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P.O. Box 251551
Woodbury, Minnesota 55125-6551
   

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US District Court: CIVIL PROCEEDURE | SECURITIES | CORPORATIONS - fraud claims moot after new elections; no federal jurisdiction; dismissed

1
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Wolodymyr M. Starosolsky,
Plaintiff,
v. MEMORANDUM OPINION
AND ORDER
Civil No. 00-2760
Veritec, Inc. et al.,
Defendants.
_____________________________________________________________________
Joseph W. Dicker, P.A. for and on behalf of Plaintiff.
David R. Crosby and Curtis D. Ripley, Leonard, Street and Deinard,
Professional Association for and on behalf of Defendants.
_____________________________________________________________________
This matter is before the Court upon Defendants motion for summary
judgment.
Factual Background
Veritec, Inc. (Veritec) is a Nevada corporation and is engaged in the
development, marketing and sales of a line of microprocessor based encoding and
decoding systems utilizing a patented two-dimensional barcode technology.
Veritecs common stock is traded over the counter, subjecting the company to SEC
reporting obligations.
2
In October 1995, Veritecs creditors filed an involuntary petition for relief in
bankruptcy against Veritec in the United States Bankruptcy Court for the Central
District of California. Ultimately, the Bankruptcy Court confirmed Veritecs
Chapter 11 Reorganization in May 1997. This plan required an investor to invest
million in new assets into Veritec in exchange for new Veritec convertible
preferred stock. By December 1998, the Plan had not yet been satisfied.
In December 1998, Defendant The Matthews Group, L.L.C. (TMG)
contacted Veritec and indicated an interest in investing. Thereafter, Veritec and
TMG signed a preliminary agreement and Veritecs Board of Directors approved
certain items, subject to due diligence. Under the terms of TMGs proposed
investment in Veritec, TMG would deliver a million promissory note to Veritec
payable at a rate of ,518.52 per month for 108 months, bearing no interest, in
exchange for 275,000 shares of Veritec Series H Convertible Preferred stock,
convertible to 2.75 million shares of Veritec common stock. The Veritec Board of
Directors held a meeting on April 26, 1999, regarding TMGs proposal, and a
majority of the Board approved the TMG proposal.
Subsequently, in October 1999, the Bankruptcy Court entered a final decree
closing Veritecs bankruptcy proceeding. Plaintiff, who is the former director of
Veritec and one of its shareholders, did not assert any claims in this bankruptcy
proceeding.
3
On or about November 8, 1999, Veritec filed a Schedule 14A with the SEC
relating to the annual Veritec shareholders meeting, and on November 24, 1999,
proxy solicitations were distributed. The annual meeting was then held on
December 20, 1999. At this meeting, Defendants Tran and Matthews, and a third
individual were elected directors. Plaintiff did not seek to enjoin this election at
that time. Over six months later, however, on June 30, 2000, Plaintiff filed this
lawsuit in the U.S. District Court, Central District of California, seeking in part to
vacate the results of the 1999 Board of Directors elections. The matter was later
transferred to this Court in December 2000.
In the Amended and Restated Complaint, Plaintiff alleges nine causes of
action. Two are claims under federal law: a derivative claim under 14(a) of the
Securities and Exchange Act (Exchange Act) and SEC Rule 14a-9 (First Claim for
Relief) and a civil RICO claim (Eighth Claim for Relief). Plaintiff has also asserted
a claim under the Declaratory Judgment Act, and two state law claims of breach
of contract and fraud that are related to a bankruptcy proceeding (Sixth and
Seventh Claims for Relief). The remainder of the claims assert state causes of
action such as breach of contract, breach of fiduciary duty and fraud.
The underlying basis of the derivative claim under 14(a) of the Exchange
Act concerns the proxy solicitations sent out in November 1999. Plaintiff alleges
these proxies contained false statements of material fact and omitted material
4
facts. One allegedly omitted material fact concerned Defendant Van Tran, the
individual who was later elected President of the Board. Plaintiff alleges Van Tran
had previously filed personal bankruptcy, but that such fact was not included in
the proxy. Plaintiff also alleges that pursuant to Veritecs proposed plan of
reorganization, TMG was to invest million into Veritec over time and receive
shares in the company. The investment was to be secured by liens, mortgages or
deeds, and TMG represented that the properties being pledged would be
sufficient collateral for the notes. Plaintiff alleges that TMG never provided
Veritec the promised mortgages, or promissory notes. Plaintiff further alleges that
the plan was confirmed by the Bankruptcy Court, and members of TMG were
elected to the Board, and that they have exercised complete control over Veritec
and its operations since. TMG has allegedly not paid all of the amounts due to
Veritec for the shares the company has received.
Factual Background - Post Filing of Lawsuit
In January 2002, Veritec initiated arbitration against Mitsubishi alleging five
causes of action arising out of various contracts and business dealings. Mitsubishi
counterclaimed and arbitration commenced. In February 2005, the arbitrators
issued an adverse ruling against Veritec for trade secret misappropriation and
copyright infringement. A monetary award was issued in favor of Mitsubishi in
the amount of ,174,518. On February 28, 2005, Veritec filed a voluntary
5
petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the District of
Minnesota. The Bankruptcy Court later converted the Chapter 11 proceeding to a
Chapter 7 proceeding.
Mitsubishi and Veritec entered into a settlement agreement in February
2006, which provided inter alia that Mitsubishi would waive its right to the
,174,518 award and granted Veritec a license to use Mitsubishis Error
Detection and Correction Technology. The Bankruptcy Court thereafter ruled in
favor of reconverting the proceeding to a Chapter 11 proceeding. On April 26,
2006, the Bankruptcy Court confirmed Veritecs Third Amended Plan of
Reorganization. A Final Decree was entered on August 8, 2006, which closed the
Chapter 11 proceeding.
Thereafter, in February 2007, Veritec filed a Schedule 14A with the SEC
containing proxy materials related to the annual meeting scheduled for March
2007. At this meeting, Defendants Tran and Matthews were reelected as directors
by a vote of Veritecs shareholders. Plaintiff did not seek to enjoin this election
either.
Defendants move the Court for summary judgment as to the asserted
federal claims, and requests that the Court decline to exercise jurisdiction over the
pendent state law claims.
6
Summary Judgment Standard
Summary judgment is appropriate if, viewing all facts in the light most
favorable to the non-moving party, there is no genuine issue as to any material
fact, and the moving party is entitled to judgment as a matter of law. Fed. R. Civ.
P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). The party seeking
summary judgment bears the burden of showing that there is no disputed issue of
material fact. Id. at 323. If the opposing party fails to make a showing that
supports the existence of an element essential to the case on which they have the
burden of proof at trial, summary judgment must be granted. Id. at 332-33.
Summary judgment should seldom be used in employment discrimination cases.
Crawford v. Runyon, 37 F.3d 1338, 1341 (8th Cir. 1994)(citations omitted).
However, summary judgment should not be viewed as a disfavored procedural
shortcut, but rather an integral part of the Federal Rules as a whole, designed to
secure the just, speedy and inexpensive resolution of every action. Celotex Corp.,
477 U.S. at 327.
Analysis
Plaintiff concedes that the Eighth Claim for Relief, the RICO claim, should
be dismissed as such claims are precluded under the Private Securities Litigation
Reform Act (PSLRA).
7
With respect to the First Claim for Relief, the derivative claim pursuant to
Section 14(a) of the Exchange Act, Defendants note that Plaintiff is seeking only
declaratory and injunctive relief. Specifically, Plaintiff is requesting an order
setting aside the results of the 1999 shareholders meetings, and ordering a new
shareholders meeting following the filing and dissemination of proxy materials
that are in full compliance with the Exchange Act and the rules and regulations
promulgated thereunder. See Amended and Restated Complaint, p. 35. Given
the relief requested, Defendants argue this claim is moot due to the filing and
dissemination of new proxy materials and a new shareholders meeting and
election in February and March 2007. Two of the board members sued in this
case, Helen Laib and Steven Holtze, no longer serve on Veritecs board and
Defendants Tran and Matthews were reelected in 2007. Under similar
circumstances, other courts have found claims challenging shareholder elections
moot after a new election has taken place.
For example, in Buckley v. Archer-Daniels-Midland Co., 111 F.3d 524 (7th
Cir. 1997) plaintiff had asserted similar claims - that defendants omitted material
facts from the proxy statements, which if disclosed, would have altered the 1995
election. The court dismissed the claims as a subsequent election took place based
on new proxy statements.
Even if the 1995 election were invalid because the proxy statements
contained material omissions, this court has no remedy to grant Buckley
8
because the directors elected in 1995 either no longer serve as directors, or
were reelected in 1996 based on new proxy statements.
Id. at 526. See also, General Electric Co. by Levit v. Cathcart, 980 F.2d 927, 934
(3rd Cir. 1992); Browning Debenture Holders Comm. v. DASA Corp., 524 F.2d
811, 817 (2nd Cir. 1975).
Plaintiff responds that the Buckley case is inapposite, as the director, against
whom the principal allegations of misconduct had been directed, had resigned. In
this case, the challenged directors are still on the board. This is a distinction
without a difference, however. In Buckley, the court noted the issue was moot
because the directors were either no longer serving or had been reelected. Buckley,
111 F.3d at 526 (emphasis added).
Plaintiffs further argue that the issue is not moot because over the passage
of time, the issue has become more critical, asserting Defendants have had more
time to assert control over Veritec. The only asserted basis for Plaintiffs First
Claim for Relief, however, is the allegation that the 1999 proxy statements
contained misrepresentations or omitted material facts, and as a result, the
Defendants were elected to the Board. As a new election took place in March
2007, and there are no allegations the proxy statements distributed in connection
with this election contain misrepresentations or omit material facts, the equitable
relief sought because of the earlier election is moot.
9
Defendants assert that if the Court dismisses the claims asserted pursuant to
RICO and the Exchange Act, this Court no longer has subject matter jurisdiction
over Plaintiffs claims. Defendants request that the Court decline to exercise
supplemental jurisdiction over the remaining state law claims.
Plaintiff asserts that even if the Court were to dismiss his claim under the
Exchange Act, this Court has subject matter jurisdiction over his remaining claims
pursuant to diversity jurisdiction and because this case is related to a bankruptcy
proceeding.
With respect to diversity jurisdiction, the Court notes that Plaintiff did not
plead jurisdictional facts in the Amended and Restated Complaint. See Naartex
Consulting Corp. v. Watt, 772 F.2d 779, 792 (D.C. Cir. 1983). Accordingly, on this
record, Plaintiff has not demonstrated that this Court has diversity jurisdiction
over this matter.
Whether or not a case is related to a bankruptcy proceeding depends on
whether the case could have an affect on the administration of the debtors estate.
See Specialty Mills, Inc. v. Citizens State Bank, 51 F.3d 770, 774 (8th Cir. 1995).
See also, National City Bank v. Coopers & Lybrand, 802 F.2d 990, 994 (8th Cir.
1986). As no bankruptcy proceeding was pending at the time this suit was filed,
this suit could not have an affect on the administration of the debtors estate. Id.
10
Plaintiff responds that this action relates to a bankruptcy proceeding, as it
relates to the interpretation of the reorganization plan and enforcement of its
terms. This is not the standard, however. The standard is whether the issue will
affect the administration of the debtors estate. In this case, the bankruptcy was
closed, therefore the bankruptcy court was no longer administering the debtors
estate.
This Court has the discretion to decline jurisdiction over state law claims, if
it has dismissed all claims over which it had original jurisdiction. 28 U.S.C. 1367
(c)(3). Generally, the factors to be considered - judicial economy, convenience,
fairness and comity - will point toward declining to exercise jurisdiction over the
remaining state law claims. Barstad v. Murray County, 420 F.3d 880, 888 (8th
Cir. 2005). In this case, the Court finds there are no special circumstances
justifying departure from this general rule.
IT IS HEREBY ORDERED that Defendants Motion for Summary Judgment
[Doc No. 60] is GRANTED. Plaintiffs First and Eighth Claims for Relief are
DISMISSED WITH PREJUDICE, and the remaining state law claims are dismissed
without prejudice.
Date: September 13, 2007
s /Michael J. Davis
Michael J. Davis
United States District Court
 

 
 
 

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