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Kalin v. Xanboo

January 30, 2007

EDWARD KALIN, PLAINTIFF,
v.
XANBOO, INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Kenneth M. Karas, District Judge

AMENDED OPINION & ORDER

This case stems from two separate disputes between Plaintiff Kalin and his employers, Defendants Xanboo, Inc. ("Xanboo"), RDI, Inc. ("RDI"), and Shenzhen RDI Electronics and Plastics Co., Ltd. ("RDI China"). Plaintiff claims he was defrauded out of stock in Xanboo by all of the Defendants. Plaintiff also claims, on behalf of himself and those similarly situated, that Xanboo gave, or sold below market, valuable intellectual property to RDI and RDI China, thereby injuring Xanboo and its shareholders. RDI has moved to dismiss all the claims brought against it. For the reasons stated herein, RDI's Motion to Dismiss is granted in its entirety.

I. Background

A. Facts

1. The Parties

Except as otherwise noted, the following facts alleged in the Second Amended Complaint ("SAC") are presumed true for purposes of this motion. Plaintiff is an employee of Xanboo, RDI, and RDI China (collectively, the "Corporate Defendants").*fn1 (SAC ¶ 9.) Plaintiff previously worked as an engineer for IBM Corporation until Xanboo, RDI, and RDI China "induced" Plaintiff to work as an engineer for them around August 2, 1999. (Id. ¶ 29.) As part of the compensation package for employment, Plaintiff accepted 1% stock ownership in Xanboo, another potential 1% stock ownership in Xanboo in the event of the sale or public trading of Xanboo, and a below-market-value salary. (Id. ¶ 30.) Plaintiff is a founder of Xanboo. (Id.)

Defendants Xanboo and RDI are privately held corporations. (Id. ¶¶ 10-12.) Xanboo was formerly called "Core Technology, Inc." (Id. ¶ 9.) Defendant RDI China is a corporation principally owned by Bob Diamond, Bill Diamond, and Jim Diamond. (Id. ¶ 12.) The SAC does not describe the nature of the Corporate Defendants' businesses. Defendants Bob Diamond, Bill Diamond, Jim Diamond (collectively the "Diamond Defendants"), and Ed Landau are all individuals associated with the Corporate Defendants. The Diamond Defendants are principals of all three Corporate Defendants. (Id. ¶ 13.) Landau owns stock in Xanboo. (Id. ¶ 14.)

Plaintiff claims that the Corporate Defendants are interrelated companies with the same owners and office location, and "possess[ing] substantial shares of stock ownership of each other." (Id. ¶ 16.) On the Xanboo and RDI websites, each company claims ownership of a factory in Shenzhen, China, with identical characteristics, and each displays the same photo of a factory. (Id. ¶¶ 18-19.) Xanboo and RDI have offices at the same address at 400 Columbus Avenue, Valhalla, New York. (Id. ¶¶ 22-23.) Xanboo and RDI both employ John Horl as their Chief Financial Officer and Chief Accounting Officer. (Id. ¶ 25.)

2. Fraud Claims

Plaintiff alleges that when he was hired by Xanboo, RDI, and RDI China on or about August 2, 1999, he received 1% ownership of Xanboo, and was promised another 1% ownership if Xanboo was later sold or went public. (Id. ¶¶ 29-30.)

Plaintiff further alleges that, in or around September 1999, Plaintiff met with Defendants Bob Diamond and Ed Landau. (Id. ¶ 31.) During this meeting, Bob Diamond introduced Landau to Plaintiff as a lawyer knowledgeable and experienced in corporate and securities law. (Id.) Bob Diamond and Landau told Plaintiff he would avoid expensive tax complications and receive "greater and more significant benefit" if he traded in his Xanboo stock in return for Xanboo incentive stock options ("ISOs"). (Id. ¶ 32.) Two other Xanboo employees were also present at this meeting and received similar advice. (Id. ¶¶ 31-32.) Plaintiff now believes that this advice was fraudulently provided. (Id. ¶ 32.)

In reliance on this advice, Plaintiff exchanged his stock for ISOs and signed a revised employment contract preventing Plaintiff's termination except for good cause. (Id. ¶¶ 33, 35.) The other two employees at the meeting also exchanged their shares in Xanboo for ISOs. (Id. ¶ 33.) One of these other employees also signed the revised employment contract. (Id. ¶ 35.) This revised contract was created in order to help preserve the value of Plaintiff's newly-received ISOs. (Id. ¶ 35.) The contract term was for two years, and Plaintiff was told the term would be periodically renewed. (Id.) The stock options were to expire 90 days after Plaintiff stopped working for Xanboo, when and if that occurred. (Id. ¶ 40.) In or about February 2004, Plaintiff first "realized" that his contract with Xanboo would not be renewed at the end of 2004, and that Plaintiff would probably be terminated soon after (id. ¶ 37), thereby triggering the expiration of his stock options. (Id. ¶ 40.)

Plaintiff alleges that at the September 1999 meeting, Bob Diamond and Landau were acting on behalf of themselves, Bill Diamond, Jim Diamond, Xanboo, RDI, and RDI China. (Id. ¶ 32.) Plaintiff alleges that these individually named Defendants knew at the time of this meeting that Plaintiff would be terminated before Xanboo went public and that Plaintiff would never have an opportunity to exercise his ISOs. (Id. ¶ 41.)

3. Shareholder Derivative Claims

Plaintiff, on behalf of himself and those similarly situated, also claims that the Diamond Defendants, who are among the directors, officers, and shareholders of RDI and RDI China (id. ¶¶ 11, 13, 34), have a much greater stake in RDI and RDI China than in Xanboo. (Id. ¶ 60.) During the period from on or about August 5, 2004, to on or about August 5, 2005, the Diamond Defendants, RDI and RDI China allegedly used their positions in Xanboo to cause Xanboo and its officers to transfer valuable assets from Xanboo to RDI and RDI China for little or no compensation. (Id. ¶ 61.) These assets allegedly included mechanical designs, intellectual property, and source code for Xanboo's software. (Id.) Xanboo employees are also alleged to have done work to advance RDI's and RDI China's interests at Xanboo's expense, allegedly at the order and direction of the Diamond Defendants, RDI, and RDI China.*fn2 (Id. ¶ 62.) Finally, the Diamond Defendants, RDI, and RDI China allegedly persuaded investors, customers and suppliers of Xanboo to switch to RDI and RDI China, again at Xanboo's expense. (Id. ¶ 67.)

All of this has allegedly benefitted RDI and RDI China at the expense of Xanboo and its stockholders. (Id. ¶¶ 61, 62, 67.) As a result, Plaintiff claims that the Diamond Defendants have breached their stockholders' agreement with Xanboo's stockholders.*fn3 (Id. ¶ 68.) Plaintiff also claims the Diamond Defendants, RDI, and RDI China have acted and continue to act adversely to the interests of Xanboo and its stockholders (id. ¶¶ 69-70) through the transfer of Xanboo's assets, (id. ¶ 61) the use of Xanboo's employees, (id. ¶ 62) and the pursuit of Xanboo's customers (id. ¶ 67) outlined above.

Plaintiff claims to continue to own stock in Xanboo. (Id. ¶ 57.) Plaintiff informed the Defendants on or about July 20, 2004, that he intended to bring a shareholder derivative action. (Id. ¶ 71.) As of August 5, 2005, the date the SAC was filed, Xanboo had not brought action against the Diamond Defendants, RDI, or RDI China. (Id. ¶ 72.) Instead, "the Defendants" threatened to sue Plaintiff if he brought the action.*fn4 (Id.)

B. Procedural History

Plaintiff filed suit against the Defendants on July 30, 2004. Plaintiff amended his initial Complaint, filing the First Amended Complaint, on November 7, 2004, to include the derivative action. A single Answer to the First Amended Complaint was filed on behalf of all Defendants except RDI China. Following a status conference, the Court issued an order staying discovery by Plaintiff against RDI, granting Plaintiff's request for leave to amend the Complaint a second time, and giving RDI a date by which it must file a motion to dismiss or an answer. RDI subsequently filed the instant motion.

II. Discussion

A. Standard of Review

1. RDI's Motion to Dismiss Under Fed. R. Civ. P. 12(b)(6)

RDI filed its Motion pursuant to Fed. R. Civ. P. 12(b)(6). Plaintiff argues that the Court should not consider RDI's Motion under Rule 12(b)(6), which relates to the allegations made in Plaintiff's SAC, because RDI has already filed an answer to the First Amended Complaint. As discussed above, all Defendants except RDI China filed a joint answer to the First Amended Complaint. Plaintiff then sought permission to file the SAC. The SAC added RDI as a Defendant to both Counts II and III. Plaintiff also added, to all counts, factual allegations regarding the relationship between RDI and the other Parties, and added, to Count I, a reference to Plaintiff's reliance on RDI's integrity in agreeing to cede his shares.

As an initial matter, it is clear that RDI may file a motion to dismiss with regard to Counts II and III. These counts were not directed against RDI at the time that RDI filed its Answer to the First Amended Complaint. That Answer therefore cannot be considered a responsive pleading by RDI to Counts II and III. The only remaining question, ...


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