Richmond v. American Systems Corp.

• Decision Date: 01 May 1992
• Docket Number: Civ. No. 91-1930-A.
• Citation: 792 F. Supp. 449
• Parties: Frederick J. RICHMOND, et al., Plaintiffs, v. AMERICAN SYSTEMS CORPORATION, et al., Defendants.
• Court: U.S. District Court — Eastern District of Virginia

792 F. Supp. 449

Frederick J. RICHMOND, et al., Plaintiffs, v.AMERICAN SYSTEMS CORPORATION, et al., Defendants.

Civ. No. 91-1930-A.

United States District Court, E.D. Virginia, Alexandria Division.

May 1, 1992.

Kenneth Carrington Bass, III, Venable, Baetjer and Howard, McLean, Va., for plaintiffs.

David Michael Sokolow, Washington, D.C., Ginger McGuffie, McGuffie & Handal, Vienna, Va., Mary Lou Soller, Miller & Chevalier, Chartered, Washington, D.C., Raymond Donald Battocchi, McLean, Va., Constantinos George Panagopoulos, Ballard, Spahr, Andrews & Ingersoll, Washington, D.C., for defendants.

MEMORANDUM OPINION

ELLIS, District Judge.

INTRODUCTION

Plaintiffs in this case are minority shareholders of a close corporation who sued the officers, directors, and controlling shareholders of the corporation in state court for alleged violations of state corporate laws establishing fiduciary duties directors, officers, and majority shareholders of close corporations owe minority shareholders and the corporation.Defendants removed to federal court.Now before the Court are plaintiffs' Motion to Remand and defendants' Motions to Dismiss.Central to the disposition of these motions is the question whether certain state law claims brought by minority shareholders of a close corporation against corporate directors and controlling shareholders are preempted by the federal Employee Retirement Income Security Act of 1974 (ERISA),88 Stat. 829, as amended, 29 U.S.C. § 1001 et seq.(1976 ed. and Supp. V).For the reasons elaborated here, the Court concludes that (i)defendant Artabane's Motion to Dismiss Count V must be granted; (ii) the remaining defendants' Motions to Dismiss Counts I-IV must be denied; (iii)plaintiffs' Motion to Remand must be granted as to Counts I-IV; and (iv) Counts I-IV must be remanded to the state court from which the case originated pursuant to 28 U.S.C. § 1441(c).

FACTS

Plaintiffs are minority shareholders of American Systems Corporation("ASC"), a close corporation organized and existing under the laws of the Commonwealth of Virginia.¹DefendantH. Thomas Curran("Curran") is the Chairman of ASC's Board of Directors, as well as its Secretary, Treasurer, and a controlling shareholder.DefendantForrest G. Ramsey, Jr.("Ramsey") is President, a Director, and the second controlling shareholder of ASC.Curran and Ramsey are the sole members of ASC's Board of Directors.ASC is a nominal defendant in this action in connection with derivative claims asserted on its behalf.DefendantJoseph A. Artabane is a party to this litigation in his representative capacity as Trustee of the ASC Employee Stock Ownership Trust ("ASC ESOT"), which is an employee benefit plan covered by ERISA.See29 U.S.C. § 1002.

The essential facts, as set forth in the complaint, are as follows.²Plaintiffs allege that Curran and Ramsey devised a plan to divert ASC corporate assets to their personal benefit through the creation of ASC ESOT.Specifically, in May 1990, Curran and Ramsey caused ASC to obtain a loan for sixteen million dollars from Sovran Bank to fund an employee stock ownership plan.The loan was secured by ASC assets and guarantees.Using the Sovran loan proceeds, ASC established ASC ESOT on May 23, 1990.As supplementary funding, ASC, at Curran's and Ramsey's direction, loaned ASC ESOT an additional two million dollars.On May 25, 1990, ASC ESOT used the eighteen million dollars from the Sovran Bank loan and the ASC loan to purchase ASC stock from Curran, Ramsey, and other insider shareholders, but not from plaintiffs.The stock purchase price, set by appraisal, was $144.75 per share.At the time of the appraisal, Curran and Ramsey allegedly knew or should have known that ASC was experiencing a multimillion dollar cost overrun as a result of a contract with the United States Air Force.They allegedly withheld this information from the appraiser, thereby allegedly causing the appraiser to over-value the stock.At no previous time had shares of ASC stock sold for more than $65.00 per share.According to plaintiffs, Curran and Ramsey personally selected the shareholders who would be permitted to sell ASC stock to ASC ESOT.In addition, plaintiffs claim that certain favored ASC employees were issued stock options that enabled them to purchase ASC stock for substantially less than the price at which they later sold the stock to ASC ESOT.Plaintiffs maintain that these stock option transactions significantly and unlawfully diluted plaintiffs' equity interests in ASC.

The result of Curran's and Ramsey's scheme, according to plaintiffs, was an unfair distribution of ASC's corporate assets.Specifically, the scheme resulted in the unfair distribution of corporate assets to fewer than all the shareholders of ASC, thereby substantially diminishing the value of plaintiffs' outstanding shares.ASC's financial statements distributed in November 1991 show that the book value of plaintiffs' stock following the stock sale to ASC ESOT was a negative number.In addition, plaintiffs claim that it would have been in ASC's best interests for ASC ESOT to purchase newly-issued stock instead of outstanding shares belonging to insider shareholders.In that way, the loan proceeds used to fund ASC ESOT would have become available to ASC to offset its financial burdens, burdens plaintiffs claim threaten ASC's existence.

Defendant Artabane was selected to administer ASC ESOT at the direction of an Administrative Committee composed of Mark J. Schuler, William E. Roberts, and Charles E. Sampson, each of whom is an ASC shareholder and officer and each of whose employment is controlled by Curran and Ramsey.The Administrative Committee acted under Curran's and Ramsey's direction, as officers and directors of ASC.Plaintiffs allege that Curran and Ramsey induced Schuler, Roberts, and Sampson to approve the creation and subsequent activities of ASC ESOT by enabling them to benefit personally through the sale of virtually all of their own ASC stock to ASC ESOT.Plaintiffs' allege that Artabane breached his fiduciary duty as trustee by failing to solicit a lower purchase price for the stock from plaintiffs.

Prior to initiating litigation, plaintiffs demanded that ASC seek independent counsel(i) to evaluate whether the Board of Directors had faithfully discharged its duties to the corporation in the establishment of ASC ESOT and (ii) to take appropriate corporate action.ASC rejected plaintiffs' demand and scheduled a shareholders' meeting on December 2, 1991, to consider a resolution to ratify the 1990 creation of ASC ESOT, despite the fact than no such ratification had been sought at the November 1990 shareholders' meeting.Plaintiffs thereafter filed this lawsuit.

Plaintiffs' complaint, initially filed in the Circuit Court of Fairfax County, Virginia, and thereafter removed to this Court, contains five counts.Count I alleges breaches of state common law fiduciary duties owed to plaintiffs as minority shareholders by Curran and Ramsey as controlling shareholders.Count II, a derivative claim, alleges a similar breach of Curran's and Ramsey's state law fiduciary duties owed to ASC.In Count III, also a derivative count, plaintiffs assert that Curran and Ramsey engaged in self-dealing in violation of state law.Count IV is a state law fraud claim.Count V is captioned "Illegal ESOP Transactions."The precise nature of these counts — whether they are state law claims, federal law claims, or mixed state and federal law claims — is disputed by the parties.Plaintiffs claim that the complaint raises purely state law claims intended to present the Virginia state courts with an opportunity to decide whether or not Virginia recognizes an "equal opportunity" doctrine for minority shareholders.Plaintiffs aver that while other states have adopted an "equal opportunity" doctrine, no reported Virginia opinion addresses the question.Defendants, on the other hand, argue that the complaint raises federal causes of action, or, in the alternative, raises state law causes of action that are so completely preempted by federal law as to require resolution in a federal forum.

Now before the Court are plaintiffs' Motion to Remand and Motions to Dismiss filed by Curran, Ramsey, ASC, and Artabane.

ANALYSIS

I.Removal Jurisdiction

The threshold issue is whether this Court has removal jurisdiction.If not, the inquiry ends, for the removal would have been illegitimate and a remand to state court would be required.On the other hand, if removal jurisdiction exists, the Court must then proceed to consider the other grounds of defendants' threshold attack.

Defendants removed this case under 28 U.S.C. § 1441, subsection (a) of which provides, in pertinent part:

Except as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or defendants, to the district court of the United States for the district and division embracing the place where such action is pending.

Thus, removal jurisdiction exists if this Court would have had original jurisdiction.That district courts have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States is axiomatic.³See28 U.S.C. § 1331.And whether a civil action arises under the laws of the United States and hence whether federal jurisdiction exists "is generally determined by the `well-pleaded complaint' rule."Childers v. Chesapeake & Potomac Tel. Co.,881 F.2d 1259, 1261(4th Cir.1989)(citations omitted).See alsoMetropolitan Life Ins. Co. v. Taylor,481 U.S. 58, 63, 107 S.Ct. 1542, 1546, 95 L.Ed.2d 55(1987)("It is long settled law that a cause of action arises under federal law only when the plaintiff's well-pleaded complaint raises issues of federal law.").Under the "well-pleaded complaint" rule, whether a cause of...