Kuhns v. Ledger

202 F.Supp.3d 433

John D. KUHNS, Plaintiff,

v.Dean LEDGER, Robert Fasnacht, Ronald B. Foster and NanoFlex Power Corp., Defendants.

15 Civ. 3246 (NRB)

United States District Court, S.D. New York.

Signed August 24, 2016

Thomas James Fleming, Renee Michele Zaytsev, Olshan Frome Wolosky LLP, New York, NY, for Plaintiff.

Aegis Joseph Frumento, Stern, Tannenbaum & Bell, L.L.P., New York, NY, for Defendants.

MEMORANDUM AND ORDER

NAOMI REICE BUCHWALD, UNITED STATES DISTRICT JUDGE

Plaintiff John D. Kuhns brings this action against defendants Dean Ledger, Robert Fasnacht, Ronald B. Foster, and NanoFlex Power Corp. ("NanoFlex" or "the company") seeking damages, injunctive, and declaratory relief arising out of his termination as Executive Chairman and co-CEO of NanoFlex. Presently before us is defendants' partial motion to dismiss the complaint. For the reasons stated below, defendants' motion is granted in part and denied in part. Specifically, Counts Two, Five (as to defendant Foster), and Seven are dismissed.

BACKGROUND

The following facts, which we assume to be true for purposes of this motion, are drawn from Kuhns' amended complaint.

Defendant NanoFlex, a Florida corporation with its principal place of business in Arizona, "is engaged in the invention, development, commercialization and licensing of advanced photovoltaic technologies and intellectual properties." Am. Compl. ¶ 7. During the events described herein, defendant Ledger served as co-CEO and defendant Fasnacht served as Executive Vice President. Defendant Foster holds 47% of the outstanding shares of NanoFlex, making him its largest shareholder. The Board of Directors of NanoFlex consisted of Kuhns, Ledger, and Fasnacht.

Kuhns, who had invested in NanoFlex for more than a decade, acted as Co-CEO and Executive Chairman of the board of NanoFlex pursuant to an employment agreement dated September 24, 2013, which was amended and restated on October 22, 2013 (the "Employment Agreement"). The Employment Agreement provided that Kuhns would serve as Executive Chairman of the board of directors for five years.

In late 2014 and early 2015, NanoFlex could not pay its officers and, according to the amended complaint, Ledger resorted to fraud in order to raise money for the company. To do so, Ledger made baseless representations to investors: he told them that NanoFlex's equity had an imputed value of $50-60 million and that NanoFlex would list its shares on the New York Stock Exchange in 2015. Ledger further offered potential investors "units" of a share of common stock and a warrant with a strike price of $2.50, without providing reliable valuation and capitalization figures, and proposed modifying the strike price without authorization from the board of directors. In addition, Ledger obtained short-term loans even though NanoFlex could not repay these loans except from new infusions of capital. Kuhns told Ledger not to make these representations to investors several times.

Pursuant to an agreement between NanoFlex and Kuhns' investment banking firm, Kuhns Brothers, Inc., Kuhns separately obtained a financing proposal from SLS Holdings VII LLC ("SLS Holdings"). Under the terms of the proposal, SLS Holdings would extend to NanoFlex a $3 million loan for three years at 5% interest, and would require the resignations of certain members of management. In addition, SLS Holdings would receive a warrant to purchase 25% of NanoFlex for $1.00. This proposal valued NanoFlex at $12 million. Kuhns circulated the proposal on March 6, 2015 and advocated exploring the proposal further, while Ledger and Fasnacht objected to the offer. SLS Holdings withdrew the proposal after NanoFlex's counsel, at the direction of Fasnacht and Ledger, asked for an extension of the deadline to accept the offer.

On March 16, 2015, Fasnacht told Kuhns that he and Ledger wanted Kuhns to resign. He told Kuhns that they were acting on behalf of "the shareholders," who found the SLS Holdings proposal "unacceptable." Am. Compl. ¶ 24. The "shareholders," according to Kuhns, "clearly referred to ... Foster, the [c]ompany's dominant and controlling shareholder." Id. Kuhns refused to resign and two days later sent NanoFlex a notice of default, in which he demanded that NanoFlex cure its breaches of the Employment Agreement, including failure to pay him compensation he was owed, within 30 days.

Kuhns received a draft Form 10-K on Friday, March 27, 2015, and told Ledger and Fasnacht that he would provide comments the following week. He subsequently received an updated draft on Monday, and provided his comments that evening. Specifically, Kuhns stated that "[t]he manner in which we are offering our securities could engender an inquiry from the regulators. In that event, we would find it expensive and difficult to defend ourselves." Am. Compl. ¶ 26. He further noted that

[e]ven though the [c]ompany is a registrant, its shareholders' ability to trade the [c]ompany's shares is extremely limited, and has not been adequately disclosed, as follows: 1) the [c]ompany has no market makers, in the absence of which trading may not take place; and 2) the [c]ompany's shares may not be uplisted to a better exchange without the approval of the exchange in question, which in turn is vague and generally depends on the [c]ompany doing an underwriting with a recognized broker/dealer. The [c]ompany has no such arrangements.

Id. Finally, he requested disclosure regarding the importance of a senior executive and the difficulties NanoFlex might face without him. Kuhns would not sign the draft Form 10-K without the requested changes.

The following day, Kuhns received a Notice of Termination, which stated that he was terminated for "Cause" as the Employment Agreement defined the term. Specifically, defendants fired him for allegedly breaching his fiduciary duties. Finally, the Notice of Termination stated that 67.26% of the shareholders had voted by written consent to remove Kuhns from the Board.

DISCUSSION

On a motion to dismiss under Rule 12(b)(6), the Court must accept as true all factual allegations in the complaint and draw all reasonable inferences in the plaintiff's favor. ATSI Commc'ns, Inc. v. Shaar Fund, Ltd. , 493 F.3d 87, 98 (2d Cir.2007). Nonetheless, "[f]actual allegations must be enough to raise a right of relief above the speculative level, on the assumption that all of the allegations in the complaint are true." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (citation omitted); see also Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Thus, a plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Twombly , 550 U.S. at 570, 127 S.Ct. 1955. If a plaintiff "ha[s] not nudged [his] claims across the line from conceivable to plausible, [his] complaint must be dismissed." Id.

I. Dodd-Frank Retaliation Claim

Defendants seek dismissal of Count One, which alleges that NanoFlex violated the whistleblower protection provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") when it fired him, allegedly in retaliation for his statements to Ledger to stop making fraudulent statements to investors and for his comments on the draft Form 10-K. NanoFlex contends that Count One fails as a matter of law, because Kuhns failed to properly report under the statute and because he did not reasonably believe that the conduct he identified constituted a violation of the securities laws. Kuhns' first count survives, because his amended complaint sufficiently pleads that he reported conduct that he reasonably believed constituted securities fraud to an employee of NanoFlex who possessed "the authority to investigate, discover, or terminate misconduct." 18 U.S.C. § 1514A(a)(1)(C).

A. Legal Standard

The whistleblower protection provision of Dodd-Frank provides that

[n]o employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower—

(i) in providing information to the [Securities and Exchange] Commission in accordance with this section;

(ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the [Securities and Exchange] Commission based upon or related to such information; or

(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq. ), this chapter, including section 78j-l(m) of this title, section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.

15 U.S.C. § 78u–6(h)(1)(A). The Sarbanes-Oxley Act of 2002, cross-referenced in Section 78u–6(h)(1)(A)(iii), prohibits retaliation against an employee because that employee reports to "a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct)," 18 U.S.C. § 1514A(a)(1)(C), information he or she reasonably believes constitutes, inter alia , "any rule or regulation of the [Securities and Exchange Commission], or any provision of Federal law relating to fraud against shareholders." 18 U.S.C. § 1514A(a)(1).

B. Application

Defendants argue that Kuhns did not report to a person empowered "to investigate, discover, or terminate misconduct."¹ 18 U.S.C. § 1514A(a)(1)(C). Principally, they argue that an employee must report to someone more senior in the organization's hierarchy in order to seek protection under the anti-retaliation provision of Dodd-Frank. Their argument relies on the grammatical structure of the provision at issue: an employee is entitled to protection if he or she reports to "a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate...