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McFarland v. Long

United States District Court, D. Nevada

October 6, 2017

MICHAEL MCFARLAND, Plaintiff,
v.
MICHAEL R. LONG, . Defendants.

          ORDER

          RICHARD F. BOULWARE, II UNITED STATES DISTRICT JUDGE

         I. INTRODUCTION

         This case is before the Court on Defendant Louis A. Hoch's Motion to Dismiss (ECF No. 31) and Defendants' Joint Motion to Dismiss (ECF No. 52). Motion to Dismiss (ECF No. 31), which joined Motions to Dismiss (ECF Nos. 12 and 18) in full, is subject to the Court's orders on those motions from January 10, 2017. Therefore, Motion to Dismiss (ECF No. 31) is GRANTED in part and DENIED in part, pursuant to the Court's order at Docket 53.

         The Court held a hearing on Motion to Dismiss (ECF No. 52) on May 18, 2017.

         II. BACKGROUND

         A. Claims

         Plaintiff brings the following claims:

         1.) A claim for breach of the fiduciary duty of loyalty, a derivative claim against all Defendants for granting themselves excessive and unfair compensation during 2013 and 2014, as well as an individual claim against Defendant Kirby for failing to implement controls to ensure fair compensation;

         2.) A claim for breach of the fiduciary duty of loyalty directly against all Defendants for granting themselves a December 2014 stock award, which Plaintiff alleges “resulted in an improper transfer of economic value and voting power from the Company's minority public shareholders to Defendants” in an action which was designed to advance Defendants' own interests; and

         3.) An unjust enrichment claim derivatively against Defendants Long, Hoch, Morrison, and Keller.

         B. Alleged Facts

         Plaintiff is a minority stockholder in Payment Data Systems (“Payment Data” or “the Company”). Payment Data generates revenues by charging fees for the electronic processing of payment transactions. Payment Data is a small company with revenues of $25.92 million in the aggregate from 2012-2014. As of June 26, 2015, Payment Data had a market capitalization of approximately $51 million.

         Since co-founding the Company in 1998, Long has served as CEO and Hoch has served as President and COO. Long also served as CFO from September 2003 until March 2015. From 2003 until March 2015, only two other executive officers, Morrison and Keller, have been employed by the Company. Morrison has served as the Company's Senior Vice President and Marketing Officer since July 2003, and Keller has served as the Company's Senior Vice President and Chief Technology Officer since 2007.

         Between 1999 and 2003, the Company had a Board consisting of between five to seven members, including Long and Hoch. During this time, the Board had an independent Audit Committee and an independent Compensation Committee, both of which were comprised of two to four members. Following the resignation of four directors between 2002 and 2003, by 2004 the Board consisted of only Long, Hoch, and Kirby. Until April 2015, the Board therefore comprised of Long and Hoch (management) and just one “purportedly independent” director Kirby. Between 2004 and April 2015, Kirby served as the lone member of the Board's Audit Committee. In its public filings, Payment Data acknowledges that Kirby does not meet the criteria to constitute an “audit committee financial expert” as defined under the SEC's rules. Between 2004 and 2007, Kirby was the lone member of the Board's Compensation Committee, which, as described in Payment Data's annual proxy statements during that period, had “authority to set all forms of compensation of Payment Data's executive officers.” After 2007, the Company's public filings no longer mention the existence of a Compensation Committee.

         Instead, beginning in 2007, Kirby simply allowed the executive officers themselves to decide how they would be paid. The executive officers responded by awarding themselves most of Payment Data's gross profits as compensation. On February 27, 2007, Long entered into an employment agreement with the Company which, among other things, provided for an annual salary, bonus payments, and stock awards, through December 31, 2011. Hoch signed the employment agreement on behalf of the Company. That same day, Hoch himself entered into an employment agreement with the Company which, among other ...


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