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LABOVITZ v. WASHINGTON TIMES CORP.

August 28, 1995

PETER C. AND SHARON M. LABOVITZ, Plaintiffs,
v.
THE WASHINGTON TIMES CORPORATION and NEWS WORLD COMMUNICATIONS, INC., Defendants.



The opinion of the court was delivered by: HARRIS

 This matter is before the Court on defendants' motion to dismiss. The Court grants defendants' motion in major part, in accordance with this Opinion. Although "findings of fact and conclusions of law are unnecessary on decisions of motions under Rule 12 or 56," Fed. R. Civ. P. 52(a), the Court nonetheless sets forth its reasoning.

 Background

 Because this matter is before the Court on a motion to dismiss, the Court takes plaintiffs' factual allegations to be true. Maljack Prods., Inc. v. Motion Picture Ass'n of Am., Inc., 52 F.3d 373, 375, 311 U.S. App. D.C. 224 (D.C. Cir. 1995). As alleged in the complaint, plaintiffs Peter and Sharon Labovitz were officers, directors, and shareholders of DCI Publishing, Inc. (DCI), and its affiliated entities, the DCI companies. *fn1" DCI published community newspapers distributed in the Maryland and Virginia suburbs of the District of Columbia. In deciding defendants' motion to dismiss, the Court must determine whether plaintiffs have standing to sue for alleged injuries suffered individually, a question which cannot be resolved without determining whether plaintiffs' alleged injuries are derivative from injuries to their corporation. *fn2"

 In January 1991, defendants The Washington Times and its parent company, News World Communications, Inc. (hereinafter WT), expressed interest in acquiring DCI. At that time, the DCI newspapers' circulation neared 500,000. Still, the corporation had been operating at a loss since 1987. *fn3" Instead of the contemplated acquisition, the parties agreed to a complex arrangement whereby WT agreed to loan DCI cash and collateral, and to provide certain services, in exchange for veto power over certain operational decisions and an option to acquire either DCI's stock or its assets after two-and-a-half years. *fn4" The parties executed written representations of their agreement on August 5, 1991, consisting of four "Loan Documents" titled "Loan Agreement," "Printing Agreement," "[Purchase] Agreement," and "Non-Negotiable Promissory Note." (Complaint P 21.) Plaintiffs signed the Loan Agreement and the Purchase Agreement in their individual capacities, as guarantors of the loan, and as DCI stockholders, respectively. *fn5"

 Again, accepting plaintiffs' allegations as true, operations under the new agreement did not go smoothly. WT and plaintiff Peter Labovitz soon disagreed as to how DCI should be run. For example, WT denied Peter Labovitz's cost-cutting recommendations and did not allow DCI to cut its circulation base. In October 1991, Peter Labovitz agreed to relinquish control of DCI's daily operations in exchange for a promise that he would be paid $ 20,000 per month for six months. This agreement contemplated that he would remain active in other areas of DCI's management, but only a short time after he relinquished control of DCI's daily operations, WT denied Labovitz access to DCI's financial information, stopped sales of equipment he had negotiated, transferred some of DCI's assets and personnel to themselves, and instructed DCI's employees not to communicate with Labovitz. WT later refused to pay him the agreed compensation.

 Plaintiffs allege that, throughout their relationship, WT attempted to operate DCI in a manner consistent with their own long-term interests and without consideration of DCI's short-term survival, despite assuring plaintiffs that they were committed to DCI's financial success. When WT stopped providing cash and services to DCI in December 1992, after DCI failed to pay the previously deferred charges for services rendered, DCI was financially devastated. DCI filed for bankruptcy in the United States Bankruptcy Court for the Eastern District of Virginia on January 20, 1993.

 Plaintiffs filed suit in this court on January 19, 1995, based on diversity of citizenship, pursuant to 28 U.S.C. § 1332. They seek relief on several counts, alleging that the value of their interests in DCI was substantially reduced, that their personal guarantees of DCI'S debts were triggered, and that WT had breached their agreement to pay Peter Labovitz for relinquishing control of DCI's daily operations. Plaintiffs contend they were economically injured in an amount not less than $ 15,000,000 in each count of their complaint.

 Discussion

 As has been noted, the Court construes plaintiffs' complaint liberally, and gives plaintiffs the benefit of all inferences that can be derived from the facts alleged because it is considering a motion to dismiss. See Jenkins v. McKeithen, 395 U.S. 411, 421, 89 S. Ct. 1843, 23 L. Ed. 2d 404 (1969). However, the Court need not accept legal conclusions cast in the form of factual allegations. Kowal v. MCI Communications Corp., 305 U.S. App. D.C. 60, 16 F.3d 1271, 1276 (D.C. Cir. 1994).

 The Court first finds that plaintiff Peter Labovitz has stated a claim for breach of contract in Count VII of the complaint, and denies defendants' motion to dismiss as to this claim. *fn6" The complaint sufficiently alleges and supports the existence of an oral contract between WT and Peter Labovitz, and WT's breach of that contract. Although the compensatory damage amount sought on this count seems excessive, the amount in controversy satisfies diversity jurisdiction requirements. Peter Labovitz will bear the burden of proving his damages at trial.

 As stated above, the remainder of plaintiffs' complaint seeks damages for the depreciation of value of their interests in the DCI corporation, and for the loss caused by the triggering of their personal guarantees of DCI's debts. Defendants assert that plaintiffs have no standing to seek relief for these injuries on the ground that the injuries are consequences of the corporation's losses.

 Whether suit may be brought by individuals or should be brought by the corporation depends on "considerations and conventions of corporate law," Whelan v. Abell, 953 F.2d at 672, and it is state law that determines "whether a shareholder may maintain a direct, nonderivative action." 12B William M. Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 5911 at 484 (perm. ed. rev. vol. 1993). Although state law is of critical importance, both parties have ignored the question of which state's law is applicable to this case. Instead, they have cited cases brought under the Racketeer Influenced and Corrupt Organizations Act, cases applying Illinois law, Louisiana law, and Missouri law, and even cases that do not make clear which state's law is being applied. A federal court sitting in diversity ordinarily must apply the choice of law rules of the jurisdiction in which it sits. GEICO v. Fetisoff, 294 U.S. App. D.C. 279, 958 F.2d 1137, 1141 (D.C. Cir. 1992). Although federal courts in the District of Columbia "are not obligated to follow the doctrine announced in Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938)," they have applied the District of Columbia's choice of law principles "to promote uniformity and [to] assure proper deference to District of Columbia laws." Gray v. American Express Co., 240 U.S. App. D.C. 10, 743 F.2d 10 (D.C. Cir. 1984).

 The District of Columbia follows a modified "interest analysis" approach to choice of law. Under this approach, courts must first determine whether a true conflict exists, and if so, must determine which jurisdiction has the "more substantial interest" in having its law applied to the case. GEICO, 958 F.2d at 1141 (citing Eli Lilly & Co. v. Home Ins. Co., 246 U.S. App. D.C. 243, 764 F.2d 876, 882 (D.C. Cir. 1985) and Fowler v. A & A Co., 262 A.2d 344, 348 (D.C. 1970)). As the Seventh Circuit has pointed out, "the choice between derivative and direct litigation is a choice about how (and by whom) the internal affairs of the firm are managed." Bagdon v. Bridgestone/Firestone, Inc., 916 F.2d 379, 382 (7th Cir. 1990), cert. denied, 500 U.S. 952, 111 S. Ct. 2257, 114 L. Ed. 2d 710 (1991). When a particular claim addresses matters of corporate governance or other internal affairs of the organization, most states apply the law of the state where the corporation is incorporated, see Restatement (Second) of Conflicts of Law §§ 301-310 (1971), and the District of Columbia follows suit. See Cowin v. Bresler, 239 U.S. App. D.C. 188, 741 F.2d 410, 414 (D.C. Cir. 1984). The state of incorporation has a strong interest in having its law applied to matters of ...


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