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In re Hawk Systems, Inc.

Court of Chancery of Delaware

September 4, 2019

IN RE: HAWK SYSTEMS, INC., a Delaware corporation

          Date Submitted: June 18, 2019

          Carl D. Neff, Esquire and Kasey H. DeSantis, Esquire of Fox Rothschild LLP, Wilmington, Delaware and Manuel A. Mesa, Esquire and Matthew Carcano, Esquire of Mesa & Pepin, LLC, Miami, Florida, Attorneys for Petitioner Mark J. Spanakos.

          Neil R. Lapinski, Esquire and Phillip A. Giordano, Esquire of Gordon, Fournaris & Mammarella, P.A., Wilmington, Delaware, Attorneys for Respondents Robert Pate, John Pate, Mary Ellen Pate, Edward Sebastiano and Joseph Garofalo.



         Legend has it that if you ask a Mainer to give directions when he does not know the way, he will reply, "You can't get there from here."[1] Petitioner, Mark Spanakos, asks this Court to declare that he is the majority stockholder, sole director and chief executive officer of Hawk Systems, Inc. ("Hawk Systems" or the "Company"). His request comes in the wake of allegations the Company's former managers engaged in rampant fraud and mismanagement at the expense of all other stockholders, and Spanakos in particular, that caused the Company to default on its obligations and ultimately go dark. In the midst of the chaos, the Company's insiders bought and sold stock for little or no consideration and with no regard for corporate formalities. The Company's stock ledger is a mess and its stock transfer agent has resigned. This all has left a splintered trail of evidence regarding stock ownership that, in its present form, cannot be reconstituted. Consequently, while Spanakos set out in this litigation to reach Hawk Systems' seat of control, given the current state of the evidence, he "can't get there from here."

         The question of Spanakos' control over Hawk Systems has bubbled to the surface in derivative litigation Spanakos initiated in Florida against several of the alleged wrongdoers. Spanakos has sought to have the Company assume control of the derivative claims and the defendants there have responded by challenging his authority to act for the Company.[2] The Florida court determined that only this Court could adjudicate whether Spanakos' claim that he controls Hawk Systems is valid, so he initiated this action under 8 Del. C. § 225 to obtain that declaration.

         Spanakos' claims here hinge on two Orders issued by state courts in Florida in resolution of direct claims he initiated against some of the alleged bad actors within the Company. The Florida Orders, he alleges, make clear that, as a result of defaulted debts and proven wrongdoing, Spanakos now owns a majority of Hawk Systems' issued and outstanding voting stock, or at least has the right to vote a majority of the Company's common shares. As explained below, the Orders do not clearly say what Spanakos says they say, nor has Spanakos sought to clarify, enforce (or execute upon) them in Florida in a manner that would allow this Court to declare that he owns or controls the disputed shares. And, of course, the Company's stock ledger does not support his claim because that record has been neglected for years.

         Spanakos has cause to be frustrated. He invested real money in Hawk Systems and his investment has been squandered. His desire to assume control of the Company and to seek accountability for what has happened to it is laudable. But he can't get there from here. The basic elements of the map to his desired destination are missing. Those elements, if they exist, are in Florida. Specifically, the Florida courts can clarify the Hawk Systems shares Spanakos has acquired through his litigation efforts in Florida and can provide a facility to execute on those Orders. Once that clarity has been given, he can return to this Court with a clearer path to the relief he seeks. For now, I must enter judgment for Respondents.

         I. BACKGROUND

         The Court held a one-day trial during which it received 82 trial exhibits, including 9 lodged depositions, and heard live testimony from two witnesses. I have drawn the facts from the stipulations of fact entered in advance of trial, the testimony and exhibits presented during trial and from reasonable inferences that flow from that evidence.[3] The following facts were proven by a preponderance of the evidence.

         A. Parties and Relevant Non-Parties

         Petitioner, Mark Spanakos, is a Florida resident and former director of Hawk Systems.[4] Nominal respondent, Hawk Systems, is a Delaware corporation based in Palm Beach County, Florida. When it was operational, Hawk Systems designed fingerprint authentication and identification technology for various applications. It is the product of a 2009 reverse merger between Hawk Acquisition Corp. (as a subsidiary of Hawk System's predecessor, Explorations Group, Inc. ("EXGI")) and non-party, Hawk Biometric Technologies, Inc. ("Hawk Biometric").[5] Respondents, Robert Pate, John R. Pate, Edward Sebastiano, Mary Ellen Pate and Joseph Garofalo, are purported stockholders of Hawk Systems.[6]

         B. The Evolution of Spanakos' Interests in Hawk Systems

         In 2006 and 2007, Spanakos made a number of investments in Hawk Biometrics of Canada, Inc. ("Hawk Canada") in exchange for four million shares of common stock.[7] Eventually, Hawk Canada re-domiciled in the United States as Hawk Biometric and Spanakos' interest in Hawk Canada was converted in a 1:1 exchange to common stock in the U.S. company.[8] In February 2009, Hawk Biometric went public through a reverse merger with EXGI, a publicly traded company that changed its name to Hawk Systems after the merger.[9] As a result of the merger, Hawk Biometric became a wholly owned subsidiary of Hawk Systems.[10] Hawk Biometric Class A and B common stock was converted into shares of Hawk Systems Series B Preferred Stock and then into shares of Hawk Systems common stock.[11] Spanakos' four million shares of Hawk Biometric stock, therefore, converted into eight million shares of Hawk Systems common stock.[12]

         C. The Coriaty Note

         Prior to the reverse merger, Spanakos loaned $1.5 million to David Coriaty, the founder and majority stockholder of Hawk Canada, as evidenced by a promissory note dated June 29, 2007 (the "Coriaty Note").[13] To secure the Coriaty Note, Coriaty granted Spanakos a security interest in Coriaty's 3, 000, 000 Class A "Preferred" shares of Hawk Canada, and voting rights associated with all of Coriaty's shares, totaling 15, 000, 000 class A "Preferred" shares (the "Coriaty Security Agreement").[14] Coriaty also agreed that "[f]urther collateral (Patents) will be pledged in exchange for the above collateral once Hawk Biometrics of Canada is domesticated into the US."[15] After receiving the funds, Coriaty loaned the $1.5 million to Hawk Canada, and the board of directors of Hawk Biometric committed to repay Spanakos on the Coriaty Note in a board resolution dated January 6, 2009 (the "Coriaty Resolution").[16] The Coriaty Resolution, however, does not purport to transfer Coriaty's pledged collateral to Hawk Biometric, nor does it commit the Company to assist Spanakos in securing Coriaty's pledged collateral in the event Coriaty and the Company both default on the loan.

         D. Hawk Systems Defaults on Obligations and Loses Its Charter

         In 2009, the Company stopped making payments on Spanakos' loan.[17] This caused Spanakos to worry that all was not well within Hawk Systems. Specifically, Spanakos began to suspect that Company directors were diverting Company funds to pay personal expenses, a fact that was particularly troubling since the Company had yet to produce a single product with its patented "biometric" technology.[18] Even though the Company had no marketable product, its insiders continued to tout its prospects in what Spanakos now alleges was a "pump and dump" scheme whereby Hawk Systems' insiders pumped the stock price with false information and then dumped their holdings.[19] At the end of the scheme, the insiders allegedly raised millions of dollars in investor funding, reported sales of $5, 575 and booked expenses and losses of approximately $22 million.[20] All the while, members of the Hawk Systems board of directors allegedly issued shares of Company stock to insiders for little or no consideration and with no regard for corporate formalities.[21] Eventually the Company defaulted on its obligations to Delaware and its charter was declared void.[22]

         E. Spanakos Attempts to Revive the Company and Assert Control

         Between 2010 and 2012, Spanakos filed several actions against Hawk Systems and its directors. On October 28, 2011, Spankos initiated a direct action against Hawk Systems and Coriaty in the Florida 15th Judicial Circuit Court for Palm Beach County to enforce the Coriaty Note and foreclose on the Coriaty Security Interest (the "Coriaty Action").[23] On December 23, 2014, the Florida court entered a Partial Final Judgment in favor of Spanakos and against Hawk Systems and Hawk Biometric (the "Partial Final Judgment").[24] While the order states that "execution" on the "Final Judgment of foreclosure" shall "issue," there is no evidence that any further steps to execute the judgment have been taken.[25]

         Spanakos also commenced a direct action against former Hawk Systems director, Edward Sebastiano, again in the Florida 15th Judicial Circuit Court for Palm Beach County (the "Sebastiano Action").[26] On June 1, 2017, Spanakos obtained a Writ of Execution against Sebastiano and levied upon his goods and chattels, including three stock certificates totaling 8, 162, 283 shares of Hawk Systems common stock.[27]

         On July 13, 2010, Spanakos brought a direct and derivative action in the Florida 15th Judicial Circuit Court against several alleged Hawk Systems insiders, alleging, among other things, unjust enrichment and fraud, and seeking judgment against the defendants for compensatory damages (the "Derivative Action").[28]On December 15, 2016, the Florida court entered summary judgment against 22 individuals and entities with respect to Spanakos' claims of unjust enrichment (the "Summary Judgment Order").[29] The implementing orders for each defendant make clear that summary judgement was entered "as to liability only."[30] Indeed, "[t]he Court reserve[d] entering a final judgment against defendant(s) . . . on damages subject to an appropriate motion regarding the same."[31] To date, Spanakos has not brought the "appropriate motion" to obtain final judgments as directed by the Florida court.

         As for Spanakos' derivative claims (the "Derivative Claims"), it appears the defendants challenged his standing to bring those claims, raising, among other issues, his failure to plead demand futility.[32] In response, Spanakos moved to realign the parties on May 26, 2015.[33] After several hearings, the Florida court determined a Delaware Court should decide the number of Hawk Systems shares controlled by Spanakos and whether Spanakos is a validly elected director and officer of Hawk Systems.[34] The Florida court entered an order to that effect on March 14, 2018.[35]

         As he prosecuted his claims against various Company insiders in court, Spanakos purported to take several steps outside of court to assert control over the Company as majority stockholder and sole director. In March 2015, he executed a "Written Consent of Majority Stockholder in Lieu of an Annual Meeting Pursuant to Sections 228(e), 211(b), and Other Provisions of the General Corporation Law of the State of Delaware" (the "2015 Written Consent").[36] Through the 2015 Written Consent, Spanakos purportedly reduced the Hawk Systems board of directors to one member and then appointed himself as the sole director, chairman of the board and CEO of the Company.[37]

         On February 1, 2017, Spanakos caused to be filed a certificate of revival of Hawk Systems' charter, which, as noted, had become void in March 2013 for failure to pay taxes and fees.[38] In April 2018, Spanakos ostensibly amended the Company's bylaws to reduce the Hawk Systems board of directors to one and to ratify his actions with respect to the Derivative Claims (the "2018 Stockholder Consent").[39] Spanakos then purported to elect himself as chairman of the board, CEO, treasurer and secretary and then purported to ratify all of his prior actions (the "2018 Director Consent").[40] On April 20, 2018, as the alleged sole director, Spanakos purported to nullify 20, 811, 000 shares of Company common stock.[41]

         As of August 22, 2018, Spanakos had acquired an additional 6, 443, 909 shares of Hawk Systems stock and voting rights in 1, 271, 713 shares through purchases on the open market and a transfer from his sister, Athena Carlone.[42] In total, including shares he allegedly secured through litigation, Spanakos claims to own 22, 606, 192 shares and to control voting rights in 46, 115, 140 shares, [43] as reflected in the chart below:

         Remainder of page intentionally left blank

Source of Shares Amount of Shares Date Shares Acquired Evidence Reflecting the Shares
Physically Controlled by Spanakos Initial Investment 8,000,000 2006 Stock Certificate of Mark Spanakos (JX 50)
Additional Purchased 2,015,554 October 1, 2015 Account statement of Gary Goldberg Financial Services, dated May 2017 (JX 40)
Sebastiano Action 8,162,283 August 17, 2017

Writ of Execution and Bill of Sheriff’s

Sale (JX 53);

Sebastiano’s Stock Certificates (JX 25)

Transferred from Athena Carlone 4,428,355 February 2017 Account statement from Scottrade, dated February 24, 2017 (JX 48)
TOTAL 22,606,192
Voting Rights Controlled by Spanakos Coriaty Action – Partial Final Judgment 36,000,000 December 23, 2014

Coriaty Note and Security Agreement (JX 5)

Partial Final Judgment (JX 38)

Additional Coriaty Shares 8,843,427 December 23, 2014 Partial Final Judgment (JX 38) 7/7/2010 Letter from M. Diamant to Olde Monmouth stock Transfer Inc. (JX 23) Olde Monmouth Stock Transfer Transaction Journal, dated Oct. 21, 2015 (JX 21)
Voting Rights to Shares of Athena Carlone 1,271,713 August 22, 2018 Spanakos Aff., ¶ 12; Shareholder Proxy (JX 65)
TOTAL 46,115,140 [Collective Total of 68,721,332]

         F. The Stock Ledger

         The Company's most recent stock ledger shows Spanakos as record holder of approximately 8 million shares of Hawk Systems stock.[44] This equates to roughly 8.4% of Hawk Systems' outstanding shares.[45] But the stock ledger is not accurate, [46] and the Company's stock transfer agent, Olde Monmouth Stock Transfer Company ("Olde Monmouth"), has resigned.[47]

         G. Procedural History

         Petitioner filed this action on April 17, 2018, seeking declarations that he controlled Hawk Systems and had taken appropriate steps to secure and exercise that control upon acquiring majority ownership of the Company's outstanding voting stock. Alternatively, he sought to compel an election of directors.

         On May 30, 2018, Neil R. Lapinski, Esq. entered his appearance and filed a letter with the Court in which he explained that he represented several clients not named in the action who, nevertheless, opposed the relief Spanakos was seeking (the "Letter").[48] A number of shareholders and non-shareholders then contacted the Court to join in the Letter and asked to be heard.[49] Spanakos moved to strike the Letter.[50] Eventually, Spanakos agreed to withdraw his motion to strike in exchange for the non-parties' agreement not to intervene in the litigation.[51] Mr. Lapinski then entered his appearance for Respondents, Robert Pate, John Pate, Edward Sebastiano, Mary Ellen Pate and Joseph Garofalo, all of whom purport to be Hawk Systems stockholders.[52] The Court held a one-day trial on September 17, 2018.[53]

         II. ANALYSIS

         Spanakos seeks declarations under 8 Del. C. § 225(a) that he controls a majority of the voting shares of Hawk Systems-specifically, 68.7 million of approximately 75 million issued shares-and that he is the validly elected, sole director and officer of Hawk Systems. To obtain these declarations, Spanakos "bears the burden of proving by a preponderance of the evidence that [he] is entitled to relief."[54] Section 225 contemplates summary proceedings that "should be limited in scope to determine 'those issues that pertain to the validity of the acts [taken to secure plaintiff's position on the board].'"[55]

         As an alternative to his requested relief under Section 225, Spanakos seeks an order compelling the Company to hold an annual election of directors under 8 Del. C. § 223(a). Section 223(a) provides, in part:

If at any time, by reason of death or resignation or other cause, a corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the certificate of incorporation or the bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in § 211 or § 215 of this title.[56]

         Apparently recognizing that an election held in accordance with the Company's current stock ledger likely would not go well for him, Spanakos has advanced a request for relief not stated in his Petition that essentially would have the Court appoint a custodian to reconstitute the Company's stock ledger and then oversee the election to ensure that the Company's stock is voted in accordance with the newly revised ledger.[57]

         Regardless of whether the Court proceeds under Section 225 or Section 223, the Court is empowered "to determine the right and power of persons claiming to own stock and . . . to vote at any meeting of stockholders or members."[58] In exercising that power, "the court may determine any legal or factual issue, the resolution of which could affect the outcome of a corporate election or of any other stockholder vote. That includes deciding beneficial ownership."[59]

         A. Petitioner Has Not Proven He Is the Majority Stockholder or Sole Director of Hawk Systems

         Spanakos maintains he has acquired a majority of Hawk Systems' shares of voting stock through a variety of means. There appears to be no controversy that Spanakos' initial investment in Hawk Canada resulted in his ownership of 8 million common shares of Hawk Systems.[60] He then acquired an additional 2, 015, 554 shares on the open market, [61] 8, 162, 283 shares through a writ of execution following his success in the Sebastiano Action, [62] and 4, 428, 355 shares through a transfer from his sister, Athena Carlone.[63] All told this amounts to 22, 606, 192 shares, which the parties agree is less than a majority of the outstanding voting shares.

         1. The Partial Final Judgment

         To reach controlling stockholder status, Spanakos must rely on the Partial Final Judgment in the Coriaty Action and the Summary Judgment Order entered in the Derivative Action. The Partial Final Judgment awarded Petitioner $3, 096, 782.00 in damages, certain Hawk Systems patents and pending patents, and:

Final Judgment of foreclosure of the security interests held by [Spanakos], as of the date of default, November 1, 2008, in 6, 000, 000 Class A "Preferred" shares of stock in Defendant Hawk Systems, Inc., and in voting rights over 30, 000, 000 Class A "Preferred" shares of stock in Defendant Hawk Systems, Inc. (including all stock acquired in any fashion thereafter) . . . .[64]

         According to Spanakos, the Summary Judgment Order in the Derivative Action (discussed below) voided 20 million shares of the Company's stock.[65] Thus, when the stock he has acquired through litigation is added to the stock he has acquired through other means, Spanakos maintains he controls over 68, 721, 332 of the Company's less than 75 million outstanding shares, a number that brings him well into majority shareholder status.[66] As discussed below, there are several problems with Spanakos' math.

         First, to count the shares pledged by Coriaty as security towards Spanakos' majority holdings, I must rewrite the Florida court's Partial Final Judgment. That Order, apparently submitted by Spanakos for the Florida court's approval, expressly references "6, 000, 000 Class A 'Preferred' shares of stock in Defendant Hawk Systems, Inc., and [] voting rights over 30, 000, 000 Class A 'Preferred' shares of stock in Defendant Hawk Systems, Inc.."[67] But there are no "Class A Preferred shares of stock in [] Hawk Systems, Inc." with voting rights.[68] Recognizing this, Spanakos would have me amend the Florida court's Partial Final Judgment to substitute "common shares" for "Class A Preferred shares" to account for the fact that the reverse merger between Hawk Biometric and EXGI converted "Class A Preferred" stock into common stock of Hawk Systems.[69] Of course, Spanakos has made no effort to have the Florida court amend its own Order to reflect that change (if justified). That alone, in my view, is fatal to Spanakos' claim here. This court does not monkey with orders from other courts.[70]

         Second, there is no evidence in this record that Spanakos has taken steps in Florida to execute on the Partial Final Judgment.[71] And it is not clear what that process would yield by way of recovery should Spanakos initiate it. For instance, the Partial Final Judgment was entered against Hawk Systems and Hawk Biometrics, not Coriaty. While the Company promised to pay the Coriaty debt, it did not purport to take control of the collateral Coriaty pledged as security for the debt or to secure it in the event of default.[72] Thus, it would appear Spanakos must take steps against Coriaty personally to expand the scope of the Partial Final Judgment and then to execute, or "foreclos[e]," on the pledged stock before he can call it his own.[73] During the course of this process, one would expect that discovery in aid of execution will uncover precisely what shares Coriaty holds and whether he or the Company have engaged in fraudulent transfers of stock to avoid their obligations to Spanakos.[74]

         Finally, the record suggests that at least some of the shares to which Spanakos claims he is entitled are now in the possession of shareholders other than Coriaty.[75]Thus, in order to provide the definitive declarations Spanakos seeks here, the Court would have to unwind transactions whereby potentially bona fide purchasers, with no knowledge of Coriaty's debt obligations, acquired shares that were subject to the Partial Final Judgment. Setting aside the due process concerns that flow from ...

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