Pernick v. Computershare Trust Co.

Decision Date29 September 2015
Docket NumberCivil Action No. 13-cv-02975-PAB-KLM
Citation136 F.Supp.3d 1247
CourtU.S. District Court — District of Colorado
Parties Norman L. Pernick as Chapter 11 Trustee of the Bankruptcy Estate of Industrial Enterprises of America, Inc., on behalf of itself, the estate and as assignee of its shareholders, Plaintiff, v. Computershare Trust Company, Inc., Defendant.

Raymond Aaron Bragar, Bragar Eagel & Squire, P.C., Doris Diana Short, Peckar & Abramson, PC, Meghan Joan Summers, Peter S. Linden, Kirby, McInerney, LLP, New York, NY, for Plaintiff.

Charles W. Azano, Mintz Levin Cohn Ferris Glovsky & Popeo, PC, Boston, MA, John McDonald Delehanty, John Stevens McMahon, III, Mintz Levin Cohn Ferris Glovsky & Popeo, PC, New York, NY, Patrick John Russell, Allen & Vellone, P.C., Denver, CO, for Defendant.


PHILIP A. BRIMMER, United States District Judge

This matter is before the Court on the Motion to Dismiss the Complaint Pursuant to Fed. R. Civ. P. 12(b)(6)

[Docket No. 56] filed by defendant Computershare Trust Company, Inc. ("Computershare").1 The motion raises the issues of whether a transfer agent has a duty to investigate the validity of an issuance of stock and whether the indemnification clause in the contract between the transfer agent and the company is enforceable. This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1332.


Advanced Bio/Chem, Inc. was established in 2004 and later changed its name to Industrial Enterprises of America, Inc. ("IEAM").3 Docket No. 1 at 7, ¶ 23. IEAM was a publicly traded shell company. Id. Computershare provides transfer agent services for securities to public corporations and closed-end funds. Id. at 5, ¶ 19. Computershare acted as the transfer agent for IEAM's securities at all times relevant. Id.

When it was established in 2004, IEAM's lone asset was 15 million shares of restricted stock in Power3 Medical Products ("Power3"), which shares were valued at $45 million. Id. at 7, ¶ 23. On August 1, 2004, John Mazzuto was appointed a director of IEAM. Id. On October 7, 2004, IEAM purchased all outstanding stock in EMC Packaging, Inc. ("EMC") by paying EMC's shareholders 2.2 million shares of IEAM stock. Id. at 7, ¶ 24. On October 15, 2004, Mr. Mazzuto was appointed vice chairman of IEAM's board of directors and, on December 15, 2005, Mr. Mazzuto was elected CEO and president of IEAM. Id. at 7, ¶ 25. James Margulies was IEAM's CFO and general counsel. Docket No. 1–5 at 2.

On November 1, 2003, IEAM and Computershare executed the Stock Transfer Agency Agreement (the "Agreement") [Docket No. 1-2]. Pursuant to the Agreement, Computershare was required to provide transfer agent services to IEAM, Docket No. 1–2 at 3, 18-19, and Computershare received $7,800 per year from IEAM for its services. Id. at 20.4 The Agreement provides that Computershare shall transfer shares "upon the presentation to Computershare of stock transfer instructions properly endorsed if Shares are in uncertificated form. Such ... transfer instructions shall be accompanied by such documents as are reasonably necessary to evidence the authority of the person making the transfer...." Docket No. 1–2 at 5. With respect to the transfer of restricted shares, the Agreement allows Computershare to request a legal opinion from IEAM's counsel and further states that "Computershare assumes no responsibility with respect to the transfer of restricted securities in accordance with such opinion." Id. at 6. The Agreement states that "Computershare may refuse to transfer Shares until it is satisfied that the requested transfer is legally authorized." Id.

Article 5 of the Agreement contains a provision limiting Computershare's liability (the "exculpatory clause"):

1. The Company agrees that Computershare shall not be liable for any action taken or omitted to be taken in connection with this Agreement, except that Computershare shall be liable for direct losses incurred by the Company arising out of Computershare's gross negligence or willful misconduct. Any liability of Computershare shall be limited to the amount of fees paid by the Company to Computershare in the preceding twelve (12) months for the Services, it being understood that the Services could not be provided to the Company by Computershare at the prices set forth herein without the foregoing liability limitation. Under no circumstances shall Computershare be liable for any special, indirect, incidental, punitive or consequential loss or damage of any kind whatsoever (including, but not limited to, lost profits), even if Computershare has been advised of the possibility of such loss or damage....
2. Notwithstanding anything to the contrary, Computershare shall not be liable in connection with
a) The legality of the issue, sale or transfer of any Shares, the sufficiency of the amount to be received in connection therewith, or the authority of the Company to request such issuance, sale or transfer;
b) The legality of the purchase of any Shares, the sufficiency of the amount to be paid in connection therewith, or the authority of the Company to request such purchase;...
e) Acting upon any oral instruction, writing or document reasonably believed by Computershare to be genuine and to have been given, signed or made by an Officer....

Id. at 7–8. Article 7 of the Agreement states that IEAM agrees to defend, indemnify, and hold harmless Computershare from any loss or damage incurred by Computershare or relating to Computershare's provision of services; "provided, however, that no Indemnified Party shall have the right to be indemnified hereunder for any liability to the extent finally determined by a court of competent jurisdiction that such Losses have resulted directly from the gross negligence or willful misconduct of such Indemnified Party." Id. at 10. The Agreement states that Colorado law governs the agreement. Id. at 14.

Plaintiff alleges that Computershare owed IEAM various extra-contractual duties. Plaintiff alleges that Computershare owed IEAM a duty to act in accordance with the Securities Transfer Association, Inc. ("STA")5 guidelines (the "STA guidelines"). Docket No. 1 at 10, ¶ 37. The STA approved the STA guidelines, intending that they be "implemented uniformly, with the result that most variations in transfer requirements will be eliminated." Id. at 11, ¶ 38. Plaintiff also alleges that Computershare owed IEAM a duty to act in accordance with various provisions of Article 8 of the Uniform Commercial Code. Id. at 14, ¶ 47.

In November 2004, IEAM issued its 2004 Stock Option Plan (the "Plan") and, on January 25, 2005, IEAM filed a form S-8 registration statement for the Plan with the United States Securities and Exchange Commission ("SEC").6 Docket No. 1 at 8, ¶¶ 27-28. The Plan permitted IEAM to issue a maximum of 15 million restricted shares to employees, outside directors, or bona fide consultants. Id. at 8, ¶ 29.

There is some dispute as to whether IEAM provided the Plan to Computershare. Plaintiff's complaint does not explicitly allege that IEAM provided the Plan to Computershare. However, the complaint suggests that the Plan was filed with the SEC and was therefore publicly available. See id. at 10, ¶ 36 (stating that the Agreement obligated Computershare to "confirm the authority of the people directing the stock issuances and check the requirements of the Plan given to them (and filed with the SEC), and empowered it to require a legal opinion when concerned about impropriety"); see also Docket No. 56 at 14 (stating that the Plan was filed with the SEC on January 25, 2005).

Beginning in January 2005, Mr. Mazzuto and Mr. Margulies directed Computershare to issue unrestricted plan shares of IEAM stock to ineligible recipients. Docket No. 1 at 8, ¶ 30. The typical process for issuing these shares was as follows: Mr. Mazzuto or Mr. Margulies would send a signed letter (collectively, the "issuance letters") to Computershare directing it to issue a certain number of IEAM shares to a particular recipient. See generally Docket No. 1–6. Many of the letters referred to the Plan and/or the S-8 registration statement. See, e.g. , id. at 4 ("Please issue Twenty Thousand (20,000) shares of [IEAM] common stock pursuant to our [IEAM] 2004 Stock Option Plan. These shares should be issued free trading via electronic transfer pursuant to the following instructions pursuant to the previously provided S-8 registration statement dated January 24, 2005"). These letters would sometimes be accompanied by fabricated minutes from an IEAM board meeting. Docket No. 1 at 8, ¶ 31. Computershare would then issue the shares to the recipient named in the issuance letters (the "recipient"). Id. Most recipients sold the shares on the open market. Id. at 9, ¶ 32. Using this process, Mr. Mazzuto and Mr. Margulies caused the issuance of approximately 43 million shares of unrestricted IEAM stock between January 24, 2005 and January 16, 2008. Id. at 9, ¶ 31. On or about September 7, 2005, share issuances exceeded the Plan's 15 million limit on restricted shares. Id.

Plaintiff alleges that Computershare issued shares regardless of whether board minutes, counsel opinion, or other confirmation was attached to the issuance letters, which was in violation of the Agreement and Computershare's "extra-contractual duties." Id. at 8–9, ¶ 31. Plaintiff alleges that Computershare issued unrestricted, free-trading stock, which was contrary to the terms of the Plan, and that 70% of the recipients were ineligible to receive such shares under the Plan, either because they were entities or natural persons who did no bona fide work for IEAM. Id. Plaintiff asserts that IEAM relied on Computershare's expertise as a transfer agent to ensure that the stock issuances were proper pursuant to the Plan. Id. at 17, ¶ 60.

Plaintiff alleges that Mr. Mazzuto and Mr. Margulies caused IEAM shares to be issued pursuant to an illegal scheme (the "Mazzuto scheme") aimed at manipulating IEAM's stock price in order to...

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