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GINTOWT v. TL VENTURES

October 3, 2002

KRISTOFF GINTOWT,
V.
TL VENTURES, ET AL.



The opinion of the court was delivered by: Baylson, District Judge.

MEMORANDUM

I. Legal Standard on Rule 12(b)(6) Motion to Dismiss

When deciding a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the court may look only to the facts alleged in the complaint and its attachments. See Jordan v. Fox, Rothschild, O'Brien & Frankel, 20 F.3d 1250, 1261 (3d Cir. 1994). The court must accept as true all well pleaded allegations in the complaint and view them in the light most favorable to the plaintiff. See Angelastro v. Prudential-Bache Sec., Inc., 764 F.2d 939, 944 (3d Cir. 1985). A Rule 12(b)(6) motion will be granted only when it is certain that no relief could be granted under any set of facts that could be proved by the plaintiff. See Ransom v. Marrazzo, 848 F.2d 398, 401 (3d Cir. 1988).

II. Allegations of the Complaint

Plaintiff alleges the following facts, which, for the purpose of deciding the instant motion, will be read in the light most favorable to Plaintiff. The Reohr Group Inc. (herein "Reohr"), a successful staffing company, was a closely-held corporation, whose shares were entirely owned by Plaintiff and two other individuals (herein "the Reohr partners"). See Complaint ¶ 11. In October 1997 Reohr merged into a new company, Broadreach Consulting, Inc. ("Broadreach"). As explained below, Plaintiff claims that his equity in Broadreach was obliterated as a result of numerous acts of fraud, which were concealed from Plaintiff (and others), as well as various misrepresentations by Defendants.

Defendant TL Ventures (herein "TL") was a venture capital fund ("VCF"), which managed other VCFs and offered shares in those VCFs to the public. Id. ¶ 5. TL was "closely affiliated" with Safeguard Scientifics, Inc. ("Safeguard"). Id. Defendants TL Ventures III L.P. ("Ventures III"), TL Ventures III Offshore L.P. ("Offshore"), TL Ventures III LLC, and TL Ventures III Interfund L.P. ("Interfund") were also VCFs affiliated with Safeguard. Id. ¶ 6. Yet another entity, TL Ventures Management L.P., was the General Partner of the other TL entities (herein "TL Defendants"). Information Technology Consulting Inc. ("ITC") was a subsidiary of HDS Network Systems, Inc. ("HDS"). ¶ Id. ¶ 7. HDS was eventually renamed Neoware Systems, Inc. ("Neoware").*fn1 Id. Defendant Arthur Spector was managing director of TL Ventures Management L.P. and CEO of HDS. Id. Defendant James Dixon was CEO of Broadreach. Id. ¶ 8. Plaintiff alleges that Dixon and Spector, at all times, acted on behalf of Neoware and the TL Defendants. Id. Defendant Rice Sangalis Toole & Wilson ("Rice") was an investment firm, while Defendant RSTW Partners, III L.P. ("RSTW") was a limited partnership created by Rice for the purpose of acquiring an interest in Reohr.*fn2 Id. ¶ 9-10.

However, Plaintiff alleges that the TL Defendants actually planned to transform Reohr into an electronic business consulting firm that could be quickly "flipped" for a giant profit, given the "public euphoria" surrounding Internet commerce in the late 1990s. Id. ¶ 19, 52. Defendants failed to disclose, at any time, that they intended to take extraordinary risks and assume high amounts of debt in managing the new entity. Id. ¶ 19.

In anticipation of the Reohr merger, TL purchased an entity called Global Consulting Group ("Global"). Id. 21. Spector and Dixon represented to the Reohr partners that Global was a stable company in the same line of business as Reohr. The merger was completed in October 1997, but with significantly different equity allocations than Defendants had led the Reohr partners to believe, Id, ¶ 27, Rice, a new investor, purchased a substantial amount of equity, allowing TL to limit its investment to about 20% of the new company. Also, the Reohr partners were paid for their shares not out of TL capital, as the Reohr partners had been led to expect, but with funds borrowed from PNC bank, which saddled Broadreach with debt. Id.

Defendants thereafter pressured Plaintiff to resign his Broadreach management and Board positions, so that he would not be in a position to oppose their risky plans for the company. In February 1998, Dixon telephoned Plaintiff and assured him that Broadreach was doing well, except in the marketing area. ¶ 43. Dixon also stated that Plaintiffs employment at the company was not "working out." Id. Plaintiff resigned his management position at Broadreach based on this discussion with Dixon, as well as Dixon's assertion that the three Reohr partners would continue to hold Broadreach board seats. Id. Yet, throughout 1998, Plaintiff was excluded from Board meetings and not provided with financial records. Id. ¶ 46. Dixon repeatedly asked for Plaintiffs Board resignation and exerted "intolerable pressure and indignities" on Plaintiff until he finally left the Board. Id.

In late January 1999, Dixon sent to Plaintiff, in the U.S. mails, a general release, which would have absolved Defendants of liability related to Plaintiffs separation, except as provided by contract. Plaintiff refused to sign the release. ¶ 48. On February 1, 1999, Dixon sent a letter to Plaintiff, also via the mails, accepting his resignation from the Board and advising him that he would keep Plaintiff appraised of Broadreach's performance. ¶ 49.

At an unspecified point in 1999, Dixon offered to buy Plaintiffs shares. When Plaintiff inquired of Kurt Keene of the Rice firm as to Broadreach's prospects, Keene failed to disclose information regarding the company's high debts and other reasons for concern, causing Plaintiff not to sell. Id. ¶ 58. By the second quarter of 2000, as a result of Defendants' scheme and the enormous bank debts taken on to finance the "charade," Broadreach was experiencing negative earnings. Id. ¶ 60. On December 19, 2000, Dixon, on behalf of Broadreach, sent a notice through the U.S. mails seeking additional funding from Plaintiff and other shareholders. ¶ 61. No investors were willing. On January 1, 2001, Broadreach announced by press release and over the wires that the company would "spin off" its staffing work into a new entity called LiquidHub. ¶ 62. On July 23, 2001, Broadreach sent to Plaintiff, via U.S. mail, notice of a Special Meeting of Shareholders, for the purpose of authorizing the sale of all or substantially all of the company's assets. Id. ¶ 64. In August 2001, Plaintiff gave Broadreach notice that he intended to exercise dissenters' rights. Id. ¶ 65. Though Plaintiff repeatedly requested access to Broadreach's books, the Board stonewalled. Id. ¶ 70.

On August 3, 2001, Citizens Bank of Massachusetts ("Citizens"), a creditor of Broadreach, notified Broadreach that it was in default and that Citizens would exercise its UCC rights, obtain all Broadreach collateral securing the defaulted loan, and transfer those assets to Vector esp, Inc. ("Vector"). Id. 68. Upon acknowledging that it had no rights as to the collateral securing the Citizens indebtedness, Broadreach conveyed to Vector all of its remaining assets. Id. ¶ 70. Thus, Broadreach ceased to exist. Id. ¶ 72. Plaintiff alleges that the Board entered into the Citizens/Vector transaction "in hopes that Broadreach would no longer constitute a viable entity for purposes either of derivative litigation or of any dissenters' rights proceedings."*fn3 Id. Plaintiff further claims that, because ...


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