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Martindale v. Gleasman

June 27, 2008

MICHAEL MARTINDALE, JACOB H. BROOKS, AND DAVID K. MARSHALL, PLAINTIFFS,
v.
KEITH GLEASMAN, MORTON POLSTER, TORVEC, INC., AND ICE SURFACE DEVELOPMENT, INC., DEFENDANTS.



The opinion of the court was delivered by: Michael A. Telesca United States District Judge

DECISION and ORDER

INTRODUCTION

Plaintiffs Michael Martindale ("Martindale"), Jacob H. Brooks ("Brooks") and David K. Marshall ("Marshall") (collectively "plaintiffs") allege four causes of action in their Complaint. The first cause of action asserts a shareholder derivative action under New York Business Corporation Law § 720 against defendants Keith Gleasman ("Gleasman"), Morton Polster ("Polster") (together referred to as "G-P defendants"), and Torvec, Inc. ("Torvec") (collectively "defendants"). The second allegation sounds in breach of common law fiduciary duty owed to defendant Ice Surface Development, Inc. ("ISDI") and its shareholders. It is also asserted derivatively against Gleasman, Polster and Torvec. Further, the third cause of action, which is alleged directly against Gleasman, Polster and Torvec sounds in breach of fiduciary duty based upon plaintiffs' alleged status as creditors of ISDI. Finally, the fourth cause of action asserts a direct claim solely against Torvec for tortious interference with plaintiffs' employment contracts.

Defendants Torvec, ISDI, Gleasman and Polster move to dismiss plaintiffs' complaint against them pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure or, alternatively, to stay the remaining portions of this action insofar as they are dependent upon the resolution of a related arbitration proceeding and plaintiffs' status as creditors of ISDI. Plaintiffs opposed the motion to dismiss and/or stay and filed a cross-motion for a preliminary injunction requesting that the Court enter an order restraining Torvec from dissipating or transferring monies received from Ice Engineering, LLC ("Ice Engineering") pursuant to ISDI's sale of the Dartmouth License to Ice Engineering.

For the reasons set forth below, the defendants' motions to dismiss are granted and plaintiffs' cross-motion for preliminary injunction is denied as moot.

BACKGROUND

I. Defendants Torvec, ISDI, Gleasman and Polster and Plaintiffs Martindale, Brooks and Marshall

Torvec is a publicly owned developmental-stage automotive technology company based in Rochester, New York.*fn1 Gleasman and Polster are officers and shareholders of both Torvec and ISDI. Moreover, Torvec is the majority shareholder of ISDI. Torvec acquired ISDI on November 20, 2000 from Utek Corporation of Plant City, Florida. As a result of this transaction, Torvec acquired a twenty-year exclusive, worldwide license granted by the Trustees of Dartmouth College for land-based motorized and non-motorized applications to a novel ice adhesion modification system which was developed by Professor Victor Petrenko at Dartmouth College (the "Dartmouth License"). See Complaint, ¶22. As Torvec's subsidiary, ISDI was to develop Professor Petrenko's novel ice adhesion modification system. Specifically, ISDI was to develop technology allowing for the rapid de-icing of vehicles. Accordingly, the principal asset of ISDI was the Dartmouth License. Plaintiffs are all former officers and current minority shareholders of ISDI. See id., ¶10. At all relevant times including through June 2007, Martindale, Brooks and Marshall were directors of ISDI and controlled ISDI's Board of Directors, which meant they controlled ISDI.

II. Plaintiffs' Employment Agreements with ISDI

Plaintiffs executed Employment Agreements with ISDI dated April 1, 2002. See Complaint, ¶¶14-16. According to the Complaint, as of 2002, ISDI failed to pay plaintiffs compensation amounting to $480,000, which was allegedly due under the Employment Agreements.*fn2 See id., ¶18. As a result, in October 2002, ISDI, Torvec, members of Torvec's Board of Directors and plaintiffs executed a Memorandum of Understanding regarding Third Quarter Financials ("MOU") and Individual Amendments ("Amendment No. 1") wherein plaintiffs agreed to contribute $480,000 in compensation as capital to ISDI. In addition, plaintiffs agreed to forgo future compensation under their Employment Agreements "until such time as ISDI's Board of Directors determined that ISDI had the requisite funds to pay such amounts." See id., ¶20. Plaintiffs allege that they continued their employment and provided services to ISDI under the Employment Agreements even though they did not receive any salary, bonuses or benefits to which they were entitled. Plaintiffs assert that the unpaid compensation owed to them totaled, in the aggregate, $1,405,000, which included plaintiffs' $480,000 capital contributions to ISDI. See id., ¶21.

III. The Liquidation of ISDI

In December 2006, ISDI and Torvec commenced discussions with Ice Engineering concerning Ice Engineering's acquisition of the Dartmouth License. See Complaint, ¶23. According to the Complaint, Ice Engineering was willing to pay $3.5 million for the License and both ISDI and Torvec became aware of this fact. See id., ¶24. In the Spring of 2007, ISDI designed a Liquidation Plan and notified its shareholders. A "Notice of Special Meeting of the Shareholders of Ice Surface Development" ("Notice of Special Meeting") was mailed to plaintiffs on May 26, 2007, which explained that the shareholders would "consider and vote upon a Plan of Liquidation and Dissolution" on June 7, 2007[.]" Attached to the Notice of Special Meeting was a copy of the Liquidation Plan for each shareholder, including plaintiffs to review in advance of the June 7 meeting and a form of proxy whereby each of the plaintiffs could approve or disapprove the proposed Liquidation Plan.

The terms of the Liquidation Plan provided for an assignment of the Dartmouth License to Ice Engineering in exchange for a royalty equal to 5% of the gross revenues generated by the commercialization of the ice adhesion technology. In addition, Ice Engineering would reimburse Torvec for a portion of the costs paid by Torvec for the acquisition and maintenance of the Dartmouth License and the development and marketing of the technology. Further, upon assignment of the Dartmouth License, ISDI would liquidate and dissolve, transferring to each ISDI shareholder his/her proportionate share of the right to receive royalty payments from Ice Engineering. Plaintiffs contend that the value of the consideration given by ISDI in the transaction was far in excess of the value of the consideration given by Ice Engineering. Plaintiffs argue that despite Ice Engineering's willingness to pay $3.5 million for the Dartmouth License, ISDI would not receive any cash in the deal, instead ISDI received only the 5% royalty payments. See Complaint, ¶¶25-27.

On June 4, 2007, Torvec received an e-mail from the plaintiffs stating in pertinent part that plaintiffs "are in agreement with the main elements of the proposal and think this may have a reasonable chance to create value for our joint investments. We do not want to hold up the process, but would like you to consider addressing some unfinished business as follows." Plaintiffs then requested to be reimbursed for any unpaid compensation under their respective Employment Agreements.*fn3 In response to plaintiffs' request, as described in the June 7 Shareholder Meeting Minutes, ISDI agreed to "increase Plaintiffs' record ownership interest in ISDI" thereby entitling plaintiffs to "a greater share of the 5% royalty" to be paid by Ice Engineering in exchange for assignment of the Dartmouth License.*fn4 There were no further communications between plaintiffs, ISDI and/or Torvec during the June 7, 2007 meeting. Despite knowledge of the shareholder meeting on June 7, 2007, none of the plaintiffs attended and none of them submitted a proxy vote either in favor or opposing the ...


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