G.R. Tech., Inc. v. Casella Waste Sys., Inc. ( 2010 )

G.R. Tech., Inc. v. Casella Waste Sys., Inc., No. 503-7-08 Rdcv (Eaton, J., Feb. 10, 2010)
[The text of this Vermont trial court opinion is unofficial. It has been reformatted from the original. The accuracy of the text and the
accompanying data included in the Vermont trial court opinion database is not guaranteed.]
STATE OF VERMONT
RUTLAND COUNTY
G.R. TECHNOLOGY, INC. )
derivatively on behalf of )
GREEN MOUNTAIN GLASS, LLC ) Rutland Superior Court
and CULCHROME, LLC ) Docket No. 503-7-08 Rdcv
)
v. )
)
CASELLA WASTE SYSTEMS, INC., )
FCR, LLC, JOHN CASELLA, )
JAMES BOHLIG, SEAN DUFFY, )
and PAULA CALABRESE )
SUPPLEMENTAL DECISION RE: AMENDED MOTION TO DISMISS
This docket is a derivative action filed by the minority shareholder in two limited
liability companies organized under the laws of Delaware. The minority shareholder
alleges eighteen separate causes of action in the derivative complaint, but many of the
causes of action are also stated as direct claims in a companion case known as Casella
Waste Systems, Inc. v. G.R. Technology, Inc., No. 409-6-07 Rdcv. The present question
before the court is whether some of the derivative claims should be dismissed on the
ground that they are solely direct, rather than derivative, in nature.
The court partially denied the amended motion to dismiss on October 15, 2009, to
the extent that it sought dismissal of the entire derivative complaint. The court explained
that under well-established Delaware law, there was no reason why the minority
shareholders could not institute parallel direct and derivative actions. The court invited
both parties to file supplemental memoranda, however, on the question of whether some
of the individual causes of action stated in the derivative complaint should be dismissed.
Both parties filed additional papers on November 10, 2009. The court has now reviewed
those memoranda and issues this supplemental decision with respect to the amended
motion to dismiss.
I.
In distinguishing between direct and derivative claims, it is the responsibility of
the court to “independently examine the nature of the wrong alleged and any potential
relief to make its own determination of the [claim’s] classification.” Tooley v.
Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1035 (Del. 2004). This means that
the court must look beyond plaintiff’s characterization of the claim and attempt to divine,
from the allegations in the complaint, whether the claim is direct or derivative in nature.1
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It does not help the analysis that, although plaintiffs provided a general factual overview in the
complaint, they did not identify the specific facts that give rise to each cause of action. Furthermore,
The court accordingly begins with the following facts, which are taken from the
derivative complaint and viewed in the light most favorable to plaintiffs.
Historically, glass manufacturers seeking to produce new glass containers from
recycled materials were limited to the use of single-colored crushed glass (also known as
cullet). This meant that processors had to separate glass by color before it could be used
in the manufacturing process. Thus, green cullet could be used to make new green
bottles, but mixed-color cullet was more or less a waste product.
Between 1998 and 2002, G.R. Technology and Professor Lehman developed
technology intended to enable glass manufacturers to use mixed-color cullet in the
production of new glass bottles. The idea was that the technology would create new
market opportunities for unsorted, mixed-color cullet, which had heretofore represented a
disposal cost to most processors and manufacturers. The research efforts led to several
patents, which are referred to herein as the Lehman patents.
In early 2003, GRT principals Lame and Billmyer began seeking business venture
partners in order to develop and commercialize the intellectual property. They were
introduced to Bohlig and Duffy, who were principals at CWS and FCR. Subsequent
negotiations led to the signing of a development agreement in April 2003.
The development agreement contained a number of confidentiality provisions. It
also licensed the Lehman patents to FCR for an initial development period, during which
FCR was granted the authority to further refine and market the technologies as an agent
for GRT. In the event that the development period was successful, the parties
contemplated a joint venture for the purpose of holding and marketing the intellectual
property.
Towards this end, the parties created two new limited liability companies.
CulChrome LLC was created for the purpose of holding the patents, and Green Mountain
Glass LLC was created for the purpose of marketing and sublicensing the technology.
The majority voting member in both companies was FCR (51%) and the minority voting
member was GRT (49%).
The central allegation in the complaint is that FCR misappropriated intellectual
property during the development period. It seems that FCR hired a consulting firm to
help in the development, and met with the consultants and Prof. Lehman several times,
including a meeting in Charlotte in July 2003. Although the meeting was intended to
further secure and develop the existing patents, Lame and Billmyer were apparently not
plaintiffs have alleged the same harm in nearly every count of the complaint. See, e.g., ¶¶ 89, 93, 99, 102,
105, 109, 112, 117, 120, 123, 126, 133, 136, 139 (“As a direct, proximate and foreseeable result of such
conduct, Plaintiffs herein suffered damages, inter alia, in the form of lost business opportunities, lost equity
and ownership interest, lost profits, lost income, attorneys’ fees and costs, and other pecuniary damages.”).
It is the responsibility of the court to look beyond this generic pleading and assess, for itself, whether the
claims are derivative or direct in nature.
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invited. The end result of the meeting was a list of suggested additional patent
applications arising out of the original Lehman intellectual property.
FCR then allegedly took this list and prepared a series of patent applications
under its own name dealing with the production and brokering of mixed-color cullet.
FCR did not tell GRT about the patent applications.
FCR and CWS then submitted a proposal to operate a landfill in Ontario County,
New York. The August 2003 proposal included a representation that FCR and CWS had
purchased a controlling interest in patented mixed-glass technology that would allow the
commingling of all mixed-color glass. The proposal was submitted, however, before
FCR had obtained any ownership interest in the Lehman technology (since the patents
were still held by GRT and had not yet been assigned to CulChrome). GRT was not
informed that the proposal had been made.
The development period was completed in October 2003. It was only at that point
that GRT assigned the Lehman patents to CulChrome. Green Mountain Glass was
thereafter in the business of marketing and licensing the Lehman technology, which
supposedly included business opportunities in the field of processing and brokering
mixed-color cullet.
FCR nevertheless allegedly entered into a number of public and private contracts
relating to the processing and brokering of mixed-color cullet under its own name. The
allegation is that these opportunities were competitive with the business plan that the
parties had laid out for Green Mountain Glass. FCR and CWS have taken the position
that they had the right to enter into their separate contracts, and that neither Green
Mountain Glass nor CulChrome have any right to the revenues generated from these
contracts.
The parties then engaged in a series of negotiations seeking a “business solution”
to the problems described herein. The attempts were ultimately unsuccessful, and the
present litigation followed.
II.
Derivative lawsuits are intended to permit shareholders to sue directors on behalf
of the corporation for an alleged breach of their fiduciary duties to the corporation, and
are necessary safeguards in ensuring that management honors its obligations to
shareholders. It is essentially the corporation itself who is the plaintiff in a derivative
action. Direct lawsuits, on the other hand, are brought by the shareholders in their
individual capacities to enforce their own rights and remedy their own injuries. 2 ALI
Principles of Corporate Governance § 7.01(a)–(b).
In this case, the minority shareholders filed a direct action and a derivative action,
and both contain essentially the same allegations and causes of actions. Since the
consequences that arise from the characterization of the action include whether recovery
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will flow to the shareholders themselves or instead to the limited liability companies (and
their creditors), and whether and how attorneys’ fees will be paid, the task presently
before the court is ensuring that the claims asserted in the derivative action are, in fact,
derivative in nature.2
The test for distinguishing derivative claims from direct claims “turn[s] solely on
the following questions: (1) who suffered the alleged harm (the corporation or the suing
stockholders, individually); and (2) who would receive the benefit of any recovery or
other remedy (the corporation or the stockholders, individually).” Tooley v. Donaldson,
Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004). In short, a claim should be
characterized as a direct action when the stockholder can prevail without showing an
injury to the corporation, and as a derivative action when the stockholder can prevail only
by showing that the wrongful act depleted corporate assets and thereby injured the
shareholders indirectly. 2 ALI Principles of Corporate Governance § 7.01(a)–(b). It
must additionally be kept in mind that the same set of facts may give rise to both direct
and derivative claims. Loral Space & Communications, Inc. v. Highland Crusader
Offshore Partners, L.P., 977 A.2d 867, 869–70 (Del. 2009).
The first set of claims asserted in the derivative complaint are rooted in a breach
of the fiduciary duty of loyalty. These counts generally assert that defendants took the
licensed technology that belonged to CulChrome and misappropriated it for their own
uses, and that defendants also took for themselves a number of business opportunities that
should have belonged to Green Mountain Glass. As stated in the complaint, these counts
include Count IV (breach of fiduciary duty), Count V (assisting others to breach fiduciary
duty), Count VI (induced infringement), Count VII (tortious interference with business
relations), Count XIII (conversion), and Count XVI (usurpation of business/corporate
opportunities).3 Defendants have conceded that all of these counts are properly asserted
in the derivative complaint.
Count III (unjust enrichment) is along the same lines, but the parties dispute
whether unjust enrichment is a permissible claim in a derivative action. In generic terms,
unjust enrichment is “the unjust retention of a benefit to the loss of another, or the
retention of money or property of another against the fundamental principles of justice or
equity and good conscience.” Fleer Corp. v. Topps Chewing Gum, Inc., 539 A.2d 1060,
1062 (Del. 1988). Here, the allegation is that defendants retained the benefit of the
misappropriated intellectual property and the misappropriated business opportunities.
This is really no different from the derivative claims that defendants have conceded
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The question of whether any causes of action asserted in the direct lawsuit are actually solely
derivative in nature is not before the court at this time. The court does not anticipate that a motion to
dismiss will be filed in that action, given that the counterclaims (i.e., the direct claims) have already been
answered, and that discovery has long since been underway. A motion for summary judgment filed at the
appropriate time would be the better forum in which to test those claims.
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Defendants contend that Count XVI should be dismissed for failure to state a claim because
“usurpation of business/corporate opportunities” is not a cognizable cause of action. It seems to the court
that this is a claim for breach of the fiduciary duty of loyalty, and there is no need to dismiss it at this time.
The fact that the claim appears to be more or less duplicative of the other fiduciary-duty counts can be
addressed at a later time.
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above. Of course, there are questions about whether a quasi-contractual claim is
appropriate in light of any express agreements that may have been made, and whether an
election-of-remedies issue would be present if plaintiff prevailed in demonstrating that
the same conduct resulted in liability for breach of fiduciary duty and unjust enrichment.
But these concerns do not require dismissal of the unjust enrichment claim at this time.
See McPadden v. Sidhu, 964 A.2d 1262, 1276–77 (Del. Ch. Aug. 29, 2008) (declining to
dismiss unjust enrichment claim from derivative action despite noting same concerns).
The next claim is rooted in a breach of the fiduciary duty of care. Count XVIII is
styled as an ordinary claim for negligence, but the central allegation is that defendants
negligently mismanaged the limited liability companies. This appears to the court to be
an allegation that defendants breached their fiduciary duties of care in managing the
companies, which is a permissible derivative claim. See In re Walt Disney Co.
Derivative Litigation, 906 A.2d 27, 52 (Del. 2006) (discussing duty-of-care claims in
derivative litigation).
The next set of claims contain allegations that defendants negligently or
intentionally misrepresented or concealed certain facts in order to induce plaintiffs to
“enter[] into the transactions described above.” It is not entirely clear from the derivative
complaint what misrepresentations were made, or what transactions plaintiffs were
induced to enter into. Yet it can be inferred with a reasonable degree of certainty that
these claims are alleging that GRT was induced by misrepresentations into transferring
the Lehman patents to FCR and CulChrome. It appears to the court, therefore, that these
claims seek to redress harms suffered by GRT, and that they are accordingly direct in
nature. See Albert v. Alex. Brown Management Services, Inc., 2005 WL 5750602 at *12
(Del. Ch. Aug. 26, 2005) (“Generally, non-disclosure claims are direct claims.”); FS
Parallel Fund L.P. v. Ergen, 2004 WL 3048751 at *3 (Del. Ch. Nov. 3, 2004) (“[A] fraud
claim is inherently direct, under either pre- or post-Tooley analysis.”).
Plaintiffs contend that these claims are also derivative in nature because
defendants owed duties to the limited liability companies, and because defendants
breached these duties by making misrepresentations, withholding information, or
otherwise committing fraud upon the companies. Plaintiffs have not referenced,
however, any specific transactions that the limited liability companies were induced to
enter into by reason of a negligent or intentional misrepresentation. And even if there
were an allegation that the limited liability companies were induced to refrain from
entering into a transaction (which there is not), it is hard to see how this would not be
covered by the foregoing counts alleging breach of the fiduciary duty of loyalty. The
court accordingly views the claims stated in Count I (negligent provision of financial
information), Count II (constructive fraud), Count VIII (consumer fraud),4 Count XII
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The claim for consumer fraud alleges that defendants’ actions constituted unfair methods of
competition and/or deceptive acts or practices in the conduct of any trade or commerce “in violation of the
Vermont Consumer Fraud Act.” It is not apparent to the court how the facts of this case give rise to a claim
for violation of the Vermont CFA (such as how the limited liability companies would be consumers within
the meaning of the statute) and plaintiffs have not provided any explanation other than to say that
defendants committed fraud on the limited liability companies (which is a direct claim, as noted above). In
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(fraudulent inducement), and Count XVII (failure to provide sufficient information to
allow informed consent) as direct in nature. The amended motion to dismiss these counts
from the derivative complaint is granted.
The next set of claims involve breach of contract (Count X) and breach of the
contractual duty of good faith and fair dealing (Count XI). Again, it is not totally clear
what conduct gives rise to the claims, as plaintiffs have alleged only that defendants
breached “the contracts between the parties,” and that whatever defendants did also
constituted a breach of the implied covenant of good faith and fair dealing. Based on the
factual allegations in the complaint, the court interprets these claims as alleging that
defendants breached contractual confidentiality provisions during the period in which
FCR was refining and marketing the Lehman technologies as an agent for FCR. This
would be a direct claim because the confidentiality provisions were allegedly set forth in
a contract between FCR and GRT, and because the alleged harm took place before the
limited liability companies obtained any interest in the technologies. See Albert, 2005
WL 5750602 at *12 (“The claims for breach of contract . . . are direct.”).
Plaintiffs have not identified any contracts between defendants and the limited
liability companies themselves, other than perhaps the LLC operating agreements. If the
claim is that defendants breached their obligations of loyalty and care set forth in the
operation agreements, it can be adequately addressed under the breach-of-fiduciary-duty
claims set forth elsewhere in the complaint. And if the claim is that defendants breached
the provisions of the operating agreements pertaining to the proper procedure for
initiating lawsuits on behalf of the company, it appears to be generally well-settled that
actions challenging unauthorized corporate acts are direct in nature. 2 ALI Principles of
Corporate Governance § 7.01, cmt. c. Thus, in the absence of any explanation as to why
the contractual claims are derivative in nature, they will be dismissed from the derivative
complaint.
The next issue is whether the “claim” for punitive damages (Count XIV) should
be dismissed. It seems obvious to the court that a motion to dismiss is not the proper
time or place to test whether a claim for punitive damages is supported by the facts of the
case, and the court will not grant dismissal at this time. Yet there appears to be a
legitimate question as a matter of Delaware law as to whether punitive damages are
available in stockholder derivative litigation. See Elf Atochem North America, Inc. v.
Jaffari, 727 A.2d 286, 292 n.31 (Del. 1999) (explaining that the Delaware Court of
Chancery does not have jurisdiction to award punitive damages) (citing Beals v.
Washington Intern., Inc., 386 A.2d 1156, 1159 (Del. Ch. 1978)). The court does not
reach that issue here, since the parties have not briefed it; any questions about the
appropriateness of punitive damages in the derivative litigation can be taken up in due
course.
The last issue is whether the claims for civil conspiracy (Count IX) and
respondeat superior (Count XV) should be dismissed. It is clear that these “claims” are
the absence of any information explaining the claim in more detail, this appears to be, if anything, solely
direct in nature.
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not independent causes of action, but rather theories of liability that link individual
defendants to some underlying harm. Davis v. West Center City Neighborhood Planning
Advisory Committee, 2003 WL 908885 at *3 (Del. Super. Mar. 7, 2003); Arnold v.
Society for Sav. Bancorp, Inc., 1995 WL 376919 at *8 (Del. Ch. Jun. 15, 1995)
(discussing respondeat superior). The “counts” will accordingly be dismissed from the
complaint to the extent that they purport to set forth independent derivative causes of
action.
Yet there is no need to dismiss the factual allegations of civil conspiracy and
agency to the extent that they serve to link individual defendants to the underlying
derivative causes of action. The factual allegations may remain a part of the case even
though the “counts” have been dismissed. See Davis, 2003 WL 908885 at *3 (explaining
that although civil conspiracy is not an independent cause of action, it can be alleged
where there is an underlying harm in which more than one person participated).
In the final analysis, the derivative complaint sets forth valid claims rooted in
allegations of breaches of the fiduciary duties of care and loyalty. The amended motion
to dismiss is granted, however, as to the direct claims rooted in allegations of fraud and
breach of contract, and as to the separate “counts” for civil conspiracy and agency.
ORDER
Defendants’ Amended Motion to Dismiss (MPR #1) is granted in part as to
Counts I, II, VIII, IX, X, XI, XII, XV, and XVII, and denied as to all other causes of
action asserted in the derivative complaint.
Dated at Woodstock, Vermont this ____ day of February, 2010.
___________________________________
Hon. Harold E. Eaton, Jr.
Superior Court Judge
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