United States District Court, E.D. Virginia, Alexandria Division
HAMPTON B. LUZAK, Plaintiff,
MERRILL B. LIGHT, et al. Defendants.
Anthony J. Trenga Judge.
October 24, 2013, defendant Coastal Forest Resources Company
("CFRC" or the "Company"), acting through
its Board of Directors (the "Board"), approved a
compensation package to Travis B. Bryant
("Bryant"), the Company's newly appointed Chief
Executive Officer and member of the Board (the
"Transaction"). The Transaction package included
certain stock transfers and option grants. Plaintiff Hampton
B. Luzak ("Ms. Luzak") is an approximately 33%
shareholder in the Company, a private, closely held
corporation. In this action, Ms. Luzak deriviatively
challenges the Transaction as a breach of fiduciary duty on
the part of those directors who approved the Transaction and
also on the part of Bryant, who is not related by blood or
marriage to either of the two families who own CFRC stock.
response to Ms. Luzak's derivative action, CFRC formed a
special litigation committee (the "SLC" or the
"Committee") to evaluate her claims pursuant to
Virginia Code § 13.1-672.4. On September 30, 2015, after
extensive investigation and consideration of Ms. Luzak's
derivative allegations and with the assistance of various
legal and other professional advisors and consultants, the
Committee concluded, as reflected in its written report (the
"Report")* that it was not in the best interests of
the Company or its shareholders to pursue the breach of
fiduciary duty claims asserted by Ms. Luzak on behalf of the
consideration of the record in this case, the Court concludes
as a matter of law that the Company and the Committee have
complied with the applicable statutory requirements- both
procedural and substantive- pertaining to the investigation
of a shareholder's derivative claim through a special
litigation committee; and Ms. Luzak's derivative claims,
which, as pleaded, include Count IX of her Second Amended
Verfied Shareholder Derivative Complaint [Doc. No. 240] (the
"Complaint" or "Compl."), must be
dismissed pursuant to Virginia Code § 13.1-672.4
governing the dismissal of derivative claims. CFRC's
Motion for Summary Judgment [Doc. No. 177] (the
"Motion") will therefore be granted and this action
otherwise indicated, the Court finds the following facts to
a closely held Virginia corporation engaged in the business
of manufacturing timber products. The Company is
headquartered in Havana, Florida. The Company's corporate
predecessor was founded by Victor Barringer, the grandfather
of Ms. Luzak and co-defendant Merrill B. Light ("Ms.
Light"), Ms. Luzak's sister. In the 1950s, Victor
Barringer sold the Company to, among others, his son Paul B.
Barringer, II ("Barringer"); the father of Ms.
Luzak and Ms. Light. Barringer; Ms. Light; J. Randolph Light,
Ms. Light's husband ("Mr. Light"); and Bryant
were at all material times members of CFRC's Board of
Transaction occurred in October 2013 when the Company sold
2.5% of its nonvoting stock to Bryant, then its CEO, at a
value of $4.92 per share, together with an option to purchase
an additional 2.5% at book value at the time of
exercise. The substantive core of Ms. Luzak's
allegations is that the Company undervalued the stock price
offered to Bryant to the detriment of the Company. See
generally Id. ¶¶ 1-23.
Company promoted Bryant to CEO from his earlier position of
Chief Financial Officer after Ms. Luzak's husband, Kevin
Luzak, was terminated as CEO and removed from the Board: and
the Transaction constituted part of Bryant's compensation
package as Chief Executive Officer. The Company did not
disclose the Transaction to Ms. Luzak at the time it was
consummated; Ms. Luzak first learned of the Transaction in
January 2015 after reviewing the Company's annual
financial statements, which described the Transaction in a
footnote. Subsequently, in early 2015, Ms. Luzak made various
records requests and other shareholder demands seeking
information related to the Transaction. On April 15, 2015, in
response to Ms. Luzak's shareholder demands, the Company
filed a declaratory judgment action against Ms. Luzak seeking
a declaration, inter alia, that the Transaction was
valid and binding and to "remove the cloud of
controversy" surrounding the Company's stock
ownership. [Doc. No. 1 at 1, 6]. On May 11, 2015, Ms. Luzak
filed a counterclaim [Doc. No. 7] seeking to void the
Transaction, which the Court deemed to be a derivative claim
by Order dated August 14, 2015. See [Doc. No.
response to Ms. Luzak's shareholder demands and
derivative claims, the Company formed the SLC on May 5, 2015
to investigate those claims and determine based on that
investigation whether pursuit of the derivative claims was in
the best interests of the Company and its shareholders. At
the time the SLC was appointed on May 5, 2015, the Board
consisted of Ms. Light, Mr. Light, Bryant, and Robert Conger
("Conger"). The Committee, as initially
constituted, included Conger and Mr. Light. In June 2015, the
Company additionally appointed Stephen A. Wannall
("Wannall") to both the Board and the Committee. In
late July 2015, Mr. Light resigned from the Committee citing
Ms. Luzak's challenges to his independence, leaving
Conger and Wannall as the Committee's only members.
appointed, the SLC conducted an investigation, aided by
various law and financial accounting firms, as detailed in
the Report. On September 30, 2015, the SLC issued the Report
[Doc. No. 439, Ex. A] which concluded that "it is not in
the best interests of the Company to pursue any of the
derivative claims against any of the Company's directors
who have been identified in the demand letters" and that
"the Transaction was authorized and valid ...."
basis of the SLCs determinations, defendants moved to dismiss
Ms. Luzak's derivative complaint pursuant to Virginia
Code § 13.1-672.4. [Doc. No. 177]. On November 18, 2015,
the Court held a hearing on defendants' motion to dismiss
during which it converted the motion into one for summary
judgment and allowed the parties to pursue additional
discovery. [Doc. No. 221]. Following completion of that
discovery, the parties filed supplemental briefing on the
Motion. The Court held a hearing on the Motion on April 21,
2016, following which it took the matter under advisement.
STANDARD OF REVIEW
to Federal Rule of Civil Procedure 56, summary judgment is
appropriate only if the record shows that "there is no
genuine issue as to any material fact and that the moving
party is entitled to a judgment as a matter of law."
Fed.R.Civ.P. 56(c); see also Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 247-48 (1986); Evans
v. Techs. Apps. & Serv. Co., 80
F.3d 954, 958-59 (4th Cir. 1996). The party seeking summary
judgment has the initial burden to show the absence of a
genuine issue of material fact. Celotex Corp. v.
Catrett, 477 U.S. 317, 325 (1986). A genuine issue
of material fact exists "if the evidence is such that a
reasonable jury could return a verdict for the nonmoving
party." Anderson, 477 U.S. at 248. Whether a
fact is considered "material" is determined by the
substantive law, and "[o]nly disputes over facts that
might affect the outcome of the suit under the governing law
will properly preclude the entry of summary judgment."
defeat a properly supported motion for summary judgment, the
non-moving party "must set forth specific facts showing
that there is a genuine issue for trial." Fed.R.Civ.P.
56(e); Anderson, 477 U.S. at 248; Matsushita
Elec. Indus. Co., Ltd. v. Zenith Radio Corp.,
475 U.S. 574, 586-87 (1986). "Specific facts" must
be more than mere speculation or inferences.
Celotex, 477 U.S. at 327; Runnebaum v.
NationsBank of Md, N.A., 123 F.3d 156, 164 (4th Cir.
1997) (en banc). The defending party must present
evidence that is "significantly probative."
Celotex, 477 U.S. at 327. In sum, "the burden
on the moving party may be discharged by showing... that
there is an absence of evidence to support the nonmoving
party's case." Id. at 325. The facts shall
be viewed, and all reasonable inferences drawn, in the light
most favorable to the non-moving party. Anderson,
477 U.S. at 255; see also Lettieri v. Equant
Inc., 478 F.3d 640, 642 (4th Cir. 2007).
dispositive issues in this case are whether the Company
validly exercised its statutory right to form the Committee
to investigate Ms. Luzak's claims for breach of fiduciary
duty and whether the Committee acted properly in concluding
that litigating those derivative claims was not in the best
interests of the Company. If so, the Company is entitled to
have the Complaint dismissed under Virginia's Stock
Corporation Act, Va. Code Ann. §§ 13.1-601 et
seq.; if not, Ms. Luzak is entitled to assert those
claims derivatively on behalf of the Company.
13.1-672.4 of the Virginia Stock Corporation Act provides, in
A) A derivative proceeding shall be dismissed by the court on
motion by the corporation if one of the groups specified in
subsection B ... has:
1. Conducted a review and evaluation, adequately informed in
the circumstances, of the allegations made in the demand or
2. Determined in good faith on the basis of that review and
evaluation that the maintenance of the derivative proceeding
is not in the best interests of the corporation; and
3. Submitted in support of the motion a short and concise
statement of the reasons for its determination.
the determination in subsection A shall be made by:
2. A majority vote of a committee consisting of two or more
disinterested directors appointed by a majority vote of
disinterested directors present at a meeting of the board of
directors, whether or not ...