services to allow DCI to continue operating.The Times also had the option of acquiring total control of DCI and its assets at fair market value after two and one-half years.To avoid public scrutiny of the Times' ownership interest in DCI, ³the parties structured the deal in the form of a loan from the Times to DCI.Peter Labovitz retained his management positions as president and chief executive officer of DCI.

Shortly thereafter, however, the Times began secret negotiations with John Hanes with the idea of committing DCI to purchase accounting and consulting services from the Times that it could not afford.In addition, the Times' agents, Richard Jones and Michael Webb, proposed to Peter Labovitz that he relinquish day-to-day control of DCI in exchange for payments of $20,000 monthly for six months and a promise that the Times would provide further financial support to DCI.Within a few months after Peter Labovitz agreed to those terms, he was barred from access to DCI financial records, and the Times transferred DCI assets and personnel to the Times and elsewhere without his knowledge, instructing DCI employees to refrain from communicating with him.The Times also refused to pay him $20,000 monthly and demanded that he and Sharon Labovitz surrender their interests and involvement in DCI, which they declined to do.The Times then withdrew its financial support from DCI and demanded that DCI pay $2 million in deferred printing, composing, accounting, and consulting service costs.According to the complaint:

[t]he Times knew that its actions in withdrawing support from DCI would cause substantial injury to plaintiffs by (a) substantially reducing the value of plaintiffs' interests in DCI; (b) triggering plaintiffs' personal guarantees of DCI's corporate debts, and (c) leading to the seizure of plaintiffs' property, which had been pledged as collateral for DCI's obligations.

In January 1993, DCI filed for bankruptcy, ⁴ and in 1995, the Labovitzes filed suit against the Times.

In their complaint the Labovitzes allege that the Times owed them a fiduciary duty (count one) because of its "de facto control" over DCI, and that it breached this duty by (1) operating DCI for its own benefit, rather than DCI's; (2) attempting to force Peter Labovitz to turn over his shares in DCI to the Times at a distressed price and to surrender his management role; and (3) refusing to pay Peter Labovitz the agreed-upon compensation of $20,000 monthly for six months.They further allege that the Times committed fraud (counts two and three) and negligent misrepresentation (count four) by making false statements about its commitment to the financial success of DCI to induce them to sign loan documents in August 1991, and to surrender day-to-day control of DCI.They also allege that the Times violated the Virginia Conspiracy Act(counts five and six), § 18.2-499(A) & (B), by conspiring with the Times' agents and John Hanes to injure the Labovitzes' business and property interests in DCI.Finally, they allege breach of contract (count seven) and promissory estoppel (count eight) based on the Times' failure to pay Peter Labovitz $20,000 monthly and to continue to support DCI financially.

The district court granted the Times' motion to dismiss the complaint except for count seven (breach of contract).The court ruled that the dismissed counts involved claims for injuries that derived from losses suffered by DCI, and that under Delaware and Virginia law, ⁵ the Labovitzes could not pursue their claims as individuals.Labovitz v. Washington Times Corp., 900 F.Supp. 500, 504(D.D.C.1995).Specifically, the court found that the injuries alleged by the Labovitzes--such as loss in stock value and losses associated with their status as guarantors--were derivative in nature.Id. at 504-05.On the remaining claim for breach of contract, a jury awarded Peter Labovitz $120,000.

On appeal, both sides contend that the district court erred, the Labovitzes maintaining that the dismissed counts involved claims for individual injuries separate and apart from those suffered by DCI, and the Times maintaining that the exclusion of evidence that Peter Labovitz failed to make certain mortgage payments on behalf of DCI to an outside lender was relevant as a setoff defense.We address three primary issues, the first two de novo, Maljack, 52 F.3d at 375, and the third for abuse of discretion, seeChedick v. Nash, 151 F.3d 1077, 1084(D.C.Cir.1998): (1) whether under Delaware law the Labovitzes were the real parties in interest to pursue claims for breach of fiduciary duty, fraud, and negligent misrepresentation, ⁶(2) whether Virginia law permits the Labovitzes to bring claims under the Virginia Conspiracy Act, §§ 18.2-499 & -500, and (3) whether the district court abused its discretion by excluding as irrelevant evidence related to the Times' setoff defense.

II.

A.

Under Delaware law, shareholders can bring an individual claim if they suffer injuries "directly or independently of the corporation."⁷Kramer v. Western Pacific Indus., Inc., 546 A.2d 348, 351(Del.1988).Claims based on injury to the corporation, however, are derivative in nature and any damages suffered are owed to the corporation.Id.To determine whether claims are individual or derivative, courts"must look to the nature of the wrongs alleged in the body of the complaint, not to the plaintiffs' designation or stated intention."Id.(quotingLipton v. News Int'l, Plc, 514 A.2d 1075, 1078(Del.1986)).Plaintiffs must allege a "special injury" to themselves, apart from that suffered by the corporation.Cowin v. Bresler, 741 F.2d 410, 414-15(D.C.Cir.1984).This injury can arise in two situations: first, "where the allegedly wrongful conduct violates a duty to the complaining shareholder independent of the fiduciary duties owed that party along with all other shareholders," such as a duty that arises out of an employment relationship, or second, "where the conduct causes an injury to the shareholders distinct from any injury to the corporation itself," such as losses resulting from a company wrongfully withholding dividends.Id.;see alsoWilliams v. Mordkofsky, 901 F.2d...