grampp v. bordynuik et al doc 23 filed 27 aug 12

UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS

ERWIN GRAMPP, derivatively on behalf of JBI, INC.,

Plaintiff, vs. JOHN BORDYNUIK, DR. JACOB SMITH, RONALD C. BALDWIN, JR., AMY BRADSHAW, JOHN M. WESSON, ROBIN BAGAI, GREGORY GOLDBERG, and THEODORE J. HENRY,

Defendants, and

JBI, INC. Nominal Defendant.

Civil Action No.: 1:12-cv-10495-MLW

THE INDIVIDUAL DEFENDANTS’ MEMORANDUM IN SUPPORT OF THEIR MOTION TO DISMISS THE COMPLAINT

Case 1:12-cv-10495-MLW Document 23 Filed 07/27/12 of 39

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TABLE OF CONTENTS

Page

INTRODUCTION ...........................................................................................................................1

BACKGROUND .............................................................................................................................3

A. The Parties ...............................................................................................................3

B. Facts and Allegations...............................................................................................4

ARGUMENT...................................................................................................................................6

I. THE COURT LACKS PERSONAL JURISDICTION OVER THE INDIVIDUAL DEFENDANTS OTHER THAN DEFENDANT BORDYNUIK......................................................................................................................6

A. Plaintiff Will Be Unable to Prove Affirmative Jurisdictional Facts Beyond The Complaint. ...........................................................................................7

B. Plaintiff Cannot Prove General Or Specific Jurisdiction.........................................7

C. The Fact That JBI Formerly Had Its Principal Place of Business In Massachusetts Is An Insufficient Basis For Specific Jurisdiction Over The Individual Defendants..............................................................................8

II. PLAINTIFF HAS NOT ADEQUATELY ALLEGED THAT DEMAND ON JBI’S BOARD WAS FUTILE PURSUANT TO RULE 23.1. ...................................10

A. Demand Futility Is Assessed Based on Composition of Board on the Date the Complaint Was Filed. ........................................................................13

B. The Particularized Facts Alleged in the Complaint Fail to Raise a Reasonable Doubt that a Majority of the JBI Board For Demand Purposes Was Disinterested...................................................................................13

1. Plaintiff’s Allegations Regarding The Company’s Public Statements and Filings Do Not Establish Demand Futility. ......................15

2. That Mr. Wesson Served On JBI’s Audit Committee Is Not Sufficient To Excuse Demand. ..................................................................18


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C. The Particularized Facts Alleged In The Complaint Fail To Raise A Reasonable Doubt That A Majority Of The JBI Board For Demand Purposes Was Independent......................................................................19

III. PLAINTIFF HAS NOT ADEQUATELY ALLEGED BREACHES OF FIDUCIARY DUTY UNDER RULE 12(B)(6) AND RULE 9(B) STANDARDS....................................................................................................................20

A. The Court Should Consider Only Factual Allegations, Not Threadbare Conclusory Allegations. .....................................................................21

B. Plaintiff Failed to Allege Cognizable Damage To JBI. .........................................21

C. Plaintiff Failed To Plead Intentional Misconduct, Fraud, Or A Knowing Violation Of The Law With Requisite Particularity. .............................23

IV. IN THE ALTERNATIVE, THE COURT SHOULD STAY THIS ACTION BECAUSE THERE IS A SIMILAR CLASS ACTION SECURITIES CASE PENDING IN NEVADA. ...............................................................28

CONCLUSION..............................................................................................................................30


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TABLE OF AUTHORITIES

Page(s) FEDERAL CASES

Adelson v. Hananel, 652 F.3d 75 (1st Cir. 2011).........................................................................................................8

Advanced Ink Sys. Corp. v. Ink Half Price, Inc., 2007 U.S. Dist. LEXIS 24009 (D.P.R. Mar. 30, 2007) ..............................................................7

Alvarado-Morales v. Digital Equip.Corp., 843 F.2d 613 (1st Cir. 1988) ................................................................................................9, 10

American Freedom Train Found. v. Spurney, 747 F.2d 1069 (1st Cir. 1984) ....................................................................................................9

Ashcroft v. Iqbal, 556 U.S. 662 (2009).................................................................................................................21

Austin v. Bradley, Barry & Tarlow, P.C., 836 F. Supp. 36 (1st Cir. 1993) ................................................................................................26

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007).................................................................................................................21

Breault v. Folino, 2002 U.S. Dist. LEXIS 25587 (C.D. Cal. Mar. 15, 2002) .......................................................29

Brown v. Moll, 2010 U.S. Dist. LEXIS 73875 (N.D. Cal. July 21, 2010)........................................................27

Carp v. XL Ins., 754 F. Supp. 2d 230 (D. Mass. 2010) ............................................................................7, 10, 21

Caviness v. Evans, 229 F.R.D. 354 (D. Mass. 2005) ...................................................................................... passim

Chlebda v. H. E. Fortna & Bro., Inc., 609 F.2d 1022 (1st Cir. 1979) ....................................................................................................7

Chorney v. White, 1986 U.S. Dist. LEXIS 25559 (D. Mass. May 13, 1986) ........................................................10

Cucci v. Edwards, 2007 U.S. Dist. LEXIS 86832 (C.D. Cal. Oct. 31, 2007)........................................................29


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Delaware & Hudson Co. v. Albany & S.R. Co., 213 U.S. 435 (1909).................................................................................................................11

Destination Mktg., Inc. v. Kessler Fin. Servs., L.P., 2001 U.S. Dist. LEXIS 25841 (D. Mass. Nov. 2, 2001)..........................................................25

Dollens v. Zionts, 2002 U.S. Dist. LEXIS 13511 (N.D. Ill. July 22, 2002)..........................................................22

Ehlert v. Singer, 245 F.3d 1313 (11th Cir. 2001) ................................................................................................13

Escude Cruz v. Ortho Pharm. Corp., 619 F.2d 902 (1st Cir. 1980) ......................................................................................................9

Fosbre v. Matthews, No. 3:09 CV-04676, 2010 WL 2696615 (D. Nev. July 2, 2010) ...........................15, 18, 20, 23

Gerber v. Bowditch, 2006 U.S. Dist. LEXIS 27552 (D. Mass. May 8, 2006) ..........................................................24

Gonzalez Turul v. Rogatol Distribs., Inc., 951 F.2d 1 (1st Cir. 1991) ..................................................................................................10, 11

Goodyear Dunlop Tires Operations v. Brown, 131 S. Ct. 2846 (U.S. 2011).......................................................................................................8

Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999) ....................................................................................................24

Grossman v. Johnson, 674 F.2d 115 (1st Cir. 1982).....................................................................................................13

Hayduk v. Lanna, 775 F.2d 441 (1st Cir. 1985) ....................................................................................................28

Heit v. Baird, 567 F.2d 1157 (1st Cir. 1977)...................................................................................................11

In re Cray Inc. Derivative Litig., 431 F. Supp. 2d 1114 (W.D. Wash. 2006) ................................................................................22

In re First Bancorp Derivative Litig., 465 F. Supp. 2d 112 (D.PR) .....................................................................................................27

In re Isolagen Inc. Sec. & Derivative Litig., 2007 U.S. Dist. LEXIS 26905 (E.D. Pa. Apr. 10, 2007)..........................................................22


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In re Kauffman Mut. Fund Actions, 479 F.2d 257 (1st Cir. 1973) ....................................................................................................11

In re Ormat Techs., Inc. Derivative Litig., 2011 U.S. Dist. LEXIS 96891 (D. Nev. Aug. 29, 2011) ..........................................................29

In re Sagent Tech. Inc., Derivative Litig., 278 F. Supp. 2d 1079 (N.D. Cal. 2003) ...................................................................................20

In re Sonus Networks, Inc., 499 F.3d 47 (1st Cir. 2007) ..........................................................................................12, 14, 20

In re Stratus Computer, 1991 U.S. Dist. LEXIS 21587 (D. Mass. Dec. 10, 1991) ........................................................24

In re United Telecomms., Sec. Litig., 1993 U.S. Dist. LEXIS 4749 (D. Kan. Mar. 4, 1993)..............................................................22

Israni v. Bittman, 2012 WL 1074266 (9th Cir. Apr. 2, 2012) ....................................................................... passim

Jones ex rel. CSK Auto Corp. v. Jenkins, 503 F. Supp. 2d 1325 (D. Ariz. 2007) ................................................................................19, 20

Klein v. Freedom Strategic Partners, LLC, 595 F. Supp. 2d 1152 (D. Nev. 2009).......................................................................................21

Ladia Sys., L.L.C. v. Argonaut Ins. Group, 2001 U.S. Dist. LEXIS 19093 (D. Mass. Nov. 20, 2001)........................................................10

Lockebridge, LLC v. RGMS Media, Inc., 2012 U.S. Dist. LEXIS 86504 (D. Mass. June 22, 2012) ......................................................7, 8

Mangual v. General Battery Corp., 710 F.2d 15 (1st Cir. 1983) ........................................................................................................7

Mass. Sch. of Law v. ABA, 142 F.3d 26 (1st Cir. 1998) ....................................................................................................7, 8

N. Am. Catholic Educ. Programming Found., Inc. v. Cardinale, 567 F.3d 8 (1st Cir. 2009) ........................................................................................................27

Pancoe v. JBI, Inc., No. 3:11-CV-00545 (D. Nev.)..................................................................................................28

Prudential Ins. Co. v. Turner & Newall Plc., 1988 U.S. Dist. LEXIS 15960 (D. Mass. Dec. 12, 1988) ........................................................25


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Rapaport v. Soffer, 2012 U.S. Dist. LEXIS 90324 (D. Nev. June 29, 2012) ..........................................................23

Sachs v. Sprague, 401 F. Supp. 2d 159 (D. Mass. 2005) ......................................................................................24

SEC v. Tambone, 597 F.3d 436 (1st Cir. 2010) ....................................................................................................26

Shaffer v. Heitner, 433 U.S. 186 (U.S. 1977).....................................................................................................9, 10

Stanley Works v. Globemaster, Inc., 400 F. Supp. 1325 (D. Mass. 1975) .........................................................................................10

Stiegele ex rel Viisage Tech., Inc. v. Bailey, 2007 WL 4197496 (D. Mass. 2007).......................................................................11, 13, 18, 19

Strickland v. Hongjun, 2011 U.S. Dist. LEXIS 73944 (S.D.N.Y. July 8, 2011) ...........................................................23

STATE CASES

Aronson v. Lewis, 473 A.2d 805 (Del. 1984) ..................................................................................................12, 19

Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040 (Del. 2004) ................................................................................................13, 20

Brehm v. Eisner, 746 A.2d 244 (Del. 2000) ............................................................................................11, 12, 14

Brudno v. Wise, 2003 Del. Ch. LEXIS 35 (Del. Ch. Apr. 1, 2003)....................................................................29

Dunphy v. Traveler’s Newspaper Ass’n, 16 N.E. 426 (Mass. 1888) ........................................................................................................11

Grimes v. Donald, 673 A.2d 1207 (Del. 1996) ......................................................................................................14

Grobow v. Perot, 539 A.2d 180 (Del. 1988) ..................................................................................................14, 20

Guttman v. Jen-Hsun Huang, 823 A.2d 492 (Del. Ch. 2003)..................................................................................................27

Harrison v. NetCentric Corp., 744 N.E.2d 622 (Mass. 2001) ..................................................................................................12


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Johnston v. Box, 903 N.E.2d 1115 (Mass. 2009) ................................................................................................12

Kahn v. Dodds, 252 P.3d 681 (Nev. 2011).............................................................................................23, 26, 27

Kannavos v. Annino, 247 N.E.2d 708 (Mass. 1969) ..................................................................................................26

Rales v. Blasband, 634 A.2d 927 (Del. 1993) ............................................................................................12, 13, 20

Roy v. Roy, 715 N.E.2d 70 (Mass. App. Ct. 1999)........................................................................................8

Seminaris v. Landa, 662 A.2d 1350 (Del. Ch. 1995)..........................................................................................13, 14

Shoen v. SAC Holding Corp., 137 P.3d 1171 (Nev. 2006)............................................................................................... passim

Wood v. Baum, 953 A.2d 136 (Del. 2008) ......................................................................................15, 16, 17, 27

STATE STATUTES

Nev. Rev. Stat. § 78.120(1) ............................................................................................................11

Nev. Rev. Stat. § 78.138(7) .................................................................................................... passim


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INTRODUCTION

Pursuant to Federal Rules of Civil Procedure 12(b)(2), 12(b)(6), and 23.1, Defendants

John Bordynuik, Dr. Jacob Smith, Ronald C. Baldwin, Jr., Amy Bradshaw, John M. Wesson,

Robin Bagai, Gregory Goldberg, and Theodore J. Henry (collectively, the “Individual

Defendants”) respectfully move the Court to dismiss the Complaint.

The Complaint should be dismissed as to all the Individual Defendants other than Mr.

Bordynuik because the Court lacks personal jurisdiction over these defendants. None of their

conduct at issue is alleged to have occurred in Massachusetts. And no facts—alleged in the

Complaint or otherwise—support the proposition that they ever had any substantial contacts with

Massachusetts. Indeed, the only alleged fact suggesting they ever had any connection with

Massachusetts is that they are current or former directors or officers of JBI, Inc. (“JBI” or “the

Company”), which formerly had its principal office in Massachusetts. But such a tenuous

connection to Massachusetts is woefully insufficient for this Court’s assertion of personal

jurisdiction under long-standing First Circuit authority.

Second, the Complaint should be dismissed because Plaintiff has failed to satisfy the

basic pleading standards for bringing this derivative action purportedly on behalf of the

Company. Because Plaintiff did not make a demand on the three-member JBI board of directors

(the “JBI Board”) serving at the time the Complaint was filed, Plaintiff must allege with

particularity the reasons why such demand should be excused as futile. See Fed. R. Civ. P. 23.1.

Here, even accepting all of Plaintiff’s allegations as true, they at most support an inference that a

majority of the three-member JBI Board serving at the time the Complaint was filed had

approved one of the SEC filings containing the erroneous media credits valuation at issue. But

such allegations are insufficient to meet the applicable demand futility standard. Under the


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applicable law of Nevada (JBI’s state of incorporation), Plaintiff must make particularized

allegations demonstrating that a majority of the JBI Board faces a substantial likelihood of

liability for engaging in intentional misconduct, fraud, or a knowing violation of the law in

connection with the underlying conduct. The Complaint contains no allegations that would meet

that stringent standard.

Third, the Complaint should be dismissed because Plaintiff has also failed to satisfy basic

pleading standards in asserting the underlying claim for breach of fiduciary duty. Most clearly,

the Complaint fails to allege cognizable damages, a necessary element of the claim. Plaintiff

asserts that JBI has sustained “substantial damages” by having been sued by the Securities and

Exchange Commission (“SEC”) in a case that the SEC has brought against JBI and Defendants

Bordynuik and Baldwin. But that case, which is still in its infancy, has not resulted in any

finding of liability, let alone judgment against the Company. Thus, any assertion that JBI has

been damaged is entirely speculative. Courts have repeatedly dismissed as premature derivative

complaints that allege as damages the mere fact that a second lawsuit is pending against the

company pursuant to which the company may ultimately be held liable.

Likewise, the Complaint fails to plead a claim for breach of fiduciary duty because none

of its particularized allegations give rise to an inference that the Individual Defendants were

engaged in intentional misconduct, fraud, or a knowing violation of the law. For example, one of

the Individual Defendants, Theodore Henry, was a JBI director for only a six week period during

which none of the filings at issue were made. Another Individual Defendant, Dr. Bagai, became

a director after the allegedly inaccurate year-end financial statements were filed, and only a few

weeks before they were corrected. Indeed, Plaintiff pleads no facts of which the Individual

Defendants were supposedly aware that would lead a reasonable person to conclude that they


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knew the statements at issue were false at the time made, much less that they were engaged in

intentional misconduct, fraud, or a knowing violation of the law.

In short, the Complaint should be dismissed for each of these independent reasons, as set

forth in greater detail below.

BACKGROUND

A. The Parties

Plaintiff Erwin Grampp claims to be a shareholder of JBI. He does not allege how many

shares he holds. (¶ 11.)1

Nominal defendant JBI is a Nevada corporation with principal offices located in Ontario,

Canada. JBI’s principal business is converting waste plastic into fuel. (¶ 12.)

Defendants Bordynuik, Wesson and Bagai were each directors of Company at the time

the Complaint was filed (i.e., March 16, 2012). (¶¶ 13, 17 & 18.) They were the Company’s

only directors as of that time. Mr. Bordynuik had been a director since April 24, 2009, and was

also the Company’s founder, CEO and President. (¶ 13.)2 Mr. Wesson has only been a director

since February 12, 2010 and holds no other positions with the Company. (¶ 17.) Likewise,

Dr. Bagai was only appointed director on April 30, 2010 and has held no other positions with the

Company. (¶ 18.)3

The Complaint’s allegations regarding the dates of Dr. Smith’s affiliation with the

Company are clearly erroneous. The Complaint contends that Dr. Smith became a JBI Board

member on February 11, 2009. (See ¶ 14.) But the Company’s public filings with the SEC

1 All references to “¶” are to the numbered paragraphs of the Complaint. 2 Mr. Bordynuik has since resigned all of these positions and is now Chief of Technology, a non-officer position. 3 Dr. Bagai has since resigned as director.


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demonstrate that Dr. Smith was appointed Chief Operating Officer on January 11, 2010, and that

he became a member of the Board on February 12, 2010. (See JBI Form 8-K, Jan. 11, 2010

(Exhibit A); JBI Form 8-K, Feb. 12, 2010 (Exhibit B).) Further, although the Complaint

suggests that Dr. Smith remained a director at the time the Complaint was filed (see ¶ 14), the

Company’s public filings with the SEC demonstrate that allegation to be incorrect, as well.

Specifically, he resigned both positions on March 12, 2012, i.e., before the Complaint was filed.

(See JBI Form 8-K, March 12, 2012 (Exhibit C).)

The Complaint names four additional defendants who were not affiliated with JBI at the

time of its filing: Ronald Baldwin, Jr. was the Company’s Chief Financial Officer from

January 1, 2010 to April 6, 2011. (¶ 15.) Amy Bradshaw was a JBI director for less than four

months from February 12, 2010 to June 1, 2010, when she resigned to become its Vice President

of Marketing and Communications, a position she held until December 16, 2010. (¶ 16.)

Theodore Henry was a JBI director for only six weeks, from February 12, 2010 to March 24,

2010. (¶ 21.) Gregory Goldberg was a JBI director for only four and one-half months, from

March 24, 2010 to August 12, 2010. (¶ 20.)

B. Facts and Allegations

In summary, the Complaint alleges as follows: On August 24, 2009, the Company, then

doing business under the name 310 Holdings, Inc. (“310 Holdings”), purchased 100% of the

outstanding shares of Javaco, Inc. (“Javaco”), which was itself a wholly owned subsidiary of an

unrelated company named Domark International, Inc. (“Domark”). (¶ 38.) As part of the

transaction, but pursuant to a separate agreement, Domark assigned to 310 Holdings certain

media credits (the “Media Credits”) that allowed their holder to purchase $9,997,134 worth of

prepaid advertising and marketing promotions. Id. 310 Holdings paid for those credits by

issuing one million shares of common stock then valued at one million dollars. Id. 310


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Holdings’ acquisition of Javaco and the amount it paid for the Media Credits was disclosed in a

Form 8-K that 310 Holdings filed on August 28, 2009. (See JBI Form 8-K, Aug. 24, 2009

(Exhibit D).)

In JBI’s third-quarter 2009 Form 10-Q filed on November 16, 2009, and in its fiscal year

2009 Form 10-K filed on March 31, 2010, JBI reported the value of the Media Credits at their

face value, i.e., $9,997,134. (¶¶ 41-42.) That valuation was based on the price Domark paid for

the Media Credits when it had purchased them from Media4Equity LLC on August 13, 2008.

(¶ 44.)

On May 21, 2010, JBI filed a Form 8-K stating that its financial statements included in its

third quarter and full year 2009 10-Q and 10-K filings should no longer be relied upon due, in

part, to the valuation of the Media Credits. (¶ 70.) The 8-K also disclosed that JBI had

dismissed its independent audit firm Gately and Associates, and had retained a new independent

registered public accounting firm, Withum Smith & Brown, PC, to review its previous financial

statements. (JBI Form 8-K, May 14, 2010 (Exhibit E).) On July 9, 2010 and November 17,

2010, JBI issued two restatements, which had the effect of writing down the value of the Media

Credits to zero. (¶ 70.)

On January 4, 2012, the SEC filed a civil lawsuit against the Company, Mr. Bordynuik

and Mr. Baldwin in the District of Massachusetts, alleging various securities fraud claims in

connection with the Company’s erroneous booking of media credits (1:12-cv-10012-MLW (D.

Mass.)) (the “SEC Action”).

On March 16, 2012, Plaintiff brought this action. The gravamen of Plaintiff’s Complaint

is that the Individual Defendants allegedly breached their fiduciary duties in connection with the

Company’s erroneous booking of the Media Credits, i.e., the subject of the SEC Action. In


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addition, the Complaint suggests that Mr. Bordynuik made a variety of misstatements about the

Company’s commercial fuel processing operations, which statements are not the subject of the

SEC Action. (¶¶ 71-80.)

ARGUMENT

I. THE COURT LACKS PERSONAL JURISDICTION OVER THE INDIVIDUAL DEFENDANTS OTHER THAN DEFENDANT BORDYNUIK.

The Court lacks personal jurisdiction over all of the Individual Defendants other than

Mr. Bordynuik. The Complaint does not allege a single fact (as opposed to mere conclusory

allegations, see ¶¶ 9-10) that would provide a valid basis for the Court’s assertion of personal

jurisdiction over any of the Individual Defendants.4 Indeed, the Complaint affirmatively alleges

that none of the Individual Defendants are citizens of Massachusetts. (¶¶ 13-21.) The only

relevant fact alleged in support of personal jurisdiction is that the Individual Defendants are

current or former directors or officers of the Company which, according to the Complaint, had its

“principal place of business . . . in Cambridge[,] Massachusetts” up through July 2010. (¶ 9.)

But JBI’s former place of business in this state is an insufficient basis for establishing personal

jurisdiction, as discussed in detail below. Further, declarations signed by these defendants

establish that there are no other bases for personal jurisdiction. See Declarations of Ronald

Baldwin, Jr., Theodore Henry, Gregory Goldberg, Dr. Robin Bagai, Dr. Jacob Smith, John

Wesson and Amy Bradshaw (attached as Exhibits F through L). Therefore, the Complaint

should be dismissed on this basis as to all Individual Defendants other than Mr. Bordynuik.

4 While the Complaint does not sufficiently allege personal jurisdiction with respect to any of the Individual Defendants, Mr. Bordynuik does not contest personal jurisdiction.


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A. Plaintiff Will Be Unable to Prove Affirmative Jurisdictional Facts Beyond The Complaint.

Plaintiff bears the burden of proving that personal jurisdiction exists over the moving

Defendants. See Mass. Sch. of Law v. ABA, 142 F.3d 26, 34 (1st Cir. 1998). And it is well-

established that in responding to this motion to dismiss, “plaintiff must go beyond the pleadings

and make affirmative proof.” Chlebda v. H. E. Fortna & Bro., Inc., 609 F.2d 1022, 1024 (1st

Cir. 1979). That is because “the unsupported allegations of the complaint are insufficient to

establish jurisdiction.” Advanced Ink Sys. Corp. v. Ink Half Price, Inc., 2007 U.S. Dist. LEXIS

24009, at *6 (D.P.R. Mar. 30, 2007).

While there are several permissible approaches to assessing whether a plaintiff has

satisfied its burden of proof, the most common is the prima facie evidentiary standard. Under

that standard, a court considers whether the plaintiff has proffered evidence that, “if credited, is

enough to support findings of all facts essential to personal jurisdiction.” Carp v. XL Ins., 754 F.

Supp. 2d 230, 232-233 (D. Mass. 2010) (quotations omitted). As an evidentiary matter, “the

Court accepts properly supported proffers of evidence by the plaintiff as true and considers facts

put forward by the defendant to the extent that they are uncontradicted by the plaintiff.” Id.

(quotations omitted).

B. Plaintiff Cannot Prove General Or Specific Jurisdiction.

Because this is a diversity case, the Court’s personal jurisdiction over nonresident

defendants is governed by Massachusetts’ long-arm statute. See Mangual v. General Battery

Corp., 710 F.2d 15, 18 (1st Cir. 1983); Lockebridge, LLC v. RGMS Media, Inc., 2012 U.S. Dist.

LEXIS 86504, 12-14 (D. Mass. June 22, 2012). Personal jurisdiction must be either general or

specific. Massachusetts Sch. of Law, 142 F.3d at 34. The Complaint alleges no facts that could

conceivably establish general jurisdiction over the Individual Defendants. That would require


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proof that they “engaged in continuous and systematic activity, unrelated” to the alleged

wrongdoing alleged in the Complaint, in Massachusetts. Id. For individuals, as opposed to

companies, “the paradigm forum for the exercise of general jurisdiction is the individual’s

domicile.” Goodyear Dunlop Tires Operations v. Brown, 131 S. Ct. 2846, 2853 (U.S. 2011).

None of the Individuals Defendants are domiciled or reside in Massachusetts, as their

Declarations establish. (See Exhibits F-L.) And there is no other basis for general jurisdiction.

See Roy v. Roy, 715 N.E.2d 70, 72 (Mass. App. Ct. 1999) (being an “officer and director of a

Massachusetts corporation” does not “constitute sufficiently substantial contacts of a continuous

and systematic nature” so as to justify general jurisdiction).

C. The Fact That JBI Formerly Had Its Principal Place of Business In Massachusetts Is An Insufficient Basis For Specific Jurisdiction Over The Individual Defendants.

Nor does this Court have specific jurisdiction over the Individual Defendants. Because

courts have construed the Massachusetts’ long-arm statute “as being coextensive with the limits

permitted by the Constitution,” district courts may “turn directly to the constitutional test for

determining specific jurisdiction.” Lockebridge, LLC, 2012 U.S. Dist. LEXIS 86504, at *13

(quoting Adelson v. Hananel, 652 F.3d 75, 80 (1st Cir. 2011)). The first step in the First

Circuit’s “tripartite analysis to determine whether specific jurisdiction is appropriate” is a

determination of “whether the claims arise out of or are related to the defendant’s in-state

activities.” Lockebridge, LLC, 2012 U.S. Dist. LEXIS 86504, at *14. The relatedness inquiry

“focuses on whether the claim underlying the litigation . . . directly arise[s] out of, or relate[s] to,

the defendant’s forum-state activities.” Id. (quotations omitted). Plaintiff cannot satisfy the

relatedness test.

Other than in the most conclusory manner (see ¶ 10), Plaintiff does not allege that any

Individual Defendant undertook any conduct at issue in Massachusetts. The only jurisdictional


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facts alleged are that the Individual Defendants are directors or officers of a company that had its

principal office in Massachusetts when the financial statements at issue were published. (¶ 9; see

also ¶¶ 13-21 (alleging the director and officer positions of the Individual Defendants). These

facts are insufficient as a matter of law, because “jurisdiction over the individual officers of a

corporation may not be based merely on jurisdiction over the corporation.” Escude Cruz v.

Ortho Pharm. Corp., 619 F.2d 902, 906 (1st Cir. 1980) (affirming dismissal for lack of personal

jurisdiction in Puerto Rico over directors and officers of Puerto Rican company); see also Shaffer

v. Heitner, 433 U.S. 186, 213-214 (1977) (Delaware lacked personal jurisdiction over directors

of Delaware corporation where plaintiff did not identify any act related to his derivative suit as

having taken place in Delaware).

Instead, “what is required is some showing of direct personal involvement by the

corporate officer in some decision or action which is causally related to plaintiff's injury” and

that occurred in Massachusetts. Escude Cruz, 619 F.2d at 907. In other words, “Jurisdiction

over the individual officers or directors of a corporation cannot be imputed from jurisdiction over

the corporation. . . . There must be independent, personal involvement in the tortious acts”

occurring in the forum state. Alvarado-Morales v. Digital Equip.Corp., 843 F.2d 613, 617 (1st

Cir. 1988) (affirming dismissal for lack of personal jurisdiction where “Plaintiffs’ affidavits were

completely devoid of any proof, or even allegations, that the individual [officer] defendants

sanctioned, formulated, directed, [or] actively participated” in the conduct at issue that occurred

in the forum state); see also American Freedom Train Found. v. Spurney, 747 F.2d 1069, 1074

(1st Cir. 1984) (affirming dismissal for lack of personal jurisdiction because defendants’ mere

“acceptance of positions as officers and directors of a Massachusetts corporation . . . falls far


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short of that necessary to give rise to plaintiff's cause of action,” and thus could not establish

specific jurisdiction).5

Here, Plaintiff failed to allege—and will not be able to prove—that the Individual

Defendants took any action in Massachusetts related to the conduct at issue. The Court therefore

lacks personal jurisdiction over Defendants Smith, Baldwin, Bradshaw, Wesson, Bagai,

Goldberg, and Henry, and should dismiss the Complaint as to them. See, e.g., Shaffer v. Heitner,

433 U.S. 186 (1977).6

II. PLAINTIFF HAS NOT ADEQUATELY ALLEGED THAT DEMAND ON JBI’S BOARD WAS FUTILE PURSUANT TO RULE 23.1.

Plaintiff admits he did not make demand on the JBI Board (see ¶ 85) but then fails

adequately to “state with particularity” that such demand was futile, as he must. Fed. R. Civ. P.

23.1; Gonzalez Turul v. Rogatol Distribs., Inc., 951 F.2d 1, 2 (1st Cir. 1991). The First Circuit

“vigorously enforces” demand requirements, and will “dismiss derivative actions when plaintiffs

do not comply.” Gonzalez Turul, 951 F.2d at 2. A shareholder “may not plead in general terms,

hoping that, by discovery or otherwise,” he can later establish that demand would have been

5 Carp v. XL Ins., 754 F. Supp. 2d 230, 232 (D. Mass. 2010) (dismissing claims against CEO because “[e]ven if the Court has jurisdiction over XL Insurance, however, jurisdiction over the individual officers of a corporation may not be based merely on jurisdiction over the corporation”) (citation omitted); Chorney v. White, 1986 U.S. Dist. LEXIS 25559, at *9 (D. Mass. May 13, 1986) (dismissing claims against officer and director because “In order for a court in Massachusetts to exercise jurisdiction over Patton, there must be an ‘independent basis’ for it. Merely being the officer or director of a corporation that acts in Massachusetts or associated with an individual who acts in Massachusetts is insufficient”); Stanley Works v. Globemaster, Inc., 400 F. Supp. 1325, 1336-1337 (D. Mass. 1975) (dismissing claims against corporate officers because defendants’ positions as officers in a company with a substantial Massachusetts office and related trips to Massachusetts once a year were insufficient). 6 See also Alvarado-Morales v. Digital Equip.Corp., 843 F.2d 613, 617 (1st Cir. P.R. 1988) (affirming dismissal where there was no proof that officers had “independent, personal involvement in the tortious acts” that occurred in the forum state); Ladia Sys., L.L.C. v. Argonaut Ins. Group, 2001 U.S. Dist. LEXIS 19093, at *18-19 (D. Mass. Nov. 20, 2001) (dismissing complaint where it did not “allege that the causes of action alleged against” corporate agent defendant “arose out of [his] contacts with Massachusetts,” and observing that “[o]rdinarily, an agent of a corporation would not be subject to jurisdiction on the basis of the corporation’s contacts with the forum”).


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futile. Id. at 3. Mere conclusory assertions or “generalized allegations of control, acquiescence,

[or] wrongful participation” are insufficient to satisfy this heightened pleading standard. Stiegele

ex rel Viisage Tech., Inc. v. Bailey, 2007 WL 4197496, at * 5 (D. Mass. 2007); accord Shoen v.

SAC Holding Corp., 137 P.3d 1171, 1180 (Nev. 2006); Brehm v. Eisner, 746 A.2d 244, 255

(Del. 2000).

Rule 23.1 places an initial burden on the plaintiff “to demonstrate why the directors are

incapable of doing their duty, or as the [Supreme] Court has put it, to show that ‘antagonism

between the directory and the corporate interest . . . be unmistakable.’” In re Kauffman Mut.

Fund Actions, 479 F.2d 257, 263 (1st Cir. 1973) (quoting Delaware & Hudson Co. v. Albany &

S.R. Co., 213 U.S. 435, 447 (1909)). Failure to meet the pleading standard imposed by Rule

23.1 requires dismissal of the action even if the plaintiff has an otherwise meritorious claim. Id.

This stringent pleading standard furthers the longstanding principle that the board of

directors is vested with the authority to manage the corporation’s affairs. Heit v. Baird, 567 F.2d

1157, 1162 n.6 (1st Cir. 1977); see also Nev. Rev. Stat. § 78.120(1) (providing that board of

directors has “full control over the affairs of the corporation”). Included within the board’s

authority is the decision of whether to take legal action on the corporation’s behalf. Shoen, 137

P.3d at 1179. As our courts have long recognized, “It would be contrary to the fundamental

principles of corporate organization to hold that a single shareholder can at any time launch the

corporation into litigation to obtain from another what he deems to be due to it, or to prevent

methods of management which he thinks unwise.” Dunphy v. Traveler’s Newspaper Ass’n, 16

N.E. 426, 431 (Mass. 1888). The demand requirement thus protects corporate assets by

“discouraging unnecessary, unfounded, or improper shareholder actions.” Shoen, 137 P.3d at

1179. It “exists at the threshold, first to insure that a stockholder exhausts his intercorporate


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remedies, and then to provide a safeguard against strike suits.” Aronson v. Lewis, 473 A.2d 805,

811-812 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).

The law of Nevada, JBI’s state of incorporation, governs both the determination of

whether the particularized facts alleged in the Complaint establish that demand was futile, as

well as the substantive law applied to the claims. See, e.g., In re Sonus Networks, Inc., 499 F.3d

47, 66 (1st Cir. 2007) (applying Delaware law as to demand futility because it was the state of

incorporation); Johnston v. Box, 903 N.E.2d 1115, 1123 (Mass. 2009) (same); Harrison v.

NetCentric Corp., 744 N.E.2d 622, 629 (Mass. 2001) ( “the law of the State of incorporation

governs claims concerning the internal affairs of a corporation, including the treatment of alleged

breaches of fiduciary duty”). The Supreme Court of Nevada has adopted Delaware’s Aronson

test, as modified by Rales, for assessing demand futility. Shoen, 137 P.3d at 1184; see Rales v.

Blasband, 634 A.2d 927, 934 (Del. 1993); Aronson, 473 A.2d at 814. Under this standard, the

plaintiff is required to plead particularized facts demonstrating: “(1) in those cases in which the

directors approved the challenged transactions, a reasonable doubt that the directors were

disinterested or that the business judgment rule otherwise protects the challenged decisions; or

(2) in those cases in which the challenged transactions did not involve board action or the board

of directors has changed since the transactions, a reasonable doubt that the board can impartially

consider a demand.” Shoen, 137 P.3d at 1184. Demand is excused only if “a majority of the

directors had a disqualifying interest in the [demand] matter or were otherwise unable to act

independently at the time the complaint was filed.” Id. at 1183 (internal quotation marks and

citation omitted, emphasis added).


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A. Demand Futility Is Assessed Based on Composition of Board on the Date the Complaint Was Filed.

Courts assess demand futility as of the date the derivative action is filed. Grossman v.

Johnson, 674 F.2d 115, 123 (1st Cir. 1982); see also Beam ex rel. Martha Stewart Living

Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1044 (Del. 2004). At the time Plaintiff filed his

complaint, JBI’s board of directors consisted of Defendants Bordynuik, Wesson and Bagai.

Plaintiff must therefore establish demand futility with respect to two out of three of those JBI

Board members (the “JBI Board For Demand Purposes”).7

B. The Particularized Facts Alleged in the Complaint Fail to Raise a Reasonable Doubt that a Majority of the JBI Board For Demand Purposes Was Disinterested.

To raise a reasonable doubt that the board was disinterested, “a shareholder must allege

that a majority of the board members would be ‘materially affected, either to [their] benefit or

detriment, by a decision of the board, in a manner not shared by the corporation and the

stockholders.’” Shoen, 137 P.3d 1171, 1183 (quoting Seminaris v. Landa, 662 A.2d 1350, 1354

(Del. Ch. 1995)). A director may be shown to be interested if he has a personal financial interest

in the subject matter of the litigation that is not shared by the corporation or its shareholders.

Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993). However, an officer or director’s receipt of

compensation or stock awards does not constitute a disabling interest unless there are

7 As noted above, Plaintiff’s allegation that Defendant Smith was also a director on the JBI Board For Demand Purposes is in obvious error, since Dr. Smith resigned four days before filing of the Complaint, on March 12, 2012. (See JBI Form 8-K, March 12, 2012, Exhibit C.) The Court may take judicial notice of the filing announcing Dr. Smith’s resignation because it is a public document filed with the SEC, which can be accessed through its “EDGAR” database accessible at www.sec.gov/edgar/searchedgar/companysearch.htmlwww.sec.gov. See Caviness v. Evans, 229 F.R.D. 354, 359 (D. Mass. 2005) (“This court may consider public filings with the SEC when deciding a motion to dismiss.”); see also Ehlert v. Singer, 245 F.3d 1313, 1317 n.4 (11th Cir. 2001) (taking judicial notice of prospectus filed with SEC); Stiegele ex rel Viisage Tech., Inc., 2007 WL 4197496, at *12 n.3 (D. Mass. 2007).


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particularized facts alleged that show the compensation was unusual or uncustomary. Israni v.

Bittman, 2012 WL 1074266, at *2 (9th Cir. Apr. 2, 2012) (applying Nevada law); Grobow v.

Perot, 539 A.2d 180, 188 (Del. 1988), overruled on other grounds by Brehm v. Eisner, 746 A.2d

244 (Del. 2000). No such facts are alleged in this case.8

The mere threat of personal liability for having approved the alleged wrongdoing, or for

otherwise having been named in the suit, is likewise insufficient to show that the director is

interested in the subject matter of the litigation. Shoen, 137 P.3d at 1183 (“Allegations of mere

threats of liability through approval of the wrongdoing or other participation . . . do not show

sufficient interestedness to excuse the demand requirement.”); In re Sonus Networks, Inc., 499

F.3d 47, 67 (1st Cir. 2007) (holding that naming of director as defendant is insufficient in and of

itself). Indeed, courts have recognized the circularity of such allegations and the ease with which

demand could be avoided if a plaintiff could disqualify a director simply by naming him a

defendant or attacking a transaction in which he participated. E.g., Grimes v. Donald, 673 A.2d

1207, 1216 n.8 (Del. 1996). Demand futility based on a director’s potential liability “can be

shown only in those ‘rare case[s] . . . where defendants’ actions were so egregious that a

substantial likelihood of director liability exists.’” Shoen, 137 P.3d at 1184 (quoting Seminaris,

662 A.2d at 1354).

In considering whether the Individual Defendants are disinterested, the Court should also

take into account the fact that, under Nevada law, the personal liability of corporate directors and

officers is statutorily limited to breaches of fiduciary duty that involve “intentional misconduct,

8 Plaintiff’s vague and conclusory allegation that “the Individual Defendants have received substantial compensation in this District by doing business here” (¶10), and its more particularized allegations of employment-related compensation received by Defendants Bordynuik and Smith (¶85(a)) are insufficient. Indeed, there is no suggestion that such compensation was in any way unusual or not customary of all directors.


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fraud or a knowing violation of law.” Nev. Rev. Stat. § 78.138(7).9 In light of Nevada’s

statutory exculpation provision, “to demonstrate demand futility through a showing of a

substantial likelihood of director liability, [the plaintiff] must plead particularized facts showing

that the acts or omissions of the defendant directors involved intentional misconduct, fraud or a

knowing violation of the law.” Fosbre v. Matthews, No. 3:09 CV-04676, 2010 WL 2696615, at

*6 (D. Nev. July 2, 2010); see also Wood v. Baum, 953 A.2d 136, 141 (Del. 2008) (plaintiff

must plead non-exculpated claim based on particularized facts). Plaintiff has not met that strict

standard here.

1. Plaintiff’s Allegations Regarding The Company’s Public Statements and Filings Do Not Establish Demand Futility.

The Complaint’s allegations are insufficient to raise a substantial likelihood that JBI’s

directors face liability based upon the Company’s valuation of Media Credits and other public

statements.

Plaintiff alleges that JBI’s third-quarter Form 10-Q, which was filed on November 16,

2009, improperly valued the Company’s Media Credits. (¶¶ 38, 42.) Significantly, however,

two of the three members of the JBI Board For Demand Purposes (Mr. Wesson and Dr. Bagai)

had no alleged affiliation with the Company at the time the 10-Q was filed (see ¶¶ 17, 18) and

thus face no personal liability for this filing.

Plaintiff further alleges that the Media Credits were improperly valued in JBI’s 2009

Form 10-K, filed on March 31, 2010. However, as of that time, Defendant Wesson had been a

9 While a corporation may affirmatively opt out of this statutory limitation of liability by including a more expansive liability provision in its articles of incorporation, id., JBI has not done so, and Plaintiff does not allege otherwise. (See Articles of Incorporation of 310 Holdings, Inc. (JBI’s former name), § 6 (JBI officers or directors shall not be personally liable to the corporation or its stockholders other than for, in relevant part, “acts or omissions which involve intentional misconduct, fraud or a knowing violation of the law”) (Exhibit M).)


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director for only six weeks, and Defendant Bagai had not yet been appointed as a director as of

this time. Indeed, just a few weeks after Dr. Bagai joined the Board on April 30, 2010, JBI took

corrective action by announcing that its previously filed financial statements could not be relied

upon due to questions concerning the valuation of the Media Credits. (¶ 70.) Thus, there is

virtually no likelihood (much less a substantial one) that these Individual Defendants—who

comprise a majority of the JBI Board For Demand Purposes—will face liability for the alleged

wrongful conduct. See, e.g., Caviness v. Evans, 229 F.R.D. 354, 360 (D. Mass. 2005) (“[F]ailing

to detect improperly audited financials for just one year is insufficient to show that [the directors]

face a substantial likelihood of liability”).

Plaintiff also asserts a variety of additional disjointed allegations suggesting that the

Company’s press releases and public filings somehow misrepresented its planned commercial

production of fuel. (See ¶¶ 71-79.) Significantly, however, there are no allegations that

Mr. Wesson or Dr. Bagai knew these statements to be false or misleading, and therefore Plaintiff

has failed to show they face potential personal liability for any of these alleged misstatements.

More broadly, Plaintiff has not alleged any facts that raise a substantial likelihood that a

majority of the JBI Board for Demand Purposes engaged in intentional misconduct, fraud, or a

knowing violation of the law as the Nevada statute requires. The Complaint is devoid of any

specific allegations that a majority of the JBI Board for Demand Purposes knew that the public

statements and filings were inaccurate when issued, and no reasonable inference of that board’s

knowledge may be drawn from the particularized facts alleged. See Wood, 953 A.2d at 141

(“Where, as here, directors are exculpated from liability except for claims based on ‘fraudulent,’

‘illegal’ or ‘bad faith’ conduct, a plaintiff must also plead particularized facts that demonstrate

that the directors acted with scienter, i.e., that they had ‘actual or constructive knowledge’ that


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their conduct was legally improper.”). The Complaint does not contain any particularized

allegations of what Mr. Wesson and Dr. Bagai knew about either the Media Credits or their

accounting treatment, or how they came to possess such knowledge. The same is true with

respect to the Complaint’s conclusory assertion that the board issued “false and misleading proxy

statements” that “failed to disclose that the JBI Board had not implemented internal controls for

JBI’s compliance with GAAP.” (See ¶ 85(d).)

Conclusory allegations like Plaintiff’s are routinely rejected. In Wood v. Baum, for

example, the plaintiff alleged that the directors breached their fiduciary duties by improperly

valuing certain assets in violation of GAAP and SEC standards, and issued false financial

statements regarding the value and performance of those assets.10 953 A.2d at 139. The

Supreme Court of Delaware held that these and other allegations were insufficient to raise a

substantial likelihood of liability for breach of fiduciary duty claims based on fraudulent, illegal,

or bad faith conduct, and affirmed dismissal of the complaint. Id. at 141, 144

Similarly, in Caviness v. Evans, the plaintiff alleged that the directors misrepresented the

corporation’s financial results and failed to correct the misstatements.11 229 F.R.D. at 356. The

plaintiff claimed that the directors “issued numerous positive statements” and filed financial

reports with the SEC that showed increasing financial performance over a period of five years.

Id. The company subsequently determined that it had improperly accounted for the revenue

recognition of numerous software license transactions during that same period and had to restate

its financials. Id. at 357. The plaintiff further alleged that the directors concealed the improper

10 The Wood v. Baum court applied Delaware law. 953 A.2d at 141. Similar to Nevada’s statutory scheme, however, the company’s operating agreement limited the directors’ liability to fraudulent, illegal, or bad faith conduct. Id. 11 Like Wood, the court in Caviness applied Delaware law. However, as in the present case, the corporate charter insulated the directors from ordinary breaches of the duty of care. 229 F.R.D. at 359 & n.45.


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revenue treatment “to artificially inflate the price of the Company’s shares” and that they “failed

to disclose that the Company lacked adequate internal controls.” Id. The Court concluded that

these allegations were insufficient because the complaint lacked particularized facts showing that

the directors knew of the accounting improprieties. Id. at 359, 361-362.

The allegations in the instant case stand on equally dubious footing. There are no

allegations, for example, as to the specific information that Mr. Wesson and Dr. Bagai (or even

Dr. Smith) had about the alleged inaccuracies that would have informed them that the

Company’s financial statements were incorrect. Alleging simply that “each of the Individual

Defendants had access to material non-public information” (¶ 30) or that Defendants Bordynuik,

Smith, and Wesson “knew and/or should have known that the financials” were false (¶ 67) is

insufficient to satisfy the stringent pleading standard imposed by Rule 23.1. See, e.g., Israni,

2012 WL 1074266, at *2 (applying Nevada law and holding that demand was not excused

“because the complaint failed to plead facts regarding what information the [directors] saw and

failed to act on”); Fosbre, 2010 WL 2696615, at *6 (same).

2. That Mr. Wesson Served On JBI’s Audit Committee Is Not Sufficient To Excuse Demand.

Plaintiff’s allegation that demand on Mr. Wesson is excused based on his audit

committee membership is without merit. It is well-established that a director’s membership on a

corporation’s audit committee, standing alone, is insufficient to establish that the director is

interested or subject to a substantial likelihood of liability based on alleged accounting

deficiencies. See, e.g., Israni, 2012 WL 1074266, at *2 (applying Nevada law); Fosbre, 2010

WL 2696615, at *6; Stiegele ex rel Viisage Tech., Inc., 2007 WL 4197496, at *10; Caviness,

229 F.R.D. 354, 359; Jones ex rel. CSK Auto Corp. v. Jenkins, 503 F. Supp. 2d 1325, 1334-1335

(D. Ariz. 2007). “[I]t has been repeatedly and rightly held that ‘generalized allegations reflecting


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poor supervision over financial statements by members of the Audit Committee and other

directors [do] not excuse pre-suit demand.’” Stiegele ex rel Visage Tech. Inc., 2007 WL

4197496, at *10 (quoting Caviness, 229 F.R.D. at 359-360 n.46). As noted above, the Complaint

does not contain any particularized allegations showing the information Mr. Wesson had as a

member of the audit committee and upon which he failed to act. Mr. Wesson’s mere

membership on the audit committee does not raise a substantial likelihood of liability based on

intentional misconduct, fraud, or a knowing violation of the law.

C. The Particularized Facts Alleged In The Complaint Fail To Raise A Reasonable Doubt That A Majority Of The JBI Board For Demand Purposes Was Independent.

In the context of demand futility, “[i]ndependence means that a director’s decision is

based on the corporate merits of the subject before the board rather than extraneous

considerations or influences.” Aronson, 473 A.2d at 816. To raise a reasonable doubt as to

independence, a plaintiff must allege particularized facts “that show that the majority is

‘beholden to’ directors who would be liable or for other reasons is unable to consider a demand

on its merits.” Shoen, 137 P.3d at 1183. “[I]t is not enough to charge that a director was

nominated by or elected at the behest of those controlling the outcome of a corporate election.”

Aronson, 473 A.2d at 816.

Plaintiff does not seriously contest the independence of a majority of the JBI Board for

Demand Purposes. The only facts alleged regarding Mr. Wesson and Dr. Bagai are that they

made remarks commending the company and its CEO. (See ¶¶ 85(c) & 85(e).) There is no basis

in the case law for concluding that a director’s enthusiasm over the company’s potential or

favorable opinion of its CEO render the director incapable of considering a demand on its


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merits,12 particularly in the absence of any alleged familial or social ties that would cast doubt on

Mr. Wesson and Dr. Bagai’s independence from Bordynuik. The relationship with an interested

director “must be of a bias-producing nature” for demand to be excused. Beam ex rel. Martha

Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1050 (Del. 2004). “Mere allegations

that [the directors] move in the same business and social circles, or a characterization that they

are close friends, is not enough to negate independence for demand excusal purposes.” In re

Sonus Networks, Inc., 499 F.3d 47, 68 (1st Cir. 2007) (quoting Beam, 845 A.2d at 1051-1052).

In other words, the relationship must be of such nature that “the non-interested director would be

more willing to risk his or her reputation than risk the relationship with the interested director.”

Beam, 845 A.2d at 1052. Plaintiff’s allegations fall far short of demonstrating such relationship.

III. PLAINTIFF HAS NOT ADEQUATELY ALLEGED BREACHES OF FIDUCIARY DUTY UNDER RULE 12(B)(6) AND RULE 9(B) STANDARDS.

Plaintiff’s breach of fiduciary duty claim should be dismissed pursuant to Rule 12(b)(6)

for two additional reasons. First, Plaintiff failed to plead the necessary element of damages. He

alleges only that JBI has been injured by the SEC lawsuit (the “SEC Action”) that has been filed

against JBI, Mr. Bordynuik, and Mr. Baldwin. (¶ 90.) It is well-established that other pending

cases relating to the same alleged conduct do not suffice to plead damages. Second, Plaintiff

failed to plead with particularity that the Individual Defendants engaged in “intentional

12 Plaintiff also alleges that “Bordynuik and Smith are long time executive officers and directors of JBI, whose primary livelihoods are bound up in the Company.” (¶ 85(a).) But these allegations are also insufficient to excuse demand based on their independence. A director’s employment by the corporation and receipt of remuneration is insufficient to create a reasonable doubt as to the director’s independence. See, e.g., Israni v. Bittman, 2012 WL 1074266, at *2 (holding that demand was not excused based on corporation’s employment of directors); Fosbre v. Matthews, 2010 WL 2696615, at *5 (“[A]llegations that directors are paid for their services as directors . . . without more, do not establish a disabling interest or lack of independence on the part of the director.” [internal quotation marks and citation omitted]); Jones ex rel. CSK Auto Corp. v. Jenkins, 503 F. Supp. 2d 1325, 1338 (D. Ariz. 2007); In re Sagent Tech. Inc., Derivative Litig., 278 F. Supp. 2d 1079, 1089 (N.D. Cal. 2003) (applying Rales); Grobow v. Perot, 539 A.2d 180, 188 (Del. 1988).


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misconduct, fraud, or a knowing violation of the law,” as is required by Nevada’s director

exculpation statute and Rule 9(b). See Nev. Rev. Stat. § 78.138(7).

A. The Court Should Consider Only Factual Allegations, Not Threadbare Conclusory Allegations.

As an initial matter, the Court should only consider the Complaint’s well-pleaded factual

allegations in assessing this motion. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, (2007)

(holding that a complaint must contain sufficient factual allegations to “state a claim to relief that

is plausible on its face”). The Court should disregard the numerous conclusory allegations, legal

conclusions and formulaic recitations of elements of a cause of action asserted throughout the

Complaint. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “Threadbare recitals of the legal

elements, supported by mere conclusory statements, do not suffice to state a cause of action.

Accordingly, a complaint does not state a claim for relief where the well-pled facts fail to

warrant an inference of any more than the mere possibility of misconduct.” Carp, 754 F. Supp.

2d at 233 (citing Iqbal, 556 U.S. 662).

B. Plaintiff Failed to Allege Cognizable Damage To JBI.

To state a claim for breach of fiduciary duty under Nevada law, Plaintiff was required to

allege the element of damages. See Klein v. Freedom Strategic Partners, LLC, 595 F. Supp. 2d

1152, 1162 (D. Nev. 2009) (“In Nevada, a claim for breach of fiduciary duty has three elements:

(1) existence of a fiduciary duty; (2) breach of the duty; and (3) the breach proximately caused

the damages”). But Plaintiff has alleged no facts concerning damages other than that “[a]s a

direct and proximate result of the Individual Defendants’ failure to perform their fiduciary

obligations, JBI has sustained significant damages, including, but not limited to, being sued by

the SEC.” (¶ 90.)


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This allegation is insufficient as a matter of law. The SEC Action is still pending; no

findings of liability have been made. Thus, there is no basis to conclude that the Company will

be found liable or sustain any losses as a result of the SEC Action. Courts routinely dismiss

derivative claims for breach of fiduciary duty in precisely these circumstances, i.e., where the

only injury alleged is that additional lawsuits are pending against the company addressing the

same alleged director misconduct as the derivative suit, and that the company will be required to

spend money to defend against those actions and may ultimately be found liable. As one such

court stated:

Derivative shareholder suits are consistently ‘foreclosed when they merely allege damages based on the potential costs of investigating, defending, or satisfying a judgment or settlement for what might be unlawful conduct’. . . . Moreover, ‘Courts routinely dismiss claims as premature if the alleged injury is contingent upon the outcome of a separate, pending lawsuit.’

In re Isolagen Inc. Sec. & Derivative Litig., 2007 U.S. Dist. LEXIS 26905, at *6-7 (E.D. Pa.

Apr. 10, 2007) (dismissing derivative complaint as premature because allegations that company

was damaged by pending securities fraud class action and related internal investigation were

insufficient) (citations and quotations omitted); see also In re Cray Inc. Derivative Litig., 431

F. Supp. 2d 1114, 1133-1134 (W.D. Wash. 2006) (dismissing derivative claim for breach of

fiduciary duty because “[t]he Court concludes that Plaintiffs’ damage allegations based on

potential costs of the class action suits are insufficient to state a claim for relief”).13

13 Dollens v. Zionts, 2002 U.S. Dist. LEXIS 13511, 27-28 (N.D. Ill. July 22, 2002) (granting motion to dismiss for failure “to plead a legally cognizable theory of damages” because “plaintiffs cannot bring a derivative action to recover expenses from a pending securities action involving [the corporate defendant] until the case has proceeded to final judgment or settlement. . . . Thus, this claim for damages is premature and must be dismissed”); In re United Telecomms., Sec. Litig., 1993 U.S. Dist. LEXIS 4749 at *10 (D. Kan. Mar. 4, 1993) (dismissing derivative suit as premature where damages depended on pending securities class action suit, and observing that “Courts routinely dismiss claims as premature if the alleged injury is contingent upon the outcome of a separate, pending lawsuit”).


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Because Plaintiff has not alleged any injury to JBI apart from defending against the

pending SEC Action, the Complaint should be dismissed for failure to allege damages.

C. Plaintiff Failed To Plead Intentional Misconduct, Fraud, Or A Knowing Violation Of The Law With Requisite Particularity.

Nevada law is unique in the extraordinarily high statutory standard it imposes on

shareholders suing directors and officers for breach of fiduciary duty. As explained supra at 14,

Section 78.138(7) provides that a director or officer of a Nevada corporation “is not individually

liable to the corporation or its stockholders . . . for any damages as a result of any act or failure to

act in his or her capacity as a director or officer unless it is proven that” he breached his or her

fiduciary duties and that the “breach of those duties involved intentional misconduct, fraud or a

knowing violation of law.” Nev. Rev. Stat. § 78.138(7) (Emphasis added.)

As Nevada courts have recognized, “Nevada law statutorily exculpates directors and

officers from personal liability for breach of fiduciary duty unless the act or failure to act

constituting the breach ‘involved intentional misconduct, fraud or a knowing violation of the

law.” Fosbre, 2010 WL 2696615 at *6; see also Kahn v. Dodds, 252 P.3d 681, 700-701 (Nev.

2011) (“to hold ‘a director or officer . . . individually liable,’ the shareholder must prove that the

director's breach of his or her fiduciary duty of loyalty ‘involved intentional misconduct, fraud or

a knowing violation of law.’”); Strickland v. Hongjun, 2011 U.S. Dist. LEXIS 73944, at *7-8

(S.D.N.Y. July 8, 2011) (same, applying Nevada law).

Significantly, Nevada’s statutory exculpation for all but intentional misconduct or fraud

applies at the pleading stage. Fosbre, 2010 WL 2696615, at *6 n.6. It also triggers the

heightened pleading requirements of Federal Rule of Civil Procedure 9(b) as to the requisite

allegations of intentional misconduct, fraud, or knowing violation of law. See Rapaport v.

Soffer, 2012 U.S. Dist. LEXIS 90324, at *14 (D. Nev. June 29, 2012) (because Section


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78.138(7) requires “intentional misconduct, fraud, or a knowing violation of the law,” it triggers

application of Fed. R. Civ. P. 9(b)). That is because Rule 9(b) requires that in “alleging fraud or

mistake, a party must state with particularity the circumstances constituting fraud or mistake.”

It is also the law of this Circuit that breach of fiduciary duty claims based on allegations

of fraud trigger application of Rule 9(b). See, e.g., Gerber v. Bowditch, 2006 U.S. Dist. LEXIS

27552, at *41-44 (D. Mass. May 8, 2006) (applying Rule 9(b) to breach of fiduciary duty claim

sounding in fraud); Sachs v. Sprague, 401 F. Supp. 2d 159, 170 (D. Mass. 2005) (“Plaintiffs’

claims alleging intentional breaches of fiduciary duties are subject to the heightened pleading

requirements of Rule 9(b)”); In re Stratus Computer, 1991 U.S. Dist. LEXIS 21587, at 20-21 (D.

Mass. Dec. 10, 1991) (applying Rule 9(b) to derivative suit alleging breach of fiduciary duty

claims that sounded in fraud). Nor does the Court even need to assess whether the allegations

here “sound in fraud.” Because any claim for breach of fiduciary duty against a director of a

Nevada corporation must allege fraud or intentional misconduct pursuant to statute, Rule 9(b) is

triggered as a matter of law.

The First Circuit has been “especially rigorous” in enforcing the particularize pleading

requirements of Rule 9(b). Greebel v. FTP Software, Inc., 194 F.3d 185, 193-94 (1st Cir. 1999).

To satisfy Rule 9(b), Plaintiff was required to allege “particularized facts showing that” directors

or officers “engaged in ‘intentional misconduct, fraud or a knowing violation of the law.’”

Israni, 2012 WL 1074266, at *2 (emphasis added).

Plaintiff failed to meet these stringent pleading standards as to most if not all of the

Individual Defendants. Plaintiff does not allege any misconduct at all by Defendants Henry and

Bagai, much less misconduct that would satisfy Nev. Rev. Stat. § 78.138(7). The claims against

these individuals are frivolous. Mr. Henry was a JBI board member for six weeks, from


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February 12, 2010 to March 24, 2010. (¶ 21.) Plaintiff does not allege that Mr. Henry had any

role at all in valuing the Media Credits or preparing the financial statements at issue. In fact, no

financial statements were filed with the SEC in the six weeks Mr. Henry was a director. Nor

does Plaintiff allege with particularity any other false statements Mr. Henry made, or any other

basis for a claim of breach of fiduciary duty against Mr. Henry.

Indeed, the only conceivable allegations of misconduct by Mr. Henry are those that are

made by “group pleading” against all “Individual Defendants,” such as that “Each of the

Individual Defendants had actual knowledge of JBI’s improper accounting of the Media Credits

. . . .” (¶ 89.) But Rule 9(b) makes group pleading insufficient as a matter of law. See, e.g.,

Destination Mktg., Inc. v. Kessler Fin. Servs., L.P., 2001 U.S. Dist. LEXIS 25841, at *22-23

(D. Mass. Nov. 2, 2001) (“where multiple defendants are involved, each person’s role in the

alleged fraud must be particularized in order to satisfy Rule 9(b)”) (quotation omitted);

Prudential Ins. Co. v. Turner & Newall Plc., 1988 U.S. Dist. LEXIS 15960, at *36-37 (D. Mass.

Dec. 12, 1988) (same).

Plaintiff’s allegations against Dr. Bagai are equally frivolous. Dr. Bagai did not become

a JBI director until April 30, 2010, which was after the financial statements at issue were already

filed with the SEC. (¶ 18.) No financial statements were filed between April 30, 2010, and

May 21, 2010, when JBI first announced that it would be restating certain 2009 financial

statements. The only allegation with respect to Dr. Bagai is that he allegedly “issued false and

misleading proxy statements to JBI shareholders in 2010 and 2011,” which were false because

they “failed to disclose that the JBI Board had not implemented internal controls for JBI’s


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compliance with GAAP.”14 (¶ 85(d).) But even accepting this cursory, unparticularized

allegation as true, there are no allegations that Dr. Bagai signed any proxy statement with the

requisite intent, i.e., that his conduct “involved intentional misconduct, fraud or a knowing

violation of law.” Nev. Rev. Stat. § 78.138(7); see also In re AMERCO Derivative Litig., 252

P.3d 681, 701 (Nev. 2011) (allegations that certain directors “knowingly signed misleading and

incomplete public filings” were insufficient to satisfy Rule 9(b) and Nev. Rev. § 78.138(7)).15

Plaintiff also failed to allege that Defendants Smith, Bradshaw, Wesson, and Goldberg

engaged in the requisite “intentional misconduct, fraud or a knowing violation of law.” The only

conduct they are alleged to have engaged in is signing a 2009 Form 10-K that contained a

valuation of Media Credits that was later restated. (¶¶ 14, 67.) Based on nothing more than the

restatement itself and the fact that Defendants Bradshaw, Wesson, and Goldberg were on the

Audit Committee at the time (¶ 43), Plaintiff claims that Defendants Smith, Bradshaw, Wesson,

and Goldberg “knew and/or should have known that the financials and presentation materials

for JBI that listed the Media Credits at a value of $9.997 million were false statements.” (¶ 67

(emphasis added).)

An allegation that these defendants “should have known” of a false statement does not

comply with Nev. Rev. Stat. § 78.138(7), which requires actual knowledge, fraud, or intentional

14 Dr. Bagai could not have “issued false and misleading proxy statements” in 2010 because he was not appointed to the JBI Board until after the 2010 proxy had been issued and the 2010 shareholder meeting had been held. (See ¶¶ 18, 85(e).) 15 Furthermore, to the extent Plaintiff suggests that corporations are under an ongoing obligation to disclose all material facts, this misstates the law. The Massachusetts Supreme Judicial Court has long adhered to the “rule of nonliability for bare nondisclosure," Kannavos v. Annino, 247 N.E.2d 708, 711 (Mass. 1969), and in the securities fraud context, the duty to disclose material facts arises only when there is some basis outside the securities laws, such as state law, for finding a fiduciary or other confidential relationship, which are not alleged in the Complaint. See SEC v. Tambone, 597 F.3d 436, 448 (1st Cir. 2010); see also Austin v. Bradley, Barry & Tarlow, P.C., 836 F. Supp. 36, 39 (1st Cir. 1993).


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misconduct. Israni, WL 1074266, at *2-3 (affirming dismissal of derivative suit under Nevada

law because the “complaint does not contain particularized facts showing that the committee

members engaged in ‘intentional misconduct, fraud or a knowing violation of the law,’ as

required under Nevada law”); In re AMERCO Derivative Litig., 252 P.3d at 701.16

With respect to Mr. Baldwin, the Complaint alleges that he knew the Media Credits were

incorrectly valued, but does so in the most conclusory manner. Plaintiff alleges that “Baldwin

knew the valuation was false and inaccurate when [he] certified the . . . 10-K, and [he] did so

with the intent to mislead and deceive JBI investors as to the true net worth of the Company.”

(¶ 43; see also ¶ 65 (Mr. Baldwin was “fully aware that they were improperly valued”).) But the

Complaint fails to allege any facts from which a reasonable person would conclude that

Mr. Baldwin had such knowledge, as the First Circuit requires. See, e.g., N. Am. Catholic Educ.

Programming Found., Inc. v. Cardinale, 567 F.3d 8, 13 (1st Cir. 2009) (“precedent in this

circuit . . . . is clear: The courts have uniformly held inadequate a complaint’s general averment

16 Even when judged under state law that is less stringent than Nevada, such bare-bones allegations are insufficient. See, e.g., In re First Bancorp Derivative Litig., 465 F. Supp. 2d 112, 120-121 (D.PR) (dismissing derivative claim where “Plaintiffs failed to allege any particularized facts that would have put the directors on ‘clear notice’ of the accounting problems” that led to restatements, and holding that allegations that the “individual defendants knew or should have known of the accounting irregularities because of their positions lacks the particularity required”); Caviness, 229 F.R.D. at 359 (directors on audit committee did not face substantial likelihood of liability where there were no “particularized allegations regarding the knowledge of any member of the Audit Committee" concerning the transactions that were accounted for improperly” and thereafter the subject of restatements); Brown v. Moll, 2010 U.S. Dist. LEXIS 73875, at *19 (N.D. Cal. July 21, 2010) (dismissing derivative claims where there were “no allegations in this case demonstrating that the improper revenue recognition at issue was so egregious or its existence so ‘clear on its face’ that audit committee approval of financial statements and audit controls would suffice to show bad faith on the part of the audit committee members”); Wood v. Baum, 953 A.2d 136, 142 (Del. 2008) (holding that “The Board’s execution of MME's financial reports, without more, is insufficient to create an inference that the directors had actual or constructive notice of any illegality,” and that membership on audit committee also did not provide basis to infer knowledge of accounting errors); Guttman v. Jen-Hsun Huang, 823 A.2d 492, 498 (Del. Ch. 2003) (dismissing derivative claims against directors based on restatement where the complaint was “entirely devoid of particularized allegations of fact demonstrating that the outside directors had actual or constructive notice of the accounting improprieties,” and as to the management director, lacked “particularized allegations regarding his involvement in the process of preparing the company's financial statements”).


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of the defendant’s ‘knowledge’ of material falsity, unless the complaint also sets forth specific

facts that make it reasonable to believe that defendant knew that a statement was materially false

or misleading”). Mr. Baldwin was not employed by JBI when the Media Credits were purchased

from Domark, nor when the first allegedly erroneous financial statement was issued in

November 2009. (¶ 42.) Nor is Mr. Baldwin alleged to have discussed the matter with JBI’s

then-auditor, Gately & Associates, LLC. (¶¶ 58-62, 64.)

Finally, Mr. Baldwin is alleged to have “made willful misrepresentations about the value

of the Media Credits at JBI’s annual General Meeting held on April 24, 2010.” (¶ 68.) But the

Complaint fails to allege either the contents of the statement, or the facts from which one could

reasonably infer that Mr. Baldwin knew the statements were false. See, e.g., Hayduk v. Lanna,

775 F.2d 441, 444 (1st Cir. 1985) (Rule 9(b) requires plaintiffs to allege the “time, place and

content of an alleged false representation”) (emphasis added). These allegations therefore fail to

state a claim against Mr. Baldwin under Rule 9(b). The claims against Mr. Baldwin should be

dismissed.

IV. IN THE ALTERNATIVE, THE COURT SHOULD STAY THIS ACTION BECAUSE THERE IS A SIMILAR CLASS ACTION SECURITIES CASE PENDING IN NEVADA.

The Court should dismiss this case for all the reasons stated above. However, if the

Court declines to dismiss any part of the case against any of the Individual Defendants, that part

should be stayed because there is a class action pending in the District of Nevada, which is based

largely on the same factual allegations concerning the Media Credits. Before Plaintiff Grampp

filed this suit, shareholders of JBI sued JBI, Mr. Bordynuik, and Mr. Baldwin on August 28,

2011, alleging violations of Section 10(b) of the Exchange Act. See Pancoe v. JBI, Inc.,

No. 3:11-CV-00545 (D. Nev.). The Pancoe plaintiffs have recently amended their complaint.

(See Exhibit N.) The amended complaint makes clear that those plaintiffs’ claims are based on


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the same conduct at issue in this derivative suit, i.e., the valuation of the Media Credits and

resulting restatement, and the SEC’s investigation and prosecution of the same. Id. Numerous

courts have stayed derivative cases in these circumstances in recognition of the fact that

permitting a derivative case to proceed simultaneously with a securities class action based on the

same allegations may harm the company, which is ostensibly the entity that the derivative claim

aims to benefit. See, e.g., In re Ormat Techs., Inc. Derivative Litig., 2011 U.S. Dist. LEXIS

96891, at *10-15 (D. Nev. Aug. 29, 2011) (staying federal derivative case for this reason); Cucci

v. Edwards, 2007 U.S. Dist. LEXIS 86832, at *2 (C.D. Cal. Oct. 31, 2007) (staying federal

derivative case); Breault v. Folino, 2002 U.S. Dist. LEXIS 25587 (C.D. Cal. Mar. 15, 2002)

(same); Brudno v. Wise, 2003 Del. Ch. LEXIS 35, at *12-13 (Del. Ch. Apr. 1, 2003) (same).

That is because in the securities case, the company will necessarily rely for its defense on the

testimony of the named directors and officers, whose credibility the derivative plaintiffs will be

seeking to undermine. That would be the result here. In the securities case, JBI will be relying

upon the testimony of Mr. Bordynuik and Mr. Baldwin—who are named as Defendants in both

actions—while Plaintiff here would be attempting to prove they breached fiduciary duties to the

company based on the same conduct. In addition, a stay is also appropriate because, as discussed

above, the damages sought in this case are dependent on other litigation, making the case

premature until the SEC action and class action have concluded. See Brudno, 2003 Del. Ch.

LEXIS 35, at *12-13 (granting stay in part because alleged damages in derivative case turned on

outcome of pending regulatory investigation and securities class action lawsuit).


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CONCLUSION

For the forgoing reasons, the Complaint should be dismissed as to the Individual

Defendants, with prejudice, or in the alternative, stayed pending resolution of the SEC and class

actions.

Dated: July 27, 2012 Respectfully submitted, /s/John G. Wheatley John G. Wheatley, BBO #670989 MELICK PORTER & SHEA LLP 28 State Street Boston, MA 02109 617 523-6200 (tel) 617 523-8130 (fax) [email protected] Michael R. MacPhail Leif T. Simonson Matthew B. Kilby FAEGRE BAKER DANIELS LLP 2200 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402-3901 (612) 766-7000 (612) 766-1600 – fax [email protected] [email protected] [email protected] Counsel for John Bordynuik, Dr. Jacob Smith, Ronald C. Baldwin, Jr., Amy Bradshaw, John M. Wesson, Dr. Robin Bagai, Gregory Goldberg, and Theodore J. Henry


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CERTIFICATE OF SERVICE

I hereby certify that this document filed through the ECF system will be sent

electronically to the registered participants as identified on the Notice of Electronic Filing and

paper copies will be sent via U.S. first class mail to those indicated as non-registered participants

on July 27, 2012.

/s/ John G. Wheatley


grampp v. bordynuik et al doc 23 filed 27 aug 12

Documents