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COYER v. HEMMER

September 20, 1995

WILLIAM F. COYER, SR., and AMERICA DIRECT, INC. FORMERLY ADVANCED ELECTRONICS, INC. aka ADVANCED ELECTRONICS and DANIEL V. BARUS, Plaintiffs and Defendants on the Counterclaim,
v.
JOHN W. HEMMER and BARBARA B. HEMMER, Defendants, Counterclaimants and Third-Party Plaintiffs, v. INNOVATIVE DESIGN PRODUCTS, INC., AMERICA DIRECT (H.K.) LTD., MEDTECH, INC., WILCORE INTERNATIONAL, INC. and MRS. WILLIAM F. COYER, SR., Third-Party Defendants.



The opinion of the court was delivered by: CLARKSON S. FISHER

 FISHER, District Judge

 This case comes before the court on the motion of plaintiffs, William F. Coyer, Sr., Daniel V. Barus and America Direct, Inc., and third-party defendant Mrs. William F. Coyer, Sr., to dismiss defendants' counterclaim and third-party complaint for failure to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). This case arises out of a series of business transactions and financial plans involving three corporations in which both plaintiff William F. Coyer, Sr. (hereinafter "Coyer"), and defendant John W. Hemmer (hereinafter "Hemmer") were employed and served on the board of directors. Additionally, both Coyer and Hemmer are shareholders in the three corporations. The principal allegations in defendants' counterclaim and third-party complaint allege Coyer has defrauded Hemmer of personal services and diluted the value of Hemmer's personal assets. The corporate parties are named as the artifice through which Coyer perpetrated his alleged acts. The remaining parties are named as incidental players. For ease of discussion a description will be provided.

 The three principal corporations are plaintiff America Direct, Inc., formerly Advanced Electronics, Inc. (hereinafter "AEI"), third-party defendant Innovative Design Products, Inc. (hereinafter "IDP") and third-party defendant MedTech, Inc. (hereinafter "MedTech"). All three companies, AEI, IDP and MedTech, are incorporated under the laws of Delaware with their principal place of business in New Jersey. Allegedly, Coyer is chief executive officer, president and chairman of the board of directors of IDP, MedTech and AEI.

 The remaining corporate parties are the third-party defendant America Direct (Hong Kong) (hereinafter "AD (Hong Kong)") and third-party defendant Wilcore International, Inc. (hereinafter "Wilcore"). AD (Hong Kong) is alleged to be a corporation existing under the laws of the British Crown Colony of Hong Kong. Wilcore is alleged to be a Delaware corporation with its principal place of business in New Jersey. Allegedly, Coyer owns 90% of the common stock of AD (Hong Kong) and is sole shareholder of Wilcore.

 Defendants John W. Hemmer and Barbara B. Hemmer are residents of New York. Mrs. Barbara Hemmer is a party to the case by virtue of her owning stock jointly with her husband in IDP, AEI and MedTech. Mr. and Mrs. William F. Coyer, Sr., are residents of New Jersey. Mrs. Coyer is a party to the case by virtue of her owning stock jointly with her husband in IDP, AEI, MedTech, AD (Hong Kong) and Wilcore. Additionally, Mrs. Coyer is allegedly a "no-show" employee of IDP and AEI and an "adviser" of her husband. Plaintiff Daniel V. Barus is a resident of New Jersey. Mr. Barus (hereinafter "Barus") is the son-in-law of Coyer, vice president and general counsel of AEI, and director and stockholder of IDP. Barus is alleged to be a "controlled" director and "aider and abettor" to Coyer. Jurisdiction is premised on diversity of citizenship pursuant to 28 U.S.C. § 1332.

 On October 14, 1994, plaintiffs Coyer and AEI filed suit against Hemmer and Mrs. Hemmer alleging Hemmer had wrongfully converted shares of AEI common stock. On November 1, 1994, plaintiffs Coyer, Barus and AEI filed a first amended complaint alleging Hemmer breached his fiduciary duty to AEI by failing to inform the board that the company's primary salesman, John A. Genarro, planned to leave the company and file a shareholder derivative suit.

 Plaintiffs also allege that fifty shares of stock in AEI were transferred to Mr. Hemmer and Mrs. Hemmer for insufficient consideration. Plaintiffs seek damages and a declaratory judgment that Mr. and Mrs Hemmer are not shareholders of Advanced Electronics, Inc. or, alternatively, Mr. and Mrs. Hemmer, as shareholders, are barred from bringing a shareholder derivative suit.

 On February 27, 1995, defendants John W. Hemmer and Barbara B. Hemmer filed an answer, counterclaim, third-party complaint and jury demand. The answer denied the allegations of breach of fiduciary duty and receipt of stock for insufficient consideration. The counterclaim and third-party complaint asserted claims on behalf of the defendants for breach of employment contract and for breach of fiduciary duty.

 According to the allegations contained in the counterclaim and third-party complaint, the business relationships involved in this suit began in 1989 and continued until 1994. During this period Hemmer was employed by IDP, MedTech and AEI as an officer, and served on the board of directors for all three companies. Allegedly, during most of this time, Hemmer was Coyer's senior assistant, and for the early period, the only other "officer" level employee. The following is a summary of the allegations contained in the counterclaim and third-party complaint. For purposes of this motion, the court shall accept these allegations as true. References, unless otherwise noted, refer to one of the ten counts contained in the counterclaim and third-party complaint. For ease of discussion, the court shall address the allegations related to each corporation individually.

 IDP

 Counts one and two discuss Hemmer's employment by IDP and his claims of breach of fiduciary duty by Coyer as director of IDP. Count one alleges that in 1989 Hemmer was approached and requested by Coyer and the "board" of IDP to accept employment with IDP. In February of 1989 he commenced employment with IDP. In May of 1989 he was appointed to the position of executive vice president, chief financial officer and director. A three-year contract at a salary of $ 60,000 per year was executed. Additionally, Hemmer purchased 20,000 shares of common stock of IDP.

 Hemmer worked in the capacity of chief financial officer until October of 1990, when he was replaced by Kevin Leibold. He continued working for IDP as an executive vice president until June of 1991. He was never paid for these services. In 1991 Hemmer was "required" to submit his resignation from IDP in his capacity as executive vice president and director in exchange for a settlement of accrued back salary in the amount of $ 75,000. Count one seeks damages against all plaintiffs and third-party defendants for breach of employment contract.

 MedTech

 Counts three, four and five address Hemmer's allegations regarding MedTech. MedTech was a company whose sole asset is allegedly a license for a "herpes device." Count three is brought as a direct action for breach of employment contract. Count four is brought as a derivative shareholder suit and seeks appointment of a receiver, an accounting of the assets of MedTech, payment to defendants of their proportional share of the assets of MedTech and punitive damages. Count five is a claim for tortious interference with a business opportunity. All three counts seek damages from all plaintiffs and third-party defendants.

 Allegedly, Hemmer was hired by MedTech in March of 1992 to serve as vice president, chief financial officer and director. As compensation, he was provided 3% of the total issued and outstanding shares of MedTech. Additionally, a formal three-year contract at a salary of $ 100,000 per year was executed in January 1993; however, to date Hemmer has never been compensated for those services. No facts are provided as to when this employment terminated, if ever. Additionally, there is no allegation that Hemmer ever resigned or was removed from his position as director.

 Allegedly, a merger was proposed with an investor who would provide the shareholders of MedTech a 20% interest in a "blind pool" in exchange for the outstanding shares of MedTech. Allegedly the 20% interest in the blind pool was worth one million dollars to MedTech and was, in effect, a "finder fee" for the acquisition of an unproven and untested "herpes device." Coyer, acting out of self-interest, requested he be individually compensated for accrued back salary and other compensation in the amount of $ 300,000 for services rendered to MedTech. The investor refused the request and the deal was terminated. Hemmer argues no demand for action was made upon the MedTech board of directors because "Coyer controlled a majority of the stock of MedTech, and/or controlled the Board of Directors, and therefore such demand would have been futile." Count Four, P43.

 Count five alleges "tortious interference with a business opportunity." Allegedly, Hemmer was offered the future position of vice president of finance and administration at the newly merged company. He was to be compensated at a salary of $ 100,000 per year. Additionally, Hemmer was to be offered a "large stock option" prior to a "planned public offering" in the newly merged company. Count four, P45. According to the counterclaim, Coyer's previously described request for accrued back salary and other compensation terminated the deal and interfered with Hemmer's business opportunity. Hemmer demands compensatory and punitive damages and attorney's fees against all plaintiffs and third-party defendants.

 Advanced Electronics, Inc. (AEI)

 Count seven is a shareholder derivative suit alleging breach of fiduciary duty by Coyer as a director of AEI. The count is broken into eight subcategories, all alleging separate claims of fiduciary duty on the part of Coyer and Barus. For discussion purposes, each subcategory will be addressed separately.

 In subcategory A of count seven, Hemmer accuses Coyer of breaching his fiduciary duty to AEI in a transaction similar to those alleged in count two. According to Hemmer, AEI markets a "Jet Aire" product which is manufactured in Hong Kong. Allegedly, AD (Hong Kong) acts as AEI's purchasing agent in Hong Kong. The role of AD (Hong Kong) in the transaction is to arrange letters of credit financing and shipping. For such services, AD (Hong Kong) is entitled to a 5% commission on the purchase price of each Jet Aire unit. Allegedly, AD (Hong Kong) was increasing the purchase price of each unit by $ 2.00. According to Hemmer, this fact was intentionally and wrongfully concealed by AD (Hong Kong) and Coyer. The net result is allegedly a misappropriation of 1.2 million dollars in revenue.

 In subcategory B of count seven, Hemmer claims Coyer breached his fiduciary duty to AEI in October of 1993 by diverting the sale of 35,500 units of the Jet Aire product. According to Hemmer, the units were sold directly to J.C. Penney and Venture stores through AD (Hong Kong). The result of this transaction was the diversion of profits from AEI to AD (Hong Kong).

 In subcategory C of count seven, Hemmer alleges Coyer breached his fiduciary duty to the AEI stockholders by attempting to form a public company and dilute stockholder interest. According to the allegations, Wilcore was a holding corporation with no assets, formed for the purpose of acquiring MedTech and AEI. It was contemplated that an initial offering of 200,000 shares and $ 1 million in proceeds would be followed by a public offering for "up to" $ 10 million in common stock. According to Hemmer, based on his percentage ownership of AEI and MedTech, he should have been a 5% shareholder in Wilcore. He contends, however, that Coyer wrongfully attempted to dilute his share to 3.4% by issuing stock to individuals with no connection to AEI, such "as personal friends, family members and unrelated creditors." Count seven, P82. According to Hemmer, this attempt to dilute his interest was a breach of fiduciary duty and "yet another wrongful artifice and device employed by Coyer in his continuing efforts to dilute and convert the value of Hemmer's investment and ownership interest in AEI to Coyer's substantial financial benefit." Count seven, P84.

 Subcategory D of count seven alleges a breach of fiduciary duty by Coyer for his conduct in attempting to divert and transfer products of AEI to other companies. According to Hemmer, AEI in 1992 entered into an exclusive nontransferable licensing agreement with the inventors of the "ultrasonic toothbrush." Count seven, P86. This product is an "apparatus for dental and hygiene care." Count seven, P87. Allegedly, Coyer and Barus have attempted "to market and sell the ultrasonic toothbrush through AD instead of AEI." Count seven, P90. According to Hemmer, it is anticipated this product would generate gross sales in excess of $ 30 million dollars over a three- to five-year period. Hemmer further alleges that Coyer has attempted to charge AEI "false and improperly alleged fees for tooling, development of the product and other expenses and charges relating to the ultrasonic toothbrush." Count seven, P95.

 Subcategory D of count seven also alleges AEI holds a proprietary interest "in a product known as a hand-held finger hair dryer." According to Hemmer, AEI planned to market this product under the Jet Aire trademark. It is alleged that Coyer has sought to market and sell this product, like the "ultrasonic toothbrush," through AD (Hong Kong), rather than AEI. According to the allegation, Coyer is seeking to divert "substantial profits in the millions of dollars to AD." Count seven, P49.

 Subcategory E of count seven alleges Coyer breached his fiduciary duty to the shareholders of AEI by directing AEI in December of 1993 to pay him $ 165,000 in "alleged accrued salary for 1992" and $ 11,500 in "alleged interest." Count seven, PP100, 101. According to Hemmer, this compensation violated AEI's by-laws, which prohibit a director from having a vote in the amount of compensation paid to a director. Hemmer further alleges that Coyer wrongfully took from AEI a salary increase in 1993 from $ 125,000 to $ 181,500 and again in 1994 from $ 181,500 to $ 199,650. According to Hemmer, he was not offered a corresponding salary increase. Additionally, it is claimed that Coyer wrongfully had AEI increase his bonus from 5% to 8% for 1993.

 Subcategory F of count seven alleges Coyer has wrongfully hired various family members, including his wife, daughter and son-in-law, as employees of AEI. According to the allegations, Mrs. Coyer was hired to perform public relations for $ 1,300 per month; however, to date she has not performed any such services. Additionally Coyer hired his son-in-law, Barus, as general counsel and "COO" at a salary of $ 100,000 per year even though Barus "has no hands-on experience in the personal hair care appliance industry." Count seven, P107. Additionally, Coyer has wasted corporate assets by wrongfully causing AEI to purchase a "key man" insurance policy for Barus. Hemmer further alleges Coyer has delegated "many of his duties" to Barus, thereby allowing himself more time to promote AD (Hong Kong). Finally, it is alleged Coyer caused AEI to hire his daughter, Theresa, though she failed to perform any services for the company.

 Finally, Subcategory G of count seven alleges Coyer has breached his fiduciary duty to AEI by converting company assets for his own use. No specific factual allegations are made. According to the allegations, Coyer has invested these "misappropriated funds" in two condominiums in Nantucket, a condominium in the Cayman islands, a 1989 Mercedes, and a stock portfolio. These misappropriated funds, it is alleged, are the product of Coyer's wilful acts of oppression.

 
Count seven concludes as to all subcategories:
 
No demand for action was made upon the Board of Directors of AEI, because Coyer controlled a majority of the stock of AEI, and/or controlled the Board of Directors, and therefore such a demand would have been futile.

 Count seven, P131.

 Count seven demands judgment against all named plaintiffs and third-party defendants for an accounting of the assets of AEI, the appointment of a receiver, the payment to "plaintiff" of his proportional share of the assets, punitive damages, and such other relief as the court deems appropriate.

 The Remaining Claims

 The remaining three counts involve claims applicable to all, or one or more, of the previously alleged facts. Count eight is a claim for "Violations of Federal New ...


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