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Canam Steel Corp. v. Mayo

May 22, 2009

CANAM STEEL CORPORATION, PLAINTIFF,
v.
JOHN MAYO, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Morrison C. England, Jr. United States District Judge

MEMORANDUM AND ORDER

Plaintiff Canam Steel ("Plaintiff") initiated this action against Defendants John Mayo ("Mayo"), Cadela Steel, Inc. ("Cadela"), JD2, Inc. ("JD2"), and The Spectrus Group, Inc. ("Spectrus"). Plaintiff seeks relief both directly on its own behalf and derivatively on behalf of JD2. Presently before the Court are two Motions to Dismiss filed by Defendants challenging Plaintiff's Third through Sixth Causes of Action. For the following reasons, Defendants' Motions are granted in part and denied in part.*fn1

BACKGROUND*fn2

In 1993, Mayo formed JD2, a closely-held corporation, to compete in the steel manufacturing and construction industry. In January of 2002, Mayo approached Plaintiff, a supplier of steel products, regarding investing in JD2. Mayo made certain financial and informational disclosures to Plaintiff, and the parties entered into two written agreements, a Stock Purchase Agreement and an Incorporated Stockholders Agreement ("Stockholders Agreement").

Pursuant to these agreements, and in reliance on further disclosures of financial and other information, Plaintiff invested a total of $2.85 million in JD2, becoming holder of twenty-five percent of the outstanding shares of JD2 common stock, which, as of December 2007, was worth approximately $10 million. Mayo owns the remaining seventy-five percent of the outstanding common stock shares.

Pursuant to the Stockholders Agreement, the JD2 shareholders elected one director to the Board and Mayo appointed the remaining directors.

Mayo subsequently formed Spectrus to pursue business opportunities concerning certain proprietary technology. Spectrus eventually became a wholly-owned subsidiary of JD2.

From the time the Directors were first elected to the Board, until December of 2007, the Board held only one meeting, in approximately February 2005.

According to Plaintiff, after that meeting, to the exclusion of Plaintiff, Mayo alone began to control the corporation. Moreover, Plaintiff alleges that Mayo failed to adhere to corporate formalities by, for example, failing to convene an annual shareholders' meeting. Mayo also allegedly failed to conduct JD2's business and financial affairs with the requisite transparency.

Plaintiff further alleges that Mayo breached contractual obligations to Plaintiff by: 1) failing to call meetings of the Board and instead directing all financial and business matters independently; 2) failing to call any shareholders' meetings and making decisions pertaining to compensation and dividends without shareholder input; 3) failing to prepare and obtain approval of annual budgets; 4) failing to obtain unanimous written consent of shareholders despite contractual requirements; and 5) failing to provide audited financial statements.

Plaintiff also contends that Mayo engaged in "gross mismanagement and self-dealing" by: 1) paying himself and other officers excessive compensation; 2) improperly sharing equipment, office space, and personnel with, as well as improperly loaning funds to, Cadela, a recently formed business that Mayo established as a steel fabrication concern; 3) improperly leasing property from an entity owned in equal shares by Mayo and another JD2 officer; 4) arranging to loan funds from JD2 to himself for the purchase of vacation property; and 5) using JD2 funds for personal items and expenses, such as the purchase of two vehicles.

Finally, Plaintiff alleges that by, inter alia, failing to obtain letters of credit, guarantees, and other security, JD2 so mismanaged its involvement in one project that it is now owed approximately $4.3 million in uncollectible accounts receivables.

Accordingly, on March 11, 2009, Plaintiff filed the instant action asserting Breach of the Stock Purchase Agreement, Breach of Fiduciary Duty, and requesting establishment of a Constructive or Resulting Trust, an Accounting, and Equitable Relief for Shareholder Oppression. Plaintiff brings each cause of action on its own behalf and also brings its Third, Fourth, and Fifth Claims derivatively on behalf of JD2. ...


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