Robertshaw v. Pudles, CIVIL ACTION NO. 11-7353

• Decision Date: 05 August 2013
• Docket Number: CIVIL ACTION NO. 11-7353
• Parties: BARBARA ROBERTSHAW v. GARY PUDLES, et al.
• Court: U.S. District Court — Eastern District of Pennsylvania

BARBARA ROBERTSHAW

v.GARY PUDLES, et al.

CIVIL ACTION NO. 11-7353

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

AUGUST 5, 2013

O'NEILL, J.

MEMORANDUM

This case arises out of an allegedly improper shareholder distribution which plaintiff Barbara Robertshaw asserts breached a shareholder agreement between her and defendant Gary Pudles.¹ The complaint was amended after approximately a year of discovery and now Robertshaw asserts eight claims against three defendants: against defendant Gary Pudles there is one claim for breach of contract, one for breach of fiduciary duty, one claim for common law fraud and a shareholder derivative action; against defendant Betty Babjak, the secretary and general counsel of Answernet, the corporation which is at the center of this dispute and that Pudles and Robertshaw were each large shareholders in, there is claim for breach of fiduciary duty and a claim for fraud; and against defendant Answernet, there is a claim for violation of § 219 of the Delaware General Corporations Law and a request for various forms of declaratory relief. Am. Compl., Dkt. No. 86. Robertshaw's request for declaratory relief emanates from what has become perhaps the heart of this case: a dispute over the exercise of various stock warrant rights and the control of Answernet. Pudles has also asserted a counterclaim for abuseof process. Dkt. No. 22. Jurisdiction is based on diversity of citizenship. Dkt. No. 86 ¶¶ 1-6. On April 23, 2013 I held a bench trial which lasted for four days. I received post-trial briefs on June 4, 2013 and held oral argument on June 19, 2013 and June 24, 2013. Pursuant to Federal Rule of Civil Procedure 52(a) and after review of the evidence presented and applicable law, I make the following findings of fact and conclusions of law.

FINDINGS OF FACT

I. The Capital Structure of Answernet

Answernet, a business that provides call center services, was incorporated in Delaware in 1998. Trial Tr. April 25, 2013 50:3-5 (Pudles); Trial Tr. April 23, 2013 7:4-7 (Robertshaw); A3² p. 7. When a fledgling Answernet desired external financing, it turned to a number of outside entities, namely Waterside Capital, Ben Franklin/Progress Bank, and Progress Capital Bank, which each took warrants from Answernet in exchange for cash loans. Trial Tr. April 25, 2013 56:8-57:4 (Pudles). As of May 19, 2000, the shareholders of Answernet were as follows:

• Gary Pudles (150,000 shares of common stock),

• Barbara Robertshaw (150,000 shares of common stock, warrant to purchase 3,959.03 shares of common stock),

• Progress Capital Bank (warrant to purchase 18,148.02 shares of common stock),

• Waterside Capital Corp. (warrant to purchase 69,837.37 shares of common stock),

• Ben Franklin/Progress Capital (warrant to purchase 27,493.3 shares of common stock)

• Michael Pudles (warrant to purchase 3,959.03 shares of common stock).

DX4 p. 15.³ This represents "all of the equity that has ever been authorized" by Answernet, Trial Tr. April 25, 2013 55:22-23 (Pudles), though the parties hotly contest the current ownership status of a substantial percentage of these shares. This section traces the ownership of the disputed shares and the rights of the various current Answernet shareholders.

A. Michael Pudles's Warrants for 3,959 Shares of Answernet

On May 17, 2000, Michael Pudles, Pudles's father, wrote a letter to Pudles to confirm his ownership of 3,959 warrant shares in Answernet. DX175 p. 14. Michael Pudles received these warrants in exchange for an investment in the company of $50,000 in May 2000. Id. at 11, 13.

B. Barbara Robertshaw's Warrants for 3,959 Shares of Answernet

Also on May 17, 2000, Robertshaw wrote a letter to Pudles to confirm her ownership of 3,959 warrant shares in Answernet. Id. at 15. Robertshaw received these warrants in exchange for an investment of $50,000 in May 2000. Id. at 11.

C. The Progress Capital Warrants

On October 15, 1998, Answernet and Progress Capital⁴ entered into a common stock purchase agreement that provided: "for good and valuable consideration . . . [Progress Capital], its successors and assigns are entitled to purchase from [Answernet] [18,148] . . . [shares of Answernet common stock]." H1 p. 49; see also DX175 p. 16.⁵ This warrant contract contained the following relevant provisions. Section 2, titled "Exercise of Warrant," provided that the

warrant may be exercised by the holder of this warrant . . . by presentation and surrender of this warrant to the company together with the annexed exercise form duly completed and executed . . . Upon [Answernet's] receipt of this warrant the completed and signed exercise form and the requisite payment the company shall issue and deliver to the exercising holder stock certificates. . . .

Id. at 56 (section 2a). Section 3, titled "Warrant Register, Exchange, Transfer, Loss, Etc.," provided that

this warrant from time to time may be transferred in whole or in part by the holder or any duly authorized representative of such holder. A transfer may be registered with the company by submission to it of this warrant together with the annexed assignment form duly completed and executed. . . . [A]fter the company's receipt of this warrant and the assignment form so completed and executed the company will issue and deliver to the transferee a new warrant representing the portion of the exercise quantity transferred . . . and otherwise having the same terms and provisions as this warrant which the company will register in the new holders name. . . . [U]pon the due delivery of this warrant for transfer the transferee shall be deemed for all purposes to have become the holder of the new warrant issued.

Id. at 57-58 (section 3c).⁶ Further, Answernet "shall not be bound by any notice or other communication asserting any change in ownership of this warrant other than through a request to register transfer in accordance with subsection c." Id. at 58 (section 3d).

Regarding lost warrants, the agreement provided that

in the event of the loss, theft or destruction of this warrant the company shall execute and deliver an identical new warrant to the holder in substitution therefor upon the company's receipt of evidence reasonably satisfactory to the company of such event (with the affidavit of an institutional holder being sufficient evidence).

Id. at 58 (section 3e). Finally, section 4, entitled "Surrender of Warrant, Expenses, Etc." provides that "upon the surrender of this warrant in connection with any exercise exchangetransfer or replacement, this warrant shall be promptly canceled by [Answernet]." Id. at 59 (section 4c).

D. The Waterside Warrants

On July 20, 1999, Answernet issued Waterside Capital Corporation (WSCC) a warrant for 18% of the common stock of Answernet. H27 p. 1. The warrant contained the following provisions regarding exercise, specifying that this "Warrant may be exercised by the Holder (but only on the following conditions) . . . on delivery of written notice of intent to exercise to [Answernet] . . . together with this Warrant and payment to [Answernet of the aggregate Exercise Price of the Shares so purchased.]" Id. at 1-2. The exercise price was $.01 a share. Id. at 1. The warrant also contained the following provisions:

On exercise of this Warrant, [Answernet] will . . . execute and deliver to the Holder a certificate . . . for the total number of whole Shares for which this Warrant is being exercised. . . . If this Warrant is exercised [for] less than all of the Shares, the Holder is entitled to receive a new warrant covering the number of Shares in respect of which this Warrant has not been exercised . . . .

Id. at p. 2. Regarding transfer and assignment, section five of the warrant provided that the warrant

may be transferred by the Holder on presentation of this Warrant to [Answernet] with written instructions for such transfer. On such presentation for transfer [Answernet] will promptly execute and deliver a new Warrant . . . in the name of the assignee . . . and in the denominations specified in such instructions.

Id. at p. 3. There were several transactions involving this 18% share in Answernet which I will now describe in turn.

1. The First Waterside Warrant Transaction (WSCC 1)

On March 27, 2003, Waterside assigned 75.75% of its interest in Answernet to Executel Communications. See H6 p. 1.⁷ Barbara Robertshaw is the sole owner of Executel and Bill Robertshaw is its president. Robertshaw Post-trial Br., Dkt. No. 164, p. 2-3; Trial Tr. April 23, 2013 52:6-17 (Robertshaw). This first warrant assignment granted Executel the right to acquire 12.5% of Answernet common stock, which was calculated at 52,899 shares. H6 p. 1. The purchase price paid by Executel for the assignment was $1,566,000. Id.

The assignment also contained the following option:

In consideration of the payment of $5,000 in readily available funds at closing, [WSCC] hereby grants [Executel] an option to purchase and a right of first refusal . . . on [75%] of [WSCC's] remaining warrant rights . . . . If exercised immediately, under Answernet's current capitalization, the Options Warrants could be exercised to acquire [3%] or 12,702 shares of Answernet's common stock. The option shall expire . . . on April 30, 2006. Assignee may exercise its Option upon written notice delivered to [WSCC]. . . . If [Executel] fails to exercise its option . . . WSCC shall be free to sell the option warrants, subject only to the restriction that such sale must close within 45 days of the expiration of the Exercise period. . . . [T]he exercise price for the Option Warrants shall be $376,000 . . . .

Id. at 1-2.

On September 3, 2003, Martin Speroni of WSCC wrote to Bill Robertshaw regarding a "small discrepancy in the number of shares under the warrant that [WSCC] sold [Executel]" and clarified that the warrant could be exercised for 52,900 shares of Answernet common stock. DX175 p. 21. Pudles responded via email with the further clarification that Executel would actually own only...