ROBERTSHAW v. PUDLES et al
Filing
175
MEMORANDUM AND/OR OPINION. SIGNED BY HONORABLE THOMAS N. ONEILL, JR ON 8/5/2013. 8/5/2013 ENTERED AND COPIES E-MAILED.(tomg, )
<![CDATA[
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
BARBARA ROBERTSHAW
v.
GARY PUDLES, et al.
:
:
:
:
:
O’NEILL, J.
CIVIL ACTION
NO. 11-7353
AUGUST 5, 2013
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 abuse
1
Unless otherwise noted, references to Robertshaw refer to Barbara Robertshaw.
References to her father, William (Bill) Robertshaw, also a key figure in this suit, will note his
first name. References to Pudles refer to Gary Pudles. His father, Michael Pudles, also plays a
role in this suit, and references to Michael Pudles will be made by his full name.
of 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); A3 2
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).
2
References to the trial exhibits in this case will be made as follows: defendants’ exhibits
all are labeled DX and identified by number (e.g., DX175); plaintiff’s exhibits have been divided
by plaintiff into alphabetical categories and then identified by number (e.g., A3, H12).
2
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 Capital 4 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
3
This document, an early Answernet “Shareholder Agreement,” appends a chart that lists
the shareholder interests in the company. The total outstanding shares in Answernet, counting
the warrants, per this document is 423,396.75. DX4 p. 15.
4
The record evidence refers to this entity at times as Progress Capital, at other times as
Progress Bank and sometimes as simply Progress. Reference to any of those three terms refers
to the Progress Capital warrants created by H1.
5
The warrant was set to expire if not exercised on or before October 15, 2008. H1 p. 55.
3
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 exchange
6
See also H1 p. 90 (blank assignment form).
4
transfer 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)
5
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 12.49% of Answernet. Id. at 22. Sometime in the fall of 2003, Answernet
7
The WSCC assignment to Executel also contains a choice of law provision selecting
Virginia law to resolve questions of validity, construction and enforcement, H6 p. 5, and a forum
selection clause naming the state and federal courts of Norfolk, VA as the forum for any
proceeding arising from or related to this assignment. Id. at 3-4. No party has raised this issue
and I consider it waived.
6
issued a stock purchase warrant to Executel for 12.494% of the shares of Answernet; the stock
purchase warrant contains handwritten modifications made by Pudles, clarifying that Executel
had a right to purchase only 12.494% of Answernet common stock, rather than 12.5% (the
percentage conveyed in the assignment from WSCC to Executel). H7 p. 1. Though the exact
date is unclear, Executel completed its purchase of 52,900 shares in the fall of 2003, see H7;
Trial Tr. April 23, 2013 12:22-13:10 (Robertshaw), and Answernet issued a share certificate to
Executel for that number of shares. H12. The document that Pudles asserts is the Answernet
capitalization table supporting chart (“the share transfer ledger”), which ostensibly recorded all
of the transactions involving warrants and shares from Answernet’s inception, also displays an
entry in September 2003 for the assignment from WSCC to Executel of the warrant rights to
52,900 shares, as well as an entry for the conversion of those warrants into common stock, also
in September 2003. DX175 p. 8. 8 That Executel purchased the assignment of these warrants,
exercised the warrants and owns these shares is not in dispute. The parties vigorously contest,
however, the disposition of the balance of WSCC’s interest in Answernet.
2.
The Second Waterside Warrant Transaction (WSCC 2)
As noted above, when Executel purchased the WSCC 1 warrants, it also acquired an
option to purchase an additional 3% of Answernet’s stock. H6 p. 1-2. Executel notified WSCC
of its intent to exercise this option in 2006 by letter from William Robertshaw to Alan Lindauer,
stating that it was Executel’s “intent to sell the Option Warrants to Gary Pudles and Barbara
8
This document was part of a large packet of documents gathered by Babjak and
compiled by the Mitts Firm, a law firm retained by Answernet, for a meeting with F. Emmett
Fitzpatrick, Robertshaw’s lawyer, in fall 2011. Trial Tr. April 25, 2013 10:14-11:11; 32:4-33:7
(Babjak). It is also referred to in testimony and record evidence as the share transfer ledger.
Trial Tr. April 25, 2013 156:5-9 (Pudles). The share transfer ledger, DX175 p. 8-9, as well as
the Answernet capitalization table, id. at 6, were created and maintained by Pudles. Trial Tr.
April 25, 2013 156:5-157:22 (Pudles).
7
Robertshaw (or their assigns) immediately following this transaction.” H30. The letter enclosed
a check for $376,000 from Executel to WSCC. Id.; H32; DX26.
Preceding the transmission of the warrant option exercise letter from Executel to WSCC,
Pudles wrote an email on February 2, 2006 to the Robertshaws attaching a draft of the warrant
option exercise letter and describing how the transaction would be funded:
my plan is to pay $250,000 out of Cerida 9 (which will be shown as
a distribution to Barbara and me of $125k each) and then write a
personal check for $65,500. We will need an equal check from
Barbara for the $65,500. This will total $381k ($376k for the
warrants plus 5$ [sic] for the option).
H28. The record reveals that this funding plan was enacted. A check dated February 8, 2006 for
$250,000 was sent from Cerida to Executel with the notation “shareholder distribution” for
Pudles and Robertshaw for $125,000, DX23, and both Pudles and Robertshaw sent personal
checks for $65,500 to Executel in February 2006. DX24; DX25. 10
On March 16, 2006, Pudles wrote to Alan Lindauer at WSCC with respect to this
transaction. H33. He stated that he and Robertshaw were “extremely concerned that Answernet
has not received any request from Waterside regarding the issuance of a new warrant related to
Barbara and my personal purchase of Executel’s Option Warrants. We made our payment over a
month ago and Waterside has not taken any action to deliver the shares . . . .” Id. In response,
Martin Speroni of WSCC wrote:
9
Cerida was a company owned by some combination of Pudles and the Robertshaws. It
is unclear what the respective ownership shares were. Pudles testified that he owned 50% of
Cerida and either Barbara or the Robertshaws together owned the other 50% (though the
Robertshaw’s respective ownership shares are not in the record). Trial Tr. April 25, 2013 84:2085:8 (Pudles). Robertshaw, however, testified that she “own[s] half of [Cerida] along with
[Pudles]. Trial Tr. April 23, 2013 90:11-13 (Robertshaw). As will be detailed further below,
Cerida’s ownership of various Answernet warrant rights is a key issue in this case.
10
Cerida consolidated financial statements for the years 2006 and 2007 show a notation
for a distribution of $250,000 for “Investment in [Answernet] warrants” in 2006. DX88 p. 13.
8
If you please, go [ahead] and have Answernet issue the two
separate warrants (3% and 1%), so we may send one and keep the
other. Executel exercised its rights and now owns the 3% warrant,
and so if you want to issue it in that name that would be ok with
us—or any other name, for that matter, that Executel is ok with
accepting. Please be sure to stick to the language, so that only the
numbers “4%” to “3%” and “1%” are changed.
Id.
Seemingly in response to the Speroni email, on March 20, 2006, Answernet issued two
warrants, one to Barbara Robertshaw for 6,351.5 shares of Answernet (or one half of the three
percent for which Executel had bought the option), and the other to WSCC for its remaining 1%
interest in Answernet. 11 Trial Tr. April 23, 2013 68:22-72:20 (Robertshaw); DX29. However,
while Robertshaw maintains the assignment of the issuance of the warrant from Answernet to her
was valid, Trial Tr. April 23, 2013 71:17-72:6 (Robertshaw), she also conceded that she never
exercised the warrant. Id. at 72:15-20 (“[Its] expiration [date] came and went.”); see also DX29
p. 8 (“This Warrant will [be] exercisable in whole or in part at any time . . . until July 20, 2009”).
Pudles insists that WSCC “rejected” the warrant dated March 20, 2006 that had been
reissued to WSCC because the warrant stated a certain number of shares rather than a percentage
(though it did also state WSCC’s remaining interest as a percentage of Answernet). Trial Tr.
April 25, 2013 79:25-80:21 (Pudles); DX29 p. 1. He points to an email written by Speroni on
March 20, 2006 to Pudles and the Robertshaws in which Speroni discusses the issue:
As you know the issue of inserting the current number of shares
that the warrant represents has been discussed and rejected by
Waterside. . . . Please re-issue the 1% warrant with the agreed
upon language it now has, except that instead of saying “from 18%
to 4%” it should read “from 18% to 1%.” The rest of the language
should be unaltered.
11
Each of these two new warrants has language regarding exercise and transfer of the
warrant rights that is substantially the same as the language in the corresponding sections from
the original WSCC warrant. Compare H27 p. 1-2 with DX29 p. 3-4, 8-10.
9
DX398. His email continued with a line directed specifically to Barbara Robertshaw: “Please let
me know if it is ok with you (Executel) to have the 3% warrant issued directly to you by
Answernet.” Id. Pudles also testified that, as a result of his further communications with WSCC
regarding this issue, he produced a new warrant for Waterside’s remaining 1%, but never
reissued a warrant for the other 3% because “by the time we resolved the issue with Waterside,
Bill [Robertshaw] and I had agreed that we were going to take the warrant in Cerida. So I never
created another actual warrant document for Cerida, because Cerida, you know, was us [, i.e.,
owned 50% by Pudles and 50% by the Robertshaws].” Trial Tr. April 25, 2013 84:20-85:8
(Pudles). 12 In the record there is also an internal Answernet memorandum prepared by Babjak
which reads: “Executel’s option for 3% of Waterside’s 4% warrant was assigned to Cerida; the
warrant was exercised and paid in full. Per conversation with [Gary Pudles] 5/22/08.” Trial Tr.
April 24, 2013 79:18-80:16 (Babjak); DX79. Finally, there is a notation in the Answernet share
transfer ledger indicating that a transaction for 12,704 shares between Cerida and Waterside took
place in June 2006, DX175 p. 8, but there is no notation referencing a transfer between Executel
and Cerida.
3.
The Third Waterside Warrant Transaction (WSCC 3)
Pudles also claims that Cerida bought WSCC’s remaining 1% interest in Answernet in
May 2007. In an email dated April 30, 2007, Speroni wrote to Pudles describing the contours of
the deal for the remaining Waterside warrants: “As per our conversation. Answernet buys the
WSCC 1% for $250k. Cash by Friday 5/4/07. Full and mutual release on Answernet.” DX62.
12
Bill Robertshaw disputed this contention in his own testimony, stating that there was
never an agreement to assign any warrants from WSCC to Cerida. Trial Tr. April 26, 2013
110:21-23 (Bill Robertshaw). Additionally, Barbara Robertshaw testified that she “own[s] half
of [Cerida] along with [Pudles]. Trial Tr. April 23, 2013 90:11-13.
10
That same day Pudles forwarded Speroni’s email to the Robertshaws and wrote that the deal was
“subject to your approval.” Id. Robertshaw responded on that same day: “That is ok with me.”
DX63; Trial Tr. April 25, 2013 96:10-25 (Pudles). However, the agreement subsequently went
through some modifications before the transaction was finalized; as Pudles testified,
when we got the agreement, I forwarded the agreement . . . with a
letter that I sent in [defendant’s exhibit] 65. And I forwarded the
agreement with notes to Barbara and Bill Robertshaw, telling them
of my plans to modify the agreement. I then made the
modifications, sent that modified document to . . . the lawyer for
Waterside, and Martin Speroni, and then forwarded that document
with my -- essentially my suggested changes, because they hadn't
been adopted yet, to Bill and Barbara Robertshaw. . . . I then got
that document back from [WSCC’s counsel] and forwarded . . .
the completely signed document to the Robertshaws.
Trial Tr. April 25, 2013 97:13-25 (Pudles). 13
On May 3, 2007, WSCC’s counsel emailed Pudles a release agreement signed by WSCC
regarding the transaction for the remaining 1% and said that “once I have received all original
signatures to the Release Agreement and the Purchase Price from Answernet, I will release the
original documents and funds from escrow, [and transfer] the purchase price to [WSCC.]” DX65
p. 1-2. 14 On May 4, 2007, Pudles forwarded the email regarding the release agreement from
WSCC’s counsel to the Robertshaws and wrote:
I have modified the agreement, signed the agreement and sent
payment to them out of Cerida. I paid it out of Cerida because [it]
13
Apparently it was Pudles’s practice to make modifications to signed agreements in the
hopes that they would be ratified by the counterparty: “[T]hat was our practice with Waterside.
That was my practice with Waterside and Waterside’s practice back to me, which was, do an
agreement that you would hope would get through, and sign it, and hopefully they would just -you know, the other side would sign it.” Trial Tr. April 25, 2013 94:1-7 (Pudles).
14
In this email WSCC’s counsel also surrendered a stock certificate for 700 shares of
preferred stock in Answernet which WSCC still possessed as well as the new warrant it was
issued in October 2003 following its transaction with Executel (WSCC 1). DX65 p. 1 (attaching
scanned copies of documents referred to in this email) (emphasis added).
11
had the cash and so that the acquisition of these shares are equal
between the Robertshaws and me. If we purchased them through
Answernet, we would have increased the disparity of ownership
between me and the Robertshaws further by .13%.
If you want us to take ownership of these shares personally instead
of through Cerida that is fine. At this point we simply increased
the Cerida [i]nvestment in Answernet and that will be reflected on
the Cerida Balance Sheet. If you would prefer to own these
warrants individually, we can simply reclassify the payment from
Cerida as an equal distribution to us personally and then own the
shares individually. Let me know your preference.
DX65 p. 1. The release agreement between WSCC and Answernet has several handwritten
modifications, initialed by Pudles, that are described in his May 4, 2007 email to the
Robertshaws. DX64. Of prime importance is that Cerida rather than Answernet purchased the
warrants under the agreement as unilaterally modified by Pudles.
Pudles altered two clauses to reflect the change in purchaser. The first initially read:
“whereas Answernet desires to close out [WSCC’s] investment by purchasing the Warrant from
Waterside for a price of $250,000.” Id. at 1. However, Pudles, as he describes in his email,
crossed out the word “purchasing” and replaced it with “allowing Cerida to purchase.” Id. The
second change is on the same page; the clause initially read: “Answernet shall pay or cause to be
paid to Waterside by wire transfer or other immediately available funds the sum of [$250,000] no
later than May 4, 2007.” Id. Pudles crossed out “pay” and “be paid” and replaced it with
“Cerida to pay” so the sentence now begins “Answernet shall cause Cerida to pay
Waterside . . . .” Id. There is no evidence in the record that the Robertshaws reviewed these
modifications before Pudles signed and transmitted the release to Waterside.
The agreement also contains the following clause which Pudles relies on in support of his
contention that Cerida was also the owner of the warrants for the 3% interest in Answernet
(WSCC 2):
12
whereas Waterside invested in Answernet pursuant to . . . Stock
Purchase Agreements dated July 20, 1999 and February 29, 2000,
and a Stock Purchase Warrant dated July 20, 1999 and
subsequently reissued in October 2003 for four percent of
Answernet’s common stock and then sold to [Cerida] as to three
percent of Answernet’s common stock so that Waterside’s
remaining warrant rights apply to one percent of Answernet’s
common stock . . . .
DX64 p. 1. On May 7, 2007 Pudles emailed the Robertshaws with a breakdown of the
ownership of Answernet in which he asserted Cerida owned 62,579.7 shares, or 14.78 percent of
the company. DX67. Cerida financial statements for 2007 show a notation for a distribution of
$250,000 for “Investment in [Answernet] warrants” in 2007. DX88 p. 13.
E.
The Ben Franklin/Progress Capital Warrants
On May 19, 2000 Ben Franklin/Progress Capital Fund (BF/PC) and Answernet entered
into a contract providing that in exchange for BF/PC giving Answernet $500,000, Answernet
issued a warrant to BF/PC to purchase 27,493.3 shares of the company. H3 p. 1, 23. 15 The
warrant to purchase Answernet stock contained several relevant provisions. Article II contained
detailed specifications regarding the exercise of the warrant including:
Section 2.02(a): The warrant holder may exercise this warrant, in
whole or in part, upon surrender of this Warrant with the form of
exercise attached hereto duly executed, to [Answernet] . . . together
with the full warrant price for each share of common stock.
(b) Upon receipt of this warrant with the form of exercise duly
executed and accompanied by payment of the aggregate warrant
price for the shares of common stock for which this warrant is then
being exercised, [Answernet] will cause to be issued certificates
for the total number of whole warrant shares (as provided in
section 4.04 hereof) for which this warrant is being exercised in
such denominations as are required for delivery to the warrant
holder, and [Answernet] shall thereupon deliver such certificates to
the warrant holder or its assignee.
15
The warrant was set to expire on May 19, 2010 if not exercised on or before that date.
H3 p. 1.
13
Id. at 24. The BF/PC warrant also contained several provisions with respect to its transfer or
assignment:
Section 2.04. . . . Subject to the foregoing transfer restrictions set
forth in this Section 2.04, this warrant is transferable, in whole or
in part, on the books of [Answernet], upon surrender of this
warrant to [Answernet], together with a written assignment duly
executed by the holder.
...
Section 6.02. Any assignment permitted hereunder shall be made
by surrender of this warrant to [Answernet] at its principal office
with the form of assignment attached hereto duly executed. . . . In
such event [Answernet] shall, without charge, execute and deliver
a new warrant in the name of the assignee named in such
instrument of assignment and this warrant shall promptly be
canceled.
...
Section 8.06. Any term of this warrant may be amended and the
observance of any term of this warrant may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with written consent of [Answernet and],
BF/PC if it is still a holder of any Registrable Securities and the
holders of at least a majority of the Registrable Securities that have
not been registered and are held by holders who are not employees,
officers or directors of the company.
Id. at 26, 33, 40; see also id. at 44 (blank assignment form). Article IV, titled “Other Provisions
Relating to Right of Warrant Holder,” specified the following:
Section 4.02. If this warrant is lost, stolen, mutilated or destroyed,
[Answernet] shall, on such reasonable terms as to indemnity or
otherwise as it may impose (which shall, in the case of a mutilated
warrant, include the surrender thereof), issue a new warrant of like
denomination and tenor as, and in substitution for, this warrant,
which shall thereupon become void. No bond shall be required.
Id. at 31. Article V clarified that
Section 5.01: Prior to due presentment for registration of transfer
of this warrant, [Answernet] may deem and treat the warrant
holder as the absolute owner of this warrant (notwithstanding any
notation of ownership or other writing hereon) for the purpose of
14
any exercise hereof and for all other purposes, and the company
shall not be affected by any notice to the contrary.
Id. at p. 32.
II.
Documents Relating to the Assignment and Exercise of Warrants by Cerida
and Gary Pudles
Pudles claims that Cerida at some point came into possession of the warrants for the
Progress Capital, BF/PC, and WSCC 2 and WSCC 3 shares. He also claims that he personally
came into possession of the Michael Pudles shares. In support of these contentions, he points to
the following record evidence, which relates to the assignment and exercise of warrants by
Cerida or, as to the Michael Pudles shares, him personally. In September 2003, Martin Speroni
of WSCC sent a letter to Bill Robertshaw regarding the details of the WSCC-Executel
transaction (WSCC 1); attached to the letter is a chart which Speroni explains reflects his
“current understanding of the common stock and warrant status in [Answernet].” DX175 at p.
23. The chart has three tables, labeled “Pre Executel Transaction,” “Post Executel Transaction”
and “Post Executel transaction and Executel warrant exercise” which each reflect an entry
naming Progress/Cerida as a shareholder of Answernet. DX175 at p. 25. However, each entry
for Progress/Cerida has a notation stating that “[t]his transfer is in dispute.” Id.
By 2007, the relationship between Pudles and the Robertshaws had seemingly become
more contentious. In February 2007 Pudles wrote an email to Robertshaw with a subject line of
“stock issues” in which he wrote that over the last two weeks he had had a chance to “review all
of the corporate documents and agreements. It turns out that my previous understanding of the
capital table may have been wrong.” DX40 p. 1. He then attached “the current [Answernet]
15
capitalization table based on transactions that have occurred.” Id. 16 The attached table shows
that Cerida owns warrants for 58,345 shares of Answernet. Id. at 3. 17 In this email Pudles also
discussed his review of the “Progress Bank warrants (now owned by Cerida).” Id. at 1. 18 In
addition to the attached capitalization table, Pudles attached the Progress Bank warrant. Id.; see
also DX399. Robertshaw forwarded this attachment to her father and her attorney. DX399;
Trial Tr. April 25, 2013 90:3-10 (Pudles).
16
This email also alludes to ongoing acrimony between Pudles and Robertshaw. Pudles
writes that he is “really committed to working towards allowing you to exit the company as soon
as possible. . . . I wish I was able to buy you out personally with a single check but as you know
this isn’t possible. However, I am meeting with a number of people on Tuesday so getting your
‘number’ by Monday afternoon would be helpful.” DX40 p. 1. The email goes on to describe
the quarrelsome recent history of the parties’ relationship, and then Pudles states that his
objective in this email is to begin a discussion about achieving each of their goals, namely:
my goal of owning all of the company without having it broken
apart and your goal of exiting the company as completely as
possible. . . . [This] means that we realize that our goals are
different and no one is going to try to sneak board motions or take
actions without consulting and working with the other one. The
worst part of the last two weeks was that you [and Bill
Robertshaw] would try to push your goals at my expense without
even discussing them with me first. I have never wanted to fight
with you but I also can’t just walk away from millions of dollars
just to avoid being called unappreciative . . . .
Id. The email foreshadows the dispute over corporate control in this litigation.
17
The chart also shows that Pudles and Robertshaw each own 150,000 shares of common
stock and each have a warrant for 3,959 shares. Id. at 3. It also shows that Executel owns
52,900 shares and WSCC owns 4,234 shares. Id.
18
In the context of his review of the Progress Warrants Pudles also discusses the WSCC
1 transaction as an “insider deal” proscribed by the Progress Bank agreement: “[T]he Executel
transaction . . . should not have been done without the approval of the disinterested Answernet
Board members.” DX40 p. 1. He also proposes that he and Barbara Robertshaw “enter into a
written agreement that no transaction will be done at any level without agreement between you
(Barbara) and me and that we both agree to be fair and reasonable with each other.” Id.
16
On May 7, 2007, Pudles again wrote Robertshaw an email with a subject “Merger
provision” in which he pasted a capitalization table into the body of the email; this table is the
same as the previous one except that Cerida now owns 62,579.9 shares of Answernet. DX67.
On May 13, 2008, Pudles wrote an email to Babjak and Peter Wszalek, then the
controller of Answernet, in which he asserts: “Cerida owns some AnswerNet warrants. I want to
make sure we exercise them ASAP.” M2. That same day, Babjak wrote to Wszalek regarding
Answernet warrants: “this is to confirm that Gary cannot locate the Cerida Warrants and we need
to prepare affidavits of lost warrants. . . . I reviewed Answernet corporate records and whatever
Leslie 19 has on Cerida and I cannot locate the warrants.” Id. However, no affidavits of lost
warrants were ever prepared. Trial Tr. April 24, 2013 73:13-24 (Babjak).
On May 15, 2008, Pudles wrote an email to the Robertshaws with the subject line
“Cerida Warrants”:
Per my conversation with Bill, I’m letting you both know that
Cerida is exercising all of its [Answernet] warrants over the next
few days. Shares will be issued to Cerida and all the warrants will
be completed. This does not require board action and actually
confers no new or additional rights on anyone as we are still bound
by the shareholder agreements. It simply completes the equity
transactions that began early on. There will be no changes to the
cap tables previously delivered to you except where there were
warrants, there will now be shares.
DX77. 20 On May 22, 2008, Pudles as President of Cerida submitted a warrant exercise form to
Answernet which recited that “the undersigned Holder of the attached original, executed stock
Purchase Warrant hereby elects to exercise its purchase right under such Warrant with respect to
Warrant Shares . . . by the cancellation of indebtedness of [Answernet] to the undersigned Holder
19
Leslie Dennis was Gary Pudles’s assistant. Trial Tr. April 25, 2013 38:12-15 (Babjak).
20
Babjak’s name appears at the top of this email on the exhibit.
17
in the amount of $249,914.10 (27,493.3 @ $9.09/share).” DX82 p. 2-3. 21 The warrant exercise
form directed Answernet to “issue a stock certificate . . . representing the appropriate number of
Warrant Shares in the name of . . . [Cerida]” and named the warrant holder as Cerida. Id. at 2-3.
The exercise form was actually prepared by Babjak, Trial Tr. April 25, 2013 17:13-19 (Babjak),
and no warrant was attached to the exercise form. Trial Tr. April 24, 2013 76:21-77:11 (Babjak).
Also on May 22, 2008, Pudles, as President of Cerida submitted a warrant exercise form
to Answernet which recited that “the undersigned Holder of the within Warrant hereby
irrevocably elects to exercise the within Warrant to the extent of 18,148 shares of common stock
. . of [Answernet]. The undersigned herewith encloses the Warrant and a check . . . in the
amount of $.05 in payment of the purchase price thereof.” DX80. The exercise form was
actually prepared by Babjak, 22 Trial Tr. April 24, 2013 73:25-74:3, 75:1-3 (Babjak), and no
warrant was attached to the exercise form. Trial Tr. April 24, 2013 76:7-20 (Babjak). 23
On this same day, Pudles, in his personal capacity, also submitted a warrant exercise
form which recited that “the undersigned Holder of the within Warrant hereby irrevocably elects
to exercise the within Warrant to the extent of 3,959 shares of common stock . . . of [Answernet].
A check in the amount of 39.59 in payment of the purchase price thereof is enclosed.” DX81.
No warrant for these shares is in the record. 24
21
No explanation of the “indebtedness” referred to in this document has been offered.
22
Babjak was Answernet’s general counsel since 2006 and director of corporate
administration since 2007, Trial Tr. April 24, 2013 57:1-11 (Babjak), and became corporate
secretary in 2010. Id. at 90:6-8 (Babjak).
23
The exhibit also does not contain a check.
24
The exhibit also does not contain a check.
18
Also on May 22, 2008, Pudles, as President of Cerida, submitted a document to
Answernet which recited that “the undersigned Holder of the within Warrant hereby irrevocably
elects to exercise the within Warrant to the extent of 12,704 shares of commons stock . . . of
Answernet. Please credit $127.04 to [Answernet] in payment of the purchase price thereof.”
DX78 (WSCC 2 exercise form). Here too the exercise form was actually prepared by Babjak,
Trial Tr. April 24, 2013 73:25-74:3, 75:1-3 (Babjak), and no warrant was attached to the exercise
form. Id. at 75:4-76:6 (Babjak). 25 There is no similar exercise form for the 4,234.37 (WSCC 3)
shares putatively owned by Cerida.
Babjak testified that she never saw any written assignments nor written payment records
for any of those allegedly executed warrants, nor any request to reissue the warrants sent to
Answernet by any of those third-party owners of the warrants. Id. at 71:11-20 (Babjak). Nor did
Babjak ever see any transfer documentation regarding any of these warrants allegedly acquired
by Cerida. Id. at 72:23-73:2 (Babjak). Nevertheless, Babjak prepared the warrant exercise forms
as set forth above. Id. at 73:25-74:3, 75:1-3.
On May 23, 2008, Pudles wrote an email to the Robertshaws in which he stated: “As part
of cleaning up the warrant situation I am also exercising the 3,959 warrant shares that Barbara
and I own related to preferred shares purchased in 1999. If Barbara wants to exercise her similar
warrants she will need to write Answernet a check for $39.59. If she wants to exercise her
similar warrants, please send the check to me and I’ll have the paperwork processed.” DX83 p.
2. 26 On that same day, Bill Robertshaw replied to Pudles: “Doing the warrants is proper and ok.
25
The exhibit also does not contain a check.
26
On the exhibit there is a handwritten notation from Alan Zar, former Answernet
secretary, see Trial Tr. April 24, 2013 90:23-24 (Babjak), regarding sending Robertshaw’s check
19
Barbara will send her check to you for Answernet. The Progress and Ben Franklin are ok. What
amount gets paid for these warrants[?]” Id. at p. 1. Pudles replied on May 24, 2008: “In order to
execute on all the warrants, Cerida will have to pay about 250K to Answernet. Some of the
warrants have a strike price of 9.09. Basically the Ben Franklin Warrants will cost Cerida 9.09
cents [sic] a share. . . . The Progress Bank Warrants will be about 5 cents for the 18k shares
(although I think I calculated the payment at a penny per share for these as well). Our personal
warrants will be a penny a share as well.” Id.
Entries from the Answernet general ledger reflect a credit on June 30, 2008 to Answernet
for $249,914.10, and the comment in the ledger states: “Cerida exercised warrants for 27,493
[shares].” DX 401 p. 2. 27 Additionally, the share transfer ledger, which was part of the package
of documents that Babjak and the Mitts firm, Answernet’s attorneys, compiled for Robertshaw’s
attorney to review in November 2011, see Trial Tr. April 25, 2013 14:16-20, 27:5-28:8 (Babjak),
shows a notation purporting to document a transaction between Cerida and BF/PC that occurred
sometime in 2005. DX175 p. 8. Similarly, the Answernet general ledger shows a credit on June
30, 2008 for $18.15, and the comment in the ledger states “Cerida exercised warrants for 18,148
[shares].” DX401 p. 2. 28
to exercise the warrants and asking Pudles to have the warrant sent to the Princeton office.
DX83 p. 2; Hrg. Tr. June 19, 2013 42:16-25 (Pudles).
27
There is a slight discrepancy between the amount paid for the exercise, the strike price
and the number of shares the comment in the ledger identifies as being exercised. The credited
amount would represent an exercise of 27,493.3 shares at the exercise price of $9.09, both of
which reflect the underlying agreement between Answernet and BF/PC. H3 p. 1. I find the
slight discrepancy to not affect my analysis.
28
There is also slight discrepancy between the amount paid for the exercise, the strike
price and the number of shares the comment in the ledger identifies as being exercised. The
credited amount would represent an exercise of 18,148 shares at an exercise price of $.001, while
the underlying agreement between Answernet and Progress Capital called for an exercise price
20
The share transfer ledger also shows a notation purporting to document a transaction
between Cerida and Progress that occurred sometime in 2003. DX175 p. 8. The Answernet
general ledger also has separate entries each for a credit of $39.59 on June 13, 2008, and the
comment states: “Warrant common stock Barbara Robertshaw and Warrant common stock Gary
Pudles.” DX401 p. 2. The share transfer ledger also shows a notation purporting to document a
transaction between Gary Pudles and Michael Pudles that occurred sometime in 2006. DX175 p.
8. 29 It also displays entries for transactions between Cerida and Waterside for 12,704 shares in
June 2006, and for 4,234.37 shares in 2007. Id. The Answernet general ledger also has an entry
reflecting a credit for $127.04 on June 30, 2008, and the comment states: “Cerida exercised
warrants for 12,704 shares.” DX401 p. 2. The share transfer ledger records the above described
warrant exercises (WSCC 2 and 3, Progress and BF/PC, and the Michael Pudles shares), and also
credits Robertshaw for 3,959.03 30 shares, all in May 2008. DX175 p. 8-9. There is no entry for
any payment from Pudles or Cerida for the exercise of the WSCC 3 warrants (for 4,234.37
shares). 31
of $.01 (which would mean that the exercise price that should have been paid was $181.48). H1
p. 1. Additionally, the warrant exercise form recited that Pudles enclosed a check for $.05, the
amount Pudles said would be the exercise price in his May 24, 2008 email to the Robertshaws.
DX80; DX83 p. 1. No such check is in the record.
29
As noted above, Robertshaw received the warrant for 3,959 shares in Answernet in
exchange for an investment of $50,000 in May 2000. DX175 p. 11, 15.
30
Pudles and Robertshaw each are credited with 3,959.03 rather than 3,959 shares
without explanation. Compare DX175 p. 9 with DX81; DX4 p. 15 (warrants for 3,959.03 to
Michael Pudles and Barbara Robertshaw).
31
On May 23, 2013 I ordered the parties in their post-trial briefs to “point to specific
documents in evidence that corroborate their position as to the shares they control in Answernet,
including but not limited to those documents that: Demonstrate the assignment or legal transfer
to that party (or any entity that a party claims entitlement to vote the shares of) of any warrants
21
III.
The Shareholder Agreement and the Special Distribution
In January 2009, the Robertshaws, Pudles, Executel and Cerida entered into the
Answernet Shareholder Agreement. DX100 p. 1. The Agreement recites that those parties and
entities are the sole equity owners of Answernet and a number of other entities “which operate
under the marketing name Answernet.” Id. at 7. It also provides that “Pudles and Robertshaw
each currently earn $350,000 per year in salary . . . and take matching distributions as necessary
to fund their personal and estimated tax payments . . . from AnswerNet. . . . Pudles and
Robertshaw also have an agreement that Tax Distributions and other distributions from
for Answernet shares from any other person or entity.” Dkt. No. 159. In a footnote in its posttrial brief, Answernet argues that:
Defendants are hampered in their ability to cite to all documents
which prove the ownership of AnswerNet stock because the
Court’s request exceeds the parameters of plaintiff’s claim and
goes beyond the issues that were tried before the Court. . . . [I]t
would be a denial of due process for Cerida to have its ownership
rights in AnswerNet adversely impacted in any way by litigation to
which it is not even a party. See Parklane Hosiery Co. v. Shore,
439 U.S. 322, 327 n.7 (1979) (“It is a violation of due process for a
judgment to be binding on a litigant who was not a party or a privy
and therefore has never had an opportunity to be heard.”). Any
invitation, explicit or implicit, by the Plaintiff to have this Court
determine Cerida’s rights without affording Cerida the opportunity
to represent its own interests should be flatly refused.
Answernet Post Trial Br., Dkt. No. 166, p. 19-20. I find that this argument has been waived. At
any point in this litigation Answernet or Pudles—or any party for that matter—could have
subpoenaed Cerida records or added Cerida as a party. Further, Pudles and Answernet produced
numerous Cerida records in this litigation, including financial statements, which I find
demonstrates that there was no legal or attitudinal barrier preventing the production of other
Cerida documents, should they exist, by Pudles or Answernet. Moreover, at all material times
Pudles was president of Cerida, and Pudles owned 50% of Cerida and Robertshaw (either
individually or together with William Robertshaw) owned 50% of Cerida. If there were Cerida
documents that existed that were relevant to this litigation, surely they could have been accessed
by the parties before me. Finally, the lack of Answernet documents regarding these purported
transactions regarding Cerida, which the warrant contracts prescribe, see e.g., H27 p. 2-3
(WSCC), H1 p. 56-58 (Progress Capital), H3 p. 24, 26, 31-33, 40 (BF/PC), is also probative of
whether the assignments to Cerida actually occurred.
22
AnswerNet are made equally to Robertshaw and Pudles.” Id. The Agreement also outlines
certain “Special Distributions” available at the request of either Pudles or Robertshaw. Id. at 7-8.
The section entitled Special Distributions contains the following:
The shareholders agree to fund the following Special Distributions
at the request of either Shareholder subject to the limitations
contained herein: One million to Pudles and Robertshaw each
August 1, 2010. Two million to Pudles and Robertshaw each
August 1, 2013. One million to Pudles and Robertshaw each
August 1, 2016 (collectively “Special Distributions”). It is
understood that these are not cumulative distributions.
Id. at 7-8. It also stipulates that “nothing in this Agreement should be construed to change the
Agreement between Pudles and Robertshaw regarding Salary payments or other distributions
from AnswerNet to the Shareholders being equal between Robertshaw and Pudles.” Id. at 8.
The Agreement further requires that either shareholder must inform the other of their intention to
take a Special Distribution at least 90 days prior to the date of the Special Distribution. Id. at p.
9. Further the agreement states that “neither party shall be required to personally guaranty any
indebtedness to support the Special Distributions and nothing herein shall be construed as a
guaranty by either party of payments to be made hereunder.” Id. at 10. 32
The record also contains a number of communications that the parties had regarding the
Agreement, particularly with respect to the Special Distributions. Several months before the
32
The Agreement also contains the following clause:
this agreement shall be construed, governed and enforced in
accordance with the laws of New Jersey without regard to the
principals [sic] relating to the conflict of law. Any action
necessary to enforce or interpret the terms of this agreement may
be only brought in the superior court located in Mercer County[,]
New Jersey.
DX100, p. 10. Until Answernet’s post-trial brief, no party had mentioned the forum selection
clause or asserted that venue is not proper here but rather should be in Mercer County, New
Jersey. I will assess these issues below in the section regarding choice of law.
23
parties entered into the Agreement, Pudles, who was getting divorced, in an email dated October
28, 2008 wrote to the Robertshaws with details of the terms of his divorce and the payments
from Answernet to Pudles with which he intended to fund his divorce settlement: “To fund these
payments I will probably need to take distributions from the company which likely will be
funded by debt. As per our agreement, every dollar I take I’ll distribute an equal amount to you.
So when I get the funding I’ll plan to take double.” K3. 33
On January 20, 2011, Pudles wrote an email to the Robertshaws:
I will be distributing between 500K and $1 million to each of us
over the next year starting no later than August 31. Just want to
know if there are any special instructions you might want me to
consider. Let me know otherwise we’ll just distribute to ourselves
through the pass through entities.
DX121. On June 24, 2011, Pudles wrote an email to the Robertshaws informing them that he
had renewed Answernet’s credit line, and increased the maximum from $1.5 million to $2.5
million. DX136. Pudles additionally wrote:
Also, pursuant to our [Agreement], please be advised that its [sic]
my intent to make a [S]pecial [D]istribution of as much as $1
million each sometime after August 31, 2011. The actual method
and amounts of the payout isn’t determined but the bank has
already approved us drawing down on the line of credit if
necessary to fund these payments. It is likely that the payments
will be spread out through the year.
Id. On August 18, 2011, Pudles wrote to Answernet employees and the company’s accountants
with instructions to
set up distributions to me from the various entities . . . in the
amount of $1 million. The payment to me must be made in time to
deliver [Pudles’s divorce payment] on August 31. We also need to
set up loans payable to the Robertshaws so its [sic] all fair and
proper. . . . The distribution should be done out of available cash
33
The payment terms under the divorce settlement outlined in this email overlap with the
dates of the Special Distributions outlined under the Agreement. Compare DX100 p. 2 with K3.
24
first (without strapping us too tightly) and the remaining portion
out of the [line of credit.]
N15 p. 1. Pudles also discusses reclassifying the interest rates on various loans to the company
made by the shareholders: “the first thing we will focus on is using this opportunity to eliminate
the 10 percent shareholder loans and move them into 5.5 percent loans. . . .” Id. He continued:
If the Robertshaws are unhappy about the reduction in interest we
will write them a check for the 278.5K [sic] out of the [line of
credit] so they get their principle back immediately and the interest
will be reduced because the debts will flow to the [line of credit].
Id. at 2.
On September 3, 2011, Pudles wrote again to the Robertshaws: “Per our agreement I
distributed money to make my required personal payment and created a distribution payable
from the company to you so we can pay your matching as cash becomes available. . . . I took
about 980K [sic] from the company.” N18 p. 1. Pudles also wrote that “we had three goals in
our approach to the payment to me & [sic] the matching for you” and under the heading
“Robertshaw Matching” wrote “we added an additional loan amount of about 646K to bring the
total amount owed to the Robertshaws to 980K. . . . My goal is to pay 100K-150K per month in
principal repayments . . . until the Robertshaw loans are paid. This would mean that all loans to
everyone would be paid off within 18 months.” Id. at 2. He also went into more detail about the
loan reclassifications mentioned above and noted that “the annual difference between the old
treatment of the loans and the new treatment is only $956 per year. This result occurred because
we are paying interest on loans that didn’t have interest before.” Id. 34
The Robertshaws however demurred, and on September 5, 2011 wrote to Pudles that they
understood that “some months ago [w]hen we agreed [to make the Special Distribution], you
34
Pudles attached a chart to the email detailing which shareholder loans would have their
interest rates changed. DX141 p. 6.
25
described and we agreed to making [sic] an equal cash distribution to the shareholders at the
same time. We prefer to keep to this program.” DX141 p. 8. Pudles responded: “In terms of the
cash at the same time, the bank will certainly lend the money to us to make equal cash
distributions if that is what you want. It will effect [sic] our borrowing ability for business
purposes but I’m sure we can work that out as well.” Id. at 9. Pudles sought such a loan from
Answernet’s bank, id. at 11-12, which would not provide one without a personal guaranty on the
loan. Id. at 12 (“As the money is creating no value to Answernet [but] simply being used for an
equity distribution for Barbara, we will require a guaranty”). Pudles had made such a guarantee
for his distribution, id. at 12, but Robertshaw refused to do so, writing: “I am not guaranteeing
any loan in order to fund distributions. . . . You brought this subject of distributions up a year
ago saying you wanted the company to make a distribution to you and me equally [because] you
needed money personally.” Id. at 20. The distribution, however, went forward, and $980,000
was paid directly to Pudles while Robertshaw received a number of promissory notes for that
same amount with interest. N22 p. 2-4. 35
Robertshaw then demanded a special meeting of Answernet’s shareholders to review the
propriety of the Pudles distribution, D4, but that the meeting was not held because Pudles
refused to call a shareholder meeting and represented that Robertshaw did not have the right to
call one because, under Answernet’s bylaws, she did not “control a sufficient amount of shares to
call a special meeting.” Trial Tr. April 23, 2013 36:14-37:5 (Robertshaw); A2 p. 1 (“Special
meetings of the shareholders may be called for any purpose . . . upon the written request of
35
The details regarding the specific entities out of which the distribution funds came are
complicated and do not change the fundamental question regarding the breach of contract claim
which is whether the Agreement required that any shareholder distributions be equal and
simultaneous. See Am. Compl. ¶¶ 9-12; Robertshaw Post-Trial Br., Dkt. No. 164 p. 37-38;
DX146 (Special Distribution summary).
26
shareholders holding fifty-one percent of the outstanding shares.”). Robertshaw then called a
special meeting of the Answernet Board of Directors for the purpose of reviewing the Special
Distribution. D5. That meeting took place on October 31, 2011 but only resulted in deadlock
and no action being taken. Trial Tr. April 23, 2013 38:7-21 (Robertshaw). Thereafter, on
November 17, 2011, Pudles noticed a special meeting of the shareholders on behalf of himself
and Cerida, the “collective owners of more than fifty-one percent of the shares of Answernet.”
D13.
On November 28, 2011, at the special meeting noticed by Pudles, Robertshaw demanded
that the corporation provide a list of shareholders pursuant to Delaware General Corporations
Law § 219, F12 p. 2, and in response received a partially-handwritten document titled the
“AnswerNet Capitalization Table” which she claims falsely asserted that Cerida owned 62,759
common shares of AnswerNet and inaccurately reported the number of issued and outstanding
shares. F12 p. 1-3, M11, Trial Tr. April 23, 2013 40:14-41:23 (Robertshaw). At the special
meeting Pudles, voting his and Cerida’s shares, removed William Robertshaw from the
Answernet board of directors. F12 p. 1, 3; Trial Tr. April 23, 2013 42:9-16 (Robertshaw).
Subsequently, on November 29, 2011, Robertshaw filed her complaint in this case asserting
claims for breach of contract and breach of fiduciary duty against Pudles in connection with the
Special Distribution, and a “shareholder derivative claim” and a claim for violation of § 219 of
the Delaware General Corporation Law against Answernet. Dkt. No. 1.
Also following the November meeting Babjak noticed an annual meeting of Answernet’s
shareholders. D3. At the annual meeting held on December 15, 2011, Pudles and Babjak once
again produced a document entitled “List of Shareholders of AnswerNet, Inc.” which asserted
that Cerida owned 62,759 common shares of Answernet. F12 p. 6, 10; Trial Tr. April 23, 2013
27
43:21-44:18 (Robertshaw). At this meeting, “[Pudles] used this claim of Cerida shares to claim a
majority in the voting [and] to vote [Robertshaw] off the board of Answernet.” Trial Tr. April
23, 2013 45:3-7 (Robertshaw). 36 The number of directors was reduced from four to two, and a
new board consisting of Pudles and his brother Stephen Pudles was elected. F12 p. 7-8.
On November 5, 2012, Robertshaw amended her complaint to include a claim for fraud
against Pudles and added Babjak as a defendant, asserting claims for fraud, negligence and
breach of fiduciary duty against Babjak, and various requests for declaratory relief. Dkt. No. 86.
On March 20, 2013, I denied Answernet’s motion to dismiss and Pudles’s motion to dismiss and
granted Babjak’s motion to dismiss the negligence claim against her but denied her motion in all
other respects. Dkt. No. 116, 117. On March 28, 2013, I scheduled this matter for trial, Dkt. No.
119, and on April 23, 2013 the four day trial began.
CONCLUSIONS OF LAW
I.
Choice of Law
As a preliminary matter, I must decide which laws govern the claims in this case, a matter
disputed by the parties. Federal courts exercising diversity jurisdiction must apply the conflict of
law rules of the forum state. On Air Entm’t Corp. v. Nat’l Indem. Co., 210 F.3d 146, 149 (3d
Cir. 2000), citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496–97 (1941).
Therefore, Pennsylvania choice of law rules apply to this case. Pennsylvania has “adopted a
flexible choice of law rule which weighs the interests [its] sister-states may have in the
transaction.” Cmwlth v. Eichinger, 915 A.2d 1122, 1133 (Pa. 2007). “Application of that rule
requires a multi-faceted analysis,” Powers v. Lycoming Engines, 328 F. App’x 121, 124-25 (3d
36
Also contained in the meeting minutes is a remark about the $980,000 Special
Distribution referenced in the September 3, 2011 email and discussed above. The minutes reflect
that “Pudles stated that AnswerNet, Inc. did not make a distribution, it paid back a loan.” F12 p.
8.
28
Cir. 2009), citing Hammersmith v. TIG Ins. Co., 480 F.3d 220, 230-31 (3d Cir. 2007), and since
the inquiry “is issue-specific, different states’ laws may apply to different issues in a single
case.” Berg Chilling Sys., Inc. v. Hull Corp., 435 F.3d 455, 462 (3d Cir. 2006).
The Court’s first level of scrutiny considers whether “an actual or real conflict [exists]
between the potentially applicable laws.” Powers, 328 F. App’x at 125, quoting Hammersmith,
480 F.3d at 230 (alterations in original). “If there are relevant differences between the laws, then
the court should examine the governmental policies underlying each law, and classify the
conflict as a ‘true,’ ‘false,’ or an ‘unprovided-for’ [(i.e., no interest)] situation.” Powers, 328 F.
App’x at 125, quoting Hammersmith, 480 F.3d at 230. A district court must conduct a deeper
analysis only where “‘both jurisdictions’ interests would be impaired by the application of the
other’s laws (i.e., there is a true conflict).’” Powers, 328 F. App’x at 125, quoting
Hammersmith, 480 F.3d at 230.
The Court’s second level of scrutiny affects only true conflicts and when they exist, I
must “determine which state has the greater interest in the application of its law.” Powers, 328 F.
App’x at 125, quoting Hammersmith, 480 F.3d at 231 (internal quotations and further citations
omitted). “Pennsylvania requires that courts making that determination use a ‘combination of
the approaches of both the Restatement [(Second) of Conflict of Laws] (contacts establishing
significant relationships) and interests analysis (qualitative appraisal of the relevant States’
policies with respect to the controversy).’” Powers, 328 F. App’x at 125, quoting Hammersmith,
480 F.3d at 231 (further citations omitted). “It is not enough to simply count the states’ contacts;
they should be weighed ‘on a qualitative scale according to their relation to the policies and
interests underlying the [particular] issue.’” Powers, 328 F. App’x at 125, quoting
29
Hammersmith, 480 F.3d at 231 (further citations omitted). 37 Moreover, “the expectations of the
parties constitute ‘an important element’ in the inquiry.” Powers, 328 F. App’x at 125, quoting
Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 822 (1985).
A.
Breach of Contract Claim
Answernet argues that, with respect to Robertshaw’s breach of contract claim, I should
give effect to the clause in the Agreement which states that:
this agreement shall be construed, governed and enforced in
accordance with the laws of New Jersey without regard to the
principals [sic] relating to the conflict of law. Any action
necessary to enforce or interpret the terms of this agreement may
be only brought in the superior court located in Mercer County[,]
New Jersey.
Answernet Post-Trial Br., Dkt. No. 166, p. 3-4. The post-trial briefs of Pudles and Robertshaw
do not discuss choice of law or venue issues as to this claim. 38
In my March 20, 2012 opinion regarding three motions to dismiss brought individually
by the defendants I noted that “[n]o party has mentioned the forum selection clause or asserted
that venue is not proper here but rather should be in Mercer County, New Jersey. I will thus
consider this provision waived by mutual assent of the parties.” 39 Robertshaw v. Pudles, No. 117353, 2013 WL 1148395, at *1, n.2 (E.D. Pa. Mar. 20, 2013). I also noted that the elements of a
37
Once the survey has been completed and a choice of law is made, I must then consider
whether applying that law to all the parties violates the Due Process and Full Faith and Credit
Clauses. Powers, 328 F. App’x at 125. “[F]or a State’s substantive law to be selected in a
constitutionally permissible manner, that State must have a significant contact or significant
aggregation of contacts, creating state interests, such that choice of its law is neither arbitrary nor
fundamentally unfair.” Id., quoting Allstate Ins. Co. v. Hague, 449 U.S. 302, 312-13 (1981)
(plurality opinion).
38
Babjak is neither a defendant in the breach of contract claim nor a party to the contract.
39
As no party disputes whether venue was proper in the Eastern District of Pennsylvania,
I consider this argument waived. See Fed. R. Civ. P. 12(h).
30
breach of contract claim are substantially the same in Pennsylvania, New Jersey and Delaware
and thus the choice of law is not outcome determinative. Id.
In reviewing this law again, I still find that that there is no real conflict between the laws
of these jurisdictions regarding breach of contract claims. Compare Century Land Grp., LLC v.
Mayor & Council of Borough of Keyport, No. 1869-05, 2006 WL 2457846, at *14 (N.J. Super.
Ct. Law Div. Aug. 22, 2006) (In New Jersey “to prevail on a breach of contract claim, plaintiff
must prove that the contractual relationship existed, that defendant breached the contract, and
that plaintiffs suffered damages as a result of the breach”) 40 with Omnicron Sys., Inc. v. Weiner,
860 A.2d 554, 564 (Pa. Super. Ct. 2004) (Under Pennsylvania law, a breach of contract requires:
(1) “the existence of a contract, including its essential terms, (2) a breach of a duty imposed by
the contract and (3) resultant damages.”) and VLIW Tech., LLC v. Hewlett-Packard Co., 840
A.2d 606, 612 (Del. 2003) (in Delaware the elements of a breach of contract claim are: “first, the
existence of the contract, whether express or implied; second, the breach of an obligation
imposed by that contract; and third, the resultant damage to the plaintiff.”); see also Boyko v.
Am. Int’l Grp., Inc., No. 08-2214, 2012 WL 1495372, at *9 (D.N.J. Apr. 26, 2012) (“the legal
40
In some instances courts applying New Jersey law to breach of contract claims identify
a fourth element to a breach of contract claim. See e.g., Frederico v. Home Depot, 507 F.3d 188,
203 (3d Cir. 2007) (“A claim for breach of contract in New Jersey requires: (1) a contract
between the parties; (2) a breach of that contract; (3) damages flowing therefrom; and (4) that the
party stating the claim performed its own contractual obligations.”). However, Pudles’s
assertions notwithstanding, Robertshaw’s performance of her contractual duties under the
Agreement is not at issue in this case. Moreover, this fourth element is not always included by
courts applying New Jersey law in a breach of contract action. See e.g., AT & T Credit Corp. v.
Zurich Data Corp., 37 F. Supp. 2d 367, 370 (D.N.J. 1999); Hayes v. Wal-Mart, 281 F.R.D. 203,
214 (D.N.J. 2012). Finally, even when courts identify this fourth element when conducting
choice of law analysis, the presence or absence of this fourth element has not precluded the
conclusion that “[i]t is clear that the elements required for . . . breach of contract claims are
substantially similar in New Jersey and Pennsylvania.” RBC Bank (USA) v. Riley, Riper, Hollin
& Colagreco, No. 09-00431, 2009 WL 2580354, at *6, and n.5 (D.N.J. Aug. 19, 2009).
Therefore I find that this fourth element of a breach of contract claim does not represent a real
conflict between the laws of New Jersey, Pennsylvania or Delaware as to that claim.
31
elements of a breach of contract claim are substantially similar in all fifty states, such that
certification [of a class of multi-jurisdictional plaintiffs] as to the breach of contract claim is
proper.”), order vacated in part on other grounds, 2012 WL 2132390 (D.N.J. June 12, 2012).
Thus, finding no true conflict between the law governing breach of contract claims in New
Jersey and either Pennsylvania or Delaware, I will, as before, apply Delaware law to this claim.
B.
The Breach of Fiduciary Duty Claims, the Shareholder Derivative Claim, the
Claim Raised Under Section 219 of the DGCL and the Declaratory Relief
Sought Regarding Issues of Corporate Control
I must also decide which state’s law applies to Robertshaw’s breach of fiduciary duty
claims, her shareholder derivative claim, the claim brought pursuant to section 219 of the DGCL
and her requests for declaratory relief. To do so, I consider the applicability of the internal
affairs doctrine, “a long-standing choice of law principle which recognizes that only one state
should have the authority to regulate a corporation’s internal affairs—the state of incorporation.”
VantagePoint Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108, 1112-13 (Del. 2005). The
internal affairs doctrine thus “holds that courts look to the law of the state of incorporation to
resolve issues involving the internal affairs of a corporation.” Banjo Buddies, Inc. v. Renosky,
399 F.3d 168, 179 n.10 (3d Cir. 2005). Pennsylvania has adopted the internal affairs doctrine by
statute. Id.; see also 15 Pa. Cons. Stat. Ann. § 4145. 41
41
In pertinent part, the statute states:
The courts of this Commonwealth shall not dismiss or stay any
action or proceeding brought by a shareholder or representative of
a foreign domiciliary corporation, as such, against the corporation
or any one or more of the shareholders or representatives thereof,
as such, on the ground that the corporation is a foreign corporation
for profit or that the cause of action relates to the internal affairs
thereof, but every such action shall proceed with like effect as if
the corporation were a domestic corporation. Except as provided
in subsection (b), the court having jurisdiction of the action or
32
The internal affairs doctrine applies to matters that pertain to the relationships among or
between the corporation and its officers, directors, and shareholders. 42 VantagePoint, 871 A.2d
at 1113. Accordingly, the conflicts practice of both state and federal courts has consistently been
to apply the law of the state of incorporation to claims relating to “the entire gamut of internal
corporate affairs.” Id. Thus, clearly “corporate voting rights disputes are governed by the law of
the state of incorporation.” Id. at 1117. And given the Delaware Supreme Court’s guidance in
VantagePoint, I find that the internal affairs doctrine also militates toward the conclusion that the
law of the state of incorporation governs the breach of fiduciary duty claims, derivative claims
and claims arising under the DGCL, as they all relate to the relationships between the
corporation, its directors, officers and shareholders and overlap with the issues of corporate
control. See Banjo Buddies, 399 F.3d 168, 179 n.10 (3d Cir. 2005) (applying law of state of
incorporation to breach of fiduciary duty claims); Baker-Bey v. Delta Sigma Theta Sorority, Inc.,
No. 12-1364, 2013 WL 1742449, at *4 (E.D. Pa. Apr. 23, 2013) (same); Rapoport v. Litig. Trust
of MDIP Inc., No. 1035-N, 2005 WL 3277911, at *5 (Del. Ch. Nov. 23, 2005) (“The fiduciary
duties owed by directors and officers to the corporation unquestionably pertain to the
relationships among the corporation and its officers and directors. Therefore, Delaware law
governs this dispute.”); Hamilton Partners, L.P. v. Highland Capital Mgmt., L.P., No. 6547-
proceeding shall apply the law of the jurisdiction under which the
foreign domiciliary corporation was incorporated.
15 Pa. Cons. Stat. Ann. § 4145 (emphasis added).
42
The Restatement (Second) of Conflict of Laws § 301 provides: “application of the local
law of the state of incorporation will usually be supported by those choice-of-law factors
favoring the need of the interstate and international systems, certainty, predictability and
uniformity of result, protection of the justified expectations of the parties and ease in the
application of the law to be applied.” VantagePoint Venture Partners 1996 v. Examen, Inc., 871
A.2d 1108, 1113 (Del. 2005).
33
VCN, 2012 WL 2053329, at *3 n.14 (Del. Ch. May 25, 2012) (“[s]uits such as this that seek to
enforce the fiduciary duties of directors and controlling stockholders of Delaware corporations
play an integral part in regulating the internal affairs of Delaware corporations.”) (citations
omitted); Doltz v. Harris & Assocs., 280 F. Supp. 2d 377, 383 (E.D. Pa. 2003) (applying law of
state of incorporation to determine whether plaintiff had standing to bring shareholder derivative
suit in that state). 43 Thus I will apply Delaware law to these claims.
C.
Fraud Claims
As Answernet notes in its brief, “there is a meaningful distinction between Delaware law
on fraud and Pennsylvania law on fraud with respect to the burden of proof.” Answernet PostTrial Br., Dkt. No. 166, p. 10. Under Pennsylvania law, a plaintiff is required to prove fraud by
clear and convincing evidence. Freeman v. Pittsburgh Glass Works, LLC, 709 F.3d 240, 257 (3d
Cir. 2013); Rohm & Haas Co. v. Cont’l Cas. Co., 781 A.2d 1172, 1179 (Pa. 2001). In Delaware,
the plaintiff need only prove the elements of common law fraud by a preponderance of the
evidence. Outdoor Techs., Inc. v. Allfirst Fin., Inc., No. 09-151, 2001 WL 541472, at *3 (Del.
Super. Ct. Apr. 12, 2001); Tracinda Corp. v. DaimlerChrysler AG, 364 F. Supp. 2d 362, 389 (D.
Del. 2005). This constitutes a real conflict, and I must proceed to the second prong of the choice
of law analysis outlined above.
The second prong in the analysis thus requires me to determine which state has the
greater interest in the application of its laws; to do so I must use a “combination of the
approaches of both the Restatement [(Second) of Conflict of Laws] (contacts establishing
significant relationships) and ‘interests analysis’ (qualitative appraisal of the relevant States’
policies with respect to the controversy).” Powers, 328 F. App’x at 125, quoting Hammersmith,
43
I also note that none of the parties have briefed which jurisdiction’s law properly
applies to the breach of fiduciary duty claims.
34
480 F.3d at 231 (further citations omitted). The Restatement offers the following guidance to
help determine which state has the most significant relationship to the occurrence giving rise to
the fraud claim and to the parties, suggesting a court consider:
(a) the place, or places, where the plaintiff acted in reliance
upon the defendants representations,
(b) the place where the plaintiff received the
representations,
(c) the place where the defendant made the representations,
(d) the domicil[e], residence, nationality, place of
incorporation and place of business of the parties,
(e) the place where a tangible thing which is the subject of
the transaction between the parties was situated at the time, and
(f) the place where the plaintiff is to render performance
under a contract which he has been induced to enter by the false
representations of the defendant.
Restatement (Second) of Conflict of Laws § 148 (Fraud and Misrepresentation) (1971).
However, as noted above, the number of contacts is not dispositive as to which state has the
greater interest in the application of its law. Powers, 328 F. App’x at 125.
Applying these factors generates ambivalence as to whether Pennsylvania or Delaware
has the more significant relationship to the fraud claim in this case. Robertshaw is a citizen of
Massachusetts, Pudles a citizen of Pennsylvania, Babjak a citizen of New Jersey, and Answernet
is a Delaware corporation with its principal place of business in Pennsylvania. Am. Compl. ¶¶ 14. Answernet’s offices, now located in Willow Grove, Pennsylvania, were until the fall of 2007
located in Princeton, New Jersey. Trial Tr. Apr. 25, 2013, 85:13-15 (Pudles). The extensive
record in this case reveals that the parties corresponded with each other chiefly by email, though
Pudles and Bill Robertshaw for a time talked daily, and also communicated a great deal via
email. Trial Tr. April 23, 2013, 67:6-7 (Robertshaw). Thus, the first three Restatement factors
regarding the place of reliance on the misrepresentations, the place where the representations
were received by Robertshaw and the place where Pudles and/or Babjak made the
35
representations do not direct me to a forum that clearly has the most significant contacts with the
litigation. Similarly, the fourth factor relating to the domicile of the parties and the place that
they conducted business also points to multiple jurisdictions. Further, the fifth factor, the
location of the subject of the transaction, points to Delaware because at issue in the fraud claim,
inter alia, is the existence, or lack thereof, of certain documents demonstrating an entitlement to
vote certain shares of Answernet, and because the disputed shares were issued in Delaware, as
discussed above, the issuance of the shares and voting rights associated with these shares are
governed by Delaware law pursuant to the internal affairs doctrine. VantagePoint, 871 A.2d at
1113, 1117.
However, turning to the interests analysis component of the choice of law analysis,
Powers, 328 F. App’x at 125, I find that “with respect to the interest each state holds in the [case]
that Delaware has a clear interest in regulating the internal affairs of those entities incorporated
under its laws. Pennsylvania, on the other hand, has a more attenuated interest.” Franklin v.
SKF USA Inc., 126 F. Supp. 2d 911, 918 (E.D. Pa. 2000). I find Delaware’s contact as the state
of incorporation is dispositive with respect to the law I must apply to the fraud claims, given that
the nature of this dispute at its heart is a question of corporate control, implicating Answernet’s
internal governance and the conduct of its shareholders, officers and directors. The issues that
predominate in this case are “quintessentially . . . associated with the state in which the
corporation chose to incorporate itself. Therefore, Delaware’s contact with this dispute has
greater weight in [my] choice of law analysis than the fact that [Answernet’s] principal place of
business is in Pennsylvania.” Id. Thus, because I find the issues surrounding the question of
control of Answernet and the validity of the actions taken at the 2011 Board and Shareholder
meetings here are interwoven with the fraud claims, I conclude that Delaware substantive law
36
should govern the claims for fraud in this case as well. See e.g., Intarome Fragrance & Flavor
Corp. v. Zarkades, No. 07-873, 2009 WL 931036, at *14 (D.N.J. Mar. 30, 2009) (applying
Delaware law to fraud and breach fiduciary duty claims because Delaware was state of
incorporation). 44
D.
Abuse of Process Counterclaim
The parties have not discussed the appropriate choice of law for Pudles’s counterclaim
for abuse of process, though his post-trial brief identifies the elements of an abuse of process
claim as they have been articulated by Pennsylvania courts. Pudles Post-Trial Br., Dkt. No. 167,
p. 36. In assessing the elements of the tort as they are commonly identified in Delaware and
Pennsylvania, there does not seem to be a conflict. Compare Toll Bros., Inc. v. Gen. Acc. Ins.
Co., No. 98C-08-203 WTQ, 1999 WL 744426, at *5 (Del. Super. Aug. 4, 1999), aff’d, 765 A.2d
953 (Del. 2000) (In Delaware “[t]he elements of abuse of process . . . are: (1) an ulterior purpose,
44
I also note that
[t]he internal affairs doctrine is not, however, only a conflicts of
law principle. Pursuant to the Fourteenth Amendment Due Process
Clause, directors and officers of corporations “have a significant
right . . . to know what law will be applied to their actions” and
“[s]tockholders . . . have a right to know by what standards of
accountability they may hold those managing the corporation’s
business and affairs.” Under the Commerce Clause, a state “has no
interest in regulating the internal affairs of foreign corporations.”
Therefore, this Court has held that an “application of the internal
affairs doctrine is mandated by constitutional principles, except in
the ‘rarest situations,’’’ e.g., when “the law of the state of
incorporation is inconsistent with a national policy on foreign or
interstate commerce.”
VantagePoint, 871 A.2d at 1113 (citations omitted). Because Answernet was incorporated in
Delaware, see A3, “Restated Certificate of Incorporation,” by Gary Pudles, id. at 14, two of the
defendants in this case “purposefully avail[ed] [themselves] of the privilege of conducting
activities within [Delaware], thus invoking the benefits and protections of its laws” and
satisfying any concerns associated with the due process clause in subjecting them to Delaware’s
laws. Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475 (1985).
37
and (2) a wilful [sic] act in the use of process not proper in the regular conduct of the proceeding.
The improper purpose is usually to obtain a collateral advantage.”) with Lerner v. Lerner, 954
A.2d 1229, 1238-39 (Pa. Super. Ct. 2008), quoting Shiner v. Moriarty, 706 A.2d 1228, 1236 (Pa.
Super. Ct. 1998), appeal denied, 729 A.2d 1130 (1998) (In Pennsylvania, “[t]o establish a claim
for abuse of process it must be shown that the defendant (1) used a legal process against the
plaintiff, (2) primarily to accomplish a purpose for which the process was not designed; and (3)
harm has been caused to the plaintiff”).
However, in comparing which jurisdiction has the greater interest in the application of its
laws, I find that the laws of Pennsylvania clearly should apply here since the alleged abuse of
process, namely this lawsuit, occurred in Pennsylvania and the alleged victim of the tort, Pudles,
is a citizen of Pennsylvania. Thus Pennsylvania has the superior interest in protecting Pudles
from various tortious conduct and having its laws applied. See Chicarelli v. Plymouth Garden
Apartments, 551 F. Supp. 532, 540 (E.D. Pa. 1982); see also Zebrowski v. Wells Fargo Bank,
N.A., 657 F. Supp. 2d 511, 517 (D.N.J. 2009) (“Although the parties have not explicitly
discussed the appropriate choice of law for this case, New Jersey state law is properly applied for
the [tort of abuse of process] as the alleged torts occurred in New Jersey and Plaintiffs appear to
be New Jersey citizens, whom the state has an interest in protecting from conduct of this
nature”); U. S. ex rel. Sacks v. Phila. Health Mgmt. Corp., 519 F. Supp. 818, 826 (E.D. Pa. 1981)
(“Under the flexible contacts/interest analysis adopted in Pennsylvania . . . the substantive law of
Pennsylvania would govern in determining the [abuse of process] counterclaim since plaintiff is
a resident of Pennsylvania . . . and no other state appears to have a dominant interest in the
occurrences.”). Thus I will apply Pennsylvania law to the counterclaim for abuse of process.
Having resolved the conflict of law issues I now turn to the substance of the claims.
38
II.
Breach of Contract Claim
Robertshaw contends that the Agreement mandated that any distributions of funds from
Answernet would be distributed equally to her and Pudles, and at the same time, and that Pudles
breached the Agreement by taking his Special Distribution in cash while giving her a promissory
note. Robertshaw Post-Trial Br., Dkt. No. 164, p. 37. Pudles asserts that the Agreement did not
require that the Special Distribution be made simultaneously but merely that it be equal. Pudles
Post-Trial Br., Dkt. No. 167, p. 2. He further argues that Cerida actually made the distribution
and that Robertshaw has suffered no damages because she eventually received a distribution with
interest that accounted for the time value of money. Id. at p. 8, 12.
In Delaware the elements of a breach of contract claim are: “first, the existence of the
contract, whether express or implied; second, the breach of an obligation imposed by that
contract; and third, the resultant damage to the plaintiff. VLIW Tech., LLC v. Hewlett-Packard
Co., 840 A.2d 606, 612 (Del. 2003). “[‘W]here the contract language is clear and unambiguous,
the parties’ intent is ascertained by giving the language its ordinary and usual meaning.’” AT &
T Corp. v. Faraday Capital Ltd., 918 A.2d 1104, 1108 (Del. 2007). “The fact that the parties
disagree on the meaning of a term does not render that term ambiguous.” Id. “Rather, a contract
is ambiguous only when the provisions in controversy are reasonably or fairly susceptible of
different interpretations or may have two or more different meanings.’” Id. “Where an
ambiguity exists in a contract, it is generally construed against the party that created the
ambiguity.” Pritchett v. I/O Repair, Inc., No. 12002461, 2013 WL 1750888, at *4 (Del. Com. Pl.
Apr. 22, 2013), citing Intel Corp. v. American Guar. & Liab. Ins. Co., 51 A.3d 442, 447 (Del.
2012). The parties do not dispute the validity of the Agreement, DX 100, but vigorously contest
39
whether Pudles breached the Agreement and whether Robertshaw suffered any damages as a
result.
While the Agreement does not contain the word simultaneous, Answernet Post Trial Br.,
Dkt. No. 166 p. 1, DX100, I find that it is unclear whether all shareholder distributions were
supposed to be simultaneous. The Agreement provides that “Pudles and Robertshaw . . . take
matching distributions as necessary to fund their personal and estimated tax payments . . . from
AnswerNet. . . . Pudles and Robertshaw also have an agreement that Tax Distributions and other
distributions from AnswerNet are made equally to Robertshaw and Pudles.” DX100 p. 7.
“Matching distributions” certainly implies that the distributions would be equal but could also
suggest that they be exactly the same, including at the same time. Compare Definition of Match
1a (a person or thing equal or similar to another) and 1c (an exact counterpart), Merriam-Webster
Online Dictionary, http://www.merriam-webster.com/dictionary/match (accessed July 16, 2013).
The section of the agreement entitled Special Distributions contains the following: “The
shareholders agree to fund the following Special Distributions [. . . ]: One million to Pudles and
Robertshaw each August 1, 2010. Two million to Pudles and Robertshaw each August 1, 2013.
One million to Pudles and Robertshaw each August 1, 2016 (collectively “Special
Distributions”). Clearly then these Special Distributions were to be made on the same day to
each shareholder.
Moreover, as Pudles made clear at trial, the Agreement was created in response to
Pudles’s need for cash to finance his divorce. Trial Tr. April 25, 2013 111:11-112:4 (Pudles)
(e.g., “I was in negotiations with my ex-wife for the . . . property settlement of our divorce . . .
Bill and I had been talking about how we could make sure that I can pay that. . . . As part of my
negotiation with my ex-wife, I wanted to make sure that I had an agreement in place so that I
40
could take the money from the company which was necessary for me to pay the obligation,
without having to either sell or break up the company. And so I reached out to Bill and Barbara
to do a shareholder agreement.”). Because the primary purpose of the Agreement was to create
Special Distributions to finance Pudles’s divorce payments, I find this to be further evidence for
the proposition that the Special Distributions were intended to be made on the same day. DX100
p. 1-2 (“[whereas] Pudles and Robertshaw desire certain Special Distributions . . . the
shareholders agree to this future funding plan for such Special Distributions” and then describing
the specific dates the Special Distributions were to be made to each of them, as set forth above).
Finally, I will look to other record evidence, of which each side has submitted volumes, to
confirm what the party’s expectations were regarding the timing of the Special Distribution in
question.
In an email dated October 28, 2008, Pudles wrote to the Robertshaws detailing the terms
of Pudles’s divorce and the payments from AnswerNet to Pudles with which he intended to fund
his divorce settlement: “To fund these payments I will probably need to take distributions from
the company which likely will be funded by debt. As per our agreement, every dollar I take I’ll
distribute an equal amount to you. So when I get the funding I’ll plan to take double.” K3. That
Pudles planned to take “double” suggests that he contemplated Answernet would distribute the
funds to him and Robertshaw at the same time.
On January 20, 2011, Pudles wrote to the Robertshaws forecasting his plans to distribute
between half a million and a million dollars “to each of us over the next year starting no later
than August 31.” DX121. On June 24, 2011 Pudles again wrote to the Robertshaws that it was
his
intent to make a [S]pecial [D]istribution of as much as $1 million
each sometime after August 31, 2011. The actual method and
41
amounts of the payout isn’t determined but the bank has already
approved us drawing down on the line of credit if necessary to
fund these payments. It is likely that the payments will be spread
out through the year.
DX136. This suggests that at least some point Pudles contemplated that the payments would not
be in one lump sum to either of them.
However, on August 18, 2011, Pudles wrote to Answernet employees with instructions to
“set up distributions to me from the various entities . . . in the amount of $1 million. The
payment to me must be made in time to deliver [Pudles’s divorce payment] on August 31. We
also need to set up loans payable to the Robertshaws so its [sic] all fair and proper . . . .” N15 p.
1. Pudles here seems to contemplate that his distribution would not coincide with the
distribution to Robertshaw; rather Pudles would get cash and Robertshaw would get promissory
notes. In this email Pudles also discusses reclassifying the interest rates on various loans to the
company made by the shareholders: “the first thing we will focus on is using this opportunity to
eliminate the 10 percent shareholder loans and move them into 5.5 percent loans. . . .” Id. He
continued: “If the Robertshaws are unhappy about the reduction in interest we will write them a
check for the 278.5K out of the [line of credit] so they get their principle back immediately and
the interest will be reduced because the debts will flow to the [line of credit].” Id. at 2. This
statement suggests that the Robertshaws were not entirely aware of or in accord with his plans
for Robertshaw’s payment. 45
Finally, on September 3, 2011, Pudles wrote again to the Robertshaws: “Per our
agreement I distributed money to make my required personal payment and created a distribution
45
This email is also illustrative of the ambiguity as to Bill Robertshaw’s role in all of
this, as Pudles often discusses the Robertshaws in tandem (and they both received much of the
correspondence in the record), though no party disputes that the distributions called for under the
Agreement were to be made to Barbara Robertshaw.
42
payable from the company to you so we can pay your matching as cash becomes available. . . . I
took about 980K [sic] from the company.” N18 p. 1.
Robertshaw contends that this was contrary to their Agreement. On September 5, 2011,
she wrote: “some months ago [w]hen we agreed [to make the Special Distribution], you
described and we agreed to making [sic] an equal cash distribution to the shareholders at the
same time. We prefer to keep to this program.” DX141 p. 8. 46 However, the bank would not
loan the money to Answernet without a personal guaranty on the loan, which neither Pudles
(who had made a personal guaranty on the loan for his Special Distribution) nor Robertshaw was
willing to make. Id. at 9-12.
Considering this evidence I find that the Agreement meant that Robertshaw and Pudles
would take their distributions at the same time and that Pudles breached the agreement by
unilaterally taking his Special Distribution and giving Robertshaw a distribution in the form of a
promissory note for a Special Distribution to be made and various reclassifications on interests
rates on loans already due to her. DX145 p. 3-5.
However, I also find that Robertshaw’s Special Distribution has been made, with interest,
and thus she has suffered no resultant damages from the breach of this agreement. Robertshaw
testified that since the breach of the Agreement, she has “received 980 [thousand dollars] back,
plus some interest.” Trial Tr. April 23, 2013 94:10-12, 102:24-103:3 (Robertshaw); see also id.
at 46:7-13, 94:7-9. As to the loan reclassifications, Robertshaw points to no contract or authority
46
I find it appropriate to consider Robertshaw’s submissions as clarifications of her and
Pudles’s understanding of the Agreement. J.A. Moore Const. Co. v. Sussex Assocs. Ltd. P’ship,
688 F. Supp. 982, 988 (D. Del. 1988) (“The parole evidence rule bars evidence only of
negotiations and agreements which precede or are contemporaneous with a written integrated
agreement. Subsequent bargains may arise at any time and may be pleaded and proved by the
aggrieved party”), citing Pepsi-Cola Bottling Co. of Asbury Park v. Pepsico, 297 A.2d 28 (Del.
1972).
43
or any record evidence demonstrating why she was entitled to a certain interest rate. In her
damages summary Robertshaw also seems to calculate her damages based on the assumption that
all of the loans should have been paid 10% interest, O1 p. 3, but, as Answernet notes in its brief,
there is no “justification for why she should be paid 10% interest on those notes, which
previously were not accruing or paying any interest at all.” Answernet Post-trial Br., Dkt. No.
166 p. 7. 47 Accordingly, I find that Robertshaw has not proven any damages as a result of
Pudles’s breach and thus has not proven her breach of contract claim. 48
III.
DGCL Section 219
Robertshaw asserts a claim for violation of section 219 of the Delaware General
Corporations Law because the stock ledger Babjak gave to Robertshaw was not based solely on
information set forth in Answernet’s official stock ledger but rather was based on documents that
Pudles himself created. Robertshaw Post Trial Br., Dkt. No. 164, p. 18. Section 219(a) provides
that the officer who has charge of the stock ledger of a corporation shall prepare and make, at
least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting. Del. Code Ann. tit. 8, § 219(a) (West). Implicit in section 219 is the
47
Moreover, by Answernet’s calculation, the loan reclassifications actually resulted in
Robertshaw receiving slightly more in interest than she would have had the loan interest rates
remained the same because all the loans due her after reclassification earned interest whereas
before only some did. DX400.
48
Robertshaw contends that Delaware law specifically permits punitive damages to be
awarded in breach of contract claims where the defendant’s conduct is found to have been
“characterized by willfulness or malice.” Robertshaw Post-Trial Br., Dkt. No. 164 p. 47, citing
Casson v. Nationwide Ins. Co., 455 A.2d 361, 368 (Del. Super. Ct. 1982). However, “[i]t is clear
[that I] cannot award punitive damages without first finding some element of compensatory or
consequential damages. In reviewing the language in Casson, it is clear the court intended the
consequential or compensatory damages arising from a failure to pay to be used as the spring
board for an award of punitive damages.” E. I. Du Pont De Nemours & Co. v. Admiral Ins. Co.,
No. 89-AU-99, 1994 WL 465547, *7 (Del. Super. Ct. Aug. 3, 1994), citing Casson, 455 A.2d at
368. Thus, because Robertshaw has not proven any damages resulting from the breach of the
Agreement, she is not entitled to punitive damages.
44
affirmative duty of Delaware corporations to maintain a stock ledger. Rainbow Nav., Inc. v. Pan
Ocean Nav., Inc., 535 A.2d 1357, 1359 (Del. 1987) (citations omitted).
I find that the requirements of section 219(a) were satisfied when Pudles delivered what
was ostensibly the Answernet stock ledger to Robertshaw at the November and December 2011
meetings. According to the November 28, 2011 meeting minutes: “Mr. Fitzpatrick made a
motion on behalf of Ms. Robertshaw and seconded by Executel, for the list of shareholders and
other documentation required under Section 219 of the Delaware Corporation law. Mr. Pudles in
his capacity as President of AnswerNet then provided Mr. Fitzpatrick with a copy of the
capitalization table as well as the addresses as known to Answernet of shareholders Barbara
Robertshaw and Executel.” F12 p. 2. Similarly, according to the December 15, 2011 meeting
minutes: “[t]he list of Shareholders of the Corporation was produced and remained open and
available for inspection throughout the entire course of the meeting.” Id. at 6. Thus, though the
ledger may have been inaccurate, the corporation did indeed turn over the records covered by the
statute. Therefore I find that Robertshaw has not proven her section 219 claim.
IV.
Declaratory Relief Regarding Corporate Control
The Declaratory Judgment Act provides that in “a case of actual controversy within its
jurisdiction, . . . any court of the United States . . . may declare the rights and other legal relations
of any interested party seeking such declaration, whether or not further relief is or could be
sought.” Honeywell Int’l Inc. v. Int’l Union, United Auto., Aerospace & Agr. Implement
Workers of Am., 502 F. App’x 201, 203 (3d Cir. 2012), citing 28 U.S.C. § 2201(a). Any such
declaration shall have the force and effect of a final judgment or decree and shall be reviewable
as such. 28 U.S.C. § 2201(a). The Act does not require a court to determine the rights of parties
but rather permits a court to exercise its sound discretion in determining whether to grant a
45
remedy under the Act. Wohl v. Wilkoski, No. 87-1445, 1989 WL 64426, at *4 (E.D. Pa. June
14, 1989), citing Brillhart v. Excess Ins. Co., 316 U.S. 491 (1942) and Travelers Ins. Co. v.
Davis, 490 F.2d 536 (3d Cir. 1974) (declaratory judgment is discretionary and not mandatory).
Further, “a declaratory judgment is an equitable remedy; therefore, the court must strike a
balance between the needs of the plaintiff and the consequences of giving the desired relief.”
Wohl, 1989 WL 64426, at * 4, citing Great Lake Co. v. Huffman, 319 U.S. 293, 300 (1943)
(declaratory judgment is an equitable cause of action and district court is free to grant or
withhold relief on equitable grounds) (further citations omitted).
Robertshaw requests that I issue an order pursuant to 28 U.S.C. § 2201:
a. declaring void the November 28, 2011 Special Meeting
of the Shareholders of Answernet, Inc., and all votes taken at that
meeting;
b. declaring void the December 15, 2011 Annual Meeting
of the Shareholders of Answernet, Inc., and all votes taken at that
meeting;
c. declaring that Cerida Investment Corp. does not possess
the 12,704 shares of Answernet, Inc., that Defendants Gary Pudles
and Betty Babjak falsely claimed it received as a result of an
alleged assignment and exercise of the Waterside Warrants;
d. declaring that the total of shares of Answernet, Inc., held
by Plaintiff Barbara Robertshaw and Executel, Inc., constitute a
majority of the issued and outstanding shares of the company;
e. declaring that Betty Babjak was never lawfully elected
Secretary of Answernet;
f. declaring that Plaintiff Barbara Robertshaw and Executel,
Inc., may at any time call a Special Meeting of the Shareholders in
order to elect new corporate officers and to take all other actions
permitted by law and the By-Laws.
Am. Compl. ¶ 75.
46
Answernet objects to these requests for declaratory relief. Answernet claims that,
because the warrants for certain shares were assigned to or purchased by either Pudles or Cerida,
Pudles was entitled to exercise those warrants in May 2008 and thus the actions that he took
thereafter, specifically those taken at the November and December 2011 meetings, were valid.
Answernet Post-Trial Br., Dkt. No. 166 p. 13-20. 49 In order to determine whether the requested
declaratory relief is appropriate, I must therefore first decide, in consideration of the facts
established at trial, who or what entity controls the Answernet shares associated with each of the
warrants described above and how many shares each owner now controls. 50
A.
The Warrant Rights at Issue and the Control of Answernet
Section 219 of the Delaware General Corporations Law states that the “stock ledger shall
be the only evidence as to who are the stockholders entitled by this section to examine the list
required by this section or to vote in person or by proxy at any meeting of stockholders.” Del.
Code Ann. tit. 8, § 219(c) (West). However, “[a]lthough a corporation is entitled to rely upon
the stockledger to determine who are the stockholders entitled to vote . . . this Court is not
limited to or bound by the stocklist in a proceeding to review a corporate election.” Viele v.
49
Pudles does not mention the declaratory relief in his post-trial brief.
50
Although Robertshaw sued under the federal Declaratory Judgments Act and not its
state counterpart, Del. Code Ann. tit. 10, § 6506, when state law provides the rule for deciding
which party has the burden of proof in a suit for declaratory judgment in federal court, I must
follow the law of the forum state “as that issue is substantive, not procedural.” Fireman’s Fund
Ins. Co. v. Videfreeze Corp., 540 F.2d 1171, 1175-76 (3d Cir. 1976), cert. denied, 429 U.S. 1053
(1977). “The rule in Delaware appears to be that “‘a plaintiff in a declaratory judgment action
should always have the burden of going forward.’” Policemen’s Annuity & Benefit Fund of
Chicago v. DV Realty Advisors LLC, No. 7204-VCN, 2012 WL 3548206, at *11 n.81 (Del. Ch.
Aug. 16, 2012), quoting Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715,
739 (Del. Ch. 2008) (further citations omitted). Thus, Robertshaw “bears the burden of proof by
a preponderance of the evidence for the declaratory judgment sought.” Friends of Christine
O’Donnell v. Moseley, No. CPU4-11-00573, 2012 WL 1996860, at *3 (Del. Com. Pl. June 5,
2012), citing Rhone-Poulenc v. GAF Chemicals, No. 12848, 1993 WL 125512, at *3 (Del. Ch.
Apr. 8, 1993).
47
Devaney, 679 A.2d 993, 996 (Del. Ch. 1996) (citations omitted). Indeed, “Delaware courts have
often looked beyond the stockledger to determine shareholder status, particularly with regard to
voting rights.” Id. (citation omitted). In this case, because Robertshaw contends that the share
transfer ledger and capitalization tables are inaccurate, I find it necessary to look beyond those
documents, which were provided to Robertshaw at the November and December 2011 meetings,
and consider extrinsic evidence in order to ascertain the true ownership interests of Answernet.
Id., citing Arbitrium (Cayman Islands) Handels A.G. v. Johnson, No. 13506, 1996 WL 12149, at
*3-14 (Del. Ch. Jan. 5, 1996) (disregarding inaccurate and “highly suspect” stock ledger and
considering extrinsic evidence to determine various ownership interests in a corporation and
existence of various agreements about the corporation between the litigants), aff’d, 683 A.2d 59
(Del. 1996) and In re Canal Construction Co., 182 A. 545, 160-63 (Del. Ch. 1936) (looking
beyond stock ledger to determine voting rights of shareholders in a corporation). I will now turn
to that extrinsic evidence to resolve the questions of corporate control and Robertshaw’s requests
for declaratory relief.
Pudles claims an entitlement to exercise certain warrants because these warrants were
assigned to or purchased by him or Cerida. “[A]n assignment of a right is a manifestation of the
assignor’s intention to transfer it by virtue of which the assignor’s right to performance by the
obligor is extinguished in whole or in part and the assignee acquires a right to such
performance.” Barefoot Architect, Inc. v. Bunge, 632 F.3d 822, 831 (3d Cir. 2011), quoting
Restatement (Second) of Contracts § 317(1). “No words of art are required to constitute an
assignment; any words that fairly indicate an intention to make the assignee owner of a claim are
sufficient, and the same interpretation should be given the words whether they are oral or
48
written.” 29 Williston on Contracts § 74:3 pp. 59-60 (4th ed.). 51 “[G]enerally speaking the
intent to transfer a right may be manifested through conduct.” Bunge, 632 F.3d at 833 n.4, citing
Restatement (Second) of Contracts § 19 (“The manifestation of assent may be made wholly or
partly by written or spoken words or by other acts or by failure to act.”); 6 Am. Jur. 2d
Assignments § 83 (“Under the appropriate circumstances, a right may even be assigned without
the execution of a formal assignment.”). 52 There must be, however, some evidence upon which I
may conclude that such a transfer actually occurred. Bunge, 632 F.3d at 831-33.
1.
WSCC 1
On March 27, 2003, Waterside assigned 75.75% of its interest in Answernet to Executel.
See H6 p. 1. In October 2003, Answernet issued a stock purchase warrant to Executel for
12.494% of the shares of Answernet; the stock purchase warrant contains handwritten
modifications made by Gary Pudles, clarifying that Executel had a right to purchase 12.494% of
Answernet common stock, rather than 12.5% (the number conveyed in the assignment from
WSCC to Executel). H7 p. 1. Though the exact date is unclear, Executel completed its purchase
of 52,900 shares in the fall of 2003 (WSCC 1), see H7 and Trial Tr. April 23, 2013 12:22-13:10
(Robertshaw), and was issued a share certificate by Answernet for that amount of shares. H12.
As Pudles conceded at the post trial oral argument, “the Executel warrants are undisputed.” Hrg.
Tr. June 19, 2013 48:21-22 (Pudles). These formalities surrounding the Executel warrant
51
Further, “an assignment that is not a gift, and hence is a completed transaction and
irrevocable, must ordinarily be supported by consideration.” 29 Williston on Contracts § 74:3 p.
88 (4th ed.).
52
The contracts creating the third party warrants, however, are very clear that any
assignment of the warrant rights required a writing as well as the issuance of a new warrant. See
H3 p. 26, 33 (BF/PC); H1 p. 56-58 (Progress Capital), H27 p. 1-3 (WSCC).
49
exercise, however, were not observed with similar rigor for the other two transactions that
disposed of the remainder of the WSCC interest in Answernet.
2.
WSCC 2
Pudles claims that the WSCC 2 warrants were assigned to or purchased by Cerida. I find
that Robertshaw has shown by a preponderance of the evidence that this assignment or purchase
did not occur. As noted above, when Executel purchased the WSCC 1 warrants, it also acquired
an option to purchase an additional 3% of Answernet’s stock. H6 p. 1-2. Executel exercised this
option in early 2006. H30. Sometime after the exercise, on March 16, 2006, Pudles wrote to
Speroni of WSCC expressing concern that “that Answernet has not received any request from
Waterside regarding the issuance of a new warrant related to Barbara and my personal purchase
of Executel’s Option Warrants.” H33. In response, Speroni wrote to Pudles directing him to
“have Answernet issue the two separate warrants (3% and 1%), so we may send one and keep the
other. Executel exercised its rights and now owns the 3% warrant.” Id.
On March 20, 2006 Answernet issued two warrants, one to Robertshaw for 6,351.5
shares of Answernet (or one half of the three percent that Executel had bought the option for),
and the other to WSCC for its remaining 1% interest in Answernet (what would become the
subject of the WSCC 3 transaction). 53 Trial Tr. April 23, 2013 68:22-72:20 (Robertshaw);
DX29. However, while Robertshaw maintains the assignment of the issuance of the warrant
from Answernet to her was valid, Trial Tr. April 23, 2013 71:17-72:6 (Robertshaw), she
concedes that she never exercised the warrant. Id. at 72:15-20 (“[Its] expiration [date] came and
went.”); see DX29 p. 8 (“This Warrant will [be] exercisable in whole or in part at any time . . .
53
Each of these two new warrants had language regarding the exercise and transfer of the
warrant rights that is substantially the same as the corresponding sections from the original
Waterside warrant (which memorialized the agreement surrounding Waterside’s initial
investment in Answernet). Compare H27 p. 1-2 with DX29 p. 3-4, 8-10.
50
until July 20, 2009”). Thus I find that Robertshaw did not exercise those warrants and thus does
not own those 6,351.5 shares (or half of the WSCC 2 shares).
Also on March 20, 2006, Speroni wrote to Pudles and the Robertshaws directing them to
“re-issue the 1% warrant with the agreed upon language” and ended the email with a line
directed specifically to Barbara Robertshaw: “Please let me know if it is ok with you (Executel)
to have the 3% warrant issued directly to you by Answernet.” DX398. Pudles also testified that
he did produce a new warrant for Waterside’s remaining 1%, but never reissued a warrant for the
other 3% because “by the time we resolved the issue with Waterside, Bill and I had agreed that
we were going to take the warrant in Cerida. So I never created another actual warrant document
for Cerida, because Cerida, you know, was us [, i.e., owned 50% by Pudles and 50% by the
Robertshaws].” Trial Tr. April 25, 2013 84:20-85:8 (Pudles); see also id. at 73:1-22. 54 There is
also an internal Answernet memorandum prepared by Babjak at the direction of Pudles which
purports to memorialize the assignment of the rights to the 3% by Executel to Cerida. DX79;
Trial Tr. April 24, 2013 79:18-80:16 (Babjak). Finally, there is a notation in the Answernet
share transfer ledger indicating that a transaction for 12,704 shares between Cerida and
Waterside took place in June 2006. DX175 p. 8. 55 There is, however, no entry recording a
transfer between Executel and Cerida. Id. at p. 8-9.
Pudles, however, argues that the best evidence that the WSCC 2 warrants were assigned
to Cerida is found in “the most important document in the case,” the Release Agreement between
WSCC and Cerida by which Cerida purchased the remaining WSCC shares (WSCC 3). Hrg. Tr.
54
Bill Robertshaw testified that there was never an agreement to assign any WSCC
warrants to Cerida. Trial Tr. April 26, 2013 110:21-23 (Bill Robertshaw).
55
As noted above, the share transfer ledger was created and maintained by Pudles. Trial
Tr. April 25, 2013 156:5-157:22.
51
June 19, 2013 49:8-17 (Pudles); DX64. Pudles contends that this document was prepared by
WSCC, which bolsters its credibility; “the external proof doesn’t get much stronger than that.”
Hrg. Tr. June 19, 2013 52:21-24 (Pudles). 56 He argues that “[t]he important thing about this
document is the first recital clause,” Hrg. Tr. June 19, 2013 49:8-17, which states:
whereas Waterside invested in Answernet pursuant to Series A
Stock Purchase Agreements dated July 20, 1999 and February 29,
2000, and a Stock Purchase Warrant dated July 20, 1999 and
subsequently reissued in October 2003 for four percent of
Answernet’s common stock and then sold to [Cerida] as to three
percent of Answernet’s common stock
DX64 p. 1.
However, I find that “for a writing to ‘validate’ a past transfer, the past transfer must have
actually occurred.” Bunge, 632 F.3d at 830. Given Answernet’s history of observing contractual
formalities in its interactions with WSCC and warrant transactions, as evidenced by the WSCC 1
transaction and Answernet’s issuance of a warrant for the WSCC 3 warrants (1%), I find that the
absence of documentary evidence supporting a transfer of the warrants for the WSCC 2 rights is
dispositive. 57 There is simply insufficient evidence for me to find that Cerida was actually
assigned the warrants to the WSCC 2 shares by Executel, and I cannot hold that Cerida
purchased or was assigned those warrant rights and therefore entitled to exercise those warrants
in 2008 based upon Pudles’s testimony ipse dixit. See Viele v. Devaney, 679 A.2d 993, 996-97
56
No explanation is offered as to how WSCC would independently know about
subsequent transactions regarding warrant rights that it had sold, or why, given the apparently
tumultuous relationship between WSCC and Pudles, Hrg. Tr. June 19, 2013 50:6-11 (Pudles),
WSCC would undertake to track those subsequent transactions.
57
Pudles’s own correspondence evinced concern for the observance of such formalities.
In March 2006, he wrote to Speroni regarding the option for the WSCC 2 warrants purchased
and exercised by Executel that he was “extremely concerned that Answernet has not received
any request from Waterside regarding the issuance of a new warrant related to Barbara and my
personal purchase of Executel’s Option Warrants. We made our payment over a month ago and
Waterside has not taken any action to deliver the shares.” H33.
52
(Del. Ch. 1996) (“The lack of reliable independent evidence supporting [defendant’s]
handwritten notations [to the share transfer ledger and warrant contracts], the fact that the
integrity of those notations depends entirely upon [defendant’s] own credibility . . . and the
defendants’ exclusive control of the stockledger at all times before this litigation arose-all these
factors provide serious reason to question the validity of [defendants’ assertions regarding
corporate ownership].”). Thus I will grant Robertshaw’s request for a declaration that Cerida
does not possess the 12,704 shares of Answernet that Pudles and Babjak claimed it received as a
result of an alleged assignment and exercise of the Waterside Warrants. 58
58
There is a notation in the Answernet share transfer ledger indicating that a transaction
for 12,704 shares between Cerida and Waterside took place in June 2006, DX175 p. 8. Cerida
financial statements also show notations for distributions of $250,000 for “Investment in
[Answernet] warrants” in both 2006 and 2007. DX88 p. 13; DX203 p. 7. Buried in a footnote
titled “Capitalization” in the yearly Answernet financial statements is the assertion that
[in] 2007 and prior years, Cerida acquired warrants to purchase
common shares of Answernet. These warrants were issued to
Answernet’s former lenders and a preferred shareholder in
connection with prior financing transactions. In 2008, Cerida
exercised these warrants at an aggregate purchase price of
$250,059 and, as a result, owns approximately 15% of
Answernet. . . .”
See e.g., DX175 p. 178 (2010), 154 (2009), 130 (2008); DX204 p. 21 (2011).
The “Capitalization” footnote in the Answernet combined financial statements for the
years 2006 and 2007 describes the disposition of the WSCC warrants thusly:
Answernet granted Waterside a warrant to purchase up to 69,837.4
shares of Answernet’s outstanding stock at an exercise price of
$.01 per share. The warrant expires on July 20, 2009. In 2003,
Waterside sold the right to purchase 52,900 shares under the
warrant in a private transaction. The purchaser immediately
exercised its right to purchase these shares. In February 2006, an
affiliate of [Answernet] purchased 12,703 warrant shares from
Waterside for $381,000. On May 4, 2007, this affiliate purchased
Waterside’s remaining warrant shares for $250,000.
53
3.
WSCC 3
I find that the record contains sufficient evidence for me to conclude that Cerida bought
WSCC’s remaining 1% interest in Answernet in May 2007. On May 3, 2007, WSCC’s counsel
emailed Pudles a release agreement signed by WSCC regarding the transaction for the remaining
1% and said that “once I have received all original signatures to the Release Agreement and the
Purchase Price from Answernet, I will release the original documents and funds from escrow,
[and transfer] the purchase price to [WSCC.]” DX65 p. 1-2. 59 On May 4, 2007 Pudles
forwarded the email regarding the release agreement from WSCC’s counsel to the Robertshaws
and wrote:
I have modified the agreement, signed the agreement and sent
payment to them out of Cerida. I paid it out of Cerida because [it]
had the cash and so that the acquisition of these shares are equal
between the Robertshaws and me. If we purchased them through
DX175 p. 103. While this paragraph describes the three WSCC warrant transactions, I do not
find its characterization of the Executel option purchase (in 2003) and exercise (in 2006) to be
accurate (as the payment to WSCC clearly came from Executel). See H30; H32; DX26.
Moreover it makes the same mistakes specifying a sum certain associated with each transaction
that WSCC supposedly rejected. DX398. Thus I do not find this to be especially probative of
Cerida’s, or “the affiliate’s,” claim of ownership of these warrants.
Answernet financial statements also display an entry regarding “[Cerida’s] Investment in
Answernet,” which totaled $1,231,059. DX204 p. 5. John Mitchell, the accountant for
Answernet, testified that this sum “represent[ed] the cumulative payments that had been made by
Cerida to purchase Answernet warrants up through the end of 2011.” Trial Tr. April 26, 2013
77:4-6 (Mitchell). However, Mitchell also conceded that he had no “firsthand knowledge about
what happened with [the WSCC] warrants” and that his knowledge regarding these warrant
transactions was derived exclusively from information and documents given to him by
Answernet and from what Pudles told him. Id. at 87:14-21; 91:5-7. Mitchell never saw the
warrants or the actual stock certificates. Id. at 97:2-10. Thus I do not find that the information
contained in these financial statements supports the conclusion that Cerida purchased or was
assigned warrant rights.
59
WSCC’s counsel also surrendered a stock certificate for 700 shares of preferred stock
in Answernet which WSCC still possessed as well as the new warrant it was issued following its
2003 transaction with Executel, just as the original warrant agreement required. DX65 p. 1
(emphasis added); H27 p. 1-3.
54
Answernet, we would have increased the disparity of ownership
between me and the Robertshaws further by .13%.
DX65 p. 1. The release agreement between WSCC and Answernet has several handwritten
modifications, initialed by Pudles, described in his above email. DX64. Of prime importance is
that Cerida rather than Answernet purchased the warrants. Pudles altered two clauses to reflect
the change in purchaser. The first initially read: “whereas Answernet desires to close out
[WSCC’s] investment by purchasing the Warrant from Waterside for a price of $250,000.” Id. at
1. However, Pudles, as he describes in his email, crossed out the word “purchasing” and
replaced it with the phrase “allowing Cerida to purchase.” Id. The second change is on the same
page; the clause initially read: “Answernet shall pay or cause to be paid to Waterside by wire
transfer or other immediately available funds the sum of [$250,000] no later than May 4, 2007.”
Id. Pudles crossed out “pay” and “be paid” and replaced it with “Cerida to pay” so the sentence
now begins “Answernet shall cause Cerida to pay Waterside . . .” Id. There is no evidence in the
record that the Robertshaws reviewed these modifications before Pudles transmitted the release
to Waterside. 60
However, Cerida financial statements for 2007 show a notation for a distribution of
$250,000 for “Investment in [Answernet] warrants” in 2007. DX88 p. 13. The Answernet share
60
While I am troubled that the record is ambiguous as to whether the Robertshaws
approved or otherwise ratified these changes after the fact, I am satisfied that Pudles made them
unilaterally and without consulting the Robertshaws, as he discusses in his May 3, 2007 email to
them. DX65 p. 1. From Pudles’s assertion in that email that “[i]f we purchased them through
Answernet, we would have increased the disparity of ownership between me and the
Robertshaws further by .13%” I also infer some indication of his ever-present concern both with
even the most minor details regarding the various ownership interests in the company and also
that the relative share ownership stakes were “equal between the Robertshaws and [him.]” Id.;
see also H7 (Pudles’s handwritten modification to WSCC 1 warrant changing Executel’s right to
purchase from 12.5% to 12.494% of Answernet stock).
55
transfer ledger also displays a notation for the transaction for these warrants between Cerida and
WSCC in 2007, DX175 p. 8, and the exercise of those shares in 2008. Id. at 8-9. There is,
however, no certificate or exercise form for these shares, which the initial WSCC agreements
called for; Pudles was the signatory of that agreement for Answernet. H27 p. 1, 3. Though the
record documentation of this transaction is incomplete, given the observance of some formalities
in this transaction and that the Robertshaws were clearly informed by Pudles that he altered the
terms of the WSCC 3 purchase agreement so that Cerida rather than Answernet would be the
purchaser, I find that Robertshaw has not carried her burden to demonstrate that Cerida did not
purchase the warrant rights to the 4,234.37 shares subject to the WSCC 3 transaction.
4.
Progress and BF/PC Warrants
I find that the record does not contain evidence of any assignment or sale of warrant
rights from Progress Capital or BF/PC to Cerida. The contracts creating these warrant rights
contained lengthy and detailed specifications governing the exercise of the warrants, the
assignment of the warrants, and the replacement of warrants should they somehow be lost or
destroyed. See H1 at p. 1, 23-24, 26, 31-33; H3 at p. 49, 56-59. Pudles is a signatory to these
agreements, H1 p. 40, H3 p. 15, and in correspondence with the Robertshaws referred to his
review of the agreements. See e.g. DX40 (“my review of the . . . Progress Bank warrants (now
owned by Cerida) . . .”). In other transactions involving warrant rights and outside investors,
Answernet observed the terms of the agreements and issued new warrants to the purchasers of
warrant rights and stock certificates, as in the WSCC 1 transaction. H6, H7, H12. In contrast,
the formalities called for in the contracts governing the Progress Capital and BF/PC warrants
were either not observed or the documents memorializing these transactions are not in evidence;
there are no written assignments, no new warrants, not even any cancelled checks or citations to
56
the Answernet ledger demonstrating payment for the warrants or consideration for their
assignment to Cerida. 61 The Answernet share transfer ledger has a notation for such a transfer
occurring in 2003 (Progress) and 2005 (BF/PC), DX175 p. 8, but apparently no warrants were
ever issued by Answernet to Cerida. I find the lack of any documentary evidence regarding the
transfer or assignment of the warrant rights from Progress Capital or BF/PC to Cerida to be
dispositive. See Viele v. Devaney, 679 A.2d 993, 996-98 (Del. Ch. 1996). Given this lack of
evidence, I cannot hold that Cerida was entitled to exercise the Progress Capital or BF/PC
warrants in 2008. Thus I will also issue a declaration that Cerida does not possess the 27,493.3
BF/PC shares of Answernet and that Cerida does not possess the 18,148.02 Progress Capital
shares of Answernet that Pudles and Babjak claimed Cerida received as a result of an alleged
assignment and exercise of the warrants for those shares.
5.
Michael Pudles Warrants
I find that the record also does not contain sufficient evidence of any transfer of warrant
rights from Michael Pudles to Gary Pudles. While Michael Pudles was issued warrant rights to
3,959 shares in 2000, DX 175 p. 14, there is no document memorializing any transaction in
which he sold or assigned or otherwise transferred these warrants to Gary Pudles. The
Answernet share transfer ledger has a notation for such a transfer occurring in 2006, DX175 p. 8,
but apart from this there are no documents that support that this transfer actually occurred and I
cannot hold that Pudles therefore was entitled to exercise those warrants in 2008 based solely on
his unsupported assertions that there was such a transfer. Thus I will also issue a declaration that
61
Indeed Babjak testified that she never saw any written assignments or written payment
record for any of these alleged warrants, nor any request to reissue the warrants sent to
Answernet by any of those third-party owners of the warrants, nor any transfer documentation
whatsoever regarding any of the warrants allegedly acquired by Cerida. Trial Tr. April 24, 2013
71:11-20, 72:23-73:2 (Babjak).
57
Pudles does not possess the 3,959 shares of Answernet that Pudles claimed he received as a
result of an alleged assignment and exercise of the those warrants. 62
B.
Other Requested Declaratory Relief
As set forth above, I find that Robertshaw has demonstrated by a preponderance of the
evidence that Pudles did not own all of the warrant rights for the shares in Answernet that he
claimed and thus was not entitled to exercise those warrants in 2008. Specifically, Pudles and
Cerida were not entitled to exercise the WSCC 2 warrants, the Progress Capital warrants, the
BF/PC warrants or the Michael Pudles warrants. The Delaware Supreme Court instructs that
“[s]tock issued without authority of law is void and a nullity. . . . The issuance of corporate
stock is an act of fundamental legal significance having a direct bearing upon questions of
corporate governance, control and the capital structure of the enterprise. The law properly
requires certainty in such matters.” STAAR Surgical Co. v. Waggoner, 588 A.2d 1130, 1136
(Del. 1991). 63 “[T]he available form of equitable relief depends on the facts of each case. If the
stock is indeed void, then ‘cancellation is the proper remedy.’” Id. at 1137 (citations omitted).
62
I note that there is no issue with Robertshaw’s entitlement to exercise her warrants for
3,959 shares as she was granted these rights in an earlier Answernet shareholder agreement, DX4
p. 15, and there is no dispute that she paid the exercise price of $39.59. Therefore I find it proper
to conclude that she exercised those warrants and owns those shares.
63
As the Delaware Supreme Court notes, the DGCL statutory structure governing the
rights and options respecting corporate stock and the issuance of such stock “consistently
requires board approval and a writing.” Grimes v. Alteon, Inc., 804 A.2d 256, 260 (Del. 2002).
See e.g., Del. Code Ann. tit. 8, § 157 (West) (“Subject to any provisions in the certificate of
incorporation, every corporation may create and issue . . . rights or options entitling the holders
thereof to acquire from the corporation any shares of its capital stock of any class or classes, such
rights or options to be evidenced by or in such instrument or instruments as shall be approved by
the board of directors.”)
58
Because I find that Robertshaw has shown there to be insufficient evidence of Cerida’s
entitlement to exercise the BF/PC and Progress Capital warrants and the warrants for the WSCC
2 transactions, and that the record contains no evidence that Pudles was assigned or purchased
and thus was entitled to exercise the Michael Pudles warrants, “[Answernet] had no power to
issue the kind of stock that was attempted to be issued [in 2008]; the act was void and not merely
voidable, and under practically all the authorities, it is incapable of being cured or validated by
an attempted ratification by amendment or other subsequent proceeding.” Superwire.com, Inc.
v. Hampton, 805 A.2d 904, 909 (Del. Ch. 2002), quoting Triplex Shoe Co. v. Rice & Hutchins,
152 A. 342, 348 (Del. 1930). 64
Thus, Cerida did not possess the BF/PC or Progress Capital warrants or the WSCC 2
warrants at the time of exercise, and thus Pudles’s exercise of them was void and these shares
were never issued. They therefore expired by the terms of the agreements that created them. See
DX29 p. 8 (“[WSCC] Warrant will [be] exercisable in whole or in part at any time . . . until July
20, 2009”); H6 p. 1-2 (WSCC 2 option to expire on April 30, 2006); H3 p.1 ([BF/PC] warrant set
to expire on May 19, 2010); H1 p. 55 (Progress Capital warrant was set to expire if not exercised
on or before October 15, 2008). Further, Pudles does not possess the Michael Pudles shares, and
these shares too were void ab initio. Thus the actions that Pudles took at the November 2011 and
64
The question of corporate control of Answernet is not merely whether Pudles’s
exercise in May 2008 of the warrant rights was proper. While the May 2008 exercise ignored
contractually-imposed formalities governing the warrants that heretofore Answernet had
observed, my inquiry into his or Cerida’s entitlement to exercise those rights reveals that he had
no authority to do so in the first place, and thus I do not reach the question of whether the
problems with the exercise forms—namely that they falsely recited that the warrants were
surrendered with the exercise forms—are curable deficiencies or even independent grounds to
reject Pudles’s control claims. Rather, the problems with the exercise forms—of which the lack
of the surrender of the warrants with the forms or the arguably incorrect exercise price (i.e., the
consideration for the stock issuance) are just examples—are part and parcel of the lack of
evidentiary support for the contention that Pudles or Cerida possessed the exercise rights at all.
59
the December 2011 Answernet meetings on the strength of the votes he was not entitled to
exercise are void too. Accordingly, I will issue the declarations requested by Robertshaw: 1)
declaring void the November 28, 2011 Special Meeting of the Shareholders of Answernet, Inc.,
and all votes taken at that meeting; and 2) declaring void the December 15, 2011 Annual
Meeting of the Shareholders of Answernet, Inc., and all votes taken at that meeting. 65
I will also issue a declaration that “Barbara Robertshaw and [Executel] may at any time
call a Special Meeting of the Shareholders in order to elect new corporate officers and to take all
other actions permitted by law and the By-Laws.” Am. Compl. 75(f). Because she and Executel
now together hold more than 51% of the outstanding shares in Answernet, they are entitled under
the Answernet bylaws to call such a meeting. A2 p. 1 (“Special meetings of the shareholders
may be called for any purpose, at any time . . . upon the written request of shareholders holding
fifty-one percent of the outstanding shares of stock of the corporation eligible to vote at the
meeting.”); see also Appendix, infra.
V.
Fraud
Robertshaw argues that Pudles and Babjak were aware that the Cerida ownership claims
were false, that no records existed to support such a claim and that these facts thus constitute
common law fraud. Robertshaw Post-Trial Br., Dkt. No. 164, p. 22-36. I disagree. The
elements of fraud under Delaware law are: (1) a false representation, usually one of fact, made
by the defendant; (2) defendant’s knowledge or belief that the representation was false or was
65
The Order that follows this opinion includes a comprehensive declaratory statement of
the rights of the parties as determined by my findings in this case. It also includes as an
Appendix to this opinion a chart demonstrating the resulting capitalization structure of
Answernet.
I also find that Robertshaw has not carried her burden to demonstrate that Babjak was not
lawfully elected Secretary of Answernet. There is no documentary support for that proposition
and no testimony on the issue, and so I will not issue such a declaration.
60
made with reckless indifference to the truth; (3) an intent to induce the plaintiff to act or to
refrain from acting; (4) the plaintiff’s action or inaction taken in justifiable reliance upon the
representation; and (5) damage to the plaintiff as a result of such reliance. Metro. Life Ins. Co. v.
Tremont Group Holdings, Inc., No. 7092, 2012 WL 6632681, at *16 (Del. Ch. Dec. 20, 2012).
In Delaware, a plaintiff must prove the elements of common law fraud by a preponderance of the
evidence. Outdoor Techs., Inc. v. Allfirst Fin., Inc., No. 09-151, 2001 WL 541472, at *3 (Del.
Super. Ct. Apr. 12, 2001); Tracinda Corp. v. DaimlerChrysler AG, 364 F. Supp. 2d 362, 389 (D.
Del. 2005).
While I find that the representations made by Babjak and Pudles regarding the Cerida and
Pudles share ownership were inaccurate, I find that Robertshaw has not supplied evidence that
either defendant had anything other than a good faith but mistaken belief that certain warrant
rights had been purchased or assigned by Cerida or Pudles. For example, the validity of the
Cerida/Progress transaction was in controversy since 2003, DX175 p. 23, but Pudles consistently
represented that Cerida had been assigned the rights to those shares. See e.g. DX40.
Robertshaw has shown, however, that there is nothing in the record that substantiates that claim.
Pudles also testified that in 2006 he lost a lot of files in a computer crash, Trial Tr. April 25,
2013 176:20-25 (Pudles), which may explain the disappearance of some of the pertinent records
in this case. I do not find that the evidence reveals that Pudles knew that he and Cerida did not
possess the rights to all of the shares that he believed he and Cerida possessed. Nor is there
anything to demonstrate that Babjak, though she failed to undertake any further investigation of
Pudles’s representations about the Answernet capital structure, knew that Cerida did not possess
certain warrants. Trial Tr. April 24, 2013 71:24-72:1, 79:8-80:16 (Babjak). Moreover, when
confronted with the controversy about the capital structure, Babjak sought the advice of outside
61
counsel. Id. at 105:24-106:21 (Babjak). Thus, Robertshaw has failed to carry her burden on
common law fraud and I find for each respective defendant on the fraud claims.
VI.
Breach of Fiduciary Duty
Robertshaw argues that the actions of Pudles and Babjak with respect to the Cerida
ownership claim were not taken for any legitimate corporate purpose but rather to further
Pudles’s own personal interests at Robertshaw’s expense. Robertshaw Post-Trial Br., Dkt. No.
164, p. 40-41. Pudles responds that his actions in taking the Special Distribution and his
assertions regarding the capital structure of Answernet all demonstrate that he was acting in good
faith at all times and thus he did not breach any fiduciary duty. Pudles Post-Trial Br., Dkt. No.
167, p. 21, 35. Babjak argues that, in response to Robertshaw’s contentions about the relative
shareholder interests in Answernet, she sought and relied on the advice of outside counsel, and
that this demonstrates that she too acted in good faith and thus did not breach her fiduciary
duties. Babjak Post-Trial Br., Dkt No. 165, p. 11-13.
The directors of a Delaware corporation are presumed to act with care and loyalty.
Shocking Techs., Inc. v. Michael, No. 7164-VCN, 2012 WL 4482838, at *8 (Del. Ch. Oct. 1,
2012). “[O]fficers of Delaware corporations, like directors, owe fiduciary duties of care and
loyalty, and [ ] the fiduciary duties of officers are the same as those of directors.” Gantler v.
Stephens, 965 A.2d 695, 708-09 (Del. 2009). The fiduciary duty of loyalty imposes “an
affirmative obligation to protect and advance the interests of the corporation” and requires an
officer or director “absolutely [to] refrain from any conduct that would harm the corporation.”
Encompassed within the duty of loyalty is a duty of good faith, and “a failure to act in
good faith may result in liability because the requirement to act in good faith ‘is a subsidiary
element[,]’ i.e., a condition, ‘of the fundamental duty of loyalty.’” Stone ex rel. AmSouth
62
Bancorporation v. Ritter, 911 A.2d 362, 369-70 (Del. 2006). “To act in good faith, a director
must act at all times with an honesty of purpose and in the best interest and welfare of the
corporation.” Id., quoting In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 755 (Del. Ch.
2005), aff’d, 906 A.2d 27 (Del. 2006). Thus a showing of bad faith conduct demonstrates a
violation of the duty of loyalty. Id. at 370. A failure to act in good faith may establish a
violation of the duty of loyalty, inter alia,
where the fiduciary intentionally acts with a purpose other than
that of advancing the best interests of the corporation, where the
fiduciary acts with the intent to violate applicable positive law, or
where the fiduciary intentionally fails to act in the face of a known
duty to act, demonstrating a conscious disregard for his duties.
Id. The third of these examples describes the lack of good faith conduct that the Delaware
Supreme Court held was a “necessary condition” for oversight liability, i.e., “a sustained or
systematic failure of the board to exercise oversight—such as an utter failure to attempt to assure
a reasonable information and reporting system exists. . . .” Stone, 911 A.2d at 369, quoting In re
Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 971 (Del. Ch. 1996). “[T]he necessary
conditions predicate for director oversight liability are: (a) the directors utterly failed to
implement any reporting or information system or controls; or (b) having implemented such a
system or controls, consciously failed to monitor or oversee its operations thus disabling
themselves from being informed of risks or problems requiring their attention.” Stone, 911 A.2d
at 370. In either case, imposition of liability requires a showing that the directors knew that they
were not discharging their fiduciary obligations. Id. “A director acting in subjective good faith
may, nevertheless, breach his duty of loyalty.” Shocking Techs, 2012 WL 4482838, at *8; see
also Johnston v. Pedersen, 28 A.3d 1079, 1092 (Del. Ch. 2011) (finding defendants breached
duty of loyalty despite honest and good faith belief that they were acting toward the
63
corporation’s best interests). However, the “essence of the duty of loyalty” stands for the
fundamental proposition that a director or officer, even if he is a shareholder, may not engage in
conduct that is “adverse to the interests of [his] corporation.” Shocking Techs., 2012 WL
4482838, at *8.
Here, as with the fraud claims, I find that while Pudles and Babjak were mistaken in their
conclusions regarding Cerida’s and Pudles’s warrant rights, Robertshaw has failed to adduce
evidence that either defendant had anything other than good faith but mistaken ideas about the
Answernet capital structure. Thus, while Pudles’s consistent assertions that Cerida owned
Answernet warrants, see e.g., M2, DX40, DX77, DX175 p. 23, turned out to lack substantive
documentary support, I cannot based on the evidence before me find that his assertions were
tantamount to bad faith. Further, Pudles gave the Robertshaws opportunities to challenge his
assertions or unmake his actions as they deemed necessary. For example, after altering the
WSCC 3 purchase agreement to make Cerida rather than Answernet the purchaser, Pudles told
the Robertshaws of his actions and offered them the opportunity to take the shares personally
rather than through Cerida. DX65 p. 1. Similarly, after the completion of the May 22, 2008
warrant exercise, Pudles in a May 23, 2008 email describes the details of the warrant exercise,
and that same day Bill Robertshaw responded that “doing the warrants is proper and ok.” DX83
p.1-2. 66 There is no evidence before me that Pudles took these actions for an illegitimate
purpose; he simply was mistaken about his right to exercise certain warrants. Similarly, there is
no evidence that Babjak, though she failed to undertake further investigation of the claims made
66
Though I note that if the dates on the warrant exercise forms are correct, Pudles had
already exercised the warrants when he wrote to the Robertshaws about the warrant executions.
Compare DX83 with DX78, DX80-82.
64
by Pudles, Trial Tr. April 24, 2013 79:8-80:16 (Babjak), acted or failed to act for an improper
purpose. Moreover, she did seek the advice of outside counsel. Id. at 105:24-106:21.
Further, I do not find that Robertshaw has established the conditions required to impose
oversight liability on Pudles or Babjak. Answernet had a recordkeeping system, albeit one that
fell short of having the precision one might desire, and when its records were challenged by the
Robertshaws, Answernet’s officers and directors sought the advice and assistance of outside
counsel. There is also no evidence that Answernet was harmed by the imprecise recordkeeping
by its officers and directors. Thus I find that Robertshaw has failed to produce evidence that
satisfies the predicate conditions for oversight liability.
Similarly, I do not find that Pudles’s unilateral taking of the Special Distribution (while
giving Robertshaw promissory notes to pay her Special Distribution) was a violation of his
fiduciary duties. There is no evidence that his conduct surrounding the Special Distribution
harmed the corporation or was even really adverse to its interests, and to protect against that risk,
Pudles made the personal guaranty that the bank required in order to loan Answernet the money
to make the Special Distribution. Because there has been an insufficient evidentiary showing of
bad faith or lack of good faith on the part of either Pudles or Babjak, I find for defendants on
these claims.
VII.
Shareholder Derivative Claim
Robertshaw also asserts a shareholder derivative claim against Pudles. Am. Compl. ¶¶
76-81. Whether a claim is direct or derivative “turns solely on who suffered the alleged harm
and who would receive the benefit of any recovery or other remedy.” Tooley v. Donaldson,
Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033, 1035 (Del. 2004). To be a direct claim, plaintiff's
alleged injury “must be independent of any alleged injury to [the corporation].” Tooley, 845
65
A.2d at 1039. In other words, Robertshaw “must demonstrate that the duty breached was owed
to [her] and that [she] . . . can prevail without showing an injury to [Answernet].” Id. “In
determining whether plaintiff has done this, the court looks beyond [plaintiff’s] characterization
of the claims.” Polak v. Kobayashi, No. 05-330, 2008 WL 4905519, at *7 (D. Del. Nov. 13,
2008), citing Dietrich v. Harrer, 857 A.2d 1017, 1027 (Del. Ch. 2004) (“Even after Tooley, a
claim is not ‘direct’ simply because it is pleaded that way . . . . Instead, the court must look to all
the facts of the complaint.”); In re Syncor Int’l Corp. Shareholders Litig., 857 A.2d 994, 997
(Del. Ch. 2004) (courts applying Tooley “look at the nature of the wrong alleged, not merely at
the form of the words in the complaint”). “[T]he same set of facts can give rise to both a direct
claim and a derivative claim.” Gentile v. Rossette, 906 A.2d 91, 100 n.19 (Del. 2006) (internal
quotation marks omitted). However, “Delaware law generally does not allow shareholders to
assert breach-of-fiduciary-duty claims directly, unless the shareholders can show damage distinct
from the damage to the corporation. LaSala v. Bordier et Cie, 519 F.3d 121, 130 (3d Cir. 2008),
citing Tooley, 845 A.2d at 1034.
Robertshaw has consistently styled one of her claims as derivative, but in her post-trial
briefing, Robertshaw seeks “judgment against [Answernet] in addition to the above judgments
against Pudles and Babjak . . . and judgment against [Answernet] jointly and severally with
[Pudles and Babjak] for the total amount of attorney’s fees and litigation expenses this litigation
ultimately costs her.” Robertshaw Post-Trial Br., Dkt. No. 164 ECF p. 45-46. This then is
plainly not a derivative claim because no benefit Robertshaw seeks would inure to the
corporation. However, because I find that there was no breach of fiduciary duty or fraud by
either Pudles or Babjak, there is no relief from those claims that would go to Answernet, and so
it is irrelevant whether they are direct or derivative. Further, because the Special Distributions
66
created no value for Answernet (and thus the bank required personal guaranties from the
shareholders who intended to take them), I find that Robertshaw’s breach of contract claim, if
successful, also plainly would have created no benefit for Answernet. See DX141 at p.11-12.
Finally, as noted above, there is no evidence that Answernet itself was harmed by Pudles’s
conduct. Thus, I find for Pudles and Babjak on this claim as well.
VIII.
Punitive Damages
Because Robertshaw has failed to carry her burden on the breach of contract, fraud and
breach of fiduciary duty claims, she is plainly not entitled to punitive damages on those claims.
IX.
Attorneys’ fees
Robertshaw also has requested that I award her attorneys’ fees because she had to bring
suit to enforce her rights and as a result incurred significant litigation costs. Dkt. No. 164 ECF p.
45-47. I decline to do so.
“[U]nder the prevailing ‘American Rule,’ courts generally do not award attorney’s fees to
a prevailing party unless some special circumstance is present.” Barrows v. Bowen, No. 1454-S,
1994 WL 514868, at *1 (Del. Ch. Sept. 7, 1994). Those special circumstances which warrant
exceptions to the American Rule are limited to:
1) cases where fees are authorized by statute, 2) cases where the
applicant creates a common fund or non-monetary benefit for the
benefit of others, 3) cases where the underlying (pre-litigation)
conduct of the losing party was so egregious as to justify an award
of attorneys’ fees as an element of damages, and 4) cases where
the court finds that the litigation was brought in bad faith or that a
party’s bad faith conduct increased the costs of litigation. (This
fourth exception is referred to as the “bad faith exception”).
67
Arbitrium (Cayman Islands) Handels AG v. Johnston, 705 A.2d 225, 231 (Del. Ch. 1997), aff’d,
720 A.2d 542 (Del. 1998). 67 Here, only the last two exceptions could possibly apply to
Robertshaw’s direct claims. I find that they do not.
Pudles’s conduct which led to the litigation was not sufficiently egregious so as to justify
fee shifting in this case. As noted above, he held good faith but mistaken beliefs about the
Answernet capital structure and shareholder agreement, and outside counsel was retained to
review and affirm his opinions as to the former. See Judge v. City of Rehoboth Beach, No.
1613, 1994 WL 198700, at *2 (Del. Ch. Apr. 29, 1994) (holding that bad faith exists where a
defendant requires a plaintiff to utilize the courts in order to enforce a right which clearly
belongs to the plaintiff; such bad faith was found where the “defendants were faced with a
mountain of evidence, including legal opinions, legal authority and judicial declarations,
demonstrating” the plaintiff’s right to an easement). Similarly, while “in unusual circumstances
attorneys’ fees will be assessed against a corporation in connection with its treatment of one or
more stockholders,” Weinberger v. UOP, Inc., 517 A.2d 653, 656 (Del. Ch. 1986), the
circumstances of this case are not so unusual as to warrant a departure from the American Rule
and a shift in legal fees from Pudles or Answernet to Robertshaw. 68 Further, though this
67
An entitlement to attorneys’ fees could also be created by contract. See Kahan v.
Rosenstiel, 424 F.2d 161, 165-66 (3d Cir. 1970). No such contract right exists here.
68
Robertshaw contends that she is entitled to fees for bringing her shareholder derivative
suit. Robertshaw Post Trial Br., Dkt. No. 164 p. 45-47. While
[u]nder the common fund doctrine, “a litigant or a lawyer who
recovers a common fund for the benefit of persons other than
himself or his client is entitled to a reasonable [attorneys’] fee from
the fund as a whole.” The common fund doctrine is a wellestablished basis for awarding attorneys’ fees in the Court of
Chancery. It is founded on the equitable principle that those who
have profited from litigation should share its costs. “Typically,
68
litigation has undoubtedly been acrimonious, I do not find that the conduct of Pudles, or any
party for that matter, constitutes bad faith; neither has a party’s conduct increased the costs of
litigation in an outlandish way. Thus, I will not award Robertshaw attorneys’ fees.
X.
Abuse of Process
Pudles also asserts a counterclaim against Robertshaw for abuse of process. Dkt. No. 22.
I find that nothing in the record demonstrates an abuse of process. 69 In Pennsylvania, “[t]he tort
successful derivative or class action suits which result in the
recovery of money or property wrongfully diverted from the
corporation . . . are viewed as fund creating actions.”
Americas Mining Corp. v. Theriault, 51 A.3d 1213, 1252-53 (Del. 2012), reargument denied
(Sept. 21, 2012). Robertshaw did not bring a successful derivative claim, and thus is not entitled
to attorneys’ fees under that theory. Further, it is unclear to me that the declaratory relief
Robertshaw has shown an entitlement to in this case creates any benefit to Answernet, and thus I
will not grant Robertshaw attorneys’ fees on that claim either.
69
I note that the Pennsylvania Supreme Court, in T.C.R. Realty, Inc. v. Cox, 372 A.2d
721 (Pa. 1977), held that Pennsylvania procedural rules governing counterclaims preclude the
assertion of a counterclaim for abuse of process based on the initiation and prosecution of the
underlying action. 372 A.2d at 727-29. The Court found that such a counterclaim is not
sufficiently related to the same transaction or occurrence giving rise to the plaintiff's cause of
action to permit its joinder. Id. at 727-29. However, it is a long-recognized principle that federal
courts sitting in diversity “apply state substantive law and federal procedural law.” Shady Grove
Orthopedic Assoc.’s P.A. v. Allstate Ins. Co., 559 U.S. 393, 130 S. Ct. 1431, 1448 (2010), (J.
Stevens, concurring), quoting Hanna v. Plumer, 380 U.S. 460, 465 (1965). I find that my
consideration of Pudles’s counterclaim is not precluded by the rules of federal procedure. See
Fed. R. Civ. Pro. 13; 28 U.S.C. § 1367.
Moreover, the T.C.R. Realty Court identified several problems associated with permitting
joinder of such a counterclaim, namely that joinder would
require the plaintiff to present his case in chief, which would not
involve the elements of the tort claim, e.g., malice, probable cause,
improper motive, etc., and then to allow the defense in addition to
the presentation of his evidence in rebuttal of plaintiff’s case in
chief, to interject additional and unrelated testimony to establish
the claimed tort. Thereafter of course, the plaintiff would be
required to introduce further evidence to meet that issue, thus
probably completely obfuscating the basic issue which initially
69
of ‘abuse of process’ is defined as the use of legal process against another primarily to
accomplish a purpose for which it is not designed.” Lerner v. Lerner, 954 A.2d 1229, 1238-39
(Pa. Super. Ct. 2008), quoting Shiner v. Moriarty, 706 A.2d 1228, 1236 (Pa. Super. Ct. 1998),
appeal denied, 729 A.2d 1130 (1998). “‘To establish a claim for abuse of process it must be
shown that the defendant (1) used a legal process against the plaintiff, (2) primarily to
accomplish a purpose for which the process was not designed; and (3) harm has been caused to
the plaintiff.’” Lerner, 954 A.2d at 1238, quoting Shiner 706 A.2d at 1236. The Pennsylvania
Supreme Court has said that “[t]he gist of an action for abuse of process is the improper use of
process after it has been issued, that is, a perversion of it.” Gen. Refractories Co. v. Fireman’s
Fund Ins. Co., 337 F.3d 297, 304 (3d Cir. 2003), quoting In re Larsen, 616 A.2d 529, 586 (Pa.
1992). As the Court of Appeals notes, abuse of process generally is found only:
where conduct has been truly abusive. In General Refractories, we
held that an abuse of process claim would be valid where a party
“intentionally withheld critical documents, ignored court orders,
permitted false testimony at depositions and misrepresented facts
to opposing counsel and the court.” Id. at 301. The defendants
perverted the legal process by “engag[ing] in an intentional effort
to obstruct legitimate discovery by using the claim of privilege”
and attempting to hide critical facts and discoverable documents.
Id. at 302.
In re Finney, 184 F. App’x 285, 289-90 (3d Cir. 2006), quoting Gen. Refractories Co. v.
Fireman’s Fund Ins. Co., 337 F.3d 297, 301 (3d Cir. 2003). Here I find nothing that would
inspired the bringing of the lawsuit. Such a co-mingling of the
plaintiff’s claim and those of defendants’ counterclaim would be
likely to produce such confusion in the mind of the fact finder as to
make the possibility of a just decision unlikely and increase the
probability of a miscarriage of justice.
T. C. R. Realty, Inc. v. Cox, 372 A.2d at 728 (1977). Because Pudles introduced no evidence to
prove his counterclaim apart from the legal bills he incurred in defending this litigation, I was
spared the confusion anticipated by the Court as outlined above.
70
constitute an abuse of process. I find no evidence in the record that Robertshaw initiated this suit
with an improper purpose. She commenced the action with a reasonable interpretation of the
Agreement and the belief that Pudles was in breach of its terms. Additionally, Robertshaw has
now proven by a preponderance of the evidence that Pudles did not comply with the terms of the
Agreement and she has shown that his ownership claims regarding certain Answernet shares
were false. Pudles submitted no additional evidence to prove his counterclaim, apart from a
document purporting to demonstrate his legal bills in defending the lawsuit. Trial Tr. April 26,
2013 101:22-102:9; 104:13-105:3. There is nothing in the record that suggests Robertshaw
conducted the lawsuit in an abusive fashion or employed the process to accomplish an improper
purpose. Thus I find for Robertshaw on the counterclaim.
An appropriate Order follows.
71
Appendix: Answernet Capital Structure
Robertshaw/Executel
Pudles/Cerida
Prejudgment
Post-judgment
Prejudgment
Post-Judgment
Initial issue
150,000 shares
150,000 shares
150,000 shares
150,000 shares
Initial warrant
issue
3,959 shares
3,959 shares
WSCC 1
(Executel)
52,900 shares
52,900 shares
WSCC 2
(Cerida)
12,704 shares
0 shares
WSCC 3
(Cerida)
4,234.37 shares
4,234.37 shares
Progress
warrants
(Cerida)
18,148.02 shares
0 shares
BF/PC
warrants
(Cerida)
27,493.3 shares
0 shares
Michael
Pudles
warrants
(Gary Pudles)
3,959 shares
0 shares
216,538.69
shares (51.14%)
154,234.37
shares (42.71%)
Total
206,859 shares
(48.86%)
206,859 shares
(57.29%)
Parenthesis in left column denote alleged transferee of the warrants rights
Total issued shares pretrial: 423,397.69
Total issued shares post-trial: 361,093.37
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