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Quinn v. Knight

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

November 1, 2016

JAMES QUINN, Derivatively on Behalf of Nominal Defendant
GLADE M. KNIGHT et al., Defendants. APPLE REIT TEN, INC., Plaintiff,


          John A. Gibney, Jr. United States District Judge

         The plaintiff, James Quinn, brings this derivative lawsuit alleging the defendants' breached their fiduciary duties to the shareholders of Apple REIT Ten, Inc. ("Apple Ten") in the merger of Apple Ten and Apple Hospitality REIT, Inc. ("Apple Hospitality"). The Court heard oral argument on Quinn's motion for a preliminary injunction and denied the motion. The defendants filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 23.1, arguing that Quinn cannot fairly and adequately represent Apple Ten. Subsequently, the Apple Ten defendants[1] and the Apple Hospitality defendants[2] brought separate motions to dismiss for lack of standing and for failure to state a claim. The Court finds that Quinn has standing to fairly and adequately represent Apple Ten in this derivative action because he represents the interests of the Apple Ten shareholders and owned stock in Apple Ten at the time of the alleged wrongdoing. Additionally, neither the Apple Ten shareholder's vote in favor of the merger, the Virginia Statute on Limitations of Remedies, nor Apple Ten's Articles of Incorporation bars this suit. Quinn also adequately pleads claims against the Apple Hospitality defendants for aiding and abetting the Apple Ten defendants' breach of fiduciary duties.

         I. BACKGROUND

         The heart of the alleged misconduct involves Glade Knight, the Executive Chairman of Apple Hospitality, and his son, Justin Knight, the President of Apple Ten and President and CEO of Apple Hospitality. Quinn says that Glade and Justin Knight sought the merger of Apple Ten and Apple Hospitality because it triggered a conversion of Apple Ten series B stock and made Glade Knight close to sixty-five million dollars in the process. Glade Knight utilized the highly overlapping executive boards of each company, fueled by millions of dollars in special compensation to Apple Hospitality officers, to push through the merger.

         Although Apple Ten established a Special Committee to consider the merger, its members had long-time relationships with Glade Knight and had served on the boards of prior Apple REIT companies. These considerations compromised the Special Committee's ability to act independently on behalf of Apple Ten. Essentially, Quinn says that the Special Committee members knew about Glade Knight's financial interests in the merger and had incentives to help Knight, not to protect Apple Ten. The Special Committee, therefore, engaged in superficial negotiations in which they bowed to the desires of Apple Hospitality. The Committee members failed to inform themselves as to Apple Ten's true value. They hired non-independent financial and legal advisors with ties to the Knight family and refused to explore any third-party acquisition options prior to signing a deal with Apple Hospitality. Further, the Committee failed to provide full financial disclosures to Apple Ten's shareholders about the worth of Apple Ten shares. These actions resulted in a severe under-valuation of Apple Ten by Apple Hospitality and denied Apple Ten's shareholders fair compensation for their shares. Further, Quinn says that Apple Hospitality's officers and directors knew of the Apple Ten defendants' breaches of fiduciary duty, but participated in the tainted negotiations because they stood to make millions of dollars from the merger.

         Following this Court's denial of the preliminary injunction motion, the Apple Ten shareholders approved the merger. Quinn, who owned stock in both companies prior to the merger, now seeks damages for the defendants' breach of fiduciary duties and injunctive relief rescinding the merger.


         A. Quinn Has Standing to Bring a Derivative Suit

         A shareholder derivative suit deputizes shareholders to protect themselves "from the designing schemes and wiles of insiders who are willing to betray their company's interests in order to enrich themselves." Simmons v. Miller, 261 Va. 561, 573, 544 S.E.2d 666, 674 (2001) (quoting Surowitz v. Hilton Hotels Corp., 383 U.S. 363, 371 (1966)). Virginia law requires that "suits for breach of fiduciary duty against officers and directors must be brought derivatively on behalf of the corporation and not as individual shareholder claims." Id. at 576, 544 S.E.2d at 675. A plaintiff must satisfy a number of procedural hurdles in order to bring a derivative action. First, the plaintiff must "fairly and adequately represent[ ] the interests of the corporation." Va. Code Ann. § 13.1-672.1. Second, a plaintiff "shall not commence or maintain a derivative proceeding unless the shareholder ... was a shareholder of the corporation at the time of the act or omission complained of."[3] Id.

         i. Quinn Adequately and Fairly Represents the Interests of Apple Ten

         Although Quinn owns stock in in both Apple Ten and Apple Hospitality, he can nonetheless fairly and adequately represent the interests of Apple Ten in this derivative lawsuit.[4]Virginia law and the Federal Rules of Civil Procedure require a plaintiff to fairly and adequately represent the interests of shareholders in enforcing the rights of the corporation. See Fed. R. Civ. P. 23.1; Va. Code Ann. § 13.1-672.1(A)(4). When determining the adequacy of representation, courts consider a number of factors including (1) the economic antagonisms between the derivative claimant and the rest of the shareholders; (2) the remedies sought; (3) indications that the plaintiff is not the driving force behind the litigation; and (4) the degree of support received from the shareholders. See Argiropoulos v. Kopp, No. CBB-06-0769, 2007 U.S. Dist. LEXIS 22351, at *20-22 (D. Md. Mar. 26, 2007) (citing Davis v. Corned, Inc., 619 F.2d 588, 593-94 (6th Cir. 1980)). Further, "a plaintiff is not necessarily disabled to bring suit simply because some of his interests extend beyond that of the class" Davis, 619 F.2d at 593.

         Neither party cited, nor did this Court find, caselaw stating that stock ownership in both sides of a merger prevents a plaintiff from maintaining a derivative action. Despite the fact that Quinn owned more Apple Hospitality stock than he owned of Apple Ten stock prior to the merger, the parties have not submitted any evidence to show that Quinn does not stand to benefit, overall, from winning this case. From a financial perspective, there is no evidence that if Apple Hospitality paid more for Apple Ten's shares that it would harm Apple Hospitality's stock price. Further, even if Apple Hospitality were to suffer some financial loss, there is no evidence that a favorable outcome for Apple Ten shareholders would not overcome any loss Quinn suffered as an Apple Hospitality shareholder. Further, Quinn maintains that he brings this action as a check on the Knights, who manage and direct Apple Hospitality. This interest aligns Quinn with the Apple Ten shareholders who had their Apple Ten stock converted to Apple Hospitality stock following the merger. Thus, Quinn's economic interests do not create conflicting economic antagonisms which prevent him from adequately representing the interests of Apple Ten.

         The rest of the factors also weigh in favor of Quinn's ability to fairly and adequately represent the interests of Apple Ten. First, Quinn now seeks remedies to hold the defendants accountable for the alleged breaches of fiduciary duty and to rescind the merger if the shareholders voted without adequate financial disclosures. Next, Quinn has demonstrated that he is in fact the driving force of this litigation, in which he sought out financial and legal counsel concerning the deal and has committed substantial time and effort towards the prosecution of this case. Finally, although other Apple Ten shareholders have not joined this suit, this fact alone does not prevent Quinn from maintaining his derivative claims.

         ii. Quinn Owned Apple Ten Stock at the Time of the ...

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