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Weiss v. E-Scrub Systems, Inc.

United States District Court, D. Delaware

September 19, 2014

STANLEY WEISS, derivatively on behalf of e-Scrub Systems, Inc. Plaintiff,
v.
e-SCRUB SYSTEMS, INC., RALPH GENUARIO, MAIJA HARKONEN, JOHN PACKARD, and ELIZABETH RICHARDSON, Defendants.

MEMORANDUM

GREGORY M. SLEET, District Judge.

I. INTRODUCTION

Plaintiff, Stanley Weiss, who is suing derivatively on behalf of e-Scrub Systems, Inc. ("e-Scrub"), filed a complaint on April 23, 2013, naming e-Scrub, Ralph Genuario ("Genuario"), Maija Harkonen ("Harkonen"), John Packard ("Packard"), and Elizabeth Richardson ("Richardson") as defendants. (D.I. 1 at ¶¶ 1-6.) The complaint asserts the defendants, as directors of e-Scrub, breached fiduciary duties. ( Id. at ¶¶ 24-27.)

II. BACKGROUND

A. Parties

Plaintiff is an attorney and a New Jersey resident. ( Id. at ¶¶ 1, 10.) e-Scrub is a Delaware corporation, which specialized in developing and marketing anti-pollution technology. ( Id. at ¶ 2.) Genuario, a resident of Virginia, is the founder of e-Scrub, as well as its longtime director, CEO, and technology expert. ( Id. at ¶ 3.) Harkonen was e Scrub's director, President, Secretary, and Genuario's assistant. ( Id. at ¶ 4.) Her last known residence was in Virginia, but she may have relocated to Finland. ( Id. ) Packard, upon information and belief, is a California resident and served as an e-Scrub director from 2002 until January 2009. ( Id. at ¶ 5.) Richardson is a resident of Maryland, and served as an e-Scrub director. ( Id. at ¶ 6.)

B. Factual Background[1]

In November 2007, Genuario retained the Swedish law firm of Andersson, Gustafsson Advokatbyra KB ("Andersson"), on behalf of e-Scrub, to initiate an arbitration proceeding in Stockholm, Sweden against A.P. Moller-Maersk ("Maersk") to resolve certain contract issues and the ownership of processes used in developing e-Scrub's technologies. ( Id. at ¶ 9.) In December 2007, Maersk filed for an injunction against e-Scrub in United States District Court for the Eastern District of Virginia, to enjoin certain activities of e-Scrub while the arbitration was pending in Stockholm. ( Id. at ¶ 9(b).) On December 19, 2007, Andersson, with e-Scrub's approval, retained Weiss to respond to Maersk's injunction proceeding. ( Id. at ¶ 10.) After Weiss performed his services, he submitted a $20, 000 bill to e-Scrub, which was approved by Harkonen on February 4, 2008. ( Id. at ¶ 11.) Genuario, however, objected to Harkonen's approval and sent Weiss "a number of letters asserting various frivolous claims and demanding payments in various escalating amounts." ( Id. at ¶11(a).)

On July 13, 2009, e-Scrub filed suit against Weiss in New Jersey, seeking damages of $1 million and to disbar Weiss pending a competency evaluation. ( Id. at ¶ 11(b).) Weiss counterclaimed against e-Scrub and also filed a third party complaint against Genuario. ( Id. at ¶ 11(c).) On February 5, 2010, the Superior Court of New Jersey entered judgment in favor of Weiss and against e-Scrub and Genuario for $100, 150.00, finding their actions "were malicious and done with an evil purpose... by seeking to use same to extort monies from Stanley Weiss." ( Id. at ¶ 12.) After entry of that judgment, Weiss hired Virginia counsel to enforce the judgment in Virginia and proceedings were filed in the Circuit Court for the City of Alexandria. ( Id. at ¶ 12(b).) On June 27, 2012, that court found Genuario in contempt and inter alia, his "behavior throughout [the] process [as] contentious and designed to obfuscate Weiss' counsel's efforts to obtain information related to the assets of e-Scrub, " and imposed a fine of $10, 000 on e-Scrub to cover Weiss' court costs. ( Id. at ¶ 12(c).)

Andersson filed suit in Virginia against e-Scrub, Genuario, Packard, and Harkonen. The same lawyer retained by Weiss also represented Andersson. ( Id. at ¶ 13.) Although Andersson obtained judgment against e-Scrub for $178, 000 plus interest and costs, the suit against the individual defendants was dismissed because Packard was granted judgment in his favor, based on the operation of the two year statute of limitations. ( Id. ) Packard allegedly prevailed on the summary judgment motion by representing:

From several years before 2007 through my resignation from e-Scrub board of directors in 2009, I participated in e-Scrub board meetings by telephone from either my business office in Menlo Park, California or from San Francisco, California or from my home in Palo Alto, California, and I had no contact with the Commonwealth of Virginia in connection with e-Scrub during that time.

( Id. at ¶ 14.) During the litigation's discovery proceedings in April 2011, Weiss first learned that Packard's statement was purportedly false. ( Id. at ¶ 15.) Weiss also learned that e-Scrub's Board had not created or implemented a reliable information reporting system to enable oversight management of the company. ( Id. at ¶ 15(a).) Documents indicate Packard purchased over $400, 000 worth of securities of e-Scrub and one of it subsidiaries on fourteen different occasions. ( Id. at ¶ 16(a).) Packard also frequently communicated with Genuario and Harkonen regarding the payment of and delivery of the securities. ( Id. )

On November 6, 2007, before e-Scrub retained Andersson and Weiss, Harkonen informed Packard that e-Scrub had "considerable cash flow problems" and received a bill of $23, 832.00 from an American law firm that was working on the Maersk case, as well as a request for $25, 000 in securities. ( Id. at ¶ 16(b).) The following day, Packard wired e-Scrub $25, 000. ( Id. at ¶ 16(c).) Packard also wired $25, 000 to e-Scrub on January 8, 2008, $15, 000 in February 2008, and $11, 600 in July 2008, to cover e-Scrub's share of the arbitrator fees for the Stockholm arbitration. ( Id. ) Packard testified during deposition in the other matters that e-Scrub was bankrupt, however he never investigated the nature of the company's cash flow problems or examined any financial statements. ( Id. at ¶ 17(a)-(c).) Packard attested e-Scrub's officers were "very lax" or "too lazy" to provide financial or corporate data. According to Packard, the officers "went around and did their stuff. I didn't get involved in any of it." ( Id. at ¶ 17(d).) His main concern while a director of e-Scrub was the lack of corporate information to the Board. ( Id. at ¶ 17(e).) According to the complaint, Packard described Genuario as an awful, irrational, phony person, who refused to pay bills. ( Id. at ¶ 17(h)-(i).)

Plaintiff claims the lack of Director oversight enabled Packard to further his short term investment in the company. ( Id. at ¶ 18.) Packard made substantial investments to profit from the future marketing of e-Scrub's intellectual property. ( Id. at ¶ 18(a).) Finally, plaintiff avers that a dependable reporting system would have alerted the directors to the company's major financial problems and permitted them to respond appropriately. ( Id. at ¶ 18(b).)

There is no evidence e-Scrub filed any bankruptcy proceedings. ( Id. at ¶ 19.) It failed to pay its Delaware franchise tax for 2009. ( Id. at ¶ 19(a).) e-Scrub has not paid its debts to counsel, including the judgments entered in favor of Weiss and Andersson. ( Id. at ¶ 19(c).) Genuario has filed for personal bankruptcy, and continues to act on behalf of e-Scrub. ( Id. at ¶¶ 20-21.) Packard resigned from e-Scrub's Board of Directors in January 2009. ( Id. at ¶ 21.) Plaintiff is unsure of Harkonen's and Richardson's present relationship with e-Scrub and any attempts to contact them have been unsuccessful. ( Id. at ¶ 22.)

C. Procedural Background

On June 21, 2013, Packard filed a motion to dismiss for lack of subject-matter jurisdiction pursuant to FED. R. Civ. P. 12(b)(1), insufficiency of service of process under Rule 12(b)(5), failure to state a claim pursuant to Rule 12(b)(6), and failure to meet the pleading requirements of Rule 23.1. (D.I. 15.) On February 14, 2014, plaintiff filed a motion for default judgment against Genuario, Harkonen, and Richardson. (DJ. 25.) On March 21, 2014, Richardson, acting pro se, filed a motion to dismiss pursuant to Rule 12(b)(1), 12(b)(5), 12(b)(6), 23.1, as well as for lack of personal jurisdiction under Rule 12(b)(2). (D.I. 33.) The court will consider each of these motions.

III. POSITION OF THE PARTIES

A. Count 1

1. Plaintiffs Claim

Count 1, the sole count in the complaint, alleges defendants, as directors of e-Scrub, breached their fiduciary duties by failing to mitigate the financial problems of the company. (D.I. 1 at ¶¶ 24-27.) Plaintiff contends defendants knew by November 2007 that unless Packard continued to advance funds, e-Scrub could not pay its accumulated debts. ( Id. at ¶ 25.) Defendants failed to exercise any control over e-Scrub's financial situation, and specifically, Packard did nothing to investigate the details of e-Scrub's assets, liabilities, revenues, or expenses. ( Id. at ¶ 25(a).) Plaintiff asserts defendants knew or should have known that the combination of Genuario's irrational and irresponsible behavior and Packard's extension of credit was destroying the company and misleading and injuring third parties. ( Id. at ¶ 26.) Plaintiff maintains defendants were beyond grossly negligent and violated their duties of good faith and loyalty in failing to implement a ...


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