Cellucci v. O'Leary

Background

The plaintiffs—Thomas A. Cellucci, Stephen Goodman, David D. Singer, Mark A. Banash, and Robert Allan Campbell—were alleged to be minority shareholders and, except for Campbell, former officers of DarkPulse, Inc. DarkPulse is described as a publicly traded company organized under Delaware law. Dennis Michael O’Leary allegedly served as DarkPulse’s president, chief executive officer, and sole board member during at least part of the relevant period, and allegedly held shares representing 67.14% of the company’s voting power.

The plaintiffs brought both derivative claims on behalf of DarkPulse and individual claims. They alleged breaches of fiduciary duty, violations of DarkPulse’s certificate of incorporation and by-laws, waste or misuse of corporate assets, breach of employment contracts, and retaliation under the Dodd-Frank Act. Their allegations included improper removal of officers and a director, diversion of business opportunities and company resources to other entities, possible export-control violations, misleading statements to shareholders and the public, poor management decisions, failure to pay compensation, and retaliation against Singer after he filed a complaint with the Securities and Exchange Commission.

The defendants moved to dismiss all causes of action under Rule 12(b)(6), which allows dismissal when a complaint does not allege enough facts to state a legally plausible claim.

Derivative claims

A derivative action is brought by a shareholder on behalf of the corporation. Federal Rule of Civil Procedure 23.1 requires such a complaint to be verified, to allege that the plaintiff owned shares when the challenged transaction occurred, to state that the action is not a collusive attempt to create jurisdiction, and to describe with particularity any effort to have the corporation’s directors or shareholders pursue the claim and why that effort was not made.

The court held that the plaintiffs’ amended complaint did not comply with those requirements. It was not verified, did not provide adequate facts about when each plaintiff acquired DarkPulse shares, did not include the required non-collusion allegation, and did not adequately explain why making a demand on DarkPulse’s board would have been futile. The court therefore dismissed all derivative claims for failure to comply with Rule 23.1. It granted leave to file a second amended complaint because the plaintiffs might be able to correct those defects.

Individual claims

The court also dismissed all individual claims for failure to state a claim.

For the claims concerning removal as officers or a director, the court questioned whether the plaintiffs could obtain the requested relief in this federal case. Under Delaware law, disputes over the validity of an officer’s or director’s removal generally take the form of a proceeding under Section 225 in the Delaware Court of Chancery. The court dismissed the plaintiffs’ claims based on alleged violations of DarkPulse’s governing documents. It directed the plaintiffs to file a letter motion if they intended to pursue a Section 225 claim in federal court, explaining why the claim should not be brought in Delaware’s Court of Chancery.

The court dismissed the claim that DarkPulse violated its charter or by-laws by retaining new counsel without consulting its officers because the plaintiffs identified no provision requiring that consultation. The dismissal was with leave to amend.

The court dismissed the employment-contract claims asserted by Cellucci, Banash, and Singer, as well as Cellucci’s claim based on an alleged assignment from Stephen Goodman. The amended complaint did not allege the contracts’ terms, whether they were written or oral, what performance was required, how the compensation amounts were calculated, or the terms of Goodman’s alleged assignment. The court concluded that the allegations were too conclusory to establish that the contracts existed or were breached. The court granted the defendants’ motion to dismiss those claims and allowed the plaintiffs to amend.

The court also dismissed Singer’s Dodd-Frank retaliation claim. Singer alleged that he filed a Securities and Exchange Commission complaint on March 7, 2019, and was terminated on March 19, 2019, in retaliation. But the amended complaint did not describe what Singer reported, identify a specific law or rule he believed had been violated, or plausibly allege that the defendants knew about his confidential Securities and Exchange Commission report before terminating him. The court held that Singer had not adequately alleged protected activity or the defendants’ knowledge of that activity. Because the court was allowing another amendment, it gave Singer one last opportunity to plead a plausible retaliation claim.

Disposition

The court stated that all derivative claims in the amended complaint were dismissed for failure to comply with Rule 23.1 and all individual claims were dismissed for failure to state a claim. The plaintiffs were given until March 20, 2020, to file a second amended complaint consistent with the opinion. The court required the amended pleading to separate causes of action from remedies, avoid duplicative claims, provide required shareholder-ownership and misconduct dates, address demand futility, and allege facts supporting diversity jurisdiction if that jurisdiction was asserted. The court also required a letter motion by March 13, 2020, for any individual claims arising from the plaintiffs’ removal as officers or a director.