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Rich v. Shrader

September 17, 2010

FOSTER RICH, PLAINTIFF,
v.
RALPH W. SHRADER, C.G. APPLEBY, SAMUEL R. STRICKLAND, JOSEPH E. GARNER, DENNIS O. DOUGHTY, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Hon. Michael M. Anello United States District Judge

ORDER GRANTING DEFENDANTS' MOTION TO DISMISS [Doc. No. 21]

Now before the Court is Defendants' motion to dismiss the complaint for failure to state a claim. Fed. R. Civ. P. 12(b)(6). The Court submitted the motion on the written briefs. Local Civ. R. 7.1(d)(1). For the reasons stated below, the Court GRANTS Defendants' motion.

I. FIRST AMENDED COMPLAINT

Plaintiff Foster Rich compiled rambling speculations into a lengthy First Amended Complaint ("FAC") that alleges his former partners destroyed the firm's honor code and cheated him out of a fortune.*fn1 Rather than repeat the 531 paragraphs, the Court summarizes Plaintiff's basic contentions as follows.

Defendant Booz Allen Hamilton, Inc. (hereinafter "Booz Allen" or "BAH") is a strategy and technology consulting firm. [FAC ¶ 9.]*fn2 The company was formed as a partnership in 1914, but it re-organized as a corporation (under Delaware law) in 1964. [Id.] Plaintiff was hired in 1987 as a Vice President. [Defs.' Ex. C.] Part of his compensation was the right to purchase stock. [Id. at 4.] Plaintiff alleges that Booz Allen "retained the attitude and culture of a partnership, owned and led by a relatively small cadre of corporate officers." [FAC ¶ 9; id. ¶ 27 (in 2003, Booz Allen had 44 senior vice presidents).] Plaintiff ascribes the collegial atmosphere at Booz Allen to its bedrock principles and values, including, "an oath that BAH would never be sold, and was held in trust by the current partners for the benefit of future partners." [Id. ¶ 9; id. ¶ 59 & 100 (guiding financial principle that "The Firm will owned by the Partners, with no outside control.").]

In September 2003, Booz Allen evaluated Plaintiff's job performance. Defendant Ralph Shrader (Chairman and Chief Executive Officer) falsely attacked Plaintiff's performance on a 1992 Warbreaker program. [Id. ¶¶ 166-69.] Although Plaintiff believed that program had been a success, he thought the evaluation would focus only on the past ten years. [Id. ¶¶ 168 & 170.] The written assessment contained positive remarks, but ultimately found that Plaintiff was "[n]ot on track" and recommended that he retire within two years. [Id. ¶¶ 170-74.] Plaintiff alleges that at the time he received the evaluation, he disagreed with Shrader's opinion, but he believed that the recommendation to retire was accurate and he planned accordingly.

The complaint is ambiguous as to whether Plaintiff voluntarily retired or was forced to retire. [Compare id. ¶ 527 ("Plaintiff 'retired'") with ¶ 175 ("He was terminated").] In October 2004, Plaintiff decided to accelerate his retirement date from September 2005 to March 2005. [Id. ¶ 417.] Defendant Dennis Doughty, President of the government division, offered to reverse the retirement recommendation if Plaintiff agreed to stay through September 2005. [Id. ¶¶ 417-20.] Because Plaintiff was unhappy with the 2003 evaluation process, he rejected that offer and "proceeded to complete his voluntary retirement on March 31, 2005." [Id. ¶ 422 (emphasis added); see id. at 1 (Plaintiff "elected" to accelerate retirement date).]

Plaintiff owned 30,500 shares of Booz Allen stock. [Id. ¶ 176.] Plaintiff had been granted and purchased those shares throughout his employment pursuant to the Officers' Stock Rights Plan. [Id. ¶ 67; Defs.' Exs. A & B.] The Plan provided, in part:

In the event an Officer ceases to be an employee of the Company or its subsidiaries by virtue of retirement, death, or disability, the Company shall have the right, exercisable at any time following the expiration of 24 months from such event, to purchase all or any portion of the Common Stock held by Officer (or the Officer's estate) at the Repurchase Price in effect at the date of exercise of the Company's right.

[Defs.' Ex. B, ¶ 7(b) (approved in 1988); Defs.' Ex. A ¶ 10 (as amended in 2006).] Two years after Plaintiff retired, Booz Allen exercised its right and repurchased all of Plaintiff's stock for millions of dollars in 2007. [FAC ¶ 494-98.]

All would have been well, but for the announcement in May 2008 that Booz Allen sold its government division to the Carlyle Group for $2.54 billion. [Id. ¶ 2.] Under the terms of that leveraged buyout, the outstanding shares were repurchased at a materially higher value than book value.*fn3 [Id.] Booz Allen had approximately 300 shareholders, and approximately 44 of them were senior executives. [Id. ¶ 9 (in 2007).] The senior executives received substantial sums for the shares, which they had acquired pursuant to the Stock Rights Plan during their lengthy service at the firm. [Id. ¶¶ 33, 260.] Plaintiff alleges that had Booz Allen told him it was going to sell the government division, he would have not have retired in 2005 but would have waited until the deal closed in July 2008 and he would have received an additional $16 million for his shares. [Id. ¶ 2.] Plaintiff talked to other retired executives about his suspicion that his former colleagues had cheated him, and his investigation revealed the hidden agenda of greed that forms the basis of this action. [Id. ¶¶ 437-43.]

Plaintiff complains that Booz Allen changed from a "friendly 44 person quasi-partnership" into a "normal corporation." [Pl.'s Opp. Br. at 10.] Plaintiff's theory is that Shrader, with his close associates, engineered a secret plan to split Booz Allen into two divisions so they would control the company. The scheme commenced in 2003 (or earlier) and culminated in 2008 when Carlyle bought the government division. Shrader's group forced sixteen senior executives to retire. [Id. ¶¶ 177-260.] Plaintiff now believes that his treatment during his 2003 performance evaluation was a part of this scheme. [ Id. ¶¶ 3, 164-65 (alleging assessment process was changed to further "plan to seize control of the Government Sector by providing a mechanism to purge" opponents), 170-71 (alleging Shrader had assessment altered and Defendant Joseph Garner went along with false review).] Because Booz Allen re-purchased the shares of its former executives at book value, the plan ensured that Shrader's group benefitted financially when the company was split up and sold to Carlyle. The Delaware Supreme Court aptly described the financial aspect: "the pre-Carlyle transaction redemption of [the retired-executive's] shares reduced the number of 'slices' into which the Carlyle transaction 'cake' (a fixed amount) would be cut, thereby enlarging each 'slice' [of the remaining working stockholders]." Nemec, supra, at 20. Shrader allegedly ensured the success of his hidden agenda by changing the stock plan, implementing a Partnership Compensation Committee ("PCC") to review annual performance, re-structuring and weakening the commercial division, failing to conduct a "bake off" with competing banks, and conducting a "sham" auction that undervalued the company and did not include an offer by a different strategic buyer (SAIC). [E.g., id. ¶¶ 119-257.]

Plaintiff alleges breach of fiduciary duty and breach of contract claims as well as federal racketeering and securities fraud. Plaintiff sued the corporate entity and 23 directors. [Id. ¶ 2 (labeling the 23 collectively as "Director Defendants").] The FAC specifically mentions only five executives -- Defendants Shrader, Doughty, C.G. Appleby, Samuel Strickland, and Garner. [See id. ¶ 3 (labeling this subgroup as "Individual Defendants").] The FAC barely mentions the remaining eighteen directors.*fn4

II. MOTION TO DISMISS

A complaint must contain sufficient factual matter, accepted as true, to "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. "[C]onclusory allegations of law and unwarranted inferences will not defeat a motion to dismiss for failure to state a claim." Miranda v. Clark Cnty., 279 F.3d 1102, 1106 (9th Cir. 2002). "While legal conclusion can provide the framework of a complaint, they must be supported by factual allegations." Iqbal, 129 S.Ct. at 1950.

When the complaint is based upon fraud, the circumstances "shall be stated with particularity." Fed. R. Civ. P. 9(b). The complaint must be "specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong." Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985). "The pleader must state the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentations." Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986).

Ordinarily, leave to amend is granted to allow the plaintiff an opportunity to correct the failure to state a claim; however, a court may deny leave to amend when "the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency." Id.

III. BREACH OF CONTRACT

Plaintiff's breach of contract claim is based upon his employment contract with Booz Allen. He alleges that the company "was obligated to provide [him] with an assessment of his performance that was based upon and consistent with the opinion and recommendation of numerous co-workers." [FAC ¶ 524.] Plaintiff contends that Booz Allen breached that contract in September 2003. [Id. ¶ 525.] The company did not base his performance review on his co-workers' evaluations (the assessor interviewed twelve employees), which were "very positive," but instead relied on Shrader's false accusation concerning Plaintiff's deficient performance on the Warbreaker project eleven years earlier. [Id. ¶¶ 146-76, 415-25, 526.] The "Partner Assessment Summary" form was altered to include this false comment and, as a result, to recommend that Plaintiff retire in two years. [Id. ¶¶ 166-76.]

Plaintiff was upset by the faulty assessment, but believed the exercise of business judgment permitted management to replace him, and he "retired." [Id. ¶¶ 415-25, 436, 527.] The leveraged buy out in 2008 prompted Plaintiff to investigate whether his retirement had been engineered by an improper motive of self-enrichment. [Id. ¶ 436-443.] Plaintiff alleges that he discovered in March 2009 the corrupt motive and the details of how his performance assessment had been altered. [Id. ¶ 443.]

A. Statute of Limitations

Plaintiff filed his original complaint on April 1, 2009. Defendants argue that the breach of contract accrued in September 2003, when Plaintiff received the assessment.

They contend the claim is barred by the four year statute of limitation which expired in September 2007. Cal. Civ. Proc. Code § 337.

Plaintiff invokes the discovery rule to postpone the date the limitations period began to run until July 2008, which he contends is when he knew or should have known, with the exercise of reasonable diligence, of the wrongful conduct at issue. Fox v. Ethicon Endo-Surgery, Inc., 35 Cal. 4th 797, 807 (2005); Kline v. Turner, 87 Cal. App. 4th 1369, 1375 (2001) (delayed discovery rule provides cause of action does not accrue until plaintiff suspects or should have suspected defendant's wrongdoing).

The current pleading is both factually and legally insufficient. Because the discovery rule is an exception, the plaintiff must plead facts to show the time and manner of discovery and the inability to have made the discovery earlier despite reasonable diligence. Fox, 35 Cal. 4th at 920-21; McKelvey v. Boeing N. Am. Inc., 74 Cal. App. 4th 151, 160 (1999). The FAC alleges that Plaintiff was aware, on September 11, 2003, that Defendant Shrader was not a member of his assessment group, that Shrader made false accusations at the meeting, and that Defendant Garner also knew the Warbreaker program had been a success. [FAC ¶¶ 166-69.] On September 30, 2003, Plaintiff received the written assessment form that notified him "Not on track, not recommended for L3; initiate retirement plan with objective between October 04 and October 05." [Id. ¶ 172.] Plaintiff contends that this conclusion was inconsistent with other laudatory comments by other partners, and therefore "false and completely contradictory." [Id. ¶ 174.] These plain allegations indicate that Plaintiff should have been aware that something was amiss in 2003.

Plaintiff attempts to save his claim by arguing he was not aware of the deceptive practice at the time he received his review because Shrader kept his corrupt motive a secret. The Court agrees with Defendants' analysis. Motive is not an element of a breach of contract action. Applied Equip. Corp. v. Litton Saudi Arabia Ltd., 7 Cal. 4th 503, 517 (1994) ("the law generally does not distinguish between good and bad motive for breaching a contract"); Ruscigno v. Am. Nat'l Can Co., Inc., 84 Cal. App. 4th 112, 126 (2000) (employment contract). It does not matter that Plaintiff did not suspect that Defendant Shrader had an allegedly secret plan to force out equity partners in order to seize control of Booz Allen for personal financial gain. Plainly, Plaintiff was aware of the injury (the initiation of a retirement plan) and the cause of the injury (the negative performance review) when he received the assessment in September 2003. Plaintiff continued to work at Booz Allen until March 2005 and thus had the opportunity to investigate the reason for the negative assessment. The flaw is apparent on the face of the pleading.

In addition to the hurdle of pleading the facts required to invoke the discovery rule to his claim, Plaintiff faces a legal problem. The discovery rule generally applies to tort claims. It may apply to a breach of contract claim where plaintiff shows the defendant concealed its improper conduct, the injury or the act causing it would be difficult for plaintiff to detect, the defendant was in a superior position to comprehend the act and injury, and the defendant had reason to believe the plaintiff remained ignorant he had been wronged. Gryczman v. 4550 Pico Partners, Ltd., 107 Cal. App. 4th 1, 4-6 (2003); April Enters., Inc. v. KTTV, 147 Cal. App. 3d 805, 825-33 (1983) (applying discovery rule to breach of contract action when breach committed in secret and plaintiff would not reasonably discover harm until a future time). The FAC does not allege the facts necessary to trigger the use of the discovery rule on his employment contract. See Gryczman, 107 Cal. App. 4th at 4-6; April, 147 Cal App. 3d at 825-33; El Pollo Loco, Inc. v. Hashim, 316 F.3d 1032, 1039 (9th Cir. 2003) ("There is no need for the discovery rule to apply in the typical breach of contract case" but rule may apply in "unique" cases); Perez-Encinas v. Amerus Life Ins. Co., 468 F. Supp. 2d 1127, 1134-37 (N.D. Cal. 2006) (in summary judgment context, finding no basis to apply discovery rule to breach of contract claim).

B. Elements

Defendants next argue that the plain terms of the employment contract did not impose a duty on Booz Allen to assess performance "based upon and consistent with the opinion and recommendation of numerous co-workers." [FAC ¶ 524.] Defendants refer to the 1987 letter that offered Plaintiff the job, which does not contain that promise. [Defs.' Ex. C at 3 (listing 5 categories of performance standards).]

This argument fails at this stage of the proceedings. Plaintiff's claim is based upon written personnel policies including the "360 Assessment Process" and a "New Assessment Process" that created implied-in-fact promises. [FAC ¶¶ 153-63.] California law allows an employee to state a claim for breach of certain personnel policies and official guidelines that limit the employer's power to terminate an employee. Guz v. Bechtel Nat'l, Inc., 24 Cal. 4th 317, 344-45 (2000). Under this standard, Plaintiff has pleaded an implied-in fact contract and its breach. Foley v. Interactive Data Corp., 47 Cal. 3d 654, 681-82 (1988).

Defendants attack the breach of contract claim for failing to show that the breach was the proximate cause of Plaintiff's damage. "A proximate cause of loss or damage is something that is a substantial factor in bringing about that loss or damage." U.S. Ecology, Inc. v. Cal., 129 Cal. App. 4th 887, 909 (2005). Defendants argue that the facts alleged demonstrate there was an intervening event that broke the chain of causation. California v. Superior Court, 150 Cal. App. 3d 848, 857 (1984) (citing Cal. Civ. Code § 3300). Namely, Plaintiff "concedes that despite his qualms with his review and the initial recommendation concerning a plan for retirement, Booz Allen 'offered to cancel the forced retirement,' and that his retirement was in the end wholly 'voluntary.'" [Defs.' Mot. at 41 (quoting FAC ¶¶ 1, 422).]

Plaintiff argues in his opposition brief that he alleged the offer of reinstatement was inadequate to put him in the position he was in before the negative assessment. [Pl.'s Opp. Br. at 54.] He states that he suffered emotional distress from the false information in that unfair assessment and seeks consequential damages. [FAC ¶ 527; see id. ¶ 418.]

Defendants' position is well taken. Even construing the allegations that are set forth in the complaint in Plaintiff's favor, the facts reveal that Booz Allen offered to retract the recommendation to retire if Plaintiff would not accelerate his retirement from September to March 2005. [Id. ¶¶ 416-20.] "Plaintiff Rich proceeded to complete his voluntary retirement on March 31, 2005." [Id. 422 (emphasis added).] Plaintiff explicitly identified the intervening event that broke the chain of causation between the alleged breach and his ultimate decision to retire. Franklin v. Murphy, 745 F.2d 1221, 1228-29 (9th Cir. 1984) (court may dismiss complaint that discloses a fact that necessarily defeats plaintiff's claim), abrogated on other grounds by, Neitzke v. Williams, 490 U.S. 319, 324 & n.3 (1989), superceded by statute as recognized in Spivey v. Godinez, 1997 U.S. Dist. LEXIS 15255, *2 n.1 (N.D. Ill. 1997).

Moreover, the damages that Plaintiff seeks are not recoverable in a contract action. Applied Equip., 7 Cal. 4th at 516 (emotional distress damage is not an available contract remedy).

Further, the Court agrees with Defendants' observation that to the extent Plaintiff attempts to recover consequential damages by measuring the profit he would have made if he had sold his shares to the Carlyle Group, it fails on its face. California law measures damages for a breach of contract by those which were reasonably foreseeable at the time the contract was formed. 999 v. C.I.T. Corp., 776 F.2d 866, 872 (9th Cir. 1985) (citing California authorities). "If special circumstances result in an unusual injury, damages cannot be recovered unless those circumstances were known or should have been know by the breaching party at the time the contract was made." Id. (emphasis added). Booz Allen entered the employment contract with Plaintiff in 1987. The leveraged buyout took place twenty years later. The Court holds, as a matter of law, that Plaintiff's theory violates the rule of law measuring contract damages.

For all of the above reasons, the Court GRANTS Defendants' motion to dismiss the breach of contract cause of action.

IV. TORTIOUS INTERFERENCE WITH CONTRACT

In a related claim, Plaintiff alleges that Defendants Shrader and Doughty interfered with his employment contract with Booz Allen when they reviewed his job performance in bad faith. [FAC ¶¶ 515-22.] This claim is based upon the same facts as Plaintiff's breach of contract claim.

"[A] stranger to a contract may be liable in tort for intentionally interfering with the performance of the contract." Pac. Gas & Elec. Co. v. Bear Stearns & Co., 50 Cal. 3d 1118, 1126 (1990) (citations omitted).

The elements which a plaintiff must plead to state the cause of action for intentional interference with contractual relations are (1) a valid contract between plaintiff and a third party; (2) defendant's knowledge of this contract; (3) defendant's intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage.

Id. (citations omitted).

Defendants move to dismiss the claim on the ground that Shrader and Doughty, as agents of Booz Allen, are not strangers or third-parties to their principal's employment contract. Applied Equip., 7 Cal. 4th at 516-17.

The Court agrees. Agents and employees of a corporation who act in their official capacities on behalf of the corporation "cannot be liable for inducing a breach of the corporation's contract since being in a confidential relationship to the corporation their action in this respect is privileged." Wise v. S. Pac. Co., 223 Cal. App. 2d 50, 72-73 (1963), abrogated on other grounds by Applied Equip., 7 Cal. 4th at 512 n.4 & 510-18.

Plaintiff argues that he has pled around this restriction because he alleges that these senior executives were acting in their personal financial interest and in violation of their fiduciary duty to shareholders. Doctors' Co. v. Superior Court, 49 Cal. 3d 39, 47 (1989). Plaintiff's theory is that by repurchasing Plaintiff's shares, Defendants increased the percentage of the company that Carlyle would buy, which increased the payout to the directors. [E.g., FAC ¶¶ 5, 50.]

To the extent Plaintiff relies on his naked allegation that Shrader and Doughty breached their fiduciary duty to the shareholders in connection with the sale to Carlyle, the Court rejects that argument for the reasons stated in the Nemec decision. As discussed in more detail below, the Delaware Supreme Court rejected the state law claims against Booz Allen on the same facts involved in the instant case. All of Booz Allen's shareholders profited from the Carlyle transaction. "The directors did nothing unfair and breached no fiduciary duty by causing the Company to exercise its absolute contractual right to redeem the retired stockholders' shares at a time that was most advantageous to the Company's working stockholders." Nemec, supra, at 13-14. "The fact that some directors were in the group of working stockholders who received a pro rata share of the [value of the stock repurchased from retired employees] did not make it an interested transaction." Id. at 14. All of the director stockholders, including Shrader and ...


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