Bouderau v. McCarthy

Background

Raymond Bouderau invested $200,000 in Beyond Steel under a memorandum of understanding signed by Bouderau, Duncan McCarthy, and a non-party. In exchange, the memorandum provided for a 20% premium on the investment, 40% of Beyond Steel’s profits, and a five-year restriction on McCarthy competing with Beyond Steel. McCarthy represented that he would actively participate in Beyond Steel, remain a shareholder, and not compete with the business.

McCarthy later left Beyond Steel and worked for ARO, which obtained the Domino Sugar Factory contract, described in the opinion as a nonunion job. Bouderau asserted claims under Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act, as well as claims for fraudulent inducement, breach of contract, and breach of fiduciary duty or violation of the corporate opportunity doctrine.

Summary-judgment standard

The court explained that summary judgment is appropriate when the evidence shows no genuine dispute about a material fact and the moving party is entitled to judgment as a matter of law. The court must draw reasonable inferences for the nonmoving party, but unsupported speculation and conclusory statements are insufficient. The court also noted that its role was not to weigh evidence or decide witness credibility.

Exchange Act claims

The parties disputed whether the memorandum of understanding was a “security” covered by the Exchange Act. The court assumed, for purposes of the opinion, that it was a security and decided the claims on other grounds.

For Bouderau’s Section 10(b) and Rule 10b-5 claim, the court held that Bouderau failed to provide evidence of scienter—the required intent to deceive, manipulate, or defraud, or strong circumstantial evidence of reckless conduct. Bouderau relied on McCarthy’s shifting explanations in January 2020 for leaving Beyond Steel. The court held that those later explanations did not show that McCarthy intended to deceive Bouderau when the memorandum was signed in November 2019. The court granted summary judgment on the Section 10(b) and Rule 10b-5 claim and dismissed it.

Because the court found no underlying Section 10(b) or Rule 10b-5 violation, it also dismissed Bouderau’s Section 20(a) claim, which alleged liability based on control of a person who violated the Exchange Act.

Fraudulent-inducement claim

Under New York law, fraudulent inducement requires a knowingly false material representation and detrimental reliance. Bouderau relied on the same arguments he made for the Exchange Act claims. The court held that McCarthy’s January 2020 explanations for leaving did not show that his November 2019 representations were knowingly false. The court granted summary judgment on the fraudulent-inducement claim and dismissed it.

Breach-of-contract claim

Bouderau’s complaint alleged that McCarthy breached the memorandum’s noncompetition provision. In opposition to summary judgment, Bouderau also argued that McCarthy violated the memorandum by withdrawing from Beyond Steel. The court declined to address that new theory because it had not been raised in the complaint.

The court found that Bouderau had presented enough evidence to create a genuine factual dispute about whether McCarthy’s work with ARO, including the Domino Sugar Factory job, competed with Beyond Steel. But the court held that the noncompetition provision was unenforceable as a matter of law. Under New York law, such provisions are disfavored and must protect a legitimate interest without imposing undue hardship or harming the public. The court noted that Bouderau identified no trade secrets, confidential customer lists, goodwill, or unique or extraordinary services that could support enforcement of the restriction. The court granted summary judgment on the breach-of-contract claim and dismissed it.

Fiduciary-duty and corporate-opportunity claims

Bouderau claimed that McCarthy owed him fiduciary duties under the shareholders agreement because Bouderau was a third-party beneficiary, and that McCarthy breached those duties by joining ARO. The court assumed, without deciding, that Bouderau’s rights under the memorandum were the type of rights that could create a fiduciary duty.

The court nevertheless held that Bouderau’s claim failed. Bouderau did not identify a specific fiduciary duty that McCarthy breached. To the extent the claim concerned the Domino Sugar Factory job, Bouderau testified that Beyond Steel did not bid on that job and that he believed ARO had bid on it before McCarthy joined ARO. Because the job was already underway when McCarthy told Bouderau he planned to leave, the court held that Beyond Steel had no “tangible expectancy”—a concrete enough interest—in the job. The court concluded that McCarthy breached no fiduciary duty, granted summary judgment on the claim, and dismissed it.

Disposition

The court granted McCarthy’s motion for summary judgment in its entirety and dismissed Bouderau’s complaint. The opinion states that the only remaining claims were McCarthy’s counterclaims against Bouderau. The court directed the parties to appear for a telephonic pretrial conference on May 29, 2024, and directed the clerk to terminate the summary-judgment motion.