Weinberger v. American Composting, Inc.

• Decision Date: 09 April 2012
• Docket Number: No. 4:11CV00848 JLH,4:11CV00848 JLH
• Parties: RISA WEINBERGER, in her individual capacity, and on behalf of herself and all similarly situated shareholders of American Composting, Inc. PLAINTIFF v. AMERICAN COMPOSTING, INC.; and JAMES WILLITS DEFENDANTS
• Court: U.S. District Court — Eastern District of Arkansas

RISA WEINBERGER, in her individual capacity,and on behalf of herself and all similarly situatedshareholders of American Composting, Inc. PLAINTIFF

v.AMERICAN COMPOSTING, INC.; and JAMES WILLITS DEFENDANTS

No. 4:11CV00848 JLH

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF ARKANSAS WESTERN DIVISION

Dated: April 9, 2012

OPINION AND ORDER

Risa Weinberger brings this shareholder derivative suit on behalf of American Composting, Inc., against James Willits, American Composting's majority shareholder, alleging breach of fiduciary duty, breach of contract, and conversion. Weinberger also brings an individual action against Willits, alleging that Willits breached his fiduciary duty to her as a minority shareholder. American Composting has moved to dismiss Weinberger's shareholder derivative claims under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief may be granted. American Composting argues that Weinberger has failed to allege with sufficient particularity that a pre-lawsuit demand upon American Composting would have been futile. For the following reasons, the Court denies the motion.

I.

In ruling on a motion to dismiss, the Court must accept as true all factual allegations in the complaint and review the complaint to determine whether its allegations show that the pleader is entitled to relief. Schaaf v. Residential Funding Corp., 517 F.3d 544, 549 (8th Cir. 2008). All reasonable inferences from the complaint must be drawn in favor of the nonmoving party. Crumpley- Patterson v. Trinity Lutheran Hosp., 388 F.3d 588, 590 (8th Cir. 2004). The Court need not,however, accept as true legal conclusions, even those stated as though they are factual allegations. Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 1949-50, 173 L. Ed. 2d 868 (2009).

II.

The following facts are taken from Weinberger's amended complaint and the documents attached or referenced therein. Document #14.¹

American Composting is a domestic corporation organized under Arkansas law. Practically speaking, American Composting has two shareholders, Willits and Weinberger. Willits owns 51 percent of American Composting's outstanding shares, serves as the company president, and is responsible for all aspects of the company's management and operation. Weinberger owns 24.5 percent of American Composting's outstanding shares and controls another 24.5 percent in her position as the sole trustee for her children. Weinberger has never held any managerial or other position of responsibility or employment with American Composting.

After receiving American Composting's tax returns and other financial documents in 2009 and 2010, Weinberger became concerned that Willits was mismanaging the company and using corporate funds for his personal benefit. Weinberger requested various financial statements and other information from Willits, who did not fully cooperate with the requests. Weinberger then called a special American Composting shareholders' meeting, which was held on July 1, 2010. At and afterthe meeting, Weinberger requested that Willits provide certain corporate records. Some, but not all, of the records were provided.

Weinberger submitted the various records that she did obtain to her accountant, who discovered that multiple cash disbursements had been made from American Composting's corporate bank accounts for Willits' benefit. The disbursements included payments to Willits' ex-wife totaling $283,068.48, and payments to the law firm that represented Willits in his divorce totaling $145,789.26. The documents showed a "Loans to Shareholders" balance that increased from $21,075 in 2004 to $444,642.68 by September 9, 2011. The only loan evidenced by a promissory note was a loan in the amount of $37,000, and Willits was not repaying that loan according to the terms of the note. The records demonstrated that only $2,500 had been repaid from the loans, and that there were no specific repayment plans or collateral presented in return. Weinberger alleges that these loans are shams and that Willits has used corporate funds for his personal benefit.

On August 30, 2011, Weinberger's counsel sent a letter to Willits' counsel with a draft complaint detailing, among other things, potential shareholder derivative claims. While Willits provided a substantial number of documents in response to the letter, and he cooperated regarding various stock transfers in question, he did not provide any solution or relief as to the alleged misuse of corporate funds. After the letter was received, Willits acknowledged through his counsel that the corporate funds had been used for his divorce-related issues and stated that he intended to present a repayment plan to American Composting's board of directors.

Around November 4, 2011, Weinberger received a letter from Willits' counsel giving notice of a special American Composting shareholders' meeting to be held on November 15, 2011. Willits stated in the letter that issues to be considered at the meeting were amendment of AmericanComposting's articles and by-laws and election of directors. Specifically, the letter stated that Willits would nominate David Steinmetz and Mark Perry to "fill the two empty positions of director." Willits added that the "intent of the expansion of the board of directors is to elect independent members . . . who may immediately continue the investigation of allegations by a shareholder that the Corporation has claims against the current director, James R. Willits, and to direct the operations of the Corporation in the future." Neither Steinmetz nor Perry was employed by American Composting, although Weinberger believes that Perry has sold insurance products to American Composting. At the November 15 meeting, Willits voted all his shares in favor of the amendments and two new directors, guaranteeing their success, while Weinberger voted her shares against these actions. Perry and Steinmetz were elected, and the amendments passed. According to Weinberger, the amendments: (1) enabled the two new directors to be elected at a special meeting rather than an annual meeting; and (2) allowed the corporation to take action without a meeting at all, and without Weinberger's consent, as had previously been required.

Two weeks later, at the end of November, Weinberger filed her original complaint with this Court. In the complaint, Weinberger alleged that the actions taken at the November 15 meeting had no legitimate business purpose, were not taken in good faith, and were purely an attempt to avoid the lawsuit. Thus, she alleged, "since Willits is both the party accused of wrongdoing against the corporation as well as the individual who completely controls the corporation, the requirement of a pre-suit demand should be excused as futile . . . ."

On January 12, 2012, Weinberger filed her amended complaint in this action, alleging many of the same claims and facts as the first complaint. Weinberger states in her amended complaint that she "has made no demand on the board of directors of [American Composting] to pursue the claimsasserted herein" because such a demand would be futile. To support her claim of demand futility, Weinberger alleges as follows:

52. Given the timing of the noticed special meeting . . .Weinberger believes that the actions taken . . . have no legitimate business purpose, were not taken in good faith, and are instead measures taken by Willits to attempt to avoid this lawsuit and to avoid liability for misappropriating corporate funds for his personal use and benefit;

53. Specifically, Weinberger believes that Willits installed Perry and Steinmetz for the purpose of creating the facade of an "independent" board of directors in order to overcome the futility exception to the demand requirement for derivative litigation, as demand would clearly be excused as futile if there were no persons other than the wrongdoer Willits who had at least official legal authority over the affairs of the corporation;

54. Regardless, as majority shareholder Willits could at any time reverse any action taken by Perry and Steinmetz by removing them from office under Ark. Code Ann. § 4-27-808, so they do not insulate the corporation from Willits' complete control, or create any buffer between Willits and any decision of [American Composting] as to whether to pursue litigation against Willits;

55. Since Willits as controlling majority shareholder can ultimately dictate the course of [American Composting] as to all of its affairs, including any decision it would make as to Weinberger's claims, any decision by Perry and Steinmetz not to pursue the lawsuit would be tainted by the realities that they were unilaterally elected by the vote of Willits, and that Willits had the power to dictate that result by removing them from office and reversing their decision if they had decided otherwise;

56. Similarly, even if Perry and Steinmetz did vote to pursue Weinberger's claims, Willits could immediately remove them from office and reverse their decision;

57. In short, regardless of the appointment of Perry and Steinmetz or how "independent" they would otherwise be, the wrongdoer Willits unilaterally elected them to the board, and still ultimately has the unfettered ability to decide whether [American Composting] will pursue Weinberger's claims in litigation against himself;

Document #14, at 8-9.

It is over the legal sufficiency and particularity of this specific language, and Weinberger's allegations in general, that the present dispute lies. American Composting argues that Weinberger has failed to allege sufficiently that a pre-lawsuit demand upon American Composting to take legalaction would have been futile, as is required by Ark. Code Ann. § 4-27-740 and Federal Rule 23.1. American Composting specifically contends that Weinberger does not allege with sufficient particularity or facts why the American Composting board of directors is not disinterested or independent. Weinberger argues the opposite: that her...