Philip Boynton v. Headwaters Inc

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 14a0332n.06
Nos. 12-5592/12-5594/12-5595 FILED
Apr 28, 2014
UNITED STATES COURT OF APPEALS
DEBORAH S. HUNT, Clerk
FOR THE SIXTH CIRCUIT
PHILIP E. BOYNTON et al., )
)
Plaintiffs-Appellees/Cross )
Appellants, ) ON APPEAL FROM THE UNITED
) STATES DISTRICT COURT FOR THE
v. ) WESTERN DISTRICT OF TENNESSEE
)
HEADWATERS, INC., )
)
Defendant-Appellant/Cross- )
Appellee. )
Before: DAUGHTREY, ROGERS, and McKEAGUE, Circuit Judges.
MARTHA CRAIG DAUGHTREY, Circuit Judge. More than 13 years after first
invoking diversity jurisdiction in federal court, the plaintiffs, former shareholders of Adtech, Inc.,
a now-dissolved Illinois corporation, and the defendant, Headwaters, Inc., ask us to resolve issues
presented in the parties= appeals and cross-appeals. Despite the long-running history of their
disputes, the positions of the parties set forth in their myriad allegations of error can be
summarized neatly: the plaintiffs believe they deserve to receive more money from the defendant
than the district court ordered; the defendant believes it should not be required to disgorge any of
its assets to any individual or group, especially to the plaintiffs. For the reasons set out in this
opinion, we conclude that the district court did not commit reversible error in its latest dispositive
rulings. We thus affirm the judgment entered below.
Nos. 12-5592/12-5594/12-5595, Boynton v. Headwaters, Inc.
I. FACTUAL AND PROCEDURAL BACKGROUND
Having lived with this case for many years, the district judge had the opportunity on
multiple occasions to recount the facts relevant to these appeals. In one such instance, he ably
summarized:
This case arises from James Gary Davidson=s (ADavidson@) scheme to defraud
investors in an Illinois corporation called Adtech (AAdtech I@). Davidson invented
a coal agglomeration process that was patented (A'629 Patent@) in 1993. Davidson
told Adtech I=s investors that he had assigned his interest in the '629 Patent to the
company, but Davidson knew that Adtech I had been administratively dissolved in
1991 by the Illinois Secretary of State. Accordingly, Davidson=s purported
assignment was ineffective.
Undeterred by Adtech I=s administrative dissolution, Davidson continued to
operate the company as if it still existed. Adtech I=s post-dissolution transactions
include (1) the grant of a license in the '629 Patent (ACarbontec License@) to
Carbontec Energy Corporation in 1996 and (2) the receipt of royalties from the
Carbontec License.
Davidson began discussions with Headwaters in 1998 regarding the transfer of
Davidson=s rights in the '629 Patent and related technologies to Headwaters.
Davidson told Headwaters in the course of negotiations that Adtech I no longer
existed. On May 14, 1998, a second Adtech corporation (AAdtech II@) was
formed. Adtech II had one shareholder, Macrotech Corporation (AMacrotech@),
which Davidson controlled. On October 21, 1998, Adtech II transferred its
putative rights in the '629 Patent to Davidson. Shortly thereafter, Davidson
executed purchase agreements with Headwaters in which Davidson transferred his
rights in the '629 Patent and the Carbontec License to Headwaters. Headwaters=
then-counsel prepared these purchase agreements. Headwaters issued 60,000
shares of common stock to Adtech II and Macrotech in exchange for the '629 Patent
and Carbontec License.
Davidson did not disclose the existence of the purchase agreements to Adtech I=s
investors until May 25, 1999. Davidson then told Adtech I=s investors about the
administrative dissolution in a letter of resignation dated November 23, 1999.
In August 2000, three of the named plaintiffs filed suit against Davidson and Headwaters in
federal district court, alleging that the sale of the '629 Patent to Headwaters was illegal because it
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was consummated without proper corporate authorization. The district court dismissed the matter
in its entirety, however, concluding that, because Adtech I never owned the contested patent, the
corporation and its shareholders lacked standing to assert any ownership rights to it.
The plaintiffs then filed the present lawsuit in 2002 in their individual capacities against
Davidson, Headwaters, and Grayton Hoover, Adtech=s accountant. Included in that complaint
was a federal claim for patent infringement, as well as state-law claims for fraud and civil
conspiracy, breach of constructive trust, breach of fiduciary duty for a resulting trust, conversion,
breach of contract, and interference with contract. When Hoover filed for bankruptcy protection,
the plaintiffs dismissed him from the suit. They also entered into a court-approved settlement
agreement with Davidson, leaving only Headwaters as a party defendant. In 2005, the district
court granted Headwaters=s motion for summary judgment and dismissed the action in its entirety.
The Federal Circuit agreed that the plaintiffs could not succeed on their claim of patent
infringement but reversed the district court, in part, by reinstating the plaintiffs= state-law
civil-conspiracy claims against the defendant. Boynton v. Headwaters, Inc., 243 F. App=x 610
(Fed. Cir. 2007).
In preparation for trial, the plaintiffs moved for class certification under Rules 23 and 23.2
of the Federal Rules of Civil Procedure. The district court granted the Rule 23 motion, defining
the class as A[a]ll shareholders of the First Adtech, their heirs, successors, and assigns, who did not
receive dividends through the Second Adtech.@ However, the district court refused to grant the
plaintiffs= request to be certified as an unincorporated association under Rule 23.2 of the Federal
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Rules of Civil Procedure because the plaintiffs could not demonstrate Avoluntary and knowing
membership@ in the group, the Ahallmark of an unincorporated association@ under Tennessee law.
Headwaters sought permission from both the Sixth Circuit and Federal Circuit to appeal the
class-certification determination. The Federal Circuit dismissed the appeal for lack of
jurisdiction under 28 U.S.C. ' 1292(c). Boynton v. Headwaters, Inc., 321 F. App=x 943, 944
(Fed. Cir. 2008). We also denied Headwaters the right to appeal, recognizing the broad discretion
of the district court to grant class certification.
Two additional complications arose in advance of trial. First, because the district judge
considered the plaintiffs= reference to a Aconstructive trust@ to be a separate claim B not a remedy B
the court determined that the plaintiffs= case against Headwaters sounded in both law (the
civil-conspiracy claim) and equity (the constructive-trust Aclaim@). Only the former conferred
upon the plaintiffs a right to a jury trial. Faced with that dichotomous situation, the district court
decided to allow a jury to resolve the legal question but issue only an Aadvisory verdict@ on the
APlaintiffs= constructive trust claims.@
Second, discovery disputes necessitated treating the named and unnamed members of the
plaintiff class differently. Headwaters wished to serve discovery requests on all members of the
purported class, whereas the plaintiffs wished to shield unnamed class members from intrusive
discovery. Partially out of concern for the burden that otherwise would be placed upon the
unnamed plaintiffs, the district judge ordered a bifurcated trial. The first phase, to be conducted
in the summer of 2009, would decide Aissues common to the entire class@ as well as Aany individual
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issues of the named Plaintiffs.@ The district court left to itself the discretion to determine, after
the conclusion of first trial, Awhether there are any remaining issues related to the unnamed class
members which will require individualized proof in a second phase of trial.@ Only then, at that
second stage in the proceedings, would Headwaters be allowed to Aconduct appropriate discovery@
against unnamed plaintiffs.
At the first trial in June 2009, the plaintiffs presented evidence that they believed
established three forms of fraud perpetrated by the defendant: fraudulent misrepresentation,
promissory fraud, and fraudulent concealment or omission. After jury deliberations began,
however, the jury sent a question to the district judge asking whether the jury was required Ato
agree on the method of fraud or can each juror possibly agree to a separate method of fraud?@ The
district judge responded with a supplemental jury instruction: A[I]t is not necessary that you all
agree that the fraud was committed by the same method.@ As a result, following its deliberations,
the jury determined that Davidson, or someone acting in concert with him, Amade either (1) a
fraudulent misrepresentation . . . OR (2) a fraudulent omission/concealment . . . with respect to@
eight of the nine named plaintiffs. The ninth plaintiff was Philip Boynton, who the jury found
had failed to demonstrate a sufficient ownership interest in Adtech I.
The jury also concluded from the trial testimony that the named plaintiffs had an ownership
interest in Adtech I prior to the corporation=s 1991 administrative dissolution, that the plaintiffs
could not have uncovered the 1998 transactions between Davidson and Headwaters Ain the
exercise of reasonable care or diligence,@ and that AHeadwaters engaged in a civil conspiracy to
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defraud the Plaintiffs by depriving them of the profits from the '629 patent in 1998.@
Nevertheless, the jury determined that the plaintiffs failed to prove by clear and convincing
evidence that Headwaters=s conduct was Areckless, intentional, fraudulent, or malicious.@ Finally,
the jury provided the district court with a finding that the plaintiff class had suffered $21,425,000
in damages as a result of Headwaters=s improper actions, a finding that the district court recognized
as advisory only, given that the plaintiffs were seeking equitable, not legal, relief.
Following that trial, the district judge determined that certain issues affecting the unnamed
class members remained unresolved, thus necessitating a second trial. Headwaters was permitted
to conduct additional discovery of the unnamed plaintiffs, leading the defendant to file numerous
motions, most of which were denied. However, the district court did grant Headwaters=s motions
to dismiss the claims of plaintiffs who were heirs of deceased Adtech shareholders (because those
plaintiffs could not prove that the decedents had acted reasonably in relying upon Davidson=s
statements) and the claims of plaintiffs who had declared bankruptcy (because any Adtech stock
previously owned by those individuals was now owned by their bankruptcy estates).
The second jury trial was conducted in late summer 2010. Based upon the evidence
presented, the jury made the following factual findings: the unnamed class members had an
ownership interest in Adtech prior to 1991; the unnamed class members had relied on Davidson=s
misrepresentation or concealment/omission of facts; the reliance by most, but not all, of the
unnamed plaintiffs on Davidson=s representations was reasonable; the plaintiffs could not have
uncovered the existence of the 1998 transactions between Davidson and Headwaters through the
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exercise of reasonable care; and the unnamed plaintiffs suffered damages as a result of Davidson=s
fraudulent concealment or misrepresentation.
Based upon the jury=s verdict, the plaintiffs then requested that the district court place in a
constructive trust for their benefit the full dollar value of the royalties received by Headwaters
from the Carbontec license (more than $43,000,000), plus prejudgment interest and costs. The
district court rejected that request, instead ordering a constructive trust for $16,011,771 with no
prejudgment-interest award.
All parties to the dispute sought to appeal various portions of the district court=s judgment
to the Federal Circuit. That court transferred the appeals to us after determining that it no longer
had jurisdiction over the matter. Thus, we now have before us three appeals: (1) an appeal by
defendant Headwaters (Case 12-5592); (2) a cross-appeal by the named plaintiffs and those
unnamed plaintiffs who were included in the constructive-trust remedy (Case 12-5594); and (3) an
appeal by the unnamed plaintiffs who were excluded from the constructive-trust remedy (Case
12-5595).
II. DISCUSSION
A. Appeal by Defendant Headwaters (Case 12-5592)
Headwaters raises three issues for our review. The corporation first asserts that the
plaintiffs failed to establish that they suffered any injury as a result of Headwaters=s actions;
therefore, Headwaters argues, the plaintiffs have no standing to bring a claim for fraud under
Tennessee law. Second, Headwaters submits that the applicable provisions of 35 U.S.C. ' 262
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shield it from liability to the plaintiffs for the sale of the patent by Davidson. Finally, the
defendant maintains that a supplemental jury instruction given by the district court violated the
requirement that a jury=s verdict be unanimous, thus necessitating a new trial. We conclude that
no reversible error was committed in regard to any of these three allegations of error.
1. Alleged Lack of Injury
Injury is an essential element of fraud. Under Tennessee law, A[a] party seeking to recover
damages for fraud and/or misrepresentation must not only establish the misrepresentation but must
also establish some loss or injury as a result of the misrepresentation.@ Harrogate Corp. v. Sys.
Sales Corp., 915 S.W.2d 812, 817 (Tenn. Ct. App. 1995) (emphasis added). Headwaters argues
that no proof exists to show that Aeach member of the class . . . owned or had some other
protectable interest in the '629 Patent and Carbontec License.@ Consequently, Headwaters asserts
that the plaintiffs cannot show the requisite injury to support their claim of conspiracy to commit
fraud. Concomitantly, Headwaters claims that, because they cannot show an injury, the plaintiffs
lack standing to bring their causes of action. See Cleveland Branch, NAACP v. City of Parma,
263 F.3d 513, 523-24 (6th Cir. 2001) (ATo satisfy Article III=s standing requirements, a plaintiff
must show: (1) it has suffered an 377 F.3d 645, 650 (6th Cir. 2004). Under Tennessee law B the law applicable to Headwaters=s
motion filed pursuant to Rule 50(b) of the Federal Rules of Civil Procedure in this diversity
action B we must “take the strongest legitimate view of the evidence in favor of the opponent of
the motion, allow all reasonable inferences in his or her favor, discard all countervailing evidence,
and deny the motion where there is any doubt as to the conclusions to be drawn from the whole
evidence.” Hometown Folks, LLC v. S & B Wilson, Inc., 643 F.3d 520, 526 (6th Cir. 2011)
(quoting Holmes v. Wilson, 551 S.W.2d 682, 685 (Tenn. 1977)). “A verdict should be directed
only >where a reasonable mind could draw but one conclusion.’” Id.
Paramount in Headwaters=s assertion that the plaintiffs suffered no injury from Davidson=s
assignment of the '629 Patent is the fact that the Illinois Secretary of State administratively
dissolved Adtech in April 1991, some three months before Davidson signed papers purporting to
assign the rights to his soon-to-be-filed patent to Adtech. Because Adtech=s corporate charter had
lapsed by the time of the July 1991 transfer of the patent, the assignment failed under Illinois law.
See 805 Ill. Comp. Stat. 5/12.30(a) (ADissolution of a corporation terminates its corporate
existence and a dissolved corporation shall not thereafter carry on any business except that
necessary to wind up and liquidate its business and affairs.@). No party to this litigation contends
that the patent assignment was necessary to Awind up and liquidate@ Adtech=s affairs; therefore,
that transfer of ownership of the patent was a nullity.
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For good reason, the plaintiffs do not contest the defendant=s assertion that, as a result of
the company=s earlier dissolution, Adtech did not own the '629 Patent. Indeed, it is the very
dissolution of Adtech without notice to the shareholders that defines the injury that forms the basis
for the plaintiffs= fraud claim. Headwaters=s argument in this regard thus utilizes the proverbial
Astraw man@ and is of no relevance to the strength of the plaintiffs= claims.
Of similar irrelevance is Headwaters=s argument that the plaintiffs, as shareholders of a
corporation, have no legal or equitable title to the property of the corporation. Instead, the
defendant contends, the plaintiffs= interests are only derivative of those of the corporation itself, a
corporation that had been dissolved before it could obtain any interest in the patent at issue.
However, the force of this argument by Headwaters is undercut fatally by the jury=s verdict that
Davidson and Headwaters perpetrated a fraud on the plaintiffs as individuals, not upon the
plaintiffs in their derivative capacities as corporate shareholders. The plaintiffs thus met the
injury requirement of their basic common-law fraud claims against Headwaters. See NBD Bank,
N.A. v. Fulner, 109 F.3d 299, 301 (6th Cir. 1997) (AA shareholder=s rights are merely derivative
unless he can show violation of a duty owed directly to him.@).
Headwaters next argues that because the plaintiffs could not establish an equitable injury,
the district court erred in imposing a constructive trust for their benefit. The defendant=s objection
to the district court=s equitable remedy is actually three-fold: (1) the plaintiffs could not
demonstrate an ownership interest in the patent; therefore, they cannot identify an equitable
interest that would justify receipt of an equitable remedy; (2) the plaintiffs made no contribution to
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the development of the patent; therefore, they are not entitled to benefits generated by the transfer
of that technology; and (3) any injury suffered by the plaintiffs was complete in 1996 when the
time for reinstating Adtech I as a corporation expired; therefore, the plaintiffs could not have any
interest in the technology that Headwaters acquired in 1998.
Headwaters=s challenge to the imposition of a constructive trust absent evidence of the
plaintiffs= ownership of an interest in the patent itself is misplaced. Under Tennessee law,
deprivation of property Aby fraud, actual or constructive, by duress or abuse of confidence, by
commission of wrong, or by any form of unconscionable conduct, artifice, concealment, or
questionable means,@ justifies the imposition of a constructive trust. Livesay v. Keaton,
611 S.W.2d 581, 584 (Tenn. Ct. App. 1980); see also Myers v. Myers, 891 S.W.2d 216, 219 (Tenn.
Ct. App. 1994). Because the plaintiffs did allege fraud here, Headwaters cannot use the plaintiffs=
lack of property interests in the patent to show a lack of equitable interests.
Nor is there merit to Headwaters=s argument that the plaintiffs cannot show an equitable
interest in the patent simply because they did not prove Athat they made any monetary or other
contribution after Adtech=s dissolution in 1991,@ and that their pre-1991 contributions Awere
lost . . . as a matter of law, when the company was dissolved.@ By its verdict, the jury concluded
that the plaintiffs suffered injuries in their individual capacities. Headwaters, perhaps
recognizing the daunting task facing a party seeking to overturn a jury verdict, does not challenge
this finding directly. Thus, irrespective of the plaintiffs= failure to make financial or other
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contributions to the development of the patent through the corporate organization, the fraud
perpetrated on the plaintiffs, as individuals, entitled them to the benefits of a constructive trust.
Finally, the jury=s verdict also defeats Headwaters=s argument that the company cannot be
liable for conspiracy because it did not begin negotiations with Davidson until 1998, two years
after the dissolution of Adtech I became final.1 In submitting the case to the jurors, the district
judge instructed that Aone cannot join a conspiracy once the conspiracy is complete B that is, when
the object of the conspiracy has been achieved.@ In finding Headwaters liable for conspiracy,
therefore, the jurors necessarily found that the conspiracy continued past 1996. Headwaters
presents no evidence that compels a conclusion that this decision was faulty. Because
Headwaters fails to challenge directly the jury findings that moot the defendant=s equitable-injury
arguments, we will not disturb those determinations now on appeal.
2. Liability Protection Afforded by the Provisions of 35 U.S.C. ' 262
In a second issue, Headwaters argues that the district court erred in failing to find that
Headwaters=s purchase of the patent from Davidson was protected by the provisions of
35 U.S.C. ' 262 B regardless of whether Davidson=s conduct was fraudulent B and that the district
court=s denial of its Rule 50(b) motion on this issue should be reversed. Again, we review a claim
of error in the denial of the defendant=s Rule 50(b) motion de novo. See H.C. Smith Invs.,
377 F.3d at 650.
1
Pursuant to Ill. Comp. Stat. 5/12.80, Illinois=s corporate survival statute, civil remedies available to or
against corporations dissolved by the secretary of state may be commenced within five years after the date of
dissolution. Thus because Adtech I was dissolved in 1991, actions by and against the corporation could have been
brought as late as 1996.
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Pursuant to 35 U.S.C. ' 262, A[i]n the absence of any agreement to the contrary, each of the
joint owners of a patent may make, use, offer to sell, or sell the patented invention within the
United States, or import the patented invention into the United States, without the consent of and
without accounting to the other owners.@ We have long interpreted this statutory provision to
mean that patent Aco-owners are at the mercy of each other.@ Willingham v. Star Cutter Co.,
555 F.2d 1340, 1344 (6th Cir. 1977). The power of one co-owner is such that Aa co-owner of a
patent can even grant a license to a third party without consent of the other owners and neither the
co-owner-licensor nor the third-party-licensee is liable to the other owners.@ Id.
Headwaters argues that this statutory provision insulated Davidson=s sale of the patent to
the defendant from the claims of the plaintiffs. According to Headwaters, 35 U.S.C. ' 262=s
broad grant of rights to joint patent owners does not include an exception for fraudulent conduct by
co-owners. Particularly, Headwaters cites Fina Technology, Inc. v. Ewen, 857 F. Supp. 1151
(N.D. Tex. 1994), for the proposition that, because 35 U.S.C. ' 262 does not include a fraud
exception, the plain language of the statute suggests that A[a]n allegation of fraud . . . does not
diminish the joint owner=s statutory right to sell or license under section 262.@
Although Headwaters is correct that Congress did not engraft a fraud exception upon the
language of 35 U.S.C. ' 262, the provisions of that statutory provision are irrelevant to the case at
hand. This case does not concern Headwaters=s right to use the technology; rather, Headwaters=s
liability is based upon claims of civil conspiracy under state, not federal, law. In other words,
Davidson=s right to sell Headwaters the patent as a co-owner does not affect the plaintiffs= claims to
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the profits that accrued to Headwaters. The predicate tort at issue here is not the sale of the patent
from Davidson to Headwaters; it is the fraudulent misrepresentation or concealment that occurred
when Davidson pretended that Adtech I still existed. The predicate fraud, in other words, was
separate from the sale of the patent. Nothing in 35 U.S.C. ' 262 speaks to that claim.2 All 35
U.S.C. ' 262 protects is Davidson=s sale of the patent to Headwaters. However, Headwaters=s
liability to the plaintiffs in this case does not stem from an allegedly illegitimate patent sale, but
rather from its conspiracy with Davidson to defraud the shareholders of Adtech I.
As a result, 35 U.S.C. ' 262 can shield Headwaters from state-law tort liability only if that
federal statute preempts the state-law claims. But there is good reason to believe that the statute
does not preempt state-law claims of civil conspiracy. In Massachusetts Eye & Ear Infirmary v.
QLT Phototherapeutics, Inc., 412 F.3d 215 (1st Cir. 2005), for example, the First Circuit held that
35 U.S.C. ' 262 did not preempt an unjust-enrichment claim that resulted from behavior that was
not governed by patent law. A[I]f the tort action is based on conduct that is not >protected or
governed by federal patent law,= then >the remedy is not preempted.=@ Id. at 234 (quoting Hunter
Douglas, Inc. v. Harmonic Design, 153 F.3d 1318, 1335 (Fed. Cir. 1998)).
As in Massachusetts Eye & Ear, this case involves a tort action arising out of conduct that
is not Aprotected or governed by federal law.@ Thus, the provisions of 35 U.S.C. ' 262 will not
2
By contrast, 35 U.S.C. ' 262 may shield a third party who purchases a patent from a fraudulent co-owner
from enduring a patent-infringement suit by other patent co-owners. See, e.g., Talbot v. Quaker-State Oil Ref. Co.,
104 F.2d 967, 967-68 (3d Cir. 1939) (A[l]icense by one of two joint owners is a complete defense to an infringement
suit@).
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preempt the state-law claim. Headwaters=s invocation of 35 U.S.C. ' 262 as a defense against
liability in this case is unavailing.
3. Jury Instruction on the Necessity of Unanimity
In its final issue on appeal, Headwaters insists that the district court committed reversible
error when instructing the jury that it need not agree unanimously on the form of predicate fraud
perpetrated by Davidson to support the conspiracy charge against Headwaters. AThe legal
correctness of the [jury] instructions is a question of law that is reviewed de novo.@ Bridgeport
Music, Inc. v. UMG Recordings, Inc., 585 F.3d 267, 273-74 (6th Cir. 2009). AReversal of a jury
verdict based on incorrect jury instructions is warranted only when the instructions, >viewed as a
whole, [are] confusing, misleading, and prejudicial.= As a result, we will not set aside a jury
verdict on the basis of a technically faulty jury instruction when the error is harmless.@ Id. at 274
(quoting Romanski v. Detroit Entm=t, LLC, 428 F.3d 629, 641 (6th Cir. 2005)).
Tennessee law defines a civil conspiracy Aas a >combination between two or more persons
to accomplish by concert an unlawful purpose, or to accomplish a purpose not in itself unlawful by
unlawful means.=@ Chenault v. Walker, 36 S.W.3d 45, 52 (Tenn. 2001) (quoting Dale v. Thomas
H. Temple Co., 208 S.W.2d 344, 353 (Tenn. 1948)). A[A] conspiracy to defraud means a
>common purpose, supported by a concerted action to defraud, that each [conspirator] has the
intent to do it, and that it is common to each of them, and that each has the understanding that the
other has that purpose.=@ Id. (quoting Dale, 208 S.W.2d at 353B54) (second alteration in original).
Significantly, A[c]ivil conspiracy requires an underlying predicate tort allegedly committed
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pursuant to the conspiracy.@ Watson=s Carpet & Floor Coverings, Inc. v. McCormick,
247 S.W.3d 169, 180 (Tenn. Ct. App. 2007) (citations omitted).
The jury instructions initially offered by the district judge outlined the elements of the three
types of fraud recognized under Tennessee law: fraudulent misrepresentation, promissory fraud,
and fraudulent concealment. Although all are related offenses, the elements of each differ
slightly. For example, fraudulent misrepresentation requires, among other elements, the
intentional misrepresentation of a material Aexisting or past fact@ with the intent to defraud. See,
e.g., Walker v. Sunrise Pontiac-GMC Truck, Inc., 249 S.W.3d 301, 311 (Tenn. 2008). Fraudulent
concealment requires both the concealment of a material fact for which there is a duty to disclose
and an intent to mislead. See, e.g., Shadrick v. Coker, 963 S.W.2d 726, 735-36 (Tenn. 1998).
Distinct from the other two forms of fraudulent activity, promissory fraud involves a
misrepresentation embodying Aa promise of future action without the present intention to carry out
the promise.@ Power & Tel. Supply Co., Inc. v. SunTrust Banks, Inc., 447 F.3d 923, 931 (6th Cir.
2006) (emphasis added).
Given those distinctions, during their deliberations, the jurors sent an inquiry to the district
judge, asking whether it was necessary to agree on one specific form of predicate fraud in order to
conclude that the defendant should be held liable for civil conspiracy. Unable to find a case
addressing the jury=s concern in the context of a civil-fraud litigation, the district judge ultimately
informed the jury that it need not agree on the form of predicate fraud as long as it was unanimous
on the Aobject of the conspiracy.@ Having received that supplemental instruction, the jury
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returned a verdict finding that Davidson had committed the predicate tort of Aeither (1) a fraudulent
misrepresentation . . . OR (2) a fraudulent omission/concealment.@
Headwaters now argues that the disjunctive jury verdict demonstrates that the district
court=s supplemental instruction was sufficiently prejudicial to warrant a remand for a new trial.
Specifically, the defendant insists that the jury should have been required to agree unanimously on
which predicate tort Davidson committed. However, any error committed by the district court in
failing to require the jury to differentiate between fraudulent misrepresentation and fraudulent
concealment was harmless. The evidence adduced at trial was sufficient to justify a finding that
the true state of Adtech I=s existence both was misrepresented to the plaintiffs and was actively
concealed from them. Significantly, moreover, the defendant does not challenge in this appeal
the sufficiency of the evidence of any of the three forms of fraud alleged by the plaintiffs.
Because the jury=s verdict did not refer to promissory fraud, Headwaters’s contention that
promissory fraud is sufficiently distinct from the other forms of the tort to call into question the
legitimacy of the jury verdict makes no difference in this case. The jury did not base its
conspiracy finding on the predicate tort of promissory fraud. The defendant thus was not
prejudiced by any possible error in the district court=s supplemental jury instruction related to that
predicate.
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B. Cross-Appeal by Named and Unnamed Plaintiffs Included in the Constructive Trust
(Case 12-5594)
1. Damages Calculation
Despite receiving jury verdicts in their favor, the named plaintiffs and the unnamed
plaintiffs who shared in the constructive-trust remedy cross-appealed to this court, complaining
that their monetary recovery was not as substantial as it should have been. In their first appellate
issue, the plaintiffs contend that the jury=s damages verdict should be overturned because the
finders of fact erroneously included in their calculations shares of Adtech stock that were
controlled by Davidson and by Davidson=s wife. In so arguing, the plaintiffs face an uphill climb.
As we have held consistently, Areview of a jury=s damage award is extremely deferential.@ Mike=s
Train House, Inc. v. Lionel, LLC, 472 F.3d 398, 413 (6th Cir. 2006). A[U]nless the award >is
contrary to all reason,=@ we will not disturb the jury=s determination. Id. (quoting In re Lewis, 845
F.2d 624, 635 (6th Cir. 1988)).
Without question, the jury=s damage award to the plaintiffs was significantly lower than the
amount requested. Indeed, the plaintiffs sought from the defendants a total of $43,986,389 B an
amount equal to all royalties received by Headwaters from the Carbontec license B but were
awarded Aonly@ $16,011,771, or the equivalent of $43.98 a share. The plaintiffs insist that the
jury=s $43.98-per-share award must have resulted from the jury accepting the $43,986,389 royalty
figure and dividing it by the one million shares of stock issued by Adtech. If such a calculation
was the basis for the jury=s damage award, the plaintiffs claim, that award should be recalculated
because only 467,743 Adtech shares were distributed to the plaintiffs; the remaining 532,257
18
Nos. 12-5592/12-5594/12-5595, Boynton v. Headwaters, Inc.
shares were owned by Davidson=s wife, Marilyn Davidson, and by Macrotech, a company
controlled by Davidson himself. According to the plaintiffs, if the jury intended to distribute
$43,986,389 in damages, that distribution should have been spread over only the 467,743 shares
owned by the plaintiffs, yielding an award of $94.04 per share, more than twice the award
approved by the district court.
Nothing in the record before us on appeal compels the conclusion that a reasonable juror
could not have arrived at the chosen damage-award amount without considering the challenged
shares owned by Macrotech and Marilyn Davidson. Even if we were to accept the plaintiffs=
argument that the Macrotech and Marilyn Davidson shares were invalid, we still would not be
justified in second-guessing the jury=s reasoning process without some concrete, non-speculative
evidence that the jury factored the allegedly invalid shares into its consideration. As the district
court observed, the jury may well have reduced the damages award in the belief that Headwaters
significantly contributed to the success of the Carbontec license, or for some other legitimate
reason.
Furthermore, the record does not indicate that Davidson=s transfer of certain shares to
Macrotech and to his wife without board approval was necessarily invalid. In fact, as even the
plaintiffs acknowledge, the validity of the transfer of those shares was never challenged either by
the plaintiffs or by other board members until the commencement of this case. Because nothing
in the record compels the conclusion that the jury relied on evidence to which no reasonable
19
Nos. 12-5592/12-5594/12-5595, Boynton v. Headwaters, Inc.
fact-finder would give credence, the district court did not err in denying the plaintiffs= post-trial
motion challenging the damage award.
2. Calculation of Constructive-Trust Amount
At the conclusion of the second of the two jury trials, the district court conducted a hearing
on the remaining equitable issue: the plaintiffs= request for creation of a constructive trust over
the proceeds realized from the licensing agreement with Carbontec. Over the objections of
Headwaters, the district court granted the plaintiffs= request and awarded a constructive trust in the
amount of $16,011,771, an amount equal to the total of the 2009 and 2010 jury awards. The
plaintiffs now argue that it was inappropriate for the district judge to adopt the lower jury-award
amount, rather than the plaintiffs= $43,986,389 requested figure, for four reasons: (1) the district
court, sitting in equity, should not have applied the same measure of damages as did the jury,
which was considering a legal remedy; (2) in adopting the jury=s damage-award amount, the
district court improperly concluded that the jury based its award on the fact that Headwaters made
significant contributions to the technology; (3) a constructive trust award should be reduced only
when the value added by a defendant Adwarfs the value of the original ideas,@ a situation that is not
present here; and (4) the jury verdicts in favor of the plaintiffs were artificially low because, as
argued previously, the jurors inappropriately considered the Macrotech and Marilyn Davidson
shares in their damages calculation.
We review equitable remedies, including the imposition of a constructive trust, for an
abuse of discretion. See, e.g., Barrett v. Sec=y of Health & Human Servs., 840 F.2d 1259, 1263
20
Nos. 12-5592/12-5594/12-5595, Boynton v. Headwaters, Inc.
(6th Cir. 1987). AAn abuse of discretion occurs when (1) the district court=s decision is based on
an erroneous conclusion of law, (2) the district court=s findings are clearly erroneous, or (3) the
district court=s decision is clearly unreasonable, arbitrary or fanciful.@ Beil v. Lakewood Eng'g &
Mfg. Co., 15 F.3d 546, 551 (6th Cir. 1994) (citation omitted). We find no such abuse of the
district court=s discretion in this matter.
First, in Tennessee, A[a] court of equity in decreeing a constructive trust is bound by no
unyielding formula.@ Holt v. Holt, 995 S.W.2d 68, 71 (Tenn. 1999) (quoting Beatty v.
Guggenheim Exploration Co., 122 N.E. 378, 380-81 (N.Y. 1919)). The district court clearly did
not abuse its broad discretion in adopting the damage-award figures supplied by the juries.
Second, the district court specifically referred in its ruling to the testimony provided by a
number of Headwaters employees that the defendant company indeed did make significant
contributions to the success of the '629 Patent. In light of that factual finding, the district court did
not abuse its discretion in concluding that it would be inappropriate to order Headwaters to return
all income it received as a result of the patent.
Third, the plaintiffs= argument that such a reduction in an award is justified only when the
defendant=s contributions Adwarf@ the value of the original product is misplaced. The plaintiffs=
position on this issue relies upon language taken from the Ninth Circuit=s opinion in Mattel, Inc. v.
MGA Entertainment, Inc., 616 F.3d 904 (9th Cir. 2010). But an opinion from another circuit,
although persuasive, is not binding on this court. Moreover, Mattel does not announce the broad
principle the plaintiffs would have us apply here. In Mattel, the Ninth Circuit recognized only
21
Nos. 12-5592/12-5594/12-5595, Boynton v. Headwaters, Inc.
that the defendant in that case did prove that its efforts >dwarfed the value= of the original product,
not that the company was required to prove such disproportionate contributions in order to justify
a downward adjustment of an award sought by the plaintiff. Thus, nothing in the language of
Mattel suggests that the district court=s decision in this matter constituted an abuse of its discretion.
Finally, for the same reasons stated previously in this opinion, the plaintiffs= argument that
the juries erred in allegedly considering the Adtech shares owned by Macrotech and by Marilyn
Davidson in arriving at its suggested damage figure is without merit. The plaintiffs offer no new
analysis or evidence on this issue to warrant our reaching a decision that the district court abused
its discretion in ordering its equitable remedy.
3. Denial of Prejudgment-Interest Award
Finally, the plaintiffs argue that the district court erred in denying their motion for an award
of prejudgment interest in addition to the district court=s constructive-trust award. AWe review the
District Court=s decision to award prejudgment interest for abuse of discretion.@ EEOC v. Ky.
State Police Dep=t, 80 F.3d 1086, 1097 (6th Cir. 1996) (citation omitted). When Astate law claims
come before a federal court[,] . . . the award of prejudgment interest rests on state law.@ Gentek
Bldg. Prods., Inc. v. Sherwin-Williams Co., 491 F.3d 320, 333 (6th Cir. 2007) (internal quotation
marks and citation omitted).
Under Tennessee law, A[a]n award of prejudgment interest is within the sound discretion of
the trial court and the decision will not be disturbed by an appellate court unless the record reveals
a manifest and palpable abuse of discretion.@ Myint v. Allstate Ins. Co., 970 S.W.2d 920, 927
22
Nos. 12-5592/12-5594/12-5595, Boynton v. Headwaters, Inc.
(Tenn. 1998) (citations omitted). In deciding whether to award prejudgment interest, the trial
court should be guided by three principles. First, Athe purpose of awarding the interest is to fully
compensate a plaintiff for the loss of the use of funds to which he or she was legally entitled, not to
penalize a defendant for wrongdoing.@ Id. (citations omitted). Second, Aprejudgment interest is
allowed when the amount of the obligation is certain, or can be ascertained by a proper accounting,
and the amount is not disputed on reasonable grounds.@ Id. (citation omitted). Third, Ainterest is
allowed when the existence of the obligation itself is not disputed on reasonable grounds.@ Id.
(citation omitted). Guided by these equitable principles, prejudgment interest Amay be awarded
by courts or juries . . . at any rate not in excess of a maximum effective rate of ten percent (10%)
per annum.@ Tenn. Code Ann. ' 47-14-123.
Ultimately, the district court denied the plaintiffs= request for prejudgment interest, noting
A[t]he length of this case@; the dismissal of Acertain unnamed Plaintiffs= claims as late as August
2010@; the jury determination that Acertain unnamed Plaintiffs= reliance on Davidson was not
reasonable@; and the contested nature of the APlaintiffs= entitlement to [the royalty] payments.@
Thus, although the district court agreed with the juries= damages awards, the actual quantity of the
constructive trust was not determined until the district court issued its ruling on April 11, 2011.
Such uncertainty alone does not require that the district court forgo awarding prejudgment interest;
however, nothing in Tennessee case law forbids consideration of the uncertainty of an award when
making a determination concerning the propriety of awarding prejudgment interest. Indeed,
throughout this appeal, the plaintiffs have continued to dispute the percentage of the Carbontec
23
Nos. 12-5592/12-5594/12-5595, Boynton v. Headwaters, Inc.
royalties owed to them. That disagreement, in addition to other disputes between the parties,
strongly suggests that the district court did not abuse its discretion in denying the plaintiffs= request
for prejudgment interest. We find no error in this regard.
C. Cross-Appeal by Unnamed Plaintiffs Not Included in the Constructive Trust (Case
12-5595)
1. Failure to Certify Class Pursuant to Fed. R. Civ. P. 23.2
The unnamed plaintiffs who did not receive a portion of the constructive-trust proceeds
also raise objections to a number of rulings made by the district court during the course of this
litigation. They first assert that the district court erred in denying them class certification under
Rule 23.2 of the Federal Rules of Civil Procedure because, even though the Illinois Secretary of
State had dissolved Adtech I, Davidson continued to operate the enterprise as an ongoing business,
and the unnamed plaintiffs thus were entitled to pursue recovery of damages they believed were
owed to them.
The pertinent language of Rule 23.2 provides:
This rule applies to an action brought by or against the members of an
unincorporated association as a class by naming certain members as representative
parties. The action may be maintained only if it appears that those parties will
fairly and adequately protect the interests of the association and its members.
In denying Rule 23.2 certification, the district court concluded that the unnamed plaintiffs could
not be considered an unincorporated association because they failed to demonstrate Avoluntary and
knowing membership@ in the business. It is this ruling that the unnamed plaintiffs dispute.
Regardless of the correctness of the district court=s reasoning on the Avoluntary and knowing
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Nos. 12-5592/12-5594/12-5595, Boynton v. Headwaters, Inc.
membership@ requirement, the unnamed plaintiffs failed to contest a second prong of the district
court=s determination B that the named plaintiffs could not represent adequately the interests of
Athose Adtech shareholders who participated in and profited from the business affairs of the second
Adtech.@ Because a prerequisite to Rule 23.2 certification is the demonstration of fair and
adequate representation of the interests of the association=s members, the district court=s
conclusion that the named plaintiffs could not provide adequate representation for the unnamed
plaintiffs justified the denial of the class certification.
2. Dismissal of Certain Unnamed Plaintiffs Prior to the 2010 Trial
In light of the class-certification denial, the unnamed plaintiffs were faced with the
prospect of demonstrating, on an individual basis, their entitlement to relief. Prior to the
commencement of the 2010 trial, however, the district court granted partial summary judgment in
favor of Headwaters, dismissing the fraud claims of two categories of proposed class members:
(1) individuals who were heirs of deceased shareholders and (2) shareholders who had declared
bankruptcy. Those unnamed plaintiffs now challenge the validity of that the grant of partial
summary judgment, which we review de novo. Dodd v. Donahoe, 715 F.3d 151, 155 (6th Cir.
2013).
One necessary element of the Tennessee torts of fraudulent misrepresentation and
fraudulent omission/concealment is the plaintiff=s reasonable reliance on the defendant=s
misrepresentation. See Power & Tel. Supply Co., 447 F.3d at 931 (quoting Stacks v. Saunders,
812 S.W.2d 587, 592 (Tenn. Ct. App. 1990)). AThe burden is not upon the defendant . . . [but]
25
Nos. 12-5592/12-5594/12-5595, Boynton v. Headwaters, Inc.
upon the plaintiff to show@ such reasonable reliance. McNeil v. Nofal, 185 S.W.3d 402, 408-09
(Tenn. Ct. App. 2005) (quoting Williams v. Berube & Assocs., 26 S.W.3d 640, 645 (Tenn. Ct. App.
2000)). In this case, however, the district court found not only that the deceased shareholders
themselves failed to offer sworn testimony before their deaths concerning their knowledge of
Davidson=s activities and Ahow they relied on any statements and/or omissions,@ but also that the
shareholders= heirs did Anot know what their decedents knew with regard to Davidson=s
misrepresentations and/or omissions.@ In short, the heirs of the deceased shareholders of Adtech
produced no Aspecific evidence that could demonstrate what the decedents knew and relied upon.@
Without evidence of a basis for reasonable reliance on Davidson=s representations, the heirs of the
deceased shareholders, as a matter of law, could not establish an essential element of their fraud
claims. See Glassner v. R.J. Reynolds Tobacco Co., 223 F.3d 343, 353 (6th Cir. 2000).3 The
district court thus did not err in granting partial summary judgment to Headwaters in this regard
and in concluding that the unnamed plaintiffs should not be included in the constructive-trust
judgment.
Likewise, the district court did not err in dismissing the claims of six unnamed plaintiffs
who had filed for bankruptcy. Upon the bankruptcy filings, any claims previously held by the six
plaintiffs vested Ain the trustee for the benefit of the bankruptcy estate.@ See Bauer v. Commerce
3
The plaintiffs assert that Glassner did not hold that fraud plaintiffs must offer testimony as to their
reasonable reliance on a defendant=s concealment or misrepresentation. The plaintiffs claim, instead, that Glassner
merely stands for the proposition that specific evidence of reasonable reliance is necessary to defeat a defendant=s
argument that the risks associated with the defendant=s action are Acommon knowledge.@ It is true that Glassner
involved a plaintiff=s efforts to overcome the fact that the risks of smoking were common knowledge. However,
that case did not otherwise undermine the necessity of alleging in a common-law fraud claim that the plaintiff Arelied
on [the defendant=s] alleged misrepresentations.@ Glassner, 223 F.3d at 353.
26
Nos. 12-5592/12-5594/12-5595, Boynton v. Headwaters, Inc.
Union Bank, Clarksville, Tenn., 859 F.2d 438, 441 (6th Cir. 1988) (citation omitted). The estates
of the bankrupt shareholders did not bring claims against Headwaters, however. Thus, the causes
of action put forth by the individual debtors were properly dismissed.
3. Claims by Unnamed Plaintiff Class Members Denied Recovery
In a final allegation of error, a number of other unnamed plaintiffs argue that the district
court erred by not including them in the constructive-trust award after the jury in the 2010 trial
found that they also had not established their reasonable reliance upon Davidson=s statements. To
the extent that these plaintiffs challenge the correctness of the jury verdict, we note again that we
will uphold the jury=s determination unless it is Acontrary to all reason.@ Mike=s Train House,
472 F.3d at 413. In assessing the propriety of the district court=s remedial ruling creating the
constructive trust, we examine the record only for an abuse of discretion. See, e.g., Barrett, 840
F.2d at 1263.
Both the unnamed plaintiffs and Headwaters refer to some testimony that would support
their respective positions. If the record on appeal contains any reasonable evidence supporting
the jury=s verdict, we must affirm that determination. Because the unnamed plaintiffs here have
failed to present evidence that compels a result contrary to that reached by the jury, their challenge
to the verdict fails.
The unnamed plaintiffs also ask us to modify the district court=s constructive-trust award to
include even those unnamed plaintiffs who did not receive jury verdicts in their favor. The
district court had broad discretion to issue the constructive trust as it saw fit in accord with the
27
Nos. 12-5592/12-5594/12-5595, Boynton v. Headwaters, Inc.
equities of the case. The decision to exclude from the constructive trust those claimants who
could not establish reasonable reliance upon Davidson=s statements obviously is not contrary to the
equities of the case. Accordingly, we also affirm the district court=s decision to exclude those
plaintiffs from the constructive-trust award.
III. CONCLUSION
For the reasons expressed in this opinion, we find no reversible error in connection with
any of the issues advanced on appeal by defendant Headwaters. Similarly, we find no error that
would require us to reverse any of the verdicts, findings, or rulings of which the named and
unnamed plaintiffs complain. Consequently, we AFFIRM the judgment of the district court.
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Nos. 12-5592/12-5594/12-5595, Boynton v. Headwaters, Inc.
McKEAGUE, Circuit Judge, dissenting.
The majority may accurately assess the merits of the parties’ arguments, however, the
majority misses one key point: do the plaintiffs have standing? I think not and respectfully dissent
from the majority’s analysis.
A statute that has been bandied about periodically throughout the litigation but never given
much attention is Illinois’s corporate survival statute: 805 Ill. Comp. Stat. 5/12.80. It reads as
follows:
The dissolution of a corporation . . . by the issuance of a certificate of dissolution
in accordance with Section 12.40 of this Act . . . shall not take away nor impair any
civil remedy available to or against such corporation, its directors, or shareholders,
for any right or claim existing, or any liability incurred, prior to such dissolution if
action or other proceeding thereon is commenced within five years after the date
of such dissolution.
The Seventh Circuit has explained the significance of this statute as follows:
Under the common law a corporation’s capacity to sue or be sued terminated when
the corporation was legally dissolved. 16A W. Fletcher, Cyclopedia of the Law of
Private Corporations § 8142 (1979 Rev. Vol. Richard P. Eickhoff). Today,
however, the harshness of the common law on creditors and shareholders has been
replaced in every state by statutes which extend the corporate life for a definite time
for the purpose of prosecuting and defending suits. However, where a statute
continues the existence of a corporation for a certain period, it is generally held that
the corporation becomes defunct upon the expiration of such period, at least in the
absence of a provision to the contrary, so that no action can afterwards be brought
by or against it and must be dismissed. 16 Fletcher, supra, § 8144.
Canadian Ace Brewing Co. v. Joseph Schlitz Brewing Co., 629 F.2d 1183, 1185 (7th Cir. 1980).
The survival statute applies both to suits brought by the corporation or its shareholders and
suits brought against them. Since the Plaintiffs in this case filed suit well after the five-year
survival period had expired, their claim was extinguished unless it falls within one of two
exceptions to the statute. The first exception, which clearly does not apply here, is for actions
29
Nos. 12-5592/12-5594/12-5595, Boynton v. Headwaters, Inc.
brought to enforce a promissory note or other similar corporate asset that passes to shareholders
after dissolution as a matter of law. See Sharif v. Int’l Dev. Grp. Co., Ltd., 399 F.3d 857, 861–62
(7th Cir. 2005). The second exception is for actions that can be brought by shareholders directly
rather than as derivative claims. See id. at 361. Only derivative claims are limited by the
five-year survival period. Id. To determine whether the Plaintiffs’ claim is properly categorized
as direct or derivative requires consideration of the Shareholder Standing Rule.
The Shareholder Standing Rule “is a longstanding equitable restriction that generally
prohibits shareholders from initiating actions to enforce the rights of the corporation unless the
corporation’s management has refused to pursue the same action for reasons other than good-faith
business judgment.” Franchise Tax Bd. of Cal. v. Alcan Aluminium Ltd., 493 U.S. 331, 336
(1990). The rule implicates the nonconstitutional prudential component of standing rather than
the Article III case-or-controversy component. See id. at 335–36. It ensures that the plaintiff is
“assert[ing] his own legal rights and interests” and is not “rest[ing] his claim to relief on the legal
rights or interests of third parties.” Id. at 336 (quotation omitted). The use of the word
“standing” has been considered a “misnomer” in this context because the rule is concerned not
with “standing (in the sense that the complaint does not allege a ‘case or controversy’ justiciable
under Article III) but the identity of the real party in interest.” Frank v. Hadesman and Frank,
Inc., 83 F.3d 158, 159 (7th Cir. 1996); see also Fed. R. Civ. P. 17(a) (“An action must be
prosecuted in the name of the real party in interest.”).
Although shareholders cannot sue in their individual capacities to enforce the corporation’s
rights, “[t]here is an exception to [the] rule allowing a shareholder with a direct, personal interest
30
Nos. 12-5592/12-5594/12-5595, Boynton v. Headwaters, Inc.
in a cause of action to bring suit even if the corporation’s rights are also implicated.” Franchise
Tax Bd., 493 U.S. at 336. Since Adtech was incorporated in Illinois, Illinois law governs its
shareholders’ ability to sue. Frank, 83 F.3d 159. The court in Frank summarized Illinois law as
follows:
Illinois follows the widespread rule that an action for harm to the corporation must
be brought in the corporate name. When investors have been injured in common,
they must continue to act through their collective—the corporation . . . . Injury to
the corporation does not, however, prevent suit by an investor who suffers a
distinct personal injury—for example, a shareholder who alleges that members of
the board have refused to return stock pledged to secure a debt, even after the loan
has been paid; or a shareholder-employee who contests his discharge from
employment . . . . The American Law Institute’s Principles of Corporate
Governance: Analysis and Recommendations § 7.01 (1992), captures this nicely:
“An action in which the holder [i.e. the investor] can prevail only by showing an
injury or breach of duty to the corporation should be treated as a derivative action.
. . . An action in which the holder can prevail without showing an injury or
breach of duty to the corporation should be treated as a direct action that may be
maintained by the holder in an individual capacity.
Id. at 160. Illinois courts say that to determine whether an action is derivative, the court must
“determine if the ‘gravamen’ of the pleadings states injury to the plaintiff upon an individual claim
as distinguished from an injury which indirectly affects the shareholders or affects them as a
whole.” Zokoych v. Spalding, 334 N.E.2d 805, 813 (Ill. App. 1976). The bottom line is that if a
plaintiff has been injured directly he can bring a direct action to rectify that harm; but if he has
been injured indirectly as a shareholder he must bring a derivative action.
So how were the Plaintiffs harmed here, directly or indirectly? Before determining how
they were injured it is important to nail down exactly when they were injured. The Plaintiffs were
not injured when the assignment of the patent failed. Rather, they were injured when Adtech was
dissolved. After the dissolution occurred, their injury was complete, and the Plaintiffs suffered
31
Nos. 12-5592/12-5594/12-5595, Boynton v. Headwaters, Inc.
no further injury from the subsequent unsuccessful assignment. The only entity that could
possibly have been harmed by the unsuccessful assignment was the corporation because it was the
only entity that was ever supposed to receive the patent in the first place. The unsuccessful
assignment of the patent really carries very little significance in this case. Rather, the dissolution
is the important event.
The reason it appears at first glance that the unsuccessful assignment injured the plaintiffs
results from the magnitude of the transaction. Imagine that instead of purporting to assign a
patent worth millions, Davidson had instead signed a rental agreement to lease some office space
in the corporation’s headquarters for his personal use. If Davidson later disclosed that the rental
agreement was invalid and tried to back out, would the Plaintiffs now maintain that they were
injured when the rental agreement was signed? Almost certainly not. Everyone would
recognize that their injury occurred when the corporation dissolved.
Just so under these facts. The factual magnitude of the transaction should not be allowed
to obscure the legal realities of the situation.
After determining that the Plaintiffs were injured when the corporation was dissolved, it is
then possible to figure out how they were injured—directly or indirectly?41 Clearly indirectly.
1
This analysis is inconsistent with a case from the Illinois Court of Appeals. See Hamilton
v. Conley, 827 N.E.2d 949, 952–53 (Ill. Ct. App. 2005). In Hamilton, after a corporation was
dissolved its sole officer and director dealt away the corporation’s assets to two companies he
controlled. 827 N.E.2d 949, 952–53 (Ill. Ct. App. 2005). Six years after dissolution, a former
shareholder sued the director and his two companies. Id. at 953. The court concluded that the
shareholder’s cause of action was derivative, but it also concluded that the cause of action was a
corporate asset which devolved to the shareholders by operation of law after the five–year survival
period expired. Id. at 957–58. After determining that the shareholder had the right to bring the
32
Nos. 12-5592/12-5594/12-5595, Boynton v. Headwaters, Inc.
The corporation suffered a direct injury because it ceased to exist; the Plaintiffs were harmed
indirectly because at that point they held shares in a company that was no longer a going concern
and, not surprisingly, shares in a dissolved company are worth less than shares in an undissolved
one. See Cashman v. Coopers and Lybrand, 623 N.E.2d 907, 911 (Ill. Ct. App. 1993).
Because the Plaintiffs were harmed only indirectly, their claim must be categorized as
derivative. As a derivative claim, it is covered by the survival statute and, not having been
brought within the requisite five years, was extinguished and should have been dismissed. This
case, in which the litigation began nine years after dissolution and is still dragging on over twenty
years after dissolution, aptly illustrates one of the reasons for the five-year limit in the survival
statute, which is to establish “‘a definite point in time at which the existence of a corporation and
claim in his individual capacity, the court next analyzed whether that claim was untimely under the
survival statute. Id. at 959. It determined that “equitable considerations” “counsel[ed] against
rote application of the Survival Statute” because the director “waited until shortly before the close
of the five-year winding-up period to engage in misconduct with respect to corporate assets.” Id.
at 960.
Hamilton, however, is a poorly reasoned case and I decline to follow it. First, by
essentially concluding that all inchoate causes of action devolve to shareholders after dissolution,
Hamilton ignored the careful distinction noted by the Seventh Circuit between claims “based on ‘a
debt of which the fixed amount could be ascertained’” (e.g. a promissory note) and a “traditional
breach of contract claim.” Sharif, 399 F.3d at 861–62 (quoting Shute v. Chambers, 492 N.E.2d
528 (Ill. Ct. App. 1986)). The former type of claim devolves to shareholders as a corporate asset
as a matter of law and can be brought after the survival period expires. The latter type of claim
does not devolve to shareholders and is subject to the survival period. Ignoring this distinction, as
the court did in Hamilton, “would effectively nullify the Illinois corporate survival statute,” id. at
862, since it would mean that all causes of action pass to shareholders after a corporation dissolves.
Furthermore, after concluding that the cause of action could be brought directly by a
shareholder, the Hamilton court then proceeded to apply the survival statute. Hamilton,
827 N.E.2d at 959. But as the Seventh Circuit pointed out, the survival statute does not apply to
direct claims brought by shareholders. Sharif, 399 F.3d at 861. After determining that the
shareholder could sue directly, the Hamilton court should not have proceeded to analyze whether
the claim was timely under the survival statute. Accordingly, I decline to follow Hamilton.
33
Nos. 12-5592/12-5594/12-5595, Boynton v. Headwaters, Inc.
the transaction of its business are terminated. To allow . . . the continued prosecution of lawsuits
perverts the definiteness and orderly process of dissolution so as to produce a continuous dribble of
business activity contrary to the intent of the winding up provisions of the statute.”” Canadian
Ace Brewing, 629 F.2d at 1190 (quoting Bishop v. Schield Bantam Co., 293 F. Supp. 94, 96 (N.D.
Iowa 1968)). The fact that the dissolution in this case was not known to or intended by the
shareholders does not make a definite period for filing suit any less important. Other companies
need to know when they can safely acquire assets that were owned at one time by a corporation
that dissolved, without worrying about the threat of a lawsuit brought by former shareholders of
the erstwhile corporation.
I respectfully dissent.
34