United States District Court for the District of Columbia
February 18, 2004.
HASSAN ABBEY & YUSSUR ABRAR, Plaintiffs
MODERN AFRICA ONE, LLC, et al., Defendants
The opinion of the court was delivered by: ELLEN S. HUVELLE, District Judge
Plaintiffs Hassan Abbey and Yussur Abrar bring this action against
Defendants Modern Africa One, LLC ("Modern Africa"), Stephen Cashin, and
Niles Helmboldt to recover compensatory and punitive damages, attorneys'
fees and costs, and injunctive relief in connection with defendants'
actions as majority shareholders of Warsun International Communications,
Inc. ("Warsun") and for their alleged interference with plaintiffs'
ownership interest in Warsun's Nigerian subsidiary.*fn1 Warsun has filed
for Chapter 11 bankruptcy and is currently in Chapter 7 liquidation
proceedings before the United States Bankruptcy Court for the Eastern
District of Virginia, Alexandria Division ("Bankruptcy Court").
Defendants have moved pursuant to 18 U.S.C. § 1404(a) and
28 U.S.C. § 1412 to transfer venue of this matter to that court, or
alternatively, to dismiss this action on the basis that plaintiffs have
failed to state a claim as to Count VI, and as to the remaining claims,
they are barred by the doctrines of
collateral estoppel, waiver and the Bankruptcy Court's
entry of a preliminary injunction and its approval of the sale of Warsun
assets to Modern Africa. Having considered the pleadings and relevant
law, the Court will deny the motion to transfer; grant the motion to
dismiss Counts III, VI and those claims that do not properly belong to
plaintiffs as opposed to the corporate entities; deny the motion to
dismiss Counts I, II, IV, V, and VII; and stay these proceedings pending
resolution of the adversary proceeding which is currently pending in the
I. The Parties
The parties to this action include individuals and companies associated
with Warsun, a New York corporation that provided facilities-based
telecommunications services in Africa. Warsun filed for Chapter 11
bankruptcy on August 13, 2002, and is currently in Chapter 7 liquidation
proceedings. Plaintiffs Hassan Abbey and Yussur Abrar hold a minority
interest in Warsun, and they served as officers and directors of Warsun
until the summer of 2002.
Modern Africa, an investment fund of Modern Africa Growth and
Investment Company (the "Fund"), was established to make equity
investments in Africa, particularly in manufacturing and communications
enterprises. Modern Africa invested $6,000,000 in Warsun in the form of a
secured loan in 1999 and another $4,000,000 over the next three years.
(Nyirjesy Decl. ¶ 3.) In return, Modern Africa received one share of
Warsun stock and warrants to obtain 700,000 additional shares, the
equivalent of a 70% equity stake. (Id.) Modern Africa currently
owns 985,714 shares of Warsun stock. (Defs.' Ex. 10 [Pls.' Objection to
Mot. to Sell Assets]
¶ 44.) Defendants Stephen Cashin and Niles Helmboldt
are members of Modern Africa Fund Managers, LLC, a limited liability
company that managed and administered the Fund. Cashin served as a member
of the board of Warsun and managing director of Modern Africa. Helmboldt
served as chairman of the boards of both Warsun and Modern Africa.
Warsun Network Solutions, Ltd. ("Warsun Nigeria") is a Warsun
subsidiary. It was established in August 2000 in Nigeria, the largest
telecommunications market in Africa, to obtain telecommunications
licenses and to establish a system of software and equipment that would
enable Warsun's African affiliates to deliver and receive communications
from local Internet Service Providers ("ISPs") and telecommunications
carriers. (Am. Compl. ¶¶ 75, 77.) Ownership of Warsun Nigeria is in
dispute. Plaintiffs (along with Chidi Ibisi who is not a party to this
action) claim an ownership interest in Warsun Nigeria (id. ¶
81), while defendants maintain that 100% of Warsun Nigeria's shares
belonged to Warsun. (Defs.' Mot. at 7 n.2.) This dispute is at the heart
of an adversary proceeding now pending before the Bankruptcy Court.
II. Bankruptcy Proceedings
Despite Modern Africa's investments, by mid-2002 Warsun, like much of
the telecommunications industry, was in financial difficulty. It was at
this time that Warsun's board terminated plaintiffs as officers, and
plaintiffs resigned as directors of the company. Thereafter, its board
determined that bankruptcy was the only viable alternative for survival
of the company, and on August 13, 2002, Warsun filed a voluntary petition
for relief under Chapter 11 of the United States Bankruptcy Code.
Shortly thereafter, Warsun entered into an asset purchase agreement
("APA") to sell all of the company's assets to Modern Africa as part of
the bankruptcy proceeding. On December 16, 2002, plaintiffs objected to
this sale, claiming that Warsun and Modern Africa were acting in bad
faith and requesting that the Bankruptcy Court prohibit the sale and
subordinate Modern Africa's debt investment to the interests of Warsun's
other creditors. (Defs.' Ex. 10 [Pls.' Objection to Mot. to Sell
Assets].) The Bankruptcy Court conducted a hearing, and over plaintiffs'
objections, it approved the sale on December 20, 2002, and it barred,
pursuant to § 363 of the Bankruptcy Code, any claims relating to
those assets that arose prior to the closing of the sale. (Defs.' Ex. 11
["363 Order"] at 2.) Listed among the assets sold in this transaction
were 6 million shares of common stock of Warsun Nigeria, "representing
all of the shares of common stock held by [Warsun] in such entity"
(Defs.' Ex. 1 [Asset Purchase Agreement Schedule 1.4]), except apparently
it was stipulated that "the assets and shares of Warsun Nigeria would be
sold subject to the parties' dispute, and that Modern Africa could not
acquire such assets to the extent that it is later determined by a
Nigerian court that Warsun is not entitled to such assets." (Pls.' Opp.
at 18.)*fn2 Modern Africa later assigned all of the assets it purchased
to Disco very Tel in return for a substantial equity stake in that
In a related matter, an adversary proceeding against Abrar and Abbey is
currently pending in the Bankruptcy Court.*fn3 In that action, initiated
on September 11, 2002, Warsun alleges that plaintiffs (1) violated the
automatic stay by pursuing litigation in Nigeria in violation
of the automatic stay; (2) conspired to injure Warsun in its trade,
reputation, and business in violation of Virginia's business conspiracy
statute; and (3) breached the fiduciary duties they owed to Warsun as
officers and directors by surreptitiously and improperly obtaining
personal ownership interests in Warsun Nigeria. (Defs.' Ex. 3 [Adversary
Proceeding Compl.] ¶¶ 22-29.)*fn4 Because Warsun sold all of its
assets, including its interest in Warsun Nigeria, to Modern Africa after
initiating the adversary proceeding, and because Modern Africa in turn
assigned the assets to DiscoveryTel, on January 6, 2004 the Bankruptcy
Court granted a motion to substitute DiscoveryTel as plaintiff in the
adversary proceeding. In its Order issued on January 6, 2004, the
Bankruptcy Court also set a pretrial conference for February 23, 2004 in
the adversary proceeding. The crux of that matter relates to the
ownership of Warsun Nigeria, i.e., whether DiscoveryTel or
plaintiffs own the stock of Warsun Nigeria.*fn5
Shortly after the adversary proceeding was initiated, plaintiffs filed
suit in a Nigerian court to prevent Modern Africa, DiscoveryTel, Cashin,
and Helmboldt from interfering with their interests in Warsun
Nigeria.*fn6 Prompted perhaps by this action in Nigeria, on September
11, 2002, Warsun asked the Bankruptcy Court to enjoin the plaintiffs from
violating the automatic stay. (Am. Compl. ¶ 230.) Finding that the
plaintiffs had violated the automatic stay, the Bankruptcy Court issued a
preliminary injunction on September 19, 2002, enjoining plaintiffs
from undertaking any litigation in any other court to determine ownership
rights of Warsun Nigeria.*fn7 (Defs.' Ex. 6 [Prelim. Inj.].)
III. The D.C. Action
It is against this backdrop that plaintiffs have brought the current
action. In their Amended Complaint, plaintiffs allege the following: (1)
breach of fiduciary duty to plaintiffs, as minority shareholders of
Warsun, by Modern Africa (Count I); (2) conversion of plaintiffs'
interest in Warsun (Count II);*fn8 (3) violations of
18 U.S.C. § 1962(c) and (d), the Racketeer Influenced and Corrupt
Organization Act ("RICO") (Count IV); (4) conversion of plaintiffs'
interest in Warsun Nigeria (Count V); (5) interference with plaintiffs'
prospective economic advantage (Count VI); and (6) conspiracy (Count
VII). On October 6, 2003, defendants moved to transfer these claims to
the Bankruptcy Court, or in the alternative, to dismiss plaintiffs'
claims. Plaintiffs oppose defendants' motion, arguing that the claims in
this case are unrelated to those raised by the bankruptcy proceeding,
including the adversary proceeding, and thus, this matter is not properly
transferrable, and it is not subject to dismissal based on Fed.R. Civ.
P. 12(b)(6) or any of the rulings or orders entered by the Bankruptcy
I. Motion to Transfer
Defendants seek transfer of this case pursuant to
28 U.S.C. § 1404(a) and § 1412.*fn9 The threshold question in
deciding a transfer motion is determining whether this action could have
been brought in the proposed transferee court at the time the complaint
was filed. Thus, this Court must determine first whether the Bankruptcy
Court would have had jurisdiction over this action. This involves a
two-part analysis. First, the bankrupcty court must have subject matter
jurisdiction over the matter under 28 U.S.C. § 1334(b). In re
Fed. Deposit Ins. Corp. v. Majestic Energy Corp., 835 F.2d 87, 90
(5th Cir. 1988). "[T]he district courts shall have original but not
exclusive jurisdiction of all civil proceedings arising under title 11
[of the Bankruptcy Act], or arising in or related to cases under title
11." 28 U.S.C. § 1334(b). Thus, there is federal jurisdiction not
only when the claim arises under title 11 or in a title 11 case, but also
if the claim is "at least `related to' a case under Title 11." Searcy
v. Knostman, 155 B.R. 699, 703 (Bankr. S.D. Miss. 1993). The usual
articulation of the test for determining whether a claim is "related to"
a bankruptcy case is "whether the outcome of that proceeding could
conceivably have any effect on the estate being administered in
bankruptcy." Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.
1984)); see also Celotex Corp. v. Edwards, 514 U.S. 300, 308
& n. 6 (1995) (applying the Pacor test); In re
McGuirl, No. 90-00141, 90-00142, 2001 WL 1798478, at *6 (Bankr.
D.D.C. Nov. 30, 2001) (same); Atkinson v. Kestell,
954 F. Supp. 14, 16 (D.D.C. 1997) (same).
Second, if subject matter jurisdiction is found under § 1334(b),
then the extent to which a bankruptcy court, rather than a district
court, can adjudicate the matter must be determined pursuant to
28 U.S.C. § 157. Fed. Deposit Ins. Corp., 835 F.2d at 90 (the
bankruptcy court's power to adjudicate the case depends on whether the
matter is a "core" or "non-core" proceeding). A bankruptcy obtains its
jurisdiction by referral from the federal district court under
28 U.S.C. § 157(a). Exercising this referred jurisdiction, a bankruptcy court
may hear and determine "core proceedings" those that "aris[e]
under" title 11 of the Bankruptcy Code or "aris[e] in" a case brought
under that title. 28 U.S.C. § 157(b)(1) ("Bankruptcy judges may hear
and determine all cases under title 11 and all core proceedings
arising under title 11, or arising in a case under title
11 . . . and may enter appropriate orders and judgments. . . .")
(emphasis added)).*fn10 Other proceedings that are otherwise
related to title 11 cases are considered non-core
proceedings. "A bankruptcy judge may hear a proceeding
that is not a core proceeding but that is otherwise related
to a case under title 11." 28 U.S.C. § 157(c)(1) (emphasis
added). However, in a non-core proceeding, absent consent of the parties,
the bankruptcy court has only limited jurisdiction and cannot issue a
final judgment, but instead, can only submit proposed findings of fact
and conclusions of law to the district court, which in turn can enter a
final judgment. Id.
Defendants appear to assume that there is subject matter jurisdiction
under 28 U.S.C. § 1334, and thus, they do not specifically address
this issue,*fn11 but instead, they argue that the bankruptcy
court can exercise its referred jurisdiction under 28 U.S.C. § 157
because the proceeding is either "relat[ed] to" a case under title 11
(Defs.' Mot. at 10) or is a "core proceeding." (Def.'s Reply at 5.) While
plaintiffs claims are factually related to the bankruptcy case,
this is not enough to justify a finding of subject matter jurisdiction in
the Bankruptcy Court, for common issues of fact will not automatically
render a civil proceeding "related to" the bankruptcy proceeding.
Pacor, 743 F.2d at 994. Although plaintiffs' claims may be
debtor's bankruptcy proceeding in a colloquial sense, in a legal sense,
they are not.
For instance, in a case similar to the instant one, the Bankruptcy
Court for the Southern District of Ohio held that, where majority
shareholders of a debtor in bankruptcy were accused of breaching
fiduciary duties to minority shareholders, that claim was not "related
to" the debtor's bankruptcy proceeding. In re Opti-Gage,
128 B.R. 189, 196 (Bankr. S.D. Oh. 1991). In reaching its conclusion, the
Opti-Gage court considered factors that are instructive here
no monetary award was sought from the debtor, the debtor was not
ultimately responsible for any damages, determination of the claim did
not adjust the debtor's rights or liabilities, and the claim did not
concern any joint conduct of the debtor and the defendants. Id. See
also In re Macnichol, 240 B.R. 731, 732 (Bankr. S.D. Oh. 1999)
(bankruptcy court lacked jurisdiction over creditor's common law fraud
and RICO claims against nondebtor defendant); In re Remington Dev.
Group, Inc., 180 B.R. 365, 369 (Bankr. D.R.I. 1995) (bankruptcy
court lacked jurisdiction over indemnity claim that the creditor had
asserted against nondebtor defendants); Pacor, 743 F.2d at 994
(an action is "related to" a bankruptcy action "if the outcome
could alter the debtor's rights, liabilities, options or freedom of
action . . . and . . . in any way impact upon the handling and
administration of the bankrupt estate.").
As in Opti-Gage, no monetary award is sought here from Warsun
(the debtor). Because plaintiffs seek monetary damages only from Modern
Africa, Cashin, and Helmboldt, any recovery would not infringe upon
Warsun's property or assets or those of the bankruptcy estate. Moreover,
plaintiffs' recovery would have no impact on Warsun's rights,
liabilities, options, or freedom of action. While the Bankruptcy Court
unquestionably has subject matter jurisdiction over issues surrounding
the ownership of Warsun Nigeria which is at issue in the
adversary proceeding this case involves much more. Accordingly,
because plaintiffs' claims (with the
exception to their claim of ownership of Warsun Nigeria) in this case are
not predominantly related to the bankruptcy action, the Bankruptcy Court
would lack subject matter jurisdiction under 28 U.S.C. § 1334(b), and
therefore, this case cannot be transferred.
Moreover, even assuming arguendo that the Bankruptcy Court had
subject matter jurisdiction, this Court would decline to exercise its
discretion to transfer. To establish that transfer is appropriate,
defendants have the burden of demonstrating that considerations of
convenience and the interest of justice weigh in favor of transfer.
DeLoach v. Philip Morris Co., Inc., 132 F. Supp.2d 22, 24
(D.D.C. 2000); Trout Unlimited v. United States Dep't of Agric.,
944 F. Supp. 13, 16 (D.D.C. 1996). The district court has discretion to
transfer "according to an individualized, case-by-case consideration of
convenience and fairness," balancing a number of factors relating to both
the private interests of the parties and the interests of the public.
Stewart Org. v. Ricoh Corp., 487 U.S. 22, 29-30 (1988).
The private interest considerations include: (1) plaintiffs choice of
forum, unless the balance of convenience is strongly in favor of
defendant; (2) defendant's choice of forum; (3) whether the claim arose
elsewhere; (4) the convenience of the parties; (5) the convenience of the
witnesses, but only to the extent that the witnesses may actually be
unavailable for trial in one of the fora; and (6) the ease of access to
sources of proof. Trout Unlimited, 944 F. Supp. at 16 (footnotes
omitted). The public interest considerations include: (1) the
transferee's familiarity with the governing laws; (2) the relative
congestion of the calendars of the potential transferee and transferor
courts; and (3) the local interest in deciding local controversies at
home. Id. (footnotes omitted).
With respect to the private interest considerations, none of the
factors favors transfer. Defendants have ties to this District, since
Modern Africa and Cashin reside here and Helmboldt
maintains an office here. No party would be
inconvenienced by a trial either here or in Virginia. And the relevant
events occurred both here and in Virginia. See generally Sparshott v.
Feld Entertainment, Inc., 89 F. Supp.2d 1, 4 (D.D.C. 2000)
(declining to transfer a case from this jurisdiction to the Eastern
District of Virginia where a bankruptcy suit involving many of the same
parties was pending).
Therefore, defendants rely on public factors to bolster their transfer
request. First, they argue that the first-filed rule warrants transfer.
(See Defs.' Mot. at 17 n.5 (citing Wash. Metro. Area Transit
Auth. v. Ragonese, 617 F.2d 820, 830 (D.C. Cir. 1980)).) This rule
provides that where "two cases between the same parties on the same cause
of action are commenced in two different Federal courts, the one which is
commenced first is to be allowed to proceed to its conclusion first."
Id. at 830 (internal citations and quotation marks omitted). The
rule, however, does not apply here, since the adversary proceeding now
pending in the Bankruptcy Court is not the same cause of action as the
case here. And, to the extent that the adversary proceeding involves the
same issue regarding the ownership of Warsun Nigeria, the Court will
permit that proceeding to reach a conclusion so as to avoid duplication
and the possibility of inconsistent verdicts. See Section II(E).
Second, defendants argue that transfer to a district in which a related
action is pending is generally favored so as to conserve judicial
resources and avoid inconsistent results. However, even if the existence
of a related case in another jurisdiction may be relevant, this "is
insufficient grounds for transfer." Sparshott, 89 F. Supp. at 4
(internal citation omitted). This is especially true in this case, since
the only issue still unresolved in the Bankruptcy Court is the adversary
But more importantly, even assuming that transfer were possible, it is
problematic that the Bankruptcy Court would have jurisdiction to issue a
final judgment as to at least some of the claims raised in this case,
since these claims would more than likely be treated as non-core
proceedings over which a bankruptcy judge could only (in the absence of
consent by the parties) exercise limited jurisdiction.*fn12 In
particular, plaintiffs' state law claims and those relating to
pre-petition activities by defendants could well be viewed as non-core,
and thus, even though the Bankruptcy Court in Virginia is familiar with
this matter, a district court judge in the Eastern District would land up
having to adjudicate this matter. See, e.g., In re Systems Eng'g
& Engergy Mgmt. Assoc., Inc., 252 B.R. 635, 644-50 (Bankr. E.D.
Va. 2000) (claims for breach of fiduciary duty, usurpation of corporate
opportunity and other business torts are non-core proceedings) and cases
Further complicating the matter of transfer is the fact that plaintiffs
have requested a jury trial in this case, and under
28 U.S.C. § 157(e) and F. R. Bankr. P. 9015, a bankruptcy judge may conduct
a jury trial only if the parties expressly consent and if the district court
has specially designated the bankruptcy judge to conduct the jury trial.
In sum, transfer is not warranted here for several reasons. Foremost,
the Bankruptcy Court in the Eastern District of Virginia lacks subject
matter jurisdiction over this matter. But even if it did have
jurisdiction, neither the public nor the private factors favor transfer,
especially given the likelihood that the Bankruptcy Court could not fully
adjudicate claims which would probably be characterized as non-core
proceedings. Thus, transfer would not serve the purpose of conserving
II. Motion to Dismiss
In the alternative, defendants move to dismiss this action. Defendants
contend that Count VI fails to state a legally viable claim, and that the
remaining claims are barred by the Bankruptcy Court's order approving
Warsun's asset sale and barring all further claims against those assets
(Counts I, II, and VII); collateral estoppel and waiver (Counts I, II,
and VII); and the Bankruptcy Court's preliminary injunction (Counts IV,
V, VI, and VII).
A. Legal Standard Applicable to Motion to Dismiss
Dismissal under Fed.R.Civ.P. 12(b)(6) is appropriate only where a
defendant has "show[n] `beyond doubt that the plaintiff can prove no set
of facts in support of his claim which
would entitle him to relief.'" In re Swine Flu Immunization Products
Liability Litigation, 880 F.2d 1439, 1442 (D.C. Cir. 1989) (quoting
Conley v. Gibson, 355 U.S. 41, 45-46 (1955)). The allegations in
plaintiffs' complaint are presumed true for purposes of a 12(b)(6)
motion, and all reasonable factual inferences should be construed in
plaintiffs' favor. Maljack Productions, Inc. v. Motion Pictures Ass
`n of Am., 52 F.3d 373, 375 (D.C. Cir. 1995); Phillips v. Bureau
of Prisons, 591 F.2d 966, 968 (D.C. Cir. 1979). If factual matters
outside the pleadings are submitted and considered by the Court, however,
a 12(b)(6) motion must be treated as a summary judgment motion under Fed.
R. Civ. P. 56. See Fed.R.Civ.P. 12(b).*fn14
B. Failure to State a Claim: Count VI
To state a claim for interference with economic advantage, plaintiffs
must allege (1) the existence of a valid business relationship or
expectancy; (2) knowledge of the relationship or expectancy on the part
of the interferer; (3) intentional interference inducing or causing a
breach or termination of the relationship or expectancy; and (4)
resultant damage. Bennett Enter., Inc. v. Domino's Pizza, Inc.,
45 F.3d 493, 499 (D.C. Cir. 1995). Defendants argue, relying on Bell
v. Ivory, 966 F. Supp. 23, 31 (D.D.C. 1997), that plaintiffs have
failed to state a claim in Count VI because any business opportunities
that would have accrued to plaintiffs in their capacity as
officers, directors or controlling shareholders of Warsun Nigeria
belonged to the company, not plaintiffs, and as such, plaintiffs cannot
satisfy the first element of a claim for interference with economic
While it is true, as argued by plaintiffs (Pls.' Opp. at 15), that
Bell involved an employee, and not officers, directors, or
shareholders, that does not resolve the matter. As is clear from the
allegations in Count VI, plaintiffs are claiming that Warsun Nigeria's
business opportunities were interfered with and they, "in their capacity
as officers, directors and controlling shareholders of Warsun Nigeria,"
were thereby injured. (Am. Compl. ¶¶ 288-89.) In effect, they are
alleging that the company was injured and they suffered derivative
injuries as a result of their positions as officers, directors and
shareholders. As discussed more fully infra (see Section II(C)),
plaintiffs' claims belong to the corporate entity Warsun Nigeria
and not to them as individuals. And, where the requirements of a
derivative suit have not been satisfied, plaintiffs cannot bring a
derivative suit on behalf of the corporation. Therefore, plaintiffs are
not entitled to sue as a result of Warsun Nigeria's loss of business
opportunities, and Count VI will be dismissed.
C. Bankruptcy Court's 363 Order
Defendants claim that Counts I, II, and VII are barred by the
Bankruptcy Court's 363 Order, which granted Warsun's motion to sell all
of its assets free and clear of interests, liens and encumbrances, and to
assume and assign certain contracts to Modern Africa. Defendants contend
that plaintiffs' claims belong to the bankruptcy estate, not to
plaintiffs personally. However, defendants paint plaintiffs' claims with
too broad a brush. To determine whether plaintiffs' claims indeed belong
equally to all shareholders (and thus to the bankruptcy estate) or to
plaintiffs personally, a closer look at relevant law and each of
plaintiffs' claims is required.
Defendants are correct that the bankruptcy estate includes all legal or
equitable interests of the debtor. (Defs.' Mot. at 22 (citing Field
v. Transcon. Ins. Co., 219 B.R. 115, 118-19 (Bankr. E.D. Va. 1998),
aff'd, 173 F.3d 424 (4th Cir. 1999)).) However, whether
plaintiffs' claims are legal interests that belong to the bankruptcy
estate turns on whether plaintiffs' claims belong to the corporation, and
as such must be brought as a derivative suit.*fn15 Kennedy, 348
F.3d at 589 (a derivative suit "is an asset of the bankrupt estate");
In re Greenwood Supply Co., 295 B.R. 787, 794 (Bankr. D.S.C.
2002) (same). Conversely, if the claim did not belong to the corporation,
the shareholder retains the right to bring a direct action.
Of importance, then, is whether a shareholder's cause of action is
derivative or direct. The law of this Circuit provides that "[w]hen an
injury to corporate stock falls equally upon all stockholders,
then an individual stockholder may not recover for the injury to his
stock alone, but must seek recovery derivatively in behalf of the
corporation." Cowin v. Bresler, 741 F.2d 410, 414 (D.C. Cir.
1984) (emphasis in original). But when the injury falls specifically on a
minority stockholder, a direct action is appropriate. Id. at
415. Plaintiffs allege in Count I that defendant Modern Africa breached
the fiduciary duty that it, as majority shareholder of Warsun, owed to
plaintiffs who were minority shareholders. (Am. Compl. ¶¶ 262-63.)
Defendants quite correctly argue that in order for plaintiffs to recover
individually in a direct action, they must assert some specific injury.
(Defs.' Mot. at 22 (citing Mullins v. First Nat'l Exch. Bank of
Va., 275 F. Supp. 712, 721 (W.D. Va. 1967) (direct suit was
inappropriate where a shareholder sued for tortious interference with a
corporation's property after a third party, which was not a shareholder,
the corporation's assets)).) However, an injury to only minority
shareholders is, quite plainly, not one that falls equally on all
stockholders. Kennedy, 348 F.3d at 589 (the breach of a majority
shareholder's fiduciary duty to a minority shareholder is a "wrong to the
minority shareholder rather than to the corporation" and, as such, it
should not be "force[d]. . . into the derivative mold"). Accordingly, to
the extent that plaintiffs' claims relate to a breach of fiduciary duty
by Modern Africa, these claims do not belong to the bankruptcy estate,
they need not be brought as a derivative action, and they are not barred
by the 363 Order.
However, many of plaintiffs' claims do not relate to a breach of
fiduciary duty, but rather, they involve harms that belong to
Warsun.*fn16 For instance, the complaint is replete with allegations of
mismanagement by Modern Africa, including claims that Modern Africa
restricted Warsun's access to funding and caused the company to
improperly file for bankruptcy. (See, e.g., Am. Compl. ¶¶
61-62, 69, 178.) "Claims of corporate mismanagement must be brought on a
derivative basis because no shareholder suffers a harm independent of
that visited upon the corporation and the other shareholders."
Cowin, 741 F.2d at 414. Because each shareholder is injured in
proportion to his or her equity interest, "each will be made whole if the
corporation obtains compensation or restitution from the wrongdoer"
through a derivative action. Id. (internal citation and
quotation marks omitted). Thus, to the extent that plaintiffs' claims
relate to Modern Africa's mismanagement of the corporation or to other
matters that affect all shareholders equally, these claims should have
been brought in a derivative action and are assets
of the bankruptcy estate. As such, they are not properly before this
Court, and they will be dismissed.
With respect to Count II, which alleges that defendants converted
plaintiffs' interest in Warsun and Count VII, which alleges a conspiracy,
it is not, however, possible to determine which specific allegations
belong to the corporation and which represent special harms inflicted on
plaintiffs in their distinct status as minority shareholders. Given the
fact that both types of claims appear to be inextricably intertwined in
these counts, the Court cannot, at this time, conclude that they should
be dismissed as barred by the 363 Order.*fn17
In sum, plaintiffs' claims are dismissed to the extent they relate to
injuries suffered by all shareholders equally. But to the extent that
plaintiffs' claims relate to the fiduciary duty owed them by the majority
shareholders, they are not barred by the Bankruptcy Court's 363
D. Collateral Estoppel and Waiver
Defendants also claim that Counts I, II, and VII are barred by
collateral estoppel. Collateral estoppel prevents repetitive litigation
of the same issue. "Under the issue preclusion aspect of res judicata, a
final judgment on the merits in a prior suit precludes subsequent
relitigation of issues actually litigated and determined
in the prior suit, regardless of whether the subsequent suit is based on
the same cause of action." NextWave Pers. Communications,
254 F.3d 130, 147 (D.C. Cir. 2001). See also Novak v. World Bank,
703 F.2d 1305, 1309 (D.C. Cir. 1983) ("Under collateral estoppel, once a
court has decided an issue of fact or law necessary to its judgment, that
decision may preclude relitigation of the issue in a suit on a different
cause of action involving a party to the first case.").
Defendants' claim that adjudication of plaintiffs' claims here will
amount to a relitigation of issues previously decided by the Bankruptcy
Court in the sale proceeding is not well founded. There, plaintiffs
objected to the sale on the grounds that Modern African engaged in
inequitable conduct and demonstrated bad faith in attempting to effect
the sale of Warsun's assets. (Defs.' Ex. 10 [Pls.' Objection to Mot. to
Sell Assets].) However, in approving the sale, the Bankruptcy Court did
not adjudicate these issues as a necessary part of its judgment, rather
it merely approved the sale after determining that it was negotiated in
good faith and that there was no better offer. (Defs.' Ex. 5 [Partial
Tr.] at 57; Defs.' Ex. 11 [363 Order].) This ruling cannot, therefore,
serve to bar plaintiffs' claims regarding Modern Africa's conduct prior
to purchasing Warsun's assets.
Defendants also claim that plaintiffs should have brought the claims
asserted in Counts I, II, and VII in the Bankruptcy Court as a challenge
to the debtor's bankruptcy petition, and having failed to have done so,
they are effectively waived. (Defs.' Mot. at 21.) Defendants present this
argument without citation to any legal authority, but merely argue that
plaintiffs should have raised these claims as a challenge to the petition
so the Bankruptcy Court could have made a determination of "whether the
letter of the bankruptcy law was being followed." (Id. at 21.)
In another section of their motion, defendants appear to be trying to
bolster their waiver argument
by asserting that plaintiffs' claims "should have been filed, if at all,
as a compulsory counterclaim in the Adversary Proceeding." (Defs.' Mot.
at 12 (citing Fed.R.Civ.P. 13(a)).)
But defendants' reliance on Fed.R.Civ.P. 13(a) is misplaced. That
rule requires a party to state a counterclaim "against any opposing
party, if it arises out of the transaction or occurrence that is the
subject matter of the opposing party's claim. . . ." Id.
However, Modern Africa, Helmboldt and Cashin are not "opposing parties"
in the adversary proceeding indeed, they are not parties to that
proceeding at all. As a result, plaintiffs' claims against defendants
here cannot be characterized as compulsory counterclaims,*fn19
and therefore, there is no basis for arguing that these claims against
third parties have been waived by plaintiffs' failure to present them to
the Bankruptcy Court.
E. Bankruptcy Court's Preliminary Injunction
Defendants allege that the Bankruptcy Court's Preliminary Injunction of
September 19, 2002 bars plaintiffs' claims in Counts IV, V, VI, and VII.
The injunction barred plaintiffs from taking action to acquire Warsun's
shares of Warsun Nigeria, commencing litigation in other courts to
determine the ownership and management rights of that company, and
interfering with Warsun employees' access to Warsun property. (Defs.' Ex.
6 [Prelim. Inj.].) While this Court recognizes that the claims currently
before it appear to be encompassed by the injunction, this
Court will not interpret or enforce that court's injunction. The
Bankruptcy Court is aware of this action, and obviously, it can proceed
to take whatever action is necessary.
However, the adversary proceeding is still pending. While the
Bankruptcy Court's injunction in that proceeding obviously does not
collaterally estop plaintiffs from bringing their claims here at this
time (see Defs.' Reply at 9-10), at least some of plaintiffs'
claims will in all probability be determined by the adversary proceeding.
For instance, in this case, plaintiffs' claims are premised on their
positions as directors of Warsun Nigeria and as owners of that company.
However, in the adversary proceeding, DiscoveryTel alleges that neither
plaintiff is an officer and that plaintiffs improperly obtained an
ownership interest in Warsun Nigeria. (Defs.' Ex. 3 [Adversary Proceeding
Compl.] ¶¶ 12, 15.) Thus, the resolution of plaintiffs' role in Warsun
Nigeria is at issue in both cases and will impact each of the remaining
counts (except Count II) of plaintiffs' complaint.
Given the posture of these cases and the substantial overlap of issues,
the Court will exercise its discretion to stay this action pending
resolution of the adversary proceeding, which is set for pretrial
conference this month. See Landis v. N. Am. Co., 299 U.S. 248,
254-55 (1936) ("[T]he power to stay proceedings is incidental to the
power inherent in every court to control the disposition of the causes on
its docket with economy of time and effort for itself, for counsel, and
for litigants."). In this way, the possibility of inconsistent results
will be avoided, and the time and resources of the court and the parties
will be conserved.
For the reasons stated above, the Court will deny defendants' motion to
transfer venue. Further, the Court will grant defendants' motion to
dismiss with respect to Counts III and VI and
with respect to those claims that have been improperly brought in a
direct action (those belonging to the corporation or all shareholders
equally). As to the remainder of plaintiffs' claims, defendants' motion
to dismiss will be denied. However, the Court stays further proceedings
in this case until the United States Bankruptcy Court for the Eastern
District of Virginia resolves the adversary proceeding now pending before
it. A separate Order accompanies this Memorandum Opinion.
For the reasons given in the attached Memorandum Opinion, it is hereby
ORDERED that defendants' Motion to Transfer Venue is
DENIED; it is
FURTHER ORDERED that defendants' Motion to Dismiss is
GRANTED with respect to Counts III ane VI and to plaintiffs'
claims that relate to all shareholders equally, but it is
DENIED as to the remainder of plaintiffs' claims; it is
FURTHER ORDERED that further proceedings in this Court are
stayed until proceedings now pending before the United States Bankruptcy
Court for the Eastern District of Virginia are resolved.