Hart v. The Tri-State Consumer, Inc.

Background

Penny Hart sued The Tri-State Consumer, Inc., WT Holdings, Inc., and Charles Slatery. She alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, control-person liability under Section 20(a) of that Act, fraudulent inducement, economic duress, and breach of contract.

According to the amended complaint, Hart and her brother sold all of Tri-State’s stock to WT Holdings in 2008. WT Holdings kept Hart as Tri-State’s President and Chief Executive Officer, and Hart later repurchased a three-percent interest in Tri-State. In 2020, Slatery allegedly told Hart that WT Holdings was considering having Stillwater acquire Tri-State. Hart alleged that Slatery and others pressured her to resign and sell her shares by representing that, after she did so, WT Holdings would fairly consider her offer to purchase Tri-State. Hart signed a severance agreement and a stock-transfer agreement, resigned, and sold her shares to WT Holdings. She later sent letters of intent proposing to purchase Tri-State, but alleged that defendants never intended to seriously consider her proposal.

Defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(2) for lack of personal jurisdiction over WT Holdings and Slatery, and under Rule 12(b)(6) for failure to state a claim against any defendant.

Personal Jurisdiction

The court denied the motion under Rule 12(b)(2). Under New York’s long-arm statute, specific personal jurisdiction can exist when a nonresident transacts business in New York and the plaintiff’s claims arise from that activity. The court held that WT Holdings purposefully conducted business related to Tri-State with Hart, whom the opinion identifies as a New York resident, through repeated communications directed into New York. The court found that the relevant transactions had their center of gravity in New York because they concerned Hart’s resignation, her sale of shares, and a proposed purchase of Tri-State, which the opinion identifies as a New York company.

The court reached the same result for Slatery. It found that he was personally involved in the alleged statements and was the primary actor in the relevant transactions. The court rejected his argument that the fiduciary-shield doctrine protected him because his contacts with New York occurred in his corporate role. The court explained that New York’s statute does not distinguish between actions taken in a personal capacity and actions taken in a corporate capacity when the individual supervises and controls the relevant activity.

The court also held that exercising jurisdiction complied with due process. WT Holdings and Slatery allegedly purposefully directed calls, correspondence, deal documents, and other communications to New York to conduct business involving Tri-State. The court concluded that these contacts were sufficient even though they were predominantly electronic and the defendants were not physically present in New York.

Rule 12(b)(6) Rulings

Count One: Securities Fraud

The court denied the motion to dismiss Count One. Hart’s theory was that defendants falsely represented that they would consider in good faith an offer by her to purchase Tri-State if she resigned and sold her shares, while allegedly having no intention of doing so when they made the statements.

The court held that Hart pleaded the alleged fraud with the required particularity. She identified the statements, the speakers, when and where the statements were made, and why she claimed they were false. The court also held that she plausibly alleged material misrepresentations, although it described the allegations as barely sufficient. The court relied on allegations that Hart’s proposal allegedly was not presented to Tri-State’s board and that Slatery allegedly had a personal financial interest in keeping Tri-State connected to WT Holdings.

The court also allowed Hart to proceed on reliance. It expressed serious reservations about whether she would ultimately be able to prove that her reliance was reasonable, particularly because she was a sophisticated insider, was represented by counsel, and did not include the alleged promise in the stock-transfer agreement. But the court held that the release and merger clauses in the agreements did not defeat the claim at the motion-to-dismiss stage. It also noted that federal securities law generally prevents blanket contractual waivers of securities-fraud liability.

Count Two: Section 20(a) Control-Person Liability

The court denied the motion to dismiss Count Two. Slatery challenged the claim, but the court found that defendants had made no real argument explaining why it failed. Because the court denied dismissal of the underlying securities-fraud claim, and because Slatery did not adequately explain why the control-person claim should be dismissed, the court denied the motion as to Count Two.

Count Three: Fraudulent Inducement

The court denied the motion to dismiss Count Three for the same reason it denied dismissal of Count One. Hart adequately alleged that defendants made material misrepresentations, knew they were false, intended Hart to rely on them, and caused her injury through that reliance.

Count Four: Economic Duress

The court granted the motion to dismiss Count Four. Hart alleged that defendants pressured her to resign and surrender shareholder and officer rights. The court held, however, that she did not allege that she repudiated either the stock-transfer agreement or the severance agreement, or that she returned the money received under either agreement. The court concluded that she had therefore ratified the agreements and was barred from challenging their validity on economic-duress grounds.

Count Five: Breach of Contract

The court granted the motion to dismiss Count Five. Hart alleged that defendants breached the 2010 Shareholder Agreement and its implied promise of good faith and fair dealing by inducing her to resign and sell her shares for less than fair market value. The court found that Hart’s argument depended on treating the stock-transfer agreement as voidable because of fraudulent inducement, but her breach-of-contract claim sought damages and did not request rescission. The court therefore dismissed the claim as pleaded.

Disposition

The court granted in part and denied in part defendants’ motion to dismiss. It denied the jurisdictional challenge to WT Holdings and Slatery and denied dismissal of Counts One, Two, and Three. It granted dismissal of Counts Four and Five. The Clerk of Court was directed to close the motion at docket entry 29.