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Bonnie Mitchell and Michael Freidman, Derivatively On Behalf of Nominal Defendant Broadwind Energy, Inc v. David P. Reiland

May 15, 2012

BONNIE MITCHELL AND MICHAEL FREIDMAN, DERIVATIVELY ON BEHALF OF NOMINAL DEFENDANT BROADWIND ENERGY, INC., PLAINTIFFS,
v.
DAVID P. REILAND, J. CAMERON DRECOLL, JAMES M. LINDSTROM, CHARLES H. BEYNON, WILLIAM T. FEJES, JR., TERENCE P. FOX, TONTINE CAPITAL PARTNERS, LP, TONTINE CAPITAL OVERSEAS MASTER FUND, LP, TONTINE PARTNERS, LP, TONTINE OVERSEAS FUND, LTD, AND TONTINE 25 OVERSEAS MASTER FUND, LP, DEFENDANTS.



The opinion of the court was delivered by: Judge Robert W. Gettleman

MEMORANDUM OPINION AND ORDER

Plaintiffs Bonnie Mitchell and Michael Freidman, derivatively on behalf of nominal defendant Broadwind Energy, Inc. ("Broadwind"), have brought a five count consolidated shareholder derivative action against: Broadwind, defendants Tontine Capital Partners, LP, Tontine Capital Overseas Master Fund, LP, Tontine Partners LP, Tontine Overseas Fund, Ltd. and Tontine 25 Overseas Master Fund, LP (collectively as "Tontine"); David P. Reiland; J. Cameron Drecoll; William Fejes; Terence Fox; James M. Lindstrom; Charles H. Beynon (the "individual defendants"). Count I is a claim against the individual defendants for breach of fiduciary duties of loyalty and good faith. Count II is brought against the individual defendants for waste of corporate assets. Count III is against Drecoll, Beynon, Fejes, Fox and Lindstrom for breach of their duties of loyalty of good faith for selling stock based on knowledge of material non-public information. Count IV is brought against Tontine for aiding and abetting breach of fiduciary duties, and Count V is brought against Tontine and Drecoll alleging unjust enrichment.

Pending before the court are four separate motions to dismiss: (1) Broadwind (joined by all defendants) has moved to dismiss arguing that plaintiffs have failed to make a demand on the board of directors to bring a suit on Broadwind's behalf and failed to plead specific facts demonstrating that such a demand would be futile; (2) calling themselves the "outside directors,." Reiland, Lindstrom, Beynon, Fejes and Fox have moved to dismiss Counts I through III for failure to state a claim (Counts I and II) and failure to plead fraud with particularity as required by Fed. R. Civ. P. 9(b) (Count III); (3) Tontine has moved to dismiss Counts IV and V for failing to state a claim; and (4) Drecoll has moved to dismiss the complaint in its entirety for failing to plead that a demand on the board to bring the claims would have been futile, and failure to state a claim. For the reasons that follow, all motions are granted and the complaint is dismissed.

BACKGROUND

Broadwind is a Delaware corporation with its principal place of business in Naperville, Illinois. Broadwind manufactures wind energy products such as structural towers and gearing systems for wind turbines and provides technical, engineering and logistics management services to the United States wind energy industry. Its customers include wind turbine manufacturers and wind farm developers and operators.

Broadwind was first incorporated as Blackfoot Enterprises, Inc. in Nevada in 1996. After a merger in 2005, it became Tower Tech Holdings, Inc. In 2008 the company was renamed as Broadwind and reincorporated in Delaware. In 2007 and 2008 the company acquired several subsidiaries to expand its operations.

Tontine began investing in Broadwind in 2007. By early 2008 it owned approximately 47.7% of the company's outstanding common stock. Under a March 2007 registration rights agreement between Broadwind and Tontine, Tontine had the contractual right to demand that the company register Tontine's shares and to participate in a registration and offering of the company's shares. Tontine also had the right to appoint three nominees to Broadwind's board of directors as long as it held more than 20% of the company's common stock.

Reiland has served as a director of Broadwind since April 16, 2008, and as chairman of the board since May 17, 2010. He has been chairman and a member of the Finance and Executive committees and is a member of the Audit and Governance/Nominating committees of the Board.

Beynon has served as a director since October 24, 2007. He has also served as chairman and member of the Audit Committee and a member of the Compensation Committee. Beynon was nominated to the board by Tontine pursuant to the registration rights agreement.

Fejes has served as a director since March 19, 2009. He has also served as chairman and member of the Governance/Nominating Committee and as a member of the Audit and Compensation Committees. Fejes was nominated to the board by Tontine.

Fox has been a member of the board since February 2006. He is a "founding stockholder" and has served as chairman and member of the Compensation Committee and member of the Governance/Nominating Committee. Under a 2007 proxy agreement, Fox appointed Tontine as proxy for all shares of the company over which Fox had voting control.

Drecoll served as chief executive officer ("CEO") and as a director from October 19, 2007 until December 1, 2010. He is currently a consultant to the company. Like Tontine, Drecoll had a registration rights agreement giving him the contractual right to demand that Broadwind register its shares and to participate in an underwritten offering.

Lindstrom was a director from October 21, 2007 until May 17, 2010. Prior to his resignation he served as chairman of the board, chairman of the Compensation and Executive Committees and member of the Governance/Nominating Committee. Lindstrom was employed by Tontine Associates, LLC, an affiliate of Tontine, and was nominated to the board by Tontine under the 2007 Registration Agreement.

On January 15, 2010, Broadwind filed a prospectus explaining that it was conducting a secondary offering (the "Offering") of common stock to raise capital to repay outstanding debt and to use for general corporate purposes. The prospectus disclosed that the company was in dire need of capital to service its debt and remain in compliance with its loan covenants. Under the terms of the Offering, Broadwind offered 10,000,000 shares, Tontine offered 6,125,000 shares and Drecoll offered 1,125,00 shares. The Offering was structured such that all the shares offered by the company had to be sold before any of the Drecoll shares could be sold and before ...


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