Petroleum Enhancer, LLC v. Lester Woodward

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 14a0184n.06
Case No. 13-1369
FILED
Mar 07, 2014
UNITED STATES COURT OF APPEALS
DEBORAH S. HUNT, Clerk
FOR THE SIXTH CIRCUIT
PETROLEUM ENHANCER, LLC, )
)
Plaintiff, )
) ON APPEAL FROM THE
v. ) UNITED STATES DISTRICT
) COURT FOR THE EASTERN
LESTER R. WOODWARD, ) DISTRICT OF MICHIGAN
)
Defendant, )
)
POLAR MOLECULAR CORP., ) OPINION
)
Intervenor Plaintiff, )
)
POLAR MOLECULAR HOLDING CORP., )
Interpleader/Third Party Plaintiff-Appellant, )
)
AFFILIATED INVESTMENTS, LLC; )
BARBARA SOCIA, PERSONAL )
REPRESENTATIVE OF THE ESTATE OF )
RICHARD J. SOCIA, DECEASED; CARL HILL; )
BRUCE BECKER; A. RICHARD NELSON, )
)
Third Party Defendants-Appellees. )
)
BEFORE: GILMAN, COOK, and McKEAGUE, Circuit Judges.
McKEAGUE, Circuit Judge. The present case involves a bitter corporate dispute that
has prompted years of litigation and several rounds of bankruptcy proceedings. Polar Molecular
Holding Corporation (“Polar Holding”) is a publicly traded Delaware corporation that owns
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
entirely Polar Molecular Corporation (“PMC”), a privately held Delaware corporation. PMC
was in the petroleum-additives business and owned numerous patents and trademarks; the
company was also heavily indebted, and had defaulted on a loan to Affiliated Investments, Inc.
(“Affiliated”). The loan was secured by all of PMC’s intellectual property. Following an
acrimonious dispute on Polar Holding’s board, one of the directors, Richard Socia (“Socia”),
formed a separate company named Petroleum Enhancer, LLC (“Petroleum Enhancer”).
Petroleum Enhancer then acquired Affiliated’s interest in PMC’s promissory note and collateral.
In 2007, Petroleum Enhancer foreclosed on PMC’s defaulted loan and brought suit to obtain
possession of the intellectual property held as collateral. Polar Holding subsequently brought
counterclaims1 asserting breach of fiduciary duty, civil conspiracy, and tortious interference
against Richard Socia, Bruce Becker, and Carl Hill (“defendants”).2 The district court granted
the defendants’ motion for summary judgment.
Having determined that there is not a genuine issue of material fact, we AFFIRM the
district court’s grant of summary judgment on all claims.
1
This case presents a complicated factual and procedural posture after nearly six years of
litigation. We have summarized only the relevant portions of the record. For a more in-depth
discussion of this case’s factual and procedural background, see Petroleum Enhancer, LLC v.
Woodward, et al, 690 F.3d 757 (6th Cir. 2012).
2
Technically, Richard Socia, Bruce Becker, and Carl Hill are third-party defendants and
appellees, but for purposes of identification in this opinion, we shall refer to them collectively as
“defendants.”
-2-
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
I. BACKGROUND
PMC’s core business involved exploiting its intellectual property to manufacture fuel
enhancers on a large scale. On October 25, 2001, PMC executed a promissory note with
Affiliated, and in return, PMC promised to pay Affiliated $600,000 plus interest by December
26, 2001.
As collateral for the loan, Affiliated obtained a first-priority lien on, among other items,
PMC’s current and future intellectual property. This included the rights to “all patents . . . and
all other intangible property of every kind and nature.” R. 155-4, Sec. Agreement, § 2(d),
PageID # 3411. The security agreement also assigned to Affiliated all future assets, including
“[a]ll assets or other property similar to any of the foregoing hereafter acquired by [PMC].” Id.
at § 2(g), PageID # 3412.
From the outset, PMC experienced difficulty repaying its loan, and was forced to
negotiate for successive loan extensions from 2001 through 2005. As part of a loan extension on
August 23, 2004, PMC agreed to place some of the intellectual property used to secure its loan in
escrow with instructions that it be delivered to Affiliated in the event PMC defaulted. After the
eighth loan extension, Bruce Becker (“Becker”), Affiliated’s president and owner, decided that
“no further extensions would be granted.” R. 149-9, Aff. Becker at 2–3, PageID # 3124–25. As
Polar Holding, PMC’s parent company, described the situation in its 2004 report filed with the
Securities and Exchange Commission:
Substantially all of our assets, including our intellectual property, are subject to
liens by our creditors, and these creditors could foreclose on substantially all of
our assets if we default on our obligations. We are currently in default on a
number of our notes payable . . . . There can be no assurance that we will be in a
position to pay our obligations to the employees and advisors under this
agreement and free our assets of the contingent lien in the near future.
-3-
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
R. 149-4, Form 10-KSB Polar Holding at 8, PageID # 2886. On January 7, 2005, PMC officially
defaulted. Affiliated, however, did not seek to immediately foreclose on the loan.
Even after the loan default, Polar Holding still sought to develop sources of financing,3 as
well as to develop deals that would create new revenue streams to save PMC. In 2006, Mark
Nelson (“Nelson”), PMC’s president and Polar Holding’s CEO and chairman of its board of
directors, sought an extensive distribution contract with a trucking company for one of PMC’s
products. Simultaneous with Nelson’s efforts, Socia, who also served as a board member for
Polar Holding, attempted to negotiate an exclusive distribution contract for the same product
with a different vendor.
Their diverging and competing business strategies placed Nelson and Socia at
loggerheads. During the fall of 2006, the disagreement escalated, resulting in Socia allegedly
being excluded from board activities. The conflict culminated in January 2007 when Socia
attempted to oust Nelson from the board. Nelson successfully rebuffed the effort, and in turn
moved for Socia’s removal, which was approved by a three-to-two vote. Despite the board’s
demand that he resign, Socia refused, asserting that only the shareholders could remove him.
Following his unsuccessful attempt to unseat Nelson from the board, Socia approached
Affiliated’s owner, Becker, with a plan. Until this point, Becker had not initiated any action to
recover PMC’s intellectual property, in part because he recognized that he “had no knowledge of
the [petroleum-additive] industry or what to do with the patents.” Petroleum Enhancer, 690 F.3d
at 762. Socia, however, did have the requisite knowledge. Allegedly, under Socia’s plan, an
3
Most promisingly, IBK Capital Corporation (“IBK”) indicated in an engagement letter in
December 2006 that it would attempt to facilitate a $10 million preferred-stock offering. This
fresh influx of capital fell through in January 2007 when IBK, as part of its due diligence, noted
that PMC was involved in extensive litigation and had recently changed its accounting firm.
Unable to obtain additional financing, PMC could not repay Petroleum Enhancer when it later
foreclosed.
-4-
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
independent corporation would purchase Affiliated’s secured promissory note, and after
foreclosing on PMC’s loan, recover the intellectual property that PMC had given as collateral.
On March 22, 2007, Socia, Carl Hill (“Hill”), who was a former consultant for PMC, and
Affiliated, through Becker, created Petroleum Enhancer, a Michigan limited-liability
corporation. At the time of Petroleum Enhancer’s formation, Socia was still a member of Polar
Holding’s board. Socia submitted his letter of resignation on April 18, 2007. Eight days later,
on April 26, Affiliated assigned its interest in the PMC note and collateral to Petroleum Enhancer
for $2 million.
Shortly after Petroleum Enhancer’s formation on May 25, 2007, and at Socia’s
suggestion,4 Affiliated requested that PMC place additional intellectual property5 in the escrow
account to facilitate any future foreclosure. At the time the request was made, Affiliated had not
yet notified Polar Holding of its intent to initiate foreclosure proceedings. Nelson, Polar
Holding’s CEO, complied with Affiliated’s request and ordered that the intellectual property be
placed in the escrow account, though he later contended that he would not have done so had he
known that Affiliated intended to foreclose.
On June 5, 2007, Petroleum Enhancer brought suit against the escrow agent to turn over
the intellectual property securing PMC’s defaulted loan. PMC and Polar Holding moved to
intervene, and Polar Holding subsequently filed counterclaims against Socia,6 Hill, and Becker,
among others. These counterclaims alleged breach of fiduciary duty, tortious interference, and
civil conspiracy under Michigan law. The district court granted the motion to intervene.
4
Although the exact date of the idea’s genesis is not clear, it appears that Socia was still a
member of Polar Holding’s board when he made the suggestion.
5
The additional intellectual property appears to have consisted of pending patent applications
and possibly some patents.
6
Socia has since died, and his estate has been substituted as a defendant.
-5-
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
On January 11, 2008, PMC filed for bankruptcy, automatically staying the sale of the
intellectual property. The first Chapter 11 bankruptcy proceeding was dismissed when PMC’s
counsel withdrew. A second bankruptcy proceeding began, which was converted into a Chapter
7 liquidation proceeding. As part of this proceeding, the bankruptcy court appointed a trustee to
control the assets of PMC’s estate, including its legal claims. In July 2009, the bankruptcy court
lifted the stay that had previously precluded the sale of the collateral, and authorized the sale of
PMC’s intellectual property. At the foreclosure sale, which was closely overseen by the district
court, Petroleum Enhancer was the sole bidder and purchased the intellectual property for $1.85
million.
Petroleum Enhancer and the other defendants moved for summary judgment on August 2,
2010 as to the claims raised by Polar Holding. The district court granted the motion dismissing
Polar Holding’s claims, and in a subsequent order, dismissed PMC’s claims without prejudice
for failure to prosecute, the latter claims being controlled by the bankruptcy trustee. Polar
Holding appealed the grant of summary judgment, but only as to its claims against Socia, Hill,
and Becker.
This court affirmed the grant of summary judgment in part, but remanded the case to
determine whether there was a genuine dispute of material fact regarding the claims that Socia
had breached his fiduciary duty to Polar Holding; that Socia had tortiously interfered with Polar
Holding and PMC’s business relationship; and that Socia, Becker, and Hill had conspired to
breach Socia’s fiduciary duty. See Petroleum Enhancer, 690 F.3d at 757. On December 5,
2012, Socia, Hill, and Becker brought a renewed motion for summary judgment on the
remaining claims. The district court granted the motion on all claims. Polar Holding now
appeals the district court’s most recent summary-judgment determination.
-6-
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
II. ANALYSIS
A. Standard of Review
We review de novo the district court’s grant of summary judgment. Hollister v. Dayton
Hudson Corp., 201 F.3d 731, 736 (6th Cir. 2000). Summary judgment is appropriate “if the
movant shows that there is no genuine dispute as to any material fact and the movant is entitled
to judgment as a matter of law.” Fed. R. Civ. P. 56. Facts must be viewed “in the light most
favorable to the non-moving party.” Flagg v. City of Detroit, 715 F.3d 165, 178 (6th Cir. 2013).
To survive summary judgment, “there must be evidence on which the jury could reasonably find
for the plaintiff.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986). “The mere
existence of a scintilla of evidence in support of the plaintiff’s position will be insufficient.” Id.
If a party “fails to make a showing sufficient to establish the existence of an element essential to
that party’s case, and on which that party will bear the burden of proof at trial,” this court should
grant summary judgment. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
In this case, the parties agree, and we have previously found, that Michigan law applies.
See Petroleum Enhancer, 690 F.3d at 765. We therefore “apply state law in accordance with the
controlling decisions of the state supreme court.” JPMorgan Chase Bank, N.A. v. Winget, 510
F.3d 577, 582 (6th Cir. 2007); Allstate Ins. Co. v. Thrifty Rent-A-Car, Inc., 249 F.3d 450, 454
(6th Cir. 2001). “If we confront an issue that has not yet been resolved by the Michigan courts,
we must attempt to predict what the Michigan Supreme Court would do if confronted with the
same question,” and we will consider decisions of the Michigan Court of Appeals and other
persuasive sources. Mazur v. Young, 507 F.3d 1013, 1016 (6th Cir. 2007) (internal citation and
quotation marks omitted).
-7-
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
B. Breach of Fiduciary Duty
Polar Holding contends that Socia breached his fiduciary duty by: (1) suggesting to
Becker that Affiliated foreclose on PMC’s loan; (2) proposing that Affiliated encourage PMC to
place additional intellectual property in the escrow account before foreclosure; and (3) forming
Petroleum Enhancer to obtain PMC’s intellectual property. This court previously determined
that Socia had a “fiduciary duty to Polar Holding [that] continued until he [resigned] on April 18,
2007.” Petroleum Enhancer, 690 F.3d at 769. Because a fiduciary relationship existed, Socia
had “a duty to act for the benefit of the other with regard to matters within the scope of the
relation.” Teadt v. Lutheran Church Mo. Synod, 603 N.W.2d 816, 823 (Mich. Ct. App. 1999).
Breach of fiduciary duty sounds in tort, see Miller v. Magline, Inc., 256 N.W.2d 761, 774
(Mich. Ct. App. 1977), and therefore, in addition to showing a breach of the actual fiduciary
duty, plaintiffs must also demonstrate proximate cause of an injury to be successful on appeal.
See Veltman v. Detroit Edison Co., 683 N.W.2d 707, 713 (Mich. Ct. App. 2004) (“The defense
of failure to establish proximate cause is an elemental defense.”); Alar v. Mercy Mem’l Hosp.,
529 N.W.2d 318, 323 (Mich. Ct. App. 1995); Hillside Prods., Inc. v. O’Reilly, Rancilio, Nitz,
Andrews, Turnbull & Scott, P.C., Case No. 2006 WL 1360502, *1 (Mich. Ct. App. May 18,
2006) (unpublished). To demonstrate proximate cause, a party must establish both cause in fact
and legal cause. Alar, 529 N.W.2d at 323. “The cause in fact element generally requires
showing that ‘but for’ the defendant’s actions, the plaintiff’s injury would not have occurred. On
the other hand, legal cause . . . normally involves examining the foreseeability of consequences,
and whether a defendant should be held legally responsible for such consequences.” Skinner v.
Square D Co., 516 N.W.2d 475, 479 (Mich. 1994).
-8-
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
1. Breach of Fiduciary Duty by Suggesting That Affiliated Foreclose on PMC’s Loan
Polar Holding claims that Socia breached his fiduciary duty by encouraging Affiliated to
foreclose on its loan to PMC. We first address whether Socia in fact breached his duty, and then
turn to the question of proximate cause.
a. Breach of Duty
The question of breach of duty is straightforward. The district court determined that
Socia’s conduct was not protected by the business-judgment rule and that he had breached his
fiduciary duty. On appeal, Socia appears to concede as much. He does not invoke the protection
of the business-judgment rule, nor does he argue that his conduct was for the benefit of Polar
Holding, or that the district court erred by not applying the business-judgment rule. We agree
that by forming an alternate company, while he was a director of Polar Holding, whose sole
purpose was to divest PMC of its most valuable asset—its intellectual property—Socia did not
act in good faith towards or for the benefit of Polar Holding. As such, he breached his fiduciary
duty and is not protected by the business-judgment rule. See In re Estate of Butterfield, 341
N.W.2d 453, 458 (Mich. 1983) (“In the absence of bad faith or fraud, a court should not
substitute its judgment for that of corporate directors.”).
b. Proximate Cause
We now turn to proximate cause, finding it to be a much closer issue. The district court
granted summary judgment to Socia after concluding that Polar Holding had failed to
demonstrate that Socia’s breach of fiduciary duty was the proximate cause of any damages
incurred by Polar Holding. After reviewing all the evidence, we agree with the district court that
summary judgment for Socia is appropriate. Polar Holding has not presented substantial
-9-
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
evidence for a reasonable jury to conclude that “but for” Socia’s conduct the foreclosure would
not have otherwise occurred.
Polar Holding argues that until Socia pitched his plan to Affiliated to create Petroleum
Enhancer, Affiliated’s owner, “Becker, had no intentions of foreclosing upon the loan.”
Appellant Br. at 32.7 In support of this contention, Polar Holding notes that “Becker stated that
he had not done so because he ‘had no knowledge of [the petroleum-additive] industry or what to
do with the patents.’” Petroleum Enhancer, 690 F.3d at 762. It is true that Becker’s statement
explains why Becker, on behalf of Affiliated, had not taken action until that point; he still sought
to maximize the return on his investment or at least to minimize his loss. It is important to note,
however, that this statement does not reveal Becker’s future intentions. Even assuming that
Socia was the cause of the foreclosure in the present case, Polar Holding offers no evidence that,
had Socia not interfered, Becker would have allowed the loan to continue in default indefinitely.8
Prior to the foreclosure, PMC was in a state of disarray. The company’s attempts to
develop new business contracts had not borne fruit, the company’s management was in turmoil
with board members openly fighting, and the company’s most promising sources of new
investment capital had fallen through because of litigation and accounting concerns. Most
troublingly, the company had been in default for several years on a loan secured by all of its
7
Polar Holding argues in the alternative that Socia breached his fiduciary duty by failing to
disclose his business plan. In Production Finishing Corp. v. Shields, the Michigan Court of
Appeals determined that a director “breached his fiduciary duties to the corporation by diverting
a corporate business opportunity for his own personal gain.” 405 N.W.2d 171, 173 (Mich. Ct.
App. 1987) (emphasis added). As the state court of appeals made clear, the breach of fiduciary
duty did not arise from the failure to disclose, but from the actual diversion of the corporate
opportunity. We thus reject Polar Holding’s contention that under Production Finishing Becker
had a strict duty to disclose his activities.
8
Because he is not a disinterested witness, we do not give credence in our analysis to Becker’s
self-avowed declaration that he intended to foreclose independent of Socia’s involvement. See
Reeves v. Sanderson Plumbing s., Inc., 530 U.S. 133, 151 (2000).
- 10 -
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
intellectual property and had been unable to make headway on repaying the sizeable debt that it
owed. By any measure, PMC was in serious trouble and at a high risk of foreclosure.
Polar Holding’s sole response to all of these concerns is to repeat that Affiliated would
not have foreclosed, but it has not provided any evidence, apart from Becker’s lack of knowledge
regarding the petroleum-additive market, to suggest that this is the case. We are not aware of
any authority, nor has Polar Holding provided us with one, that holds that a secured party’s
knowledge of a particular industry bears any relationship to its ability to foreclose without
warning on a security interest or to the sale of the collateral to someone who has such
particularized knowledge.
In reality, nothing prevented Affiliated from foreclosing. The security agreement
allowed Affiliated to foreclose at any time without providing notice to Polar Holding, and the
escrow account streamlined the process for Affiliated to acquire the intellectual property. Under
these circumstances, the district court correctly determined that it was merely a matter of time
until the foreclosure took place. Thus, the only remaining question is whether the actual timing
of the foreclosure made a difference, or whether Polar Holding’s fortunes would have changed
had foreclosure occurred later than it did. While Socia’s conduct arguably caused the
foreclosure to occur sooner than it otherwise might have, Polar Holding still has not presented
evidence to suggest that it would have been able to pay off its debt to Affiliated had Affiliated
further delayed foreclosing. As the company acknowledged in its form 10-KSB filed with the
Securities and Exchange Commission in 2004, “[t]here [is] no assurance that we will be in a
position to pay our obligations to the employees and advisors under this agreement and free our
assets of the contingent lien in the near future.” R. 149-4, Form 10-KSB Polar Holding at 8,
- 11 -
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
PageID # 2886. As this admission suggests, any claim that Polar Holding would have avoided
foreclosure at a later date is pure speculation.
Nonetheless, at several points in its brief, Polar Holding appears to suggest that it would
have somehow been able to pay off the loan and repeatedly asserts that the defendants have
conceded the intellectual property’s potential value. For example, at one point, Hill indicated
that the intellectual property “could generate a billion dollars worth of annual revenue from the
trucking industry.” Appellant Reply Br. at 9. But the context in which this assertion arose is
telling. Hill claimed that such sales were theoretically possible, but he went on to clarify that
“[u]nder [Nelson’s] leadership and direction, the company ha[d] gone through millions of dollars
of investment funds with no market position attained . . . [The company needs] help on all fronts
in formulating a ‘turn around’ plan . . . .” R. 153-6, Hill Letter at 5, PageID # 3291 (emphasis
added). Far from corroborating Polar Holding’s unsupported claim that it was on the verge of
generating substantial sales to pay back its loan to Affiliated, Hill’s letter compels the opposite
conclusion.9 The company was in dire straits.
Polar Holding’s second piece of evidence, which purportedly demonstrates the
company’s ability to generate substantial sales, also undercuts its position. Polar Holding notes
that at one point it had an “anticipated 10 million barrel order” from a trucking company.
Appellant Br. at 9, n.5 (emphasis added). The word “anticipated” says it all. As the materials
manager who made the statement explained, “[the 10 million] sounded like it was a sales
9
In a similar vein, Polar Holding also alleges that the defendants have conceded “the forty
million dollar annual forecast of purchases of [the fuel additive] by Total Fina Elf.” Appellant
Reply Br. at 9. In fact, Hill’s letter says nothing of the sort. There is no mention of a finalized
forty-million-dollar deal, let alone a forecast of annual sales in that amount. At best, the letter
speculates that some deals were possible at one point in time, but then indicates that all the deals
were disrupted or never finalized because of mismanagement. As Hill put it, all of the dealings,
even the possible one with Total Fina Elf, “are in the past tense.” R. 153-6, Hill Letter at 2,
PageID # 3292 (emphasis added).
- 12 -
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
pitch . . . . All of the salespeople give you a number to get you excited . . . . Whether that was
true numbers again, I don’t have any recollection of seeing any contracts between Polar or [the
purchaser].” R. 153-4, Urch Dep. at 4, PageID # 3723. We are not persuaded by such a “sales
pitch.” An “anticipated” order, which even the declarant admits is likely inflated and
speculative, is of little value in demonstrating Polar Holding’s financial prospects. It therefore
fails to demonstrate that the timing of the foreclosure had any effect on Polar Holding’s fate.
Far more telling is the Form 10-KSB, which Polar Holding filed with the Securities and
Exchange Commission. There, Polar Holding admitted:
Polar has not received a purchase order from any retail gasoline supplier, and
there can be no assurance that we will receive any purchase orders from any of
these companies in the future. If we are unable to obtain purchase orders from
our potential customers and begin producing net income, we may not be able to
continue as a going concern. Throughout our history of operation, we have never
produced net income and there can be no assurance that we will produce net
income in the future.
R. 149-4, Form 10-KSB Polar Holding at 8, PageID # 2886 (emphasis added). Although this
report dates back to 2004, Polar Holding offers no evidence of any improvement in PMC’s
financial health after 2004. We are thus left with the fact of a deeply indebted corporation on the
verge of bankruptcy with no apparent means to finance its defaulted loans. Accordingly, a
reasonable jury could reach only one conclusion: Affiliated would have foreclosed and acquired
the intellectual property held as collateral regardless of Socia’s actions. In other words, the
record shows that the proximate cause of Polar Holding’s loss was its weak performance as a
company and its inability to repay Affiliated’s loan, not Socia’s misconduct.
We have repeatedly noted that a defendant cannot defeat a “properly supported motion
for summary judgment . . . without offering any concrete evidence from which a reasonable juror
could return a verdict in his favor and by merely asserting that the jury might, and legally could,
- 13 -
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
disbelieve the defendant’s denial.” Anderson, 477 U.S. at 256. Polar Holding has not satisfied
its burden. Even drawing all reasonable inferences in the non-moving party’s favor, Polar
Holding has not provided concrete and “substantial evidence from which a jury [could] conclude
that more likely than not, but for the defendant[s’] conduct, the plaintiff’s injuries would not
have occurred.” Skinner, 516 N.W.2d at 480. We therefore affirm the district court’s grant of
summary judgment on this asserted breach.
- 14 -
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
2. Breach of Fiduciary Duty by Suggesting Additional Intellectual Property Be
Transferred into the Escrow Account
Polar Holding next alleges that Socia breached his fiduciary duty by suggesting that
Affiliated request additional intellectual property be placed in the escrow account. The district
court assumed that this conduct constituted a breach of Socia’s fiduciary duty, because he was
still a member of Polar Holding’s board when he made the recommendation, and focused its
analysis again on the issue of proximate cause. We do the same, also finding proximate cause to
be the dispositive issue.
Just as in the previous claim, Polar Holding has provided no evidence to indicate that the
transfer of additional intellectual property into the escrow account proximately caused harm to
the company. Instead, Polar Holding broadly contends that its stock was rendered worthless by
Socia’s suggestion that Affiliated foreclose and by the transfer of the additional property. This is
the same as the first allegation of breach of fiduciary duty. Polar Holding has not alleged a
unique or separate harm that resulted solely from the transfer of the additional collateral. Put
differently, Polar Holding has not alleged a harm that was independent of that caused by the
general foreclosure. But as discussed in the prior section, foreclosure and the resultant loss of
Polar Holding’s intellectual property and source of income were a foregone conclusion.
Consequently, because we have already determined that Polar Holding has not provided
evidence that it was proximately harmed by Socia’s suggestion that Affiliated foreclose, we also
must conclude that Polar Holding has not demonstrated that it was proximately harmed by the
transfer of additional intellectual property into the escrow account.10
10
Even if this were not the case, under the express terms of the security agreement and the loan
extensions, it is clear that Affiliated had the right to all of PMC’s patents and its pending patent
applications. Whether Petroleum Enhancer acquired the intellectual property from the escrow
account or from the final foreclosure proceeding, the end result was again the same. PMC was
- 15 -
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
In response, Polar Holding presents two generalized counterarguments. First, Polar
Holding contends that Socia should have been prevented as a matter of law from arguing that he
did not proximately cause Polar Holding’s injuries because he did not disclose his conduct or
business plan to Polar Holding. There is one problem with this argument: Socia did not have an
obligation to disclose his possible future competition. As previously discussed, Production
Finishing Corp. v. Shields prohibits the diversion of corporate opportunities. 405 N.W.2d at 175.
It does not impose a strict requirement that fiduciaries have to file a competing business plan
with their principal. We thus reject Polar Holding’s contention that Socia had a duty of full
disclosure that prohibits him from presenting a proximate-cause defense.
Second, Polar Holding argues that Nelson would not have placed additional property in
escrow had he known that Affiliated intended to foreclose. Again, there is no evidence that this
caused harm to Polar Holding, nor that this would have altered the outcome. All of PMC’s
intellectual property was sold as a single unit at the foreclosure sale, and PMC was required by
contract to provide Affiliated with all of the collateral. Furthermore, it should be recalled that,
under the loan-extension agreements, Affiliated had no obligation to provide PMC with notice of
foreclosure. As Polar Holding has again not presented “substantial evidence from which a jury
may conclude that more likely than not, but for the defendant’s conduct, the plaintiff’s injuries
would not have occurred,” Skinner, 516 N.W.2d at 479, we affirm the district court’s grant of
summary judgment on this asserted breach.
contractually obliged to provide Affiliated with all of the collateral in the event of default, and
therefore no harm was caused by the placement of additional intellectual property in escrow.
- 16 -
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
3. Breach of Fiduciary Duty by Forming Petroleum Enhancer
Polar Holding’s final contention is that Socia breached his fiduciary duty by forming
Petroleum Enhancer. Under Michigan law, a director “may compete against a former employer
in the same business and that they do not violate their duty of loyalty when they merely organize
a corporation during their employment to carry on a rival business after the expiration of
employment.” Quality Mfg., Inc., v. Mann, No. 286491, 2009 WL 4827068, *4–5 (Mich. Ct.
App. Dec. 15, 2009) (internal citation and quotation marks omitted). The court of appeals
further clarified, citing the Restatement 2d Agency, § 293:
Preparation for competition after termination of agency. After the termination
of his agency, in the absence of a restrictive agreement, the agent can properly
compete with his principal as to matters for which he has been employed. Even
before the termination of the agency, he is entitled to make arrangements to
compete, except that he cannot properly use confidential information peculiar to
his employer’s business and acquired therein. Thus, before the end of his
employment, he can properly purchase a rival business and upon termination of
employment immediately compete.
Id. (quoting Restatement 2d Agency, § 293) (emphasis added).
As the district court correctly noted, all of the prerequisites identified in Quality
Manufacturing are satisfied here. First, there was no contractual restriction on Socia’s right to
form a competing business. Polar Holding has not identified a non-compete agreement. Second,
and as discussed previously, Socia was not obliged to reveal his intent to form a competing
company. Third, based upon PMC’s Securities and Exchange filings, it was public knowledge
that PMC was in default and at risk of foreclosure. Therefore, it cannot be said that Socia took
advantage of confidential information. Finally, Socia resigned from Polar Holding’s board
before Affiliated assigned its interest in PMC’s collateral to Petroleum Enhancer.
Taken together, it is clear that Socia did not breach his fiduciary duty by forming
Petroleum Enhancer and later competing with Polar Holding after his resignation. But even were
- 17 -
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
this not the case, as extensively discussed in prior sections, Polar Holding has failed to
demonstrate that, but for Socia’s conduct, it could have avoided Affiliated’s eventual
foreclosure. For all of these reasons, we reject Polar Holding’s claim that Socia breached his
fiduciary duty by forming a competing company, and affirm the district court’s grant of
summary judgment on this asserted breach.
4. Conclusion on Breach-of-Fiduciary-Duty Claim
For the aforementioned reasons, we AFFIRM the district court’s grant of summary
judgment on the breach-of-fiduciary-duty claim.
C. Tortious Interference
Polar Holding next contends that the defendants tortiously interfered with its business
relationship with PMC. In order to prevail on a tortious-interference claim, there must exist “a
valid business relationship or expectancy, knowledge of the relationship or expectancy on the
part of the defendant, an intentional interference by the defendant inducing or causing a breach
or termination of the relationship or expectancy, and resultant damage to the plaintiff.” Mino v.
Clio Sch. Dist., 661 N.W.2d 586, 597 (Mich. Ct. App. 2003) (internal citation and quotation
marks omitted).
In the present case, a valid business relationship clearly existed. PMC was a subsidiary
wholly owned by its parent corporation, Polar Holding. Similarly, there can be no question that
Socia, as a member of the Polar Holding board, was aware of this relationship. The only
questions that remain are whether Socia intentionally interfered with Polar Holding and PMC’s
business relationship, and whether this caused damage to Polar Holding.
The district court in its ruling focused on the intentionality of the interference, correctly
emphasizing that a party must have a “motive to interfere with the business relations.” Arim v.
- 18 -
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
Gen. Motors Corp., 520 N.W.2d 695, 703 (Mich. Ct. App. 1994). After concluding that Polar
Holding had not presented evidence that revealed an affirmative intent to interfere with PMC and
Polar Holding’s business relationship, the district court rejected the claim for tortious
interference. We agree.
In its brief, Polar Holding focuses almost exclusively on Socia’s breach of fiduciary duty
and the damage allegedly caused by Socia’s conduct, identifying in particular the disruption of
monetary payments, the loss of intellectual property, and the eventual bankruptcy of PMC. With
regard to the question of intent, however, Polar Holding’s argument is confusing and woefully
insufficient.
Polar Holding first argues that the question of motive and intent “should not be decided at
the Summary Judgment stage.” Appellant Br. at 34. Although this court has previously
suggested that “summary judgment is generally not well suited for cases in which motive and
intent are at issue,” Perry v. McGinnis, 209 F.3d 597, 601 (6th Cir. 2000), we have not indicated,
contrary to Polar Holding’s intimation, that courts cannot decide such issues. See Street v. JC
Bradford & Co., et al., 886 F.3d 1472, 1479 (6th Cir. 1989) (“Cases involving state of mind
issues are not necessarily inappropriate for summary judgment.”). Moreover, even if some cases
are not well-suited for an analysis of intent at the summary judgment stage, here the record is
sufficiently developed.
Polar Holding next asserts that “Socia knew that [PMC] was paying bills owed by [Polar
Holding] based upon the product which was sold due to the fact that [PMC] had the intellectual
property and patents.” Appellant Br. at 34. Polar Holding appears to be alleging that Socia
knew that his conduct would interfere with the transfer of funds between Polar Holding and
PMC. As an initial matter, Polar Holding alleges only that Socia knew about the payment
- 19 -
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
system, not that Socia intended to disrupt the payments, nor that Socia intended to affect Polar
Holding’s relationship with PMC. Moreover, as the district court pointed out, Polar Holding
appears to contradict its statement by later asserting, “[Polar Holding] has been providing its
subsidiary with funds obtained through the sale of stock which was being used by the subsidiary
to pay off debts and for the purposes of maintaining its operation.” Id. at 34–35. The record thus
does not establish the final relationship between PMC and Polar Holding with regard to who was
providing funds to whom, or that Socia formed Petroleum Enhancer with the intent to both
interfere with PMC and Polar Holding’s relationship and to acquire PMC’s intellectual property.
Apart from these unclear and inconsistent allegations, Polar Holding’s remaining
assertions that Socia’s conduct was “improper and thus actionable” are overly conclusory.
Appellant Br. at 33. Polar Holding has failed to demonstrate that Socia’s conduct was for the
particular “purpose of invading plaintiff’s contractual rights or business relationship.” Feldman
v. Green, 360 N.W.2d 881, 886 (Mich. Ct. App. 1984). Under these circumstances, there is
insufficient evidence for a reasonable jury to determine that Socia intended to interfere with
Polar Holding and PMC’s relationship. Accordingly, we AFFIRM the district court’s grant of
summary judgment on the claim of tortious interference.
D. Civil Conspiracy
Polar Holding’s final claim is one for civil conspiracy, particularly that Becker, Hill, and
Socia conspired to breach Socia’s fiduciary duty to Polar Holding. The central elements of a
civil conspiracy are “(1) a concerted action (2) by a combination of two or more persons (3) to
accomplish an unlawful purpose (4) or a lawful purpose by unlawful means.” Mays v. Three
Rivers Rubber Corp., 352 N.W.2d 339, 341 (Mich. Ct. App. 1984). Under Michigan law, “a
claim for civil conspiracy may not exist in the air; rather, it is necessary to prove a separate
- 20 -
Case No. 13-1369
Petroleum Enhancer, LLC v. Woodward
actionable tort.” Early Detection Ctr., P.C. v. N.Y. Life Ins. Co., 403 N.W.2d 830, 836 (1986).
Accordingly, when a plaintiff’s separate actionable tort theories fail, so too must the civil
conspiracy claim.
This court previously determined that “there are only two possible independent torts upon
which the conspiracy claim could be predicated: breach of fiduciary duty and tortious
interference.” Petroleum Enhancer, 690 F.3d at 769. Because we have concluded that summary
judgment is appropriate on Polar Holding’s breach-of-fiduciary-duty and tortious-interference
claims, we likewise determine that Polar Holding’s civil-conspiracy claim must also be
dismissed.
We therefore AFFIRM the district court’s denial of Polar Holding’s claim for civil
conspiracy.
III. CONCLUSION
For these reasons, we AFFIRM the district court’s grant of summary judgment on all
claims.
- 21 -