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TALTON v. UNISOURCE NETWORK SERVICES

September 23, 2004.

SHEILA G. TALTON, on behalf of herself and derivatively on behalf of Unisource Network Services, Inc., Plaintiff,
v.
UNISOURCE NETWORK SERVICES, INC., an Illinois corporation, POLESTAR CAPITAL, INC., a Delaware corporation, POLESTAR CAPITAL FUND II, L.P., POLESTAR CAPITAL FUND III, L.P., ATLANTIC COSTAL INVESTORS, L.P., MICHAEL FIELDS, JERRY EDGERTON, DERRICK COLLINS, JOHN DOERER, WALTER THREADGILL, WOODY CHAMBERLAIN and THURMAN JORDAN, Defendants.



The opinion of the court was delivered by: MARK FILIP, District Judge

MEMORANDUM OPINION AND ORDER

Plaintiff Sheila Talton ("Talton") brings this lawsuit on behalf of herself and derivatively on behalf of Unisource Network Services, Inc. ("Unisource" or the "Company"). Ms. Talton is suing Unisource; Polestar Capital, Inc., Polestar Capital Fund II, Polestar Capital Fund III, Atlantic Costal Investors (collectively, the "Venture Capitalists"); and Michael Fields, Jerry Edgerton, Derrick Collins, John Doerer, Walter Threadgill, Woody Chamberlin, and Thurman Jordan (collectively, the "Individual Defendants").*fn1 In her First Amended Complaint, Ms. Talton alleges violations of federal securities law (Count I), common law fraud (Count II), breaches of fiduciary duty (Counts III and IV), and defamation (Count VII). Ms. Talton also seeks to inspect Unisource's corporate books and records under the Illinois Business Corporation Act of 1983, 805 ILCS 5/7.75 (Count VI), and she also seeks certain shareholder remedies under 805 ILCS 5/12.56 (Count V).*fn2

This case is before the Court on both the Unisource Defendants' and the Venture Capitalists' separately filed motions for summary judgment. (D.E. 84, 86, respectively.)*fn3 The Unisource Defendants seek summary judgment on all counts asserted against them, as do the Venture Capitalists. For the following reasons, the Court denies both of the summary judgment motions in part and grants them in part.

  BACKGROUND

  It bears mention at the outset that the summary judgment briefing at times is overly devoted to personal attacks on the credibility of putative witnesses (including, in particular, Ms. Talton), as opposed to being focused on a thorough exploration of precedent and the record. It goes without saying that credibility determinations are not the province of summary judgment adjudication, and a handful of relevant caselaw citations goes a lot further than repeated assertions that "so-and-so is a liar" or "so-and-so cannot be believed." Similarly, at times the briefs seek summary adjudication on issues without any meaningful exploration of legal authority. While a central part of the summary judgment process is to resolve whether there are material factual disputes, the question of whether there are material factual disputes can only be evaluated in the context of applicable precedent. When parties proceed without meaningfully canvassing that precedent, they, with all respect, do so at their peril, because notwithstanding a court's best efforts to ascertain applicable precedent, the adversarial process is supposed to best ensure a chance for the right answers to legal questions in the factual context of any given case. As a practical matter, uncertainty in this area falls particularly hard on the movant — who is seeking to dispose of the case short of trial. Finally, the Court notes that a substantial portion of the briefing is devoted to the general proposition that Judge Guzman (who had the case before it was reassigned to this Court) erred at the motion-to-dismiss stage in rejecting Defendants' attack on Plaintiff's Section 10b-5 claim, the sole federal law claim in the case.*fn4 Whatever the wisdom of effectively attempting to reargue Judge Guzman's prior ruling in the context of summary judgment when he was the presiding judge, Seventh Circuit precedent teaches that Defendants face an uphill battle trying to get that ruling reversed now that the case has been reassigned to this Court, as explained further below. And, as also explained further below, that effort was unsuccessful, as this Court declines any invitation to overrule Judge Guzman's prior ruling, at least certainly in the context of the presentation and treatment of the voluminous factual record set forth in the summary judgment papers.

  I. The Parties and Their Association with Unisource

  A. Ms. Talton and Unisource Network Services, Inc.

  Plaintiff Sheila Talton is an African-American woman who was the founder of Unisource.*fn5 For at least much of its existence, Unisource was a minority-owned and operated Illinois corporation that assisted its clients in establishing and maintaining computer network systems. (Pl.'s Resp. ¶¶ 1, 2 (Ind. Defs.).) Ms. Talton founded Unisource in 1986, becoming its President, Chief Executive Officer, and majority shareholder (Id. ¶ 1.) As President and CEO of Unisource, Ms. Talton supervised employees, sought potential customers, negotiated with existing customers, and exercised decision-making authority regarding Unisource's day-to-day expenses, although Ms. Talton denies that she had sole responsibility in these areas. (Pl.'s Resp. ¶ 4 (Vent Caps.).) Ms. Talton also was Chair of Unisource's board of directors (the "Board"). During Ms. Talton's tenure with Unisource, the Company had as many as 70 employees (Pl.'s Resp. ¶ 10 (Ind. Defs.)), had offices in Chicago, Illinois, New York, and Washington D.C. (Pl.'s Resp. ¶ 3. (Vent. Caps.)), and its clients included, among various other entities, McDonald's Corporation and the Chicago Public Schools. (Vent Caps.' Answer to First Am. Compl. ¶ 10.) As discussed below, Ms. Talton's tenure with Unisource ended on April 7, 2000.*fn6 B. The Venture Capitalists

  Polestar Capital, Inc. ("Polestar") is a Delaware investment corporation with its principal place of business in Chicago, Illinois (Pl.'s Resp. ¶ 3 (Ind. Defs.)), and Atlantic Costal Investors ("Atlantic") is a Delaware limited partnership (id. ¶ 4). Polestar makes equity investments in minority-owned companies. (Pl.'s Resp. ¶ 5 (Vent. Caps.).) Polestar Capital Fund II, L.P., and Polestar Capital Fund III, L.P., are Illinois limited partnerships that, according to the parties, are "associated with" Polestar. (Pl.'s Resp. ¶ 3 (Ind. Defs.).) Among other business activities, Atlantic makes equity investments in minority-owned technology companies. (Pl.'s Resp. ¶ 6 (Vent. Caps.).) Polestar and Atlantic share no corporate affiliation, no common employees or officers and, other than Unisource, no common investments. (Id. ¶ 7.) Polestar became a Unisource shareholder in 1997. (Vent. Caps.' Resp. ¶ 1.) Polestar Capital Fund II, L.P., and Polestar Capital Fund III, L.P, and Atlantic became Unisource shareholders in 1998. (Id. ¶ 2.)

  C. The Individual Defendants and the Unisource Board Structure

  The six Individual Defendants are, with the exception of Thurman Jordan, all former members of Unisource's seven-member Board (two of whom were not Unisource shareholders).*fn7 Mr. Jordan was Unisource's CEO after Ms. Talton no longer held that position. (Pl.'s Resp. ¶ 7 (Ind. Defs.).) When Ms. Talton was President and CEO, Mr. Jordan was the Company's CFO. (Id.) The holders of Unisource preferred stock (the Venture Capitalists) and/or common stock (including, among others, Ms. Talton) elected each of the Individual Defendants to the Board, according to classes of stock ownership. (Id. ¶ 13.) Specifically, the holders of preferred and common stock (as classes) elected three directors each, with the seventh director being jointly elected by the common and preferred shareholders. (Id.) The Board structure was created as a condition of the Venture Capitalists' 1998 investment, which is discussed below. (Vent. Caps.' Resp. ¶ 3.)

  The appointments were as follows. Not including the joint appointment of Mr. Fields, Ms. Talton appointed (presumably on behalf of the common shareholders) defendants Messrs. Edgerton and Chamberlain to the Unisource Board. (Ms. Talton was also presumably technically elected to the Board, but this is not readily apparent from the record.) Mr. Edgerton was not a Unisource Shareholder. (Pl.'s Resp. ¶ 6 (Ind. Defs.).) Woody Chamberlain had a beneficial interest in the shares of Unisource through his investment in Doerge-Unisource, L.P., a shareholder of Unisource. (Id. ¶ 5.) Not including the joint appointment of Mr. Fields, the Venture Capitalists appointed Messrs. Collins, Doerer, and Threadgill to the Unisource Board. (Vent. Caps.' Answer ¶ 13.) Derrick Collins is an investor and principal of Polestar (Pl.'s Resp. ¶ 3 (Ind. Defs.)), as well as a partner of Polestar Fund II and Polestar Fund III (Vent. Caps.' Resp. ¶ 2). John Doerer is a partner of Polestar. (Id. ¶ 1.) Walter Threadgill is described by the parties as "a" general partner of Atlantic, and it is unclear whether there are other general partners in the corporate entity. (Pl.'s Resp. ¶ 4 (Ind. Defs.).) With respect to the joint appointment, Ms. Talton proposed and nominated Michael Fields to the Board, after having been acquainted with him through their mutual former employment at Applied Data Research. (Pl.'s Resp. ¶ 10. (Vent. Caps.).) Ms. Talton (presumably along with the other common stock holders), Polestar, and Atlantic jointly appointed Mr. Fields to the Board. (Pl.'s Resp. ¶ 6 (Ind. Defs.).) Mr. Fields, like Mr. Edgerton, was not a Unisource shareholder. (Id.) II. Private Stock Placements, Capital Infusions, and Ms. Talton's Employment Contract

  As Unisource grew as a business, so did its need for capital; Unisource also apparently required certain capital infusions as temporary stopgaps for certain financial challenges the Company faced during the late nineties and in early 2000. (See Pl.'s Resp. ¶ 24. (Ind. Defs).) In an effort to raise that capital, Unisource sold its stock through several private placements. (Id. ¶ 11.) The first such stock sale occurred in July 1996, when Unisource sold Doerge and CI & Associates Software Consulting, Inc. 10% and 15% of the Company's authorized shares, respectively. (Id.) In January 1998, the Company executed a major financing transaction, at which time the Venture Capitalists invested a total of $3,050,001 in Unisource (id. ¶ 12) in exchange for Unisource preferred stock (id. ¶ 13). As a condition of the Venture Capitalists' January 1998 investment, the Venture Capitalists required Ms. Talton to enter into an employment agreement with Unisource. (Vent. Caps.' Resp. ¶ 4.) Ms. Talton had not had an employment agreement prior to 1998. (Id.) The employment agreement provided that Ms. Talton would be employed as the Company's President and CEO until December 31, 2000. (Pl.'s Resp. ¶ 15 (Ind. Defs.).) The employment agreement also provided that Ms. Talton could be terminated by the Company with or without cause. (Id.) The Venture Capitalists bought additional stock in a February 1999 private placement, although the details of this transaction are unclear from the record. (Id. ¶ 16.) In December 1999, the Venture Capitalists exchanged $500,000 for convertible promissory notes and additional Unisource preferred stock. (Id. ¶ 18.) Those notes became due on March 31, 2000. (Id.) The December 1999 financing, however, did not solve the Company's financial issues, and by February 2000, Unisource was unable to meet its payroll. (Id. ¶ 24.) The Unisource shareholders who participated in these transactions (including Ms. Talton) were awarded pre-emptive rights with their stock. (Id. ¶ 14.) (The briefs do not meaningfully cite to the record concerning what specific "pre-emptive rights" accompanied the stock, but as best the Court can tell from the papers, the shareholders were protected through anti-dilution option-rights that are commonly seen in corporate arrangements, often in closely-held corporations and/or corporations in which there are only a relatively limited number of shareholders).

  After these sales, and prior to the acts giving rise to this suit, Ms. Talton owned approximately 26% of Unisource stock, the Venture Capitalists combined owned approximately 31-33%, Doerge owned 10%, an ESOP held 14%, and various other shareholders held the remaining stock. (Id. ¶ 16; Vent. Caps.' Resp. ¶ 36.).)*fn8 In addition, the following entities and individuals were shareholders of Unisource at various times: Ghyslain Rivand, HC Partners, Larry and Fern Kane, Natalie Nesbitt, Milestone Growth Fund, Pacific Venture Capital, and Saskatchewan Telecommunications International, Inc. (Pl.'s Resp. ¶ 9 (Vent. Cap.).)

  III. Ms. Talton's January Investment and the January 13, 2000 Letter

  On or about January 13, 2000, Mr. Collins presented Ms. Talton with a letter to execute as part of the closing of the Venture Capitalists' December 1999 investment. (The closing took place on January 17, 2000.) The letter gave the Board the authority to request Ms. Talton to relinquish her title as the Company's President. Ms. Talton executed the letter, and it is undisputed that Ms. Talton questioned Mr. Collins about the significance of the letter prior to executing it. (Pl.'s Resp. ¶ 22. (Ind. Defs.).) The parties disagree over the substance of Mr. Collins's response (a disagreement the parties' summary judgment papers complicates (see note nine, infra)). Indeed, as discussed further below, the import of Mr. Collins's statement (or statements) regarding Ms. Talton's continued employ with Unisource, among other things, has since become the subject of Ms. Talton's 10b-5 claim. Although it is not entirely clear from the summary judgment papers, it appears that the parties do not dispute that they memorialized in writing — in connection with Ms. Talton's agreement that she would relinquish her title as President of Unisource if so requested by the Board — Collins and the Board's representation that such relinquishment by Talton would "not deprive . . . [Talton] of any of [her] duties, responsibilities and authorities as set forth in Section 3" of Talton's employment agreement. (Pl.'s St. ¶ 14 (Ind. Defs.).) Section 3 of that employment agreement, in turn, provided that "Executive [Talton] shall have the titles of Chairman of the Board of Directors, President and Chief Executive Officer of the Company . . . and Executive shall have full responsibility for managing the Company, including bottom-line profit and loss responsibility and accountability." (Ind. Defs.' St., Ex. 5, ¶ 3.) In addition, it appears undisputed that Talton did not seek to amend her employment contract to delete the Board's legal right to remove her.

  The Venture Capitalists' December 1999 investment triggered certain preemptive stock rights held by Unisource shareholders, including rights held by Ms. Talton. After executing the January 13, 2000 letter, Ms. Talton exercised her preemptive rights and invested $98,382 at the January 17, 2000 closing. (Pl.'s Resp. ¶ 23 (Ind. Defs.).) In return for this investment, Ms. Talton received convertible promissory notes totaling $98,422 and warrants to purchase 246,322 shares of Class B, Series 3 preferred stock. (Id.)

  IV. The Eclipse Deal and Ms. Talton's February 2000 Investment

  At some point (the parties disagree over exactly when), the Board decided to try to sell the Company. In February 2000, it looked like Unisource had found a buyer. At that time, Eclipse Networks, Inc. ("Eclipse"), submitted a non-binding letter of intent to purchase the Company (Pl.'s Resp. ¶ 25 (Ind. Defs.)), which letter Unisource accepted on or about February 7, 2000. (Id.) On or about February 22, 2000, Ms. Talton purchased an additional 655,300 warrants in preferred stock, and she was issued a convertible promissory note for $250,000 in return. (Id. ¶ 26.) Both the Series 3 Notes (which Ms. Talton purchased in January) and the Series 4 Notes were due on March 31, 2000. (Id.)

  Soon after Ms. Talton purchased the Series 4 warrants, however, the deal with Eclipse collapsed (id. ¶ 27), and the Company was again unable to make payroll. The Venture Capitalists offered to invest an additional $300,000 in the Company (which they eventually did invest), in exchange for convertible promissory notes and additional Series 3 warrants. (Id. ¶ 28.) As a condition of their investment, the Venture Capitalists (specifically Polestar) required that both Ms. Talton and Atlantic subordinate their securities. On or about March ...


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