SFF-Tir, LLC v. Stephenson

250 F.Supp.3d 856

SFF–TIR, LLC; Stuart Family Foundation, Inc.; Alan Stuart 2012 GST Family Trust; Stuart 2005 GST Family Trust; Celebration, LLC; Anurag Agarwal ; Peter Buckley; Vincent Signorello and Rodney M. Reynolds, Plaintiffs,

v.Charles C. STEPHENSON, Jr.; Cynthia A. Field; Peter Boylan, III; Lawrence Field; Cypress Energy Partners–TIR, LLC ; CEP Capital Partners, LLC; Cypress Energy Holdings, LLC and Tulsa Inspection Resources, LLC, Defendants.

No. CIV 14-0369 JB/FHM.

United States District Court, N.D. Oklahoma.

Signed April 25, 2017

Counsel: Jamison A. Diehl, Akin Gump Strauss Hauer & Feld LLP (NY), New York, New York—and—R. Stratton Taylor, Mark H. Ramsey, Clinton Derek Russell, Taylor Burrage Foster Mallett Downs Ramsey & Russell, Claremore, Oklahoma—and—Stuart Kagen, Daniel A. Cohen, Joshua C. Gillette, Kyla Janine Grant, Kagen & Caspersen, New York, New York, Attorneys for the Plaintiffs

Toney Daniel Foster, Taylor Burrage Foster Mallett Downs Ramsey & Russell, Claremore, Oklahoma, Attorneys for Plaintiff Stuart 2005 GST Family Trust

Frederic Dorwart, Paul DeMuro, Sarah Wishard Poston, Nora Rose O'Neill, Fredric Dorwart Lawyers, Tulsa, Oklahoma, Attorneys for the Defendants

MEMORANDUM OPINION AND ORDER

James O. Browning, UNITED STATES DISTRICT JUDGE

THIS MATTER comes before the Court on: (i) the requests in the Plaintiffs' Motion to Strike Affirmative Defenses, filed November 4, 2015 (Doc. 191)("Plaintiffs' Motion to Strike Affirmative Defenses"); (ii) the requests in the Defendants' Motion for Summary Judgment on Acquiescence Defense and Brief in Support, filed April 3, 2015 (Doc. 83)("Defendants' Acquiescence MSJ"); (iii) the requests in the Defendants' Second Motion for Summary Judgment and Brief in Support Thereof, filed September 14, 2015 (Doc. 154)("Defendants' Estoppel MSJ"); (iv) the requests in the Plaintiffs' Memorandum of Law in Support of Motion for Partial Summary Judgment on Breach of Fiduciary Duty Claims, filed September 14, 2015 (Doc. 157)("Plaintiffs' MSJ"); (v) the requests in the Plaintiffs' Motion to Strike, filed April 20, 2015 (Doc. 86), and the requests in the Plaintiffs' Motion to Strike Affidavit of Randall Lorett and Memorandum of Law in Support Thereof, filed April 20, 2015 (Doc. 87)(collectively "Motion to Strike Lorett Affidavit"); and (vi) the requests in the Plaintiffs' Motion in Limine to Preclude Evidence of Plaintiffs' Conduct, and Brief in Support, filed October 26, 2015 (Doc. 182)("Motion in Limine"). The Court held a hearing on December 27 and 28, 2016.

The Court sua sponte assesses whether it has jurisdiction over the case. The primary issues that the parties raise and that the Court resolves in this Memorandum Opinion are whether: (i) the Court should strike, or not allow evidence at trial regarding, the Defendants' affirmative defenses of acquiescence, unclean hands, estoppel, and waiver; (ii) Delaware or Oklahoma law governs the Plaintiffs' claims and the Defendants' affirmative defenses; (iii) the Plaintiffs' claims are barred under the theory of acquiescence; (iv) the Oklahoma common-law clean hands doctrine bars the Plaintiffs' claims; (v) the Oklahoma common law of waiver bars the Plaintiffs' claims; (vi) the Oklahoma common law of estoppel bars the Plaintiffs' claims; (vii) the Court should expand Securities Exchange Commission rule 10b–5 to include the force-seller doctrine; (viii) the entire fairness standard governs the Plaintiffs' claims for breach of fiduciary duty; (ix) the Defendants bear the burden of proof that the cash-out merger was entirely fair to the minority shareholders; (x) the Defendants are liable for breaching their duty of entire fairness; (xi) the Court should strike the affidavit of Randall Lorett; (xii) the Court should preclude evidence at trial of the Akin Gump Letter and other letters that the Plaintiffs and the Plaintiffs' counsel exchanged with the Defendants between September, 2013, and December, 2013; (xiii) the Court should preclude evidence at trial of letters sent to and received from the Triangle Capital mezzanine lenders; and (xiv) the Court should preclude the Defendants from mentioning during trial that the Plaintiffs' are residents of states other than Oklahoma.

The Court finds it advisable, because of this opinion's length and complexity, to summarize and clarify its holdings before it lays out the case's facts in the next section. In the Court's analysis' first section, as a preliminary threshold issue, the Court examines sua sponte whether it has jurisdiction over this case. The Court concludes that it exercises federal question jurisdiction over the federal securities claims. The Court further concludes that it exercises federal diversity jurisdiction over the case's entirety even if the securities claims do not survive a motion for summary judgment against the securities claims.

In the Court's analysis' second section, the Court examines Oklahoma choice-of-law rules to determine whether it should apply Delaware or Oklahoma law to the claims and defenses in the case. The Court concludes that: (i) Delaware law applies to the Plaintiffs' claims regarding the cash-out merger, which entails consideration of the defense of acquiescence in accordance with Delaware law; and (ii) Oklahoma law applies to the Defendants' other contract defenses of equitable estoppel, waiver, and unclean hands.

In the Court's analysis' third section, the Court evaluates the Defendants' Acquiescence MSJ. The Court concludes that: (i) the Defendants did not set up a well-functioning committee of independent directors to examine and approve the merger; (ii) a fully-informed majority of the minority shareholders never voted to approve the merger; (iii) the evidentiary burden to prove the merger's entire fairness remains with the Defendants; (iv) when the Court interprets the facts in the light most favorable to the Plaintiffs, the Defendants do not meet this evidentiary burden; and (v) Delaware common law requires the Court to allow any case where the Defendant bears the burden to prove entire fairness to proceed to trial so that the entire fairness of the transaction can be evaluated. Accordingly, the Court denies the Defendants' Acquiescence MSJ.

Because the Court denies the Defendants' Acquiescence MSJ, in the Court's analysis' fourth section, the Court assesses the Defendants' Estoppel MSJ. The Court concludes that: (i) the Defendants' Estoppel MSJ largely duplicates the Defendants' Acquiescence MSJ's facts; (ii) the Defendants fail to demonstrate that they reasonably relied on the Plaintiffs' merger acceptance or that the alleged reliance caused the Defendants to suffer a detrimental change of position; (iii) the Defendants fail to demonstrate that the Plaintiffs waived their right to challenge the entire fairness of the contested merger transaction; (iv) the Defendants fail to demonstrate that the Plaintiffs undertook the allegedly fraudulent and deceitful conduct of which they complain, thereby failing to show that the Plaintiffs have unclean hands; (v) the Tenth Circuit is unlikely to support the Plaintiffs' contention that the forced-seller doctrine is good law within the Tenth Circuit, and therefore the Court should not expand SEC rule 10b–5 to include the forced-seller doctrine and should dismiss the Plaintiffs' federal securities claims; and (vi) the Supreme Court of Oklahoma likely would dismiss the Plaintiffs' state securities claims and the Court, under the Erie doctrine's required deference to a state's supreme court, should dismiss the Plaintiffs' state securities claims. Accordingly, the Court: (i) denies the Defendants' Estoppel MSJ in part as it relates to the Oklahoma common-law clean hands doctrine, the Oklahoma common law of waiver, and the Oklahoma common law of estoppel; and (ii) grants the Defendants' Estoppel MSJ in part as it relates to securities claims, dismissing the securities claims.

Because the Court only grants in part the Defendants' Estoppel MSJ, in the Court's analysis' fifth section, the Court adjudges the Plaintiffs' MSJ. The Court concludes that (i) the entire fairness standard governs the Plaintiffs' claims for breach of fiduciary duty; (ii) the Defendants bear the burden of proof that the merger was entirely fair to the minority shareholders; and (iii) the Defendants are liable for breaching their duty of entire fairness, because the undisputed material facts show that the Defendants did not put into place sufficient safeguards protecting minority shareholder rights to meet this burden. Accordingly, the Court grants in part the Plaintiffs' MSJ with respect to liability under the entire fairness standard. The Court, however, leaves determination of damages—and only damages—to be resolved at trial.

The Court sixth investigates and adjudges the Plaintiffs' Motion to Strike Affirmative Defenses. The Court concludes that: (i) rule 12(f) motions to strike are disfavored and should be denied unless the challenged allegations have no possible relation or logical connection to the controversy's subject matter; and (ii) the Court will not "strike" Defendants' affirmative defenses of acquiescence, unclean hands, estoppel, and waiver have a possible relation or logical connection to the controversy's subject matter. Accordingly, the Court denies the Plaintiffs' Motion to Strike Affirmative Defenses. Nevertheless, given the unique procedural history and posture of this case, the Court further concludes that, because the entire fairness doctrine applies, the Defendants are precluded from raising these defenses at trial.

Further, because the Court grants the Plaintiffs' MSJ with respect to the Defendants' liability under the entire fairness standard, leaving only the determination of damages for the trial, in the Court's analysis' seventh section, the Court appraises the Plaintiffs' Motion to Strike Lorett Affidavit. The Court concludes that: (i) the Lorett Affidavit is not a pleading; (ii) the Lorett Affidavit is not...