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Springer v. Kilhefner

United States District Court, E.D. Pennsylvania

August 14, 2019

GERALD KILHEFNER, et al., Defendants


          JOSHUA D. WOLSON, J.

         Defendants have moved to dismiss this case, invoking the heightened pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4. The Court has applied those standards while being mindful that the circumstances of this action, focused on transactions in closely-held companies, make it different from the typical PSLRA case, which involves publicly-traded securities. See Klein v. Autek Corp., 147 Fed. App'x 270, 274 (3d Cir. 2005) (recognizing narrow exception to PSLRA's stringent pleading standards for non-typical securities fraud cases). Having carefully reviewed the Amended Complaint and the Parties' arguments, the Court concludes that Plaintiff Mark Springer has stated a claim with the required particularity for misrepresentations about Springer's need to exercise stock options that he held pursuant to an employment agreement. However, Springer's allegations about other misrepresentations and omissions do not state viable securities claims. Accordingly, the Court will deny the motion to dismiss in order to permit Springer to pursue the single viable securities claim that he has pled, as well as his pendent state claims.


         For purposes of resolving Defendants' Motion to Dismiss, the Court accepts as true all factual allegations in Springer's Amended Complaint. However, the Court does not consider the additional facts set forth in Springer's briefing, as “[i]t is axiomatic that the complaint may not be amended by the briefs in opposition to a motion to dismiss.” Com. of Pa. ex rel. Zimmerman v. PepsiCo, Inc., 836 F.2d 173, 181 (3d Cir. 1988) (quotation omitted).

         A. Springer's Relationship With Kilhefner And KCI

         In February 2014, Springer, Defendant Gerald Kilhefner, and Klover Contracting, Inc. (“KCI”) executed two agreements related to Springer's minority ownership and employment with KCI. (ECF No. 7 ¶¶ 20, 23.) On February 6, 2014, the parties entered into a Shareholder's Agreement (the “Shareholders Agreement”). (Id. Ex B.) Then, on February 18, 2014, Springer, Kilhefner, and KCI entered into a Stock Option and Employment Agreement (the “Employment Agreement”). (Id. Ex A.) When those agreements were executed, Kilhefner was KCI's sole shareholder. (Id. ¶ 23.)

         Pursuant to the Employment Agreement, KCI issued one share of common stock to Springer, and he became Vice President of operations and a director of KCI. (Id. ¶¶ 24-25.) His employment started on April 1, 2014. (Id. ¶ 38.) The Employment Agreement entitled Springer to receive an annual common stock distribution from KCI, as well as the right to receive a stock bonus distribution each year beginning in 2015. (Id. ¶¶ 26-27.) The Employment Agreement allowed Springer to defer his stock bonus, which would then accrue to the following year. (Id. ¶ 28.) If, however, Springer did not exercise his election to receive the stock bonus distribution with accrued options in the fourth year, 2018, he would forfeit his right to receive the accrued distributions and any further distributions. (Id.) The Employment Agreement also entitled Springer to dividends based upon KCI's year-end net profits. (Id. ¶ 30.) Finally, the Employment Agreement provided that “any stock transfer tax, payable on the sale or transfer of all or any portion of the Purchased Stock or the consummation of any other transaction contemplated hereby shall be paid by distributions from [KCI].” (Id. ¶ 32.)

         For most of the time that Springer was a KCI shareholder, Kilhefner did not provide Springer with periodic financial information about KCI, such as income statements or balance sheets. (Id. ¶ 37.) In addition, Springer contends that Kilhefner issued dividends to himself but not to Springer. (Id. ¶¶ 42-43.)

         B. Formation Of The Newcos And Related Misrepresentations And Omissions

         In January 2017, Kilhefner incorporated four new companies, Klover Metro DC, Inc. (“MDC”), Klover Prefabrication PA, Inc. (“Prefab”), Skilled Trades Hiring, Inc. (“STH”), and Klover SEPA, Inc. (“SEPA”) (collectively “Newco Defendants”). (Id. ¶ 44.) On February 23, 2017, Kilhefner met with Springer to discuss the Employment Agreement and Springer's right to exercise his KCI stock options (the “February Meeting”). (Id. ¶ 47.) In advance of that meeting, Kilhefner met with KCI's accountant to prepare a buyout plan, which Kilhefner intended to present to Springer at the February Meeting. (Id. ¶ 48.)

         At the February Meeting, Kilhefner told Springer that KCI had a market value of $5 million and that Springer would incur a tax liability of $880, 000 if Springer exercised his stock options. (Id. ¶¶ 51-53.) Kilhefner then presented to Springer the proposed buyout plan, pursuant to which one or more of the Newco Defendants would purchase KCI's assets (the “Buyout Plan”). Kilhefner claimed during the February Meeting that the Buyout Plan would permit Springer to receive an ownership in the Newco Defendants without having the tax liability that he would face from exercising his stock options in KCI.

         Springer alleges that the statements that Kilhefner made at the February Meeting were false, and that Kilhefner knew that they were false. In particular, he avers that Kilhefner knew that the Shareholder's Agreement obligated KCI “to pay any Tax Liability related to Plaintiff's exercise of his options.” (Id. ¶ 62.) According to Springer, Kilhefner made those false statements to deter Springer from exercising his stock options and to ensure that KCI did not have to pay Springer's tax bill. (Id. ¶¶ 64, 67.) Similarly, Springer contends that Kilhefner's statements at the February Meeting about the value of any potential interest in the Newco Defendants was false. (Id. ¶ 65.)

         On March 31, 2017, the Newco Defendants held board meetings (the “March Board Meetings”). During those meetings, Kilhefner awarded a 40% ownership in each company to Springer and made Springer an officer of each company. (Id. ¶¶ 68-69.) Kilhefner also proposed during those meetings that (a) SEPA would purchase KCI's outstanding shares from Kilhefner for $5 million, (b) Kilhefner would carry a note for the full purchase price for a ten-year loan at 3.25% paid monthly, and (c) the outstanding shares of all of the Newco Defendants would serve as collateral for the loan. (Id. ¶ 71.) This deal differed materially from the deal that Kilhefner proposed at the February Meeting, in that it was a stock sale rather than an asset purchase.

         According to Springer, Kilhefner altered the structure of the deal in order to avoid handing 40% of KCI's value to Springer for nothing, to avoid KCI's potential tax liability if Springer exercised his options to acquire KCI's shares, and to reduce the value of potential distributions from KCI if Springer exercised his options. (Id. ¶ 79.) Nonetheless, Springer agreed to the terms that Kilhefner proposed at the March Board Meetings. (Id. ¶ 85.)

         Following the March Board Meetings, Kilhefner issued to Springer share certificates for each of the Newco Defendants. (Id. ¶ 86.) Kilhefner also represented to Springer that Springer would continue to be employed under the Employment Agreement with KCI and that Springer did not need to elect to receive his accrued but unelected stock in KCI. (Id. ¶ 87.) Springer believed Kilhefner, and he therefore did not exercise his stock options to receive stock in KCI. (Id. ¶ 88.) According to Springer, however, Kilhefner's representations were false. Indeed, Springer now contends that his 40% interest in the Newco Defendants was worth less than his interest in KCI would have been, he would not receive cash distributions from the Newcos because those companies' cash would go to repay the loan from Kilhefner, and Springer would still incur a tax liability. (Id. ¶¶ 87, 89.)

         Over a year later, on April 18, 2018, Kilhefner asked Springer to sign a Memorandum of Understanding to clarify the relationship between Springer, Kilhefner, and the various companies for which Kilhefner was the majority shareholder (the “MOU”). (Id. ¶ 92 & Ex. K.) The MOU explains that because Springer decided not to exercise his accrued stock bonus distribution from KCI, he had forfeited his current stock options as well as any future distributions in any of the companies Kilhefner owned as majority shareholder. (Id. ΒΆ 93.) The MOU also requires Springer to return ...

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