Order re: Motion to Dismiss Counterclaim [#123], Motion for Partial Summary Judgment [#121, 127], and Crossmotions for Sanctions and Attorneys Fees [#129, 140]

JENNIFER A. DORSEY, District Judge.

This is a dispute over the payment of executive compensation to four officers and directors of HPEV, Inc. and over other rights and obligations in agreements between the corporation and a significant shareholder, Spirit Bear, Limited.

Spirit Bear owns millions of shares of HPEV stock as a result of a series of agreements with HPEV.1 HPEV alleges that, despite the settlement, Spirit Bear continues to interfere with HPEV's attempts to pay executive compensation and to raise capital by issuing equity, and HPEV commenced a breach-of-contract and bad-faith action in the District of Nevada, seeking declaratory relief and damages.2 Spirit Bear responded with a derivative action against four HPEV executives and named HPEV as a nominal counterdefendant but successfully sought leave to expand those counterclaims.3 Regurgitating the arguments it raised in opposing leave to amend, HPEV now moves to dismiss Spirit Bear's counterclaims.4 The briefing on the motion to dismiss spawned two additional countermotions: Spirit Bear's countermotion for sanctions,5 and HPEV and its executives' countermotion for attorneys fees.6

Spirit Bear offers its own dispositive motion. Its securities purchase agreement (SPA) contained conditions precedent that excused Spirit Bear from performing the purchase if HPEV's shareholders failed to agree in writing to nominate three Spirit Bear-designated candidates for HPEV's board of directors, call a special shareholder meeting to ratify the nomination, vote to elect the Spirit Bear nominees, ensure their service on the board for three years after the closing of the securities purchase, and amend the bylaws to require that 50% of the HPEV board of directors be comprised of Spirit Bear designees.7 The purchase closed without satisfaction of those conditions, Spirit Bear later notified HPEV that it considered the failure of these conditions to be a breach of the SPA, and the parties settled all of Spirit Bear's claims regarding HPEV's alleged breach.8 Spirit Bear's first two counterclaims allege that HPEV violated the SPA "to essentially preclude Spirit Bear from its contractually entitled seats on the HPEV Board,"9 and its sixth counterclaim seeks, inter alia, a judicial declaration that the Spirit Bear nominees "are still directors on the HPEV Board, and have been since their purported non-election at HPEV's annual meeting."10 Spirit bear asks the court to now grant that declaration by summary adjudication.11 HPEV and its executives oppose the request and alternatively ask me to delay ordering summary judgment to permit them additional time for discovery into who is pulling the strings behind Spirit Bear's designees.12

Having read and considered all of the parties' extensive briefing and the record in this case, I find these matters appropriate for disposition without oral argument,13 deny HPEV's motion to dismiss the cross motions for sanctions, and HPEV's Rule 56(d) request, grant Sprit Bear's motion for partial summary judgment in part and declare that Jay Palmer, Carrie Dwyer, and Donica Holt remained holdover directors on the HPEV board despite the January 2014 director election for the reasons below.

Discussion

A. HPEV's Motion to Dismiss Spirit Bear's Amended Counterclaim [#123]

On June 26, 2014, over HPEV's opposition,14 I granted Spirit Bear's motion to expand its counterclaims against HPEV.15 The claims fall into two factual categories: (1) allegations that HPEV violated the December 14, 2012, securities purchase agreement (SPA) by failing to satisfy certain conditions precedent; and (2) HPEV breached its obligations under a concurrently inked registration rights agreement (RRA) by, inter alia, failing to file a registration statement and precluding Spirit Bear's sale of its HPEV shares.16 In opposing amendment, HPEV argued that amendment would be futile based on a handful of substantive arguments relating to the interpretation of the contracts that form the basis for Spirit Bear's counterclaims.17 For example, HPEV argued that the contractual entitlements on which Spirit Bear bases its SPA-related claims are really conditions precedent that cannot form the basis of a breach claim and, in any event, the SPA-related claims were released by settlement agreement. HPEV further argued that the RRA-based claims fail because Spirit Bear already received the only remedy the RRA prescribes.18 I nevertheless granted leave because I concluded that Spirit Bear's extremely detailed allegations as pled—even if they ultimately prove unfounded—state cognizable claims for relief, and I suggested that HPEV's arguments are better suited for summary judgment.19

Three weeks later, HPEV repackaged its futility arguments into the motion to dismiss Spirit Bear's counterclaims.20 Again it argues that Spirit Bear has stated no plausible claim under either the SPA or the RRA based on the very same reasoning it provided in the opposition to the motion to amend. I treat this motion as one for reconsideration of my leave order and deny it.

Although the federal rules do not provide for motions for "reconsideration" such requests are commonly entertained under Federal Rule of Civil Procedure 59(e) and 60(b).21 Under Rule 60(b), a district court may provide relief from a final order for, inter alia, (1) "mistake, inadvertence, surprise, or excusable neglect," (2) when newly discovered evidence is presented, (3) fraud . . ., misrepresentation, or misconduct by an opposing party," or (6) "any other reason that justifies relief."22 Courts use Rule 60(b)(6) sparingly; to receive relief under the residual provision in 60(b)(6), a party must demonstrate "extraordinary circumstances."23

HPEV does not argue that reconsideration is warranted; indeed, it ignores the retread nature of its arguments entirely. And I do not find that my determination that Spirit Bear's counterclaims state plausible claims for relief that survive Rule 12(b)(6) scrutiny warrants reconsideration. Rule 12(b)(6) requires me to take all of Spirit Bear's well-pled allegations as true.24 Although my independent analysis of the contractual agreements and the actions performed by the parties may ultimately disagree with the characterization of those agreements and actions offered by Spirit Bear's allegations or HPEV may ultimately convince me of the merits of a defense, as pled (and taken as true), those allegations state cognizable claims for relief, and Spirit Bear should have been permitted to amend its counterclaim to state those claims. Accordingly, I do not find that this is a situation warranting the extraordinary relief of reconsideration, I deny HPEV's motion to dismiss Spirit Bear's counterclaims [#123], and I reiterate that HPEV's arguments are better suited for summary judgment.

B. Motions for sanctions and attorneys fees [##129, 140]

Although I certainly recognize the retread nature of HPEV's dismissal arguments, I do not find that HPEV's characterization of this motion as one for dismissal instead of reconsideration is worthy of sanctions. Spirit Bear requests $7,750 in attorneys fees and another $5,000 in punitive sanctions "to deter similar future conduct."25 HPEV characterizes Spirit Bear's sanction request as a "preposterous" and "baseless" "money grab"26 made without any attempt to satisfy Rule 11's safe-harbor prerequisite, and HPEV countermoves for $3,195 in its own attorneys fees.

"Rule 11 is intended to deter baseless filings in district court and imposes a duty of `reasonable inquiry' so that anything filed with the court is `well grounded in fact, legally tenable, and not interposed for any improper purpose.'"27 "A motion for sanctions may not be filed, however, unless there is strict compliance with Rule 11's safe harbor provision,"28 which requires a party seeking sanctions to first serve its motion for sanctions on the offending party at least 21 days before filing the motion with the court.29

Spirit Bear did not invoke Rule 11's safe-harbor provision before filing this motion, and it points out on reply that its motion (though it relies on at least one Rule 11 case) noted the court's "inherent power to impose sanctions for bad faith conduct."30 The district court does have an inherent power to sanction attorneys or parties when counsel's conduct "constitute[s] or [is] tantamount to bad faith."31 A bad-faith finding requires "more than ignorance or negligence."32

I do not find HPEV's characterization of its reconsideration motion as a new motion to dismiss to rise to the level of bad faith worthy of an exercise of the court's inherent sanction power. Nor do I find Spirit Bear's sanction request so baseless that HPEV should be awarded the attorney fees it incurred in responding to that motion. And the parties are cautioned that they should not make a habit of sanction requests. These types of requests for sanctions—primarily based on a perceived breach of litigation protocol—will not be entertained. The parties and counsel are reminded that this is an adversarial process; crying wolf with a sanctions request for every briefing cycle will not be tolerated, and the court highly discourages it as a litigation tactic. All counsel are further cautioned that the tenor of their briefs has become increasingly ad hominem, and the court urges an immediate retreat from that approach.

Spirit Bear's countermotion for sanctions [#129] and HPEV's request for attorneys' fees [#140] are denied.

C. Spirit Bear's motion for partial summary judgment on the board-composition issue [#121] and HPEV's countermotion under Rule 56(d).

As Spirit Bear's counterclaims survive HPEV's motion to dismiss, I now consider Spirit Bear's request for partial summary judgment on a portion of its sixth counterclaim by which Spirit Bear seeks a declaratory judgment that HPEV's board is and has been comprised of six directors since March 6, 2013, and that composition includes three Spirit-Bear designated members.33 Spirit Bear contends that, under the SPA, Spirit bear was "entitled" "to designate half of the HPEV Board for a three year period" and that the parties "agreed" under the SPA "that Spirit Bear's right to designate half of the Board would be ensured by, inter alia, amending HPEV's bylaws to state that the HPEV Board shall at all times be comprised of an even number of directors of which 50% are individuals designated by Spirit Bear."34 Although Spirit Bear's three designees, Jay Palmer, Carrie Dwyer, and Donica Holt, were elected to the HPEV board in early 2013, they were not re-elected when the full slate of directors was put before the shareholders at the annual meeting in January 2014.35 Spirit Bear contends that the failure to reelect these three directors is a violation of the SPA and the bylaws of HPEV, and—even if the election were properly conducted—by operation of NRS 78.330(1), Palmer, Dwyer, and Holt nevertheless remain holdover directors until successors are elected and qualified or they resign and are removed.

HPEV responds that the SPA entitlements are really conditions precedent—not promises upon which a breach of contract claim can be based after close of the transaction. Regardless, HPEV argues, any claim that the failure to fulfill the board-composition conditions violated the SPA was released by the parties' settlement agreement.36 HPEV notes that the bylaws only gave Spirit Bear the right to nominate half the board members, it does not guarantee their election; and the bylaws broadly allow "any proper matter" to be presented for action at the annual meeting, so there was no limit on the shareholders' power to approve action items that resulted in the failure to retain the Spirit Bear directors.37 And, finally, Spirit Bear argues that the shareholders' votes "against" the Spirit Bear directors are effectively votes to remove them or, at the very least, create a genuine issue of material fact regarding the effect of those votes and whether they resulted in the removal of the directors such that they cannot be deemed holdover directors under NRS 78.330(1).38

1. Legal standard for summary judgment

Summary judgment is appropriate when the pleadings and admissible evidence "show there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law."39 When considering summary judgment, the court views all facts and draws all inferences in the light most favorable to the nonmoving party.40 If reasonable minds could differ on material facts, summary judgment is inappropriate because summary judgment's purpose is to avoid unnecessary trials when the facts are undisputed, and the case must then proceed to the trier of fact.41

If the moving party satisfies Rule 56 by demonstrating the absence of any genuine issue of material fact, the burden shifts to the party resisting summary judgment to "set forth specific facts showing that there is a genuine issue for trial."42 The nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts"; he "must produce specific evidence, through affidavits or admissible discovery material, to show that" there is a sufficient evidentiary basis on which a reasonable fact finder could find in his favor.43

2. Genuine issues of material fact remain over whether the board-composition provisions in the SPA were waived.

To reach the question of board composition, I must first consider the foundational factual premise of Spirit Bear's claim: HPEV agreed in the SPA that Spirit Bear would have the right to designate half the board of directors for three years.44 The SPA does contain board-composition provisions, but they are more properly characterized as conditions precedent rather than promises. California45 defines a condition precedent as "one which is to be performed before some right dependent thereon accrues, or some act dependent thereon is performed."46 The distinction between contractual promises and conditions is drawn in Corbin on Contracts §30.13, which explains that "a condition is a fact or an event and is not expression of intention or an assurance. A promise in a contract creates a legal duty in the promisor and a right in the promisee; the fact or event constituting a condition creates no right or duty and is merely a limiting or modifying factor."47 The remedy for non-performance of a condition also differs from that for a breach of promise:

Corbin teaches that "[i]t is not difficult to draw the logical distinction between a promise that a specified performance will be rendered, and a provision that makes a specified performance a condition of the legal duty of a party who promises to render another performance."49 If the provision "intended to make the duty of one party conditional and dependent upon some performance by the other (or on some other fact or event)," it is a condition, not a promise.50

The board-composition provisions are found under section 6 of the SPA, entitled "Conditions to each purchaser's obligation to purchase," and below the paragraph that reads:

These board-composition conditions appear as follows:

By stating that Spirit Bear's purchase obligation "is subject to the satisfaction, at or before the Closing Date, of each of [these] conditions," these provisions make it clear that all of these events must occur at or before closing for Spirit Bear's purchase obligation to arise. Paragraph 4 of the SPA obligated HPEV to "use its best efforts to satisfy timely each of" these "conditions."53 These provisions did not survive the closing: paragraph 9(i) of the SPA specifically enumerates certain provisions that "shall survive the Closing"; section 6 is not one of them.54 The SPA's termination provision clarifies that the non-satisfaction of these conditions precedent gave Spirit Bear "the option to terminate" the SPA "without liability" to HPEV.55 Read together, these provisions required HPEV to use its best efforts to bring about these shareholder actions and bylaw amendments before the closing date and merely gave Spirit Bear the right to avoid the purchase if these actions were not timely performed. They are, therefore, conditions precedent to Spirit Bear's obligation to close on the deal, not promises of performance.

There is no dispute that Spirit Bear closed on the purchase without these conditions having been satisfied, and Spirit Bear does not seek to be released from any obligations under the SPA.56 A contracting party may waive a condition precedent or any covenant by "express declaration, or [waiver] may be implied from representations that fall short of an express declaration of waiver, as well as from the parties' conduct and acts and circumstances surrounding performance of the contract."57 At a minimum, there is a genuine issue of fact whether Spirit Bear's closing on the purchase agreement without these conditions having been satisfied resulted in the waiver of these conditions. The provisions contemplate pre-closing action by the shareholders of HPEV "to the satisfaction of" Spirit Bear, and Spirit Bear's completion of the purchase without these conditions having been performed by HPEV's shareholders suggests that Spirit Bear may have been content to close the deal without these conditions having been performed and thus waived their performance. Accordingly, I cannot conclude, as a matter of law, that these provisions of the SPA "entitled" Spirit Bear to the shareholder action and bylaw amendments they contemplated.

3. The effect of the April 12, 2013, settlement agreement leaves genuine issues of fact regarding the viability of Spirit Bear's board-composition claims.

Even if I could conclude that the SPA's conditions precedent obligated HPEV and its board to act and that the failure to satisfy these conditions subjects them to liability for breach, it appears that Spirit Bear released all such claims in the April 12, 2013, agreement with HPEV. The counterclaim is not the first appearance of Spirit Bear's allegation that HPEV was required—but failed—to perform these board-composition obligations under the SPA. HPEV's June 24, 2013, form 10K reports that HPEV received letters from Sprit Bear in February and March 2013 alleging that HPEV was "in default of" the SPA because it "had not acted promptly to make 50% of the board of directors Spirit Bear designees."58 HPEV and Spirit Bear then entered into a settlement of those allegations in a April 12, 2013, agreement whereby Spirit Bear "irrevocably and unconditionally release[d] and forever discharge[d]" HPEV and its "employees, stockholders, officer, directors, agents, representatives and direct and indirect affiliates and respective successors and assigns . . . of and from any and all actions, causes of actions, suits, debts, charges, demands, complaints, claims, administrative proceedings, liabilities, obligations, promises, judgments, agreements, controversies, collection efforts, damages and expenses . . . of any kind or nature whatsoever, in law or equity, whether [then] known or unknown (collectively, the "Claims"), which Spirit Bear and/or any of [its officers, directors, members, managers, equity owners, agents, representatives, heirs and direct and indirect affiliates and their respective successors and assigns] ever had until" April 12, 2013, "with respect to" the failure to perform the board-composition provisions in the SPA.59 The agreement makes clear that this release "may be asserted by any Party as a full and complete defense to any subsequent Claim by" Spirit Bear.60

At a minimum, there is a genuine issue of material fact whether Spirit Bear's claims regarding the breach of the SPA conditions precedent were released by the April 12, 2013, settlement agreement. Evidence supports that Spirit Bear raised these allegations in February and March 2013 and then broadly released HPEV, its shareholders, directors, officers, and others from all claims "of any kind or nature whatsoever" regarding those allegations.

4. Spirit Bear has not demonstrated that the bylaws-amendment and director election process was improperly conducted.

Spirit Bear's argument that the process by which the January 2014 vote (in which a majority of the shareholders voted not to retain the Spirit Bear directors) was carried out violated the company's bylaws and is therefore void also fails to carry the day. Spirit Bear argues that the Company filed with the SEC on November 15, 2013, a notice of the annual meeting, which set the meeting for December 30, 2013, identified an agenda that included election of the six directors, and noted that plurality voting would control the election of the board.61 The proxy statement for that vote represented that the board recommended a vote "for" each of the nominees.62 But on December 5, 2013, the non-Spirit Bear directors Timothy Hassett, Judson Bibb, and Quentin Ponder took it upon themselves to file amended notices—never approved by the Spirit Bear directors—that added a proposed amendment to HPEV's bylaws that changed the voting process from plurality voting to majority voting, which—if approved—would govern this election cycle. And the new proxy statement noted that any proxy returned without the shareholder having indicated its vote would result in the proxy being voted in favor of Hassett, Bibb, and Ponder and not in favor of the Spirit Bear directors.63 When the votes were tallied by the company's independent transfer agent, the bylaws amendment to the voting procedure passed by 78%, approximately 78% of the outstanding shares were voted against the Spirit Bear directors, and between approximately 72-77% of the votes were cast in favor of Hassett, Bibb, and Ponder.64

Spirit Bear contends that Hassett, Bibb, and Ponder did not have the authority to change the notice and proxy statement to include the majority-vote amendment because "HPEV's bylaws explicitly require that the board approve the inclusion of that [action] in the annual meeting notice."65 Spirit Bear offers a footnoted citation to Article II, Section 4 of HPEV's Bylaws as support for this proposition, but the text of that provision belies Spirit Bear's argument because it says nothing about board approval of annual meeting notices:

Indeed, this provision suggests that just one officer must approve the notice. Thus, the legal premise for Spirit Bear's argument—that the company's changes to the notice without approval by the non-Spirit Bear members of the board violated the bylaws—is unsupported by the record. Based on the evidence Spirit Bear itself has provided, I cannot conclude as a matter of law that the bylaws were improperly amended to change the voting process from plurality to majority vote, nor can I conclude that the election of board members at the January 2014 annual meeting was legally invalid.

5. The Spirit Bear directors are holdover directors.

Although the evidence and controlling contractual provisions presently prevent me from concluding as a matter of law that HPEV did—or failed to do—something to ensure the Sprit Bear directors' place on the HPEV board, I still must decide the question raised by Spirit Bear's final, alternative argument: even if the Spirit Bear directors were not re-elected at the annual meeting, did they retain their positions in a holdover capacity? Spirit Bear argues that HPEV's bylaws and NRS 78.330(1) answer the question clearly: Jay Palmer, Carrie Dwyer, and Donica Holt remain on the board unless and until they are replaced by a successor or they resign and are removed. HPEV responds that "a fact finder could conclude that the vote AGAINST" these Spirit Bear directors "constitute[s] the actual or constructive removal of each of them as directors,"67 so summary judgment is not available.

a. The proxy statements belie HPEV's claim that votes "against" the Spirit Bear directors were votes for their removal.

Article III, Section 6 of HPEV's bylaws permits directors to be removed by a two-thirds vote:

But nothing in the notices or proxy materials for the January 2014 election even suggested that a vote "against" any director up for election would be a vote for his or her removal under this provision. Indeed, just the opposite is true. The amended proxy statements sent to shareholders announce that they will be voting "to elect the directors of the Company to serve until the Annual Meeting of Stockholders in 2014."69 Shareholders were advised that under the plurality system, "failure to vote for an individual will result in another individual receiving a larger proportion of the votes cast."70 But if the majority-vote amendment were to first pass, "only those nominees who receive the vote of a majority of the outstanding shares will be elected to the Board. Any director who fails to receive a majority of the votes of the outstanding shares will be requested to resign from the Board. However. . . . there is currently no authority requiring a director to resign in such a situation. Therefore, this could result in having a special meeting subsequent to the Annual Meeting for the sole purpose of ensuring that any directors not voted by the shareholders are removed from the Board. . . ."71 Thus, even HPEV contemplated that removal would not happen without at least one additional step not taken by this election. HPEV's argument that votes "against" the Spirit Bear directors were effectively votes for their removal is thoroughly unsupported by the record.

b. Palmer, Dwyer, and Holt remain holdover directors under the bylaws and NRS 78.330(1).

Because Palmer, Dwyer, and Holt were not removed, they remain holdover directors by express operation of HPEV's bylaws and NRS 78.330(1). Article III, Section 5 of HPEV's bylaws provides:

Palmer, Dwyer, and Holt were appointed by the board after the number of directorships was increased.73 Thus, under this Nevada corporation's bylaws, these "newly elected director[s]" "hold such office until" their successors are "elected and qualified or until [their] earlier resignation and removal."74 There is no dispute that Palmer, Dwyer, and Holt's successors have not been elected or qualified, nor have these directors resigned and been thereafter removed. Accordingly, under Article III, Section 5, they continue to "hold such office."

NRS 78.330(1) buttresses this conclusion. The last sentence of NRS 78.330(1) states, "Unless otherwise provided in the articles of incorporation or bylaws, each director holds office after the expiration of his or her term until a successor is elected and qualified, or until the director resigns or is removed." As Palmer, Dwyer, and Holt have not been succeeded by the election and qualification of new directors, they have not resigned, and they have not been removed, "each director [continues to] hold[] office."

The Declaratory Judgment Act (DJA) states that, "In a case of actual controversy within its jurisdiction . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought."75 "[F]ederal courts have discretion under the DJA only as to whether to award declaratory relief pursuant to the jurisdiction that they must properly derive from the underlying controversy between the litigants."76 Declaratory judgment actions are justiciable when: (1) the judgment will serve a useful purpose in clarifying and settling the legal relations in issue, and (2) when it will terminate and afford relief from uncertainty, insecurity, and controversy giving rise to the proceeding.77

HPEV has failed to identify any genuine issue of material fact to preclude summary judgment in Spirit Bear's favor on the narrow issue of whether Spirit Bear is entitled to a judicial declaration that Palmer, Dwyer, and Holt are still directors on the HPEV Board and have been since their purported non-election at HPEV's annual meeting, as requested in paragraph 141 of Spirit Bear's sixth counterclaim for relief.78 This judgment will serve a useful purpose in clarifying and settling the legal relations of these parties as they proceed in corporate governance. Accordingly, I grant partial summary judgment on this singular issue and enter a declaration that Jay Palmer, Carrie Dwyer, and Donica Holt remained holdover directors on the HPEV board despite the January 2014 director election.

6. HPEV's countermotion to deny or delay summary judgment under FRCP 56(d)

HPEV also suggests that I should delay or deny summary judgment under FRCP 56(d) to allow HPEV further discovery into whether Palmer, Dwyer, and Holt are mere puppets of securities-industry "pariah" Robert Olins, whom HPEV fears "has wrapped his deceitful tentacles firmly around HPEV, through his undisclosed control of Spirit Bear." Doc. 124 at 2. I do not find that Olins's relationship, if any, with Spirit Bear and its nominees has any relevance to the questions raised by this motion, the resolution of which turns on contractual and statutory provisions, not on whether or not the alleged violation—or application—of those provisions is somehow justified by a desire to keep Olins's "deceitful tentacles" off HPEV. Id. Palmer, Dwyer, and Holt were appointed to the board by the other HPEV directors, and the company's bylaws and Nevada law permit them to retain those seats until they are properly succeeded or removed. HPEV has not demonstrated that Olins' relationship to Spirit Bear or its board-of-directors designees has any bearing on that conclusion. Accordingly, HPEV's Rule 56(d) countermotion is denied.

Conclusion

Accordingly, and for all the foregoing reasons, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that:

• HPEV's countermotion for relief pursuant to FRCP 56(d) [#127] is DENIED.