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Agar v. Judy

Court of Chancery of Delaware

January 19, 2017

DOROTHY AGAR, et al., Plaintiffs,
MICHAEL JUDY, et al., Defendant.

          Date Submitted: November 17, 2016

          Evan O. Williford, Andrew Huber, THE WILLIFORD LAW FIRM LLC, Wilmington, Delaware; Counsel for Edward Trujillo, Rachel Coughlin, Ted Kampen, James Solic, Joseph Washington, and the Preferred Investors Association

          Catherine A. Gaul, F. Troupe Mickler, ASHBY & GEDDES, Wilmington, Delaware; Counsel for Roman Kitka and J. Barclay Knapp.

          Sean T. Kelly, Ryan M. Ernst, George Pazuniak, O'KELLY ERNST & BIELLI, LLC, Wilmington, Delaware; Counsel for Carole Downs.


          LASTER, Vice Chancellor.

         On June 22, 2015, Preferred Communications Systems, Inc. ("PCSI" or the "Company") held an annual meeting of stockholders. The Preferred Investors Association (the "Association") opposed the reelection of the incumbent members of the Company's board of directors. In advance of the annual meeting, five members of the Association signed a letter that the Association distributed to the Company's investors (the "Fight Letter"). Three of the incumbent directors lost their seats.

         The former directors brought a claim for defamation against the Association and the members who signed the Fight Letter. Their lawsuit has been consolidated with a plenary proceeding that involves a variety of claims and counterclaims in which various parties appear in multiple capacities. This decision addresses the defamation claim. It refers to the former directors as the "Libel Plaintiffs." It refers to the Association and the five signatories as the "Libel Defendants."

         The Libel Defendants have moved to dismiss the defamation claim pursuant to Rule 12(b)(6) for failure to state a claim on which relief can be granted. They argue that the claim constitutes a Strategic Lawsuit Against Public Participation (a "SLAPP") within the meaning of Delaware's anti-SLAPP statute. 10 Del. C. §§ 8136-8138. The anti-SLAPP statute imposes additional burdens on a plaintiff who pursues a SLAPP at each stage of the litigation process, including a more onerous standard for surviving a motion to dismiss. This decision concludes that anti-SLAPP statute does not apply.

         The Libel Defendants separately argue that the Libel Plaintiffs are limited-purpose public figures. If they are, then the Libel Plaintiffs bear the burden of proving that the statements in the Fight Letter were not true and were made with actual malice. This decision holds that the Libel Plaintiffs are limited-purpose public figures.

         The Libel Defendants finally argue that based on the allegations in the complaint, it is not reasonably conceivable that the statements in the Fight Letter were defamatory and, to the extent they could be, were made with actual malice. This decision finds it reasonably conceivable that a subset of the statements was defamatory and made with actual malice. The motion to dismiss is denied as to these statements. Otherwise it is granted.


         The facts are drawn from the Amended and Supplemental Complaint (the "Complaint") and the documents it incorporates by reference. For purposes of the motion to dismiss, the well-pled allegations of the Complaint are assumed to be true, and the Libel Plaintiffs receive the benefit of all reasonable inferences. This decision takes judicial notice of previous proceedings in related actions, including Judy v. Preferred Communication Systems Inc., Consol. C.A. No. 4662-VCL (the "Judy Litigation"). This decision also takes judicial notice of matters of public record. See D.R.E. 201(b).

         A. The Company's Origins

         The Company was formed in 1998 as the vehicle for a scheme in which Pendleton Waugh, Charles Austin, Jay Bishop, and Charles Guskey planned to assemble a critical mass of specialized mobile radio licenses, then flip them to another company where Waugh was president. Because of how the Federal Communications Commission (the "FCC") historically distributed rights to wireless spectrum, the licenses were held by individuals having varying degrees of sophistication. Judy v. Preferred Comm'cn Sys. Inc., 2016 WL 4992687, at *2 (Del. Ch. Sep. 20, 2016).

         Waugh and Bishop were convicted felons. Both had pled guilty to crimes involving fraud or dishonesty based on their activities in the cellular telephone industry. Austin previously worked to acquire licenses for one of Waugh's companies. Evidencing his own regard for legal compliance, Austin never bothered to file a state or federal income tax return between 1997 and 2010. Guskey had worked as one of Bishop's accountants at Continental Wireless Cable Television, Inc. ("Continental"), another company that acquired wireless licenses. In 1994, the SEC filed an enforcement action against Continental for defrauding investors, obtained a restraining order against Continental, seized its assets, and froze the bank accounts of the company and its principals.[1]

         Austin served as the front man for the Company. In the Judy Litigation, after trial, this court made the following finding of fact:

[B]ecause Bishop and Waugh were convicted felons, and because the FCC looks askance at felons and fraudsters controlling (directly or indirectly) cellular communications licenses, Waugh, Bishop, Guskey, and Austin sought to conceal Waugh and Bishop's involvement. To that end, Austin always acted as the front man for the group, and Waugh and Bishop never held any official positions with PCSI. Despite foregoing any official roles, Waugh and Bishop in fact acted as principals of PCSI, participated in its operations, and made decisions on behalf of PCSI. Judy Litigation, Dkt. 432, ¶ 4.

         B. The Company's Strategy Changes.

         Beginning in 1998, the Company assembled a group of licenses in Puerto Rico and the U.S. Virgin Islands. The Company largely acquired them from individuals in return for packages of consideration that typically included securities in the Company. The Company also obtained a set of licenses predominantly clustered in Virginia and California. Judy, 2016 WL 4992687, at *3.

         In 1999, the plan to flip the licenses foundered after Waugh encountered further legal difficulties. The FCC described them as follows:

In 1999, Waugh was convicted of securities fraud, a felony, in a case brought by the State of Texas, arising from his failure, in 1993, to disclose to a potential investor that he was under investigation by federal authorities for activities relating to his involvement in Express. Waugh was sentenced to four years in state prison, all of which were suspended pending successful completion of probation. He also was ordered to pay $72, 000 in restitution and to complete 500 hours of community service.
Later in 1999, Waugh was determined to have violated the terms of his parole from federal prison and his probation on his state conviction by traveling to Puerto Rico to engage in activities relating to cellular telephone securities. As a result, Waugh was sentenced to six additional months in federal prison and four years in state prison.[2]

         With the assemble-and-flip strategy no longer viable, the four founders pivoted towards the more challenging task of turning the Company into a full-service wireless telecommunications provider.

         Ostensibly to fund this plan, the Company raised money from outside investors by issuing a variety of poorly documented securities. In the Judy Litigation, this court made the following finding of fact after trial:

To use a technical corporate term, [the Company] was a mess. Its founders did not follow corporate formalities and took dramatically different positions regarding the [C]ompany's capital structure depending on whether they were dealing with regulatory authorities like the FCC, potential investors, or the Court. It is not possible to reconcile all of the conflicting evidence into a single coherent account, nor is it possible to harmonize all of the various transactions in which [the Company] engaged or the types of securities that ostensibly were issued.

Judy Litigation, Dkt. 433, ¶ 5.

         It is not clear what progress, if any, the Company made during this period toward becoming a full-service wireless telecommunications provider. Its primary business activity appears to have been inducing individuals to buy its securities.

         C. The Order To Show Cause

         In July 2007, after conducting a preliminary investigation, the FCC issued an Order to Show Cause to Waugh, Austin, Bishop, the Company, and the Company's wholly-owned subsidiary that owned the licenses. The FCC summarized its reasoning as follows:

The record before us indicates that these individuals, two of whom are convicted felons, and the referenced entities, individually and collectively, among other things, apparently (1) failed to disclose a real-party-in-interest and engaged in unauthorized transfers of control of Commission licenses; (2) misrepresented material facts to the Commission; (3) lacked candor in their dealings with the Commission; (4) failed to disclose the involvement of convicted felons in ownership and control of the licenses; (5) failed to file required forms and information and respond fully to Enforcement Bureau letters of inquiry; and (6) discontinued operation of certain licenses. Evidence of such misconduct raises material and substantial questions requiring further inquiry at hearing as to whether the referenced licenses should be revoked and whether forfeitures should issue against one or more of the persons and/or entities identified above.

Waugh, 22 F.C.C.R. at 13364.

         The Order to Show Cause posed an existential threat to the Company. If the FCC revoked the licenses, then the Company no longer would have any valuable assets.

         By late 2007, the Order to Show Cause had driven "a wedge between Waugh and Austin." Judy Litigation, Dkt. 432, ¶ 4. Before the enforcement proceeding, Waugh was "the principal decision-maker for [the Company], with Austin acting as a figurehead." Id. Afterwards, Austin tried to distance the Company from Waugh. Austin could do this because the certificate of incorporation identified Austin as the sole director of PCSI. Shortly after the Company was formed, acting as sole director, Austin appointed himself CEO and President. The Company had never held a meeting of stockholders, so Austin continued in those roles. From a technical legal standpoint, Austin was in charge. Judy, 2016 WL 4992687, at *5.

         D. Waugh Forms Smartcomm, The Association, And PSI.

         Waugh wanted to regain control of the Company. In furtherance of this goal, he formed a series of entities. To minimize the appearance of his own involvement, he nominally put others in charge. Id.

         In December 2007, Waugh formed Smartcomm, LLC with Carole Downs (one of the Libel Plaintiffs). They met in June 2007 through Downs was a successful real estate broker in Arizona. She had no experience in the wireless industry and knew nothing about it. Despite her lack of experience, Downs became President of Smartcomm. Waugh served as Vice President. Smartcomm became the new vehicle through which Waugh pursued his activities in the wireless industry. Id.

         Waugh and Downs worked to organize the various investors who had purchased securities from the Company. Their strategy was to blame Austin for the Company's lack of progress, then use the investors' anger as the vector for regaining control. Id.

         Their first investors' organization was the Association. Waugh recruited Michael Judy to serve as its public persona. In 1999, Judy became an investor in the Company after meeting with Waugh and attending a subsequent investor presentation. Waugh and his team convinced Judy about the Company's fantastic prospects, and Judy agreed to make a personally significant investment of $40, 000, which he raised by maxing out his credit cards and borrowing from his father. Judy was not an expert in the wireless industry; his primary avocation was professional auto racing. His role was that of a passive investor until early 2007, when he became a finder for the Company and was compensated for bringing in other investors. Waugh convinced Judy that Austin was the source of the Company's problems. Id. at *6.

         In November 2008, Judy, Waugh, and other investors agreed to form the Association, and they elected Judy as President. But Judy's tenure as head of the Association and its role as a vehicle for Waugh were both short-lived. Disagreements quickly arose between Waugh's faction and investors associated with Edward Trujillo (one of the Libel Defendants). Trujillo had served as a finder for the Company and brought in many of the individuals who purchased its securities. Judy resigned, and Trujillo became President. The Association eventually came to represent approximately eighty investors who collectively provided approximately $3.1 million in funding to the Company. Trujillo and the Association came to be the principal opponents of Waugh's efforts to regain control over the Company. Id.

         Having lost control of the Association, Waugh needed to form a new organization. In January 2009, Judy, Waugh, and various supporters decided to form Preferred Spectrum Investments, LLC ("PSI"). In February 2009, Judy formally created PSI and became its President. One of the business purposes of PSI was to gain control over the Company. Id.

         E. The Judy Litigation

         PSI funded the Judy Litigation in an effort to retake control of the Company. PSI's strategy was to obtain a court-ordered meeting of stockholders at which Waugh and his allies could replace Austin and establish a new board majority. PSI itself was not a stockholder in the Company, so Judy served as the plaintiff. Id.

         In June 2009, Judy filed an action for books and records pursuant to Section 220 of the Delaware General Corporate Law (the "DGCL"). See 8 Del. C. § 220. Among other materials, Judy sought information about the stockholders of the Company and a copy of the Company's stock ledger. Judy, 2016 WL 4992687, at *6.

         In July 2009, Judy filed an action to compel the Company to hold its annual meeting of stockholders in accordance with Section 211 of the DGCL. See 8 Del. C. § 211. Since its founding in 1998, the Company had never held an annual meeting. Judy, 2016 WL 4992687, at *7.

         On the same day that he filed the annual meeting action, Judy filed a plenary action that contended, among other things, that Austin had breached his fiduciary duties. The court consolidated the three lawsuits into the proceeding that this decision refers to as the "Judy Litigation." Id.

         Judy moved for summary judgment on various aspects of his claims. By order dated September 29, 2009, as amended on October 13, the court granted summary judgment in Judy's favor on his claim for books and records. The court also granted summary judgment in favor of Judy on his request for an annual meeting. The order directed the Company hold an annual meeting of stockholders on December 9, and it appointed Richard L. Renck, Esq., to act as special master for purposes of overseeing the annual meeting. Judy, 2016 WL 4992687, at *8.

         F. The Judy Litigation Becomes Significantly More Complex.

         After the court's rulings, Waugh and his allies thought they were on their way to a court-ordered meeting in December 2009. But Austin failed to comply with the portion of the order that directed the Company to produce a list of its stockholders. Put simply, the Company's records were such a mess that Austin could not generate the list. Id. at *9.

         After the Company failed to meet the court-ordered deadline for producing the list, Judy sought the appointment of a receiver who would take control of the Company for the limited purpose of providing it. By order dated December 23, 2009, the court appointed Renck to act as receiver for the Company (the "Receiver"). The order charged the Receiver with identifying the Company's stockholders, determining who could vote at the annual meeting, and then convening and conducting the meeting. Id.

         Also in December 2009, the court permitted the Association to intervene in the Judy Litigation. Trujillo had perceived Waugh's strategy of using a court-ordered meeting to regain control of the Company. He also perceived that Waugh was using Judy as a front man to hide his involvement. Id.

         G. The Receiver's Report

         On March 5, 2010, the Receiver filed his report. He made recommendations about the identity and holdings of the Company's stockholders. He also identified serious problems with the Company's capital structure. Several of the recommendations displeased Waugh. Waugh responded by calling upon his allies to file and litigate a host of objections, which they did. Id. at *10.

         Many of the Receiver's conclusions turned on assessments of incomplete and conflicting corporate records. The ensuing avalanche of objections and claims from Waugh's allies made it clear that a trial would be necessary to resolve the persistent factual disputes. The parties engaged in litigation over the objections in anticipation of a hearing to take place in July 2010, but the process faltered when the Receiver's fees went unpaid. In September 2010, the court confirmed that it would not hold a hearing until the Receiver was paid. Trial eventually was rescheduled for February 2011, then deferred pending mediation. After several more continuances, trial took place in December 2011. Id.

         After trial, among other things, the court approved a final stock list for the Company. The court directed the Receiver to "schedule a Court-ordered meeting of stockholders for the election of a new board of directors, set the record date for the meeting, give notice of the meeting, convene and conduct the meeting, and determine those members of the board of directors who have been elected and qualified." Id. at *11.

         H. The 2013 Annual Meeting

         PSI and the Association each sought to elect candidates to the board at the court-ordered meeting. PSI put forth a slate comprising Judy, Downs, Barclay Knapp, Roman Kikta, and Michael Scott (the "PSI Nominees"). Knapp and Kitka (like Downs) are Libel Plaintiffs. The Association put forth a slate comprising Trujillo, Joseph Washington, Rodney Agar, Rachel Coughlin, and William Callahan (the "Association Nominees"). Coughlin and Washington (like Trujillo) are Libel Defendants.

         The election was hotly contested. Both sides sent fight letters to the Company's investors. The Association sent at least two letters; PSI sent at least one. Judy Litigation, Dkt. 453 Exs. A & C; id., Dkt. 459 Ex. D.

         The annual meeting was held on January 23, 2013 (the "2013 Meeting"). Out of 172 separate stockholdings appearing on the stock list, 159 voted in person or by proxy. The vote count showed that the PSI Nominees narrowly prevailed.

         The Association challenged the outcome. The court overruled the Association's objections, and by order dated March 18, 2013, approved the election of the PSI Nominees. Judy, 2016 WL 4992687, at *11. For simplicity, this decision refers to them post-election as the "PSI Directors."

         In April 2013, the PSI Directors began taking action on behalf of the Company. They appointed Knapp as President and CEO and approved a compensation package for him that included a $450, 000 salary, an incentive bonus equal to 100% of his salary, and stock options. Id.

         On December 20, 2013, the Company reached an agreement to sell approximately 70% of its licenses for $60 million to Sprint (the "Sprint Transaction"). In June 2014, the Sprint Transaction closed. After receiving the $60 million in transaction proceeds, the PSI Directors authorized various payments by the Company. They included compensation payments to the directors and a special bonus to Knapp of $315, 000. Id. at *12.

         I. The Association's Continuing Efforts.

         Despite losing the proxy context, the Association did not go away. In April 2014, over forty Company stockholders filed suit in this court against the Company, the PSI Directors, and several of their affiliates (the "Plenary Action"). The plaintiffs largely appear to be members of the Association. The wide-ranging complaint asserted twenty different causes of action.

         In November 2014, Trujillo took a page from Judy's book and filed two lawsuits against the Company. The first sought to inspect books and records. Trujillo v. Preferred Commc'ns Sys., Inc., C.A. 10376-VCL (Del. Ch. Nov. 20, 2014) (the "Books and Records Action"). The second sought to compel the Company to hold its annual meeting of stockholders. Trujillo v. Preferred Commc'ns Sys., Inc., C.A. 10378-VCL (Del. Ch. Nov. 20, 2014) (the "Meeting Action"). When Trujillo filed the Meeting Action, the Company had not held an annual meeting since the 2013 Meeting, some twenty-one months earlier. The Company originally opposed both actions.

         In the Books and Records Action, Trujillo moved for judgment on the pleadings. The court granted the motion in part and required the Company to produce the following categories of documents that the Company previously had indicated it would provide:

a. All final valuations and appraisals of significant assets since January 1, 2013;
b. The most recent financial statements or report as of (i) October 9, 2014; and (ii) the date this order is granted.
c. The [Company's] stocklist; and
d. Financial statements from which the Company's assets and liabilities can be determined.

Books and Records Action, Dkt. 33.

         In March 2015, less than two weeks before a scheduled trial in both actions, the parties agreed to a stipulated final order addressing both the Books and Records Action and the Meeting Action (together, the "Final Order"). The Final Order (i) required the Company to produce substantially all the books and records Trujillo had requested, (ii) scheduled the annual meeting for June 22, 2015, and (iii) required the Company to pay costs Trujillo incurred with both actions. See Books and Records Action, Dkt. 42.

         J. The Amended Complaint In The Plenary Action

         After receiving the documents from the Books and Records Action, the stockholder plaintiffs filed an amended complaint in the Plenary Action. The original complaint had asserted twenty different causes of action; the amended complaint expanded to assert twenty-eight different causes of action.

         In substance, the amended complaint alleged that the PSI Directors had "engaged in looting [the Company] to benefit themselves and their affiliates via a number of self- dealing, wasteful, and/or unapproved transactions." Dkt. 70, at 3. The allegations regarding misuse of Company resources included the following:

• Excessive compensation of $450, 000 per year paid to Knapp for serving as CEO, a position to which he devoted only 50% of his time. A bonus of $315, 000 paid to Knapp for the Sprint Transaction.
• An agreement pursuant to which the Company paid $7, 500 per month to a Knapp affiliate in addition to the compensation Knapp was receiving from the Company.
• A $3.5 million payment to Smartcomm License Services, LLC, an affiliate of Downs, to acquire a promissory note from PSI. An agreement pursuant to which the Company paid $7, 500 per month to a different Downs affiliate.
• Other miscellaneous payments to certain PSI Directors and their affiliates. Stock option grants to the PSI Directors.

See id. at 15-21.

         According to the amended complaint, documents obtained through the Books and Records Action showed that the PSI Directors were projecting that the $60 million received from Sprint Transaction would have dwindled to less than $7 million by the end of 2015. In making this allegation, the amended complaint relied on documents showing that as of March 10, 2015, the Company had approximately $39 million in cash on hand and had identified the following liabilities: (i) taxes payable of approximately $25 million, (ii) amounts due for Company notes and preferred stock redemption obligations of approximately $6.5 million, and (iii) monthly expenses totaling almost $1.35 million.

         K.The 2015 Annual ...

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