Submitted: November 17, 2016
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
T. Kelly, Ryan M. Ernst, George Pazuniak, O'KELLY ERNST
& BIELLI, LLC, Wilmington, Delaware; Counsel for Carole
LASTER, Vice Chancellor.
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
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
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.
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.
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.
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
The Company's Origins
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).
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.
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.
The Company's Strategy Changes.
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.
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.
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
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.
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
The Order To Show Cause
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
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
Waugh, 22 F.C.C.R. at 13364.
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.
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.
Waugh Forms Smartcomm, The Association, And
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
December 2007, Waugh formed Smartcomm, LLC with Carole Downs
(one of the Libel Plaintiffs). They met in June 2007 through
Match.com. 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.
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.
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.
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.
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.
The Judy Litigation
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
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.
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.
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."
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.
The Judy Litigation Becomes Significantly More
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.
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.
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.
The Receiver's Report
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.
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.
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.
The 2013 Annual Meeting
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
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.
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.
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
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.
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.
The Association's Continuing Efforts.
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.
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.
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.
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.
The Amended Complaint In The Plenary Action
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.
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
• 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
See id. at 15-21.
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 ...