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Luzak v. Light

United States District Court, E.D. Virginia, Alexandria Division

July 8, 2016

HAMPTON B. LUZAK, Plaintiff,
v.
MERRILL B. LIGHT, et al. Defendants.

          AMENDED MEMORANDUM OPINION [1]

          Anthony J. Trenga United State District Judge

         On 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.

         In 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 Company.

         Upon 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 dismissed.

         I. BACKGROUND

         Unless otherwise indicated, the Court finds the following facts to be undisputed:

         CFRC is 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 Directors.[2]

         The 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.[3] 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.

         The 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. 89].[4]

         In 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.

         Once 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 ...''

         On the basis of the SLC's 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.

         II. STANDARD OF REVIEW

         Pursuant 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. & Sen'. 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." Id.

         To 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).

         III. ANALYSIS

         The 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.[5]

         Section 13.1-672.4 of the Virginia Stock Corporation Act provides, in pertinent part:

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 complaint;
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.

         B)... 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 ...

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