The opinion of the court was delivered by: WILLIAM HAYES, District Judge
ORDER GRANTING DEFENDANTS' SPECIAL MOTIONS TO STRIKE
Defendants Timothy P. Dillon, Richard A. Weintraub, Weintraub
Dillon P.C. and Michael O'Hagan (collectively "Defendants") each
move to strike Plaintiffs' complaint, pursuant to California Code
of Civil Procedure 425.16. Plaintiffs John S. Stafford and David
W. Lobdell (collectively, "Plaintiffs") oppose Defendants'
motions. On August 4, 2005, the Court held a hearing on
Defendants' motions and now issues the following order. I. Factual Background
This malicious prosecution action brought by Plaintiffs John S.
Stafford III ("Stafford") and David W. Lobdell ("Lobdell") arises
out of a failed state court lawsuit brought by the Defendants in
this action. The underlying case concerned a complex series of
transactions involving the acquisition of certain corporate
assets owned by All Optical Networks ("AON") by one of AON's
directors. The Defendants in this case were the plaintiff,
officers of the plaintiff and attorneys for the plaintiff in the
underlying action. After three rounds of amended complaints,
several depositions, and extensive motion practice the underlying
case was voluntarily dismissed. Thereafter, Plaintiffs instituted
the instant action.
AON was a company specializing in the development of optical
technology to facilitate the routing and transfer of data.
Weintraub Declaration in Support of Special Mot. to Strike
("Weintraub Decl No. 1."), ¶ 16. AON was formed in or about
September 2000. Id. at ¶ 9. According to Defendants, at its
formation, AON was worth approximately $21 million dollars. Id.
at ¶ 19. AON was an off-shoot of a company named Cyber Dyne
Computer Corporation ("Cyber Dyne"). According to Defendants, in
2000 Cyber Dyne transferred all of its intellectual property to
AON in exchange for approximately 16 million shares of AON stock.
Id. at ¶ 9. Defendants contend that after the transfer, Cyber
Dyne owned nearly 77% of the outstanding AON stock. Id. at ¶
20. In conjunction with the transfer, the Cyber Dyne shareholders
created a liquidating trust (the "CDC Trust") to hold the AON
stock, and avoid certain negative tax consequences related to the
transaction. Id. at ¶ 11. The trustee for the CDC Trust was a
Delaware corporation named the Cyber Dyne Liquidating Corporation
Defendant Richard Weintraub ("Weintraub") declares that he
performed various legal services for some of the CDC Trust
beneficiaries and through that work he learned about AON, its
technology, its value and the CDC Trust percentage ownership in
the AON stock. Id. at ¶¶ 6-21. B. The July 2002 CDC Trust Beneficiary Meeting & The
According to Defendant Weintraub, in or around July 2002,
Weintraub was contacted by a CDC Trust beneficiary and was
invited to attend a beneficiary meeting where the keynote speaker
was Michael Lee ("Lee"), who at the time was an AON director and
a CDC Trust beneficiary. Id. at ¶¶ 26-27. Defendant Weintraub
attended the meeting and learned that the percentage interest of
the CDC Trust in AON had been "diluted" to approximately less
than 50%. Id. at ¶ 28. According to Defendant Weintraub, he
learned that AON had been issuing preferred stock to finance the
company's operations and that John S. Stafford III's ("Stafford")
was purchasing most of that stock. Id. at ¶ 28. In addition,
Defendant Weintraub declares that at the meeting he learned that
AON was in the "pre-production" process of developing a new
product called OC192, a potential new version of AON's "Metro
Scout" product. However, he also learned that AON was running out
of money and that it needed approximately 3 million dollars to
fund "the fabrication of the OC192 product and continue AON's
day-to-day operations." Id. at ¶ 29.
Defendant Weintraub declares that at the meeting, many of the
CDC Trust beneficiaries were concerned and "many of the
beneficiaries did not understand how a company that just a year
ago was valued in excess of 21 million dollars could now be on
the verge of bankruptcy." Id. at ¶ 30. According to Defendant
Weintraub, several beneficiaries approached Mr. Lee and requested
"that he put together a private placement memorandum ("PPM") so
that they could try to raise the necessary capital to sustain
AON." Id. at ¶ 30. Defendant Weintraub believed that David
Lobdell ("Lobdell"), then Senior Vice President of Administration
& Legal Affairs of AON, would prepare the PPM. Id. at ¶¶ 18,
31. However, according to Defendant Weintraub, Lobdell did not
provide the requested documents to raise money for AON until two
months after the meeting. Id. at ¶ 32. In Defendant Weintraub's
view this was an excessive amount of time to prepare the
documents, in light of AON's precarious financial condition.
Further, following the preparation of the documents by Lobdell,
the beneficiaries were given only three weeks to obtain three
million dollars in funding. Id. at ¶ 32. Mr. Weintraub declares
that: The foregoing facts led me to believe that AON had no
intention of allowing its beneficiaries to raise
funding in order to sustain the company. Rather, it
appeared that the goal of the company and some of its
directors, including but not limited to Mr. Lobdell,
was simply to dissolve the corporation and allow Mr.
Stafford to purchase the AON assets below market
In or around October 2002, Defendant Weintraub was contacted by
either Mr. Lee or Bob Yukes ("Yukes"), both of whom were
directors of the Trustee at the time. Id. at ¶ 33. Either Mr.
Lee or Mr. Yukes requested Defendant Weintraub "look over
documents concerning the proposed acquisition of certain AON
assets by a company called Comp-Optics," a company wholly owned
by Mr. Stafford. Id. at ¶ 33. Defendant Weintraub declares that
he learned that a letter of intent ("LOI") between Comp-Optics
and AON had been approved by the AON board, but that Mr. Lee was
objecting to the formal terms of the transaction that were
contained in the final Asset Purchase Agreement ("APA"). Id. at
¶¶ 34, 40-44.
Plaintiffs' view of the Comp-Optics Transaction, not
surprisingly, differs from Defendants. Plaintiffs assert that all
members of the AON board knew that Stafford owned Comp-Optics and
that at the time of the sale AON was in dire financial straits.
Plaintiffs also argue that after diligently trying to finance AON
and considering other strategic options, the AON board determined
that its best option was to accept an offer from Comp-Optics to
purchase the HPIC assets. Pursuant to the APA, Comp-Optics
purchased all of the HPIC assets and paid AON $400,000 in cash
and assumed $112,000 in liabilities. Stafford also released a
security interest he held in the HPIC assets in order for the
HPIC assets to be sold to Comp-Optics.
C. Weintraub's Investigation
In reviewing the Comp-Optics' LOI and the APA, Mr. Weintraub
declares that he noticed that the transaction was between AON and
one its directors, Mr. Stafford. Id. at ¶ 35. Further,
Defendant Weintraub declares that terms of the LOI required AON
to sell "the entirety of its assets for only $501,000." Id. at
¶ 36. According to Defendant Weintraub, the $501,000 amount was
comprised of a $500,000 contract price for the purchase of the
HPIC assets and an option to buy the remaining AON assets, such
as Metro Scout, for $1,000. Id. at ¶ 36. The LOI also contained a covenant not to sue Mr. Stafford. Id. at ¶
37.*fn1 Defendant Weintraub also learned that the LOI
contained a license agreement that would allow Comp-Optics to use
all of the technology of AON in the development and production of
the HPIC assets. Id. at ¶ 38. According to Defendant Weintraub,
that license meant that Mr. Stafford had the legal right to use
all of AON's "intellectual property which, of course, diminished
such property's value to other potential investors or
purchasers." Id. at ¶ 38.
Between October 2002 and November 2002, Defendant Weintraub
exchanged email messages and reviewed (and/or assisted in
drafting) certain letters by Mr. Lee to the AON board regarding
the LOI. Mr. Lee's letters raised objections to the final terms
and conditions contained in the Asset Purchase Agreement. In or
around November 2002, Defendant Weintraub began representation of
another company named Interphotonics in its attempt to purchase
the remaining AON assets. Id. at ¶ 47. Defendant Weintraub
declares that he had the "express written consent of the director
of the Trustee for the CDC Trust" to represent Interphotonics.
Id. at ¶ 47.
In or around March 2003, Ed Sullivan*fn2 and Defendant
O'Hagan contacted Defendant Weintraub. Id. at ¶ 50. Defendant
Weintraub declares that he knew that Mr. Sullivan was a CDC Trust
beneficiary and also a founder of Cyber Dyne. Id. at ¶ 47.
Further, Defendant Weintraub declares that he knew that Defendant
O'Hagan was a former Chief Technical Officer of AON, a CDC Trust
beneficiary and the director of the Trustee for the CDC Trust.
Id. at ¶ 49. Following a discussion with Mr. Sullivan and
Defendant O'Hagan, Defendant Weintraub declares that he
investigated the Comp-Optics transaction further. Id. at ¶ 50.
According to Defendant Weintraub, through the course of his
investigation he learned that the HPIC assets had "tremendous
implications for national security." Id. at ¶ 54. Specifically,
in the context of nuclear warfare, the HPIC technology could
enable computer and communication infrastructure to withstand an
electro magnetic pulse emitted during a nuclear explosion. Id. at ¶ 54. HPIC technology relies on light, rather
than electrons, and therefore would not be effected by an
electro-magnetic pulse. Id. at ¶ 54. Defendant Weintraub
declares that he "learned that the Department of Defense was very
interested in this technology." Id. at ¶ 54.
During his investigation, Defendant Weintraub also declares
that he learned that Stafford's offer to the AON board required a
decision by the board in roughly one day. Id. at ¶ 66.
Defendant Weintraub also learned of objections to the transaction
made by Mr. Lee and Peter Sahagan at various board meetings.
Id. at ¶¶ 65-67.
D. The Underlying Lawsuit
Eventually, on October 17, 2003, the Trustee filed a lawsuit
captioned Cyber Dyne Liquidating Corporation v. All Optical
Networks, Inc. et al., Case No. GIC 819673, in the Superior
Court of California in and for the County of San Diego ("the
underlying suit" or "underlying action"). At the time of the
filing of the underlying suit, Defendant O'Hagan was the director
and officer of the Trustee. Defendants Weintraub, Timothy P.
Dillon ("Dillon"), and Weintraub Dillon P.C. (collectively "the
attorney defendants") were counsel to the Trustee in the
underlying action. The named defendants in the underlying action
were former and then current officers and directors of AON.
The Trustee alleged that AON's officers and directors breached
their fiduciary duties to the AON stockholders. Specifically, the
Trustee asserted causes of action for (1) breach of duty of
loyalty in violation of Delaware Corporations Code § 144(a); (2)
breach of duty of care; (3) breach of duty of good faith; (4)
unauthorized sale of all or substantially all assets in violation
of Delaware Corporations Code § 271; (5) unauthorized
dissolution; (6) breach of duty to disclose in business
transactions; (7) fraudulent concealment; (8) breach of a
fiduciary's duty to disclose; (9) intentional misrepresentation;
and (10) negligent misrepresentation. In later amended complaints
the plaintiffs added causes of action for civil conspiracy,
aiding and abetting breach of fiduciary duty and fraud, and
unfair business practices.
The causes of action in the underlying action arose out of two
categories of transactions. The first category involved
Stafford's investment in AON. The plaintiffs in the underlying action alleged that Stafford conspired with the other defendants
in the underlying action to allow Stafford to purchase a majority
of the AON stock at below fair value in order to loot the company
one year later. Defendant Weintraub Dillon P.C. and Richard A.
Weintraub's Notice of Lodgment ("DNOL") Ex. Y [Third Amended
Complaint ("TAC"), ¶¶ 23-58]. The second transaction involved
AON's sale of its "HPIC" assets in October 2002 to Comp-Optics.
Id. at ¶¶ 59-117.
The defendants in the underlying action brought a demurrer to
the original complaint. On March 22, 2004, the Trustee filed a
first amended complaint. DNOL, Ex. T. On March 29, 2004,
Defendant O'Hagan was replaced as director of the Trustee by Carl
Lovegren ("Lovegren"), a CDC Trust beneficiary. Weintraub Decl.
No. 1, ¶ 93. The defendants demurred to the first amended
complaint. On July 15, 2004, the Honorable Jay M. Bloom issued an
order "sustaining and overruling demurrers." DNOL, Ex. U. Judge
Bloom ruled that "Plaintiffs [in the underlying action] have not
sufficiently alleged that demand on the corporation's Board of
Directors would have been futile." DNOL, Ex. U, p. 1. In
addition, Judge Bloom ruled:
[P]laintiffs have alleged only that the demand would
have been futile as to only 3 out of 9 directors.
Since this is not a majority of the board, they have
not pled facts to create a reasonable doubt that a
majority of the directors were disinterested and
independent. They also have not pled facts to suggest
a reasonable doubt that the challenged transaction
was the product of a valid exercise of business
judgment. As such, the demand futility requirement
has not been met and the demurrers are sustained.
Id. at pp. 3-4. Judge Bloom overruled the demurrer to the
twelfth cause of action for aiding and abetting breach of
fiduciary duty and fraud, holding that "Comp-Optics, as a
non-fiduciary, may be liable for aiding and abetting a
fiduciary's breach." Id. at p. 5. The court also granted
plaintiffs leave to amend their complaint.
On August 5, 2004, the Trustee filed a second amended
complaint. Defendants again demurred. On November 2, 2004, Judge
Bloom issued an order (1) overruling the demurrer filed by
Comp-Optics to the sixth cause of action, (2) sustaining with
leave to amend the demurrer to the ninth cause of action, (3) and
sustaining without leave to amend the demurrer to the eleventh
cause of action. DNOL, Ex. X, p. 1. E. The Depositions of Dr. O'Hagan & Michael Lee
Following the filing of the demurrer to the second amended
complaint, on October 26, 2004, defendants deposed Mr.
Lee.*fn3 Mr. Lee testified that although he voted in favor
of the Term Sheet for the sale of assets from AON to ...