Title: Stockbridge v. Gemini Air Cargo, Inc.

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  Hassell, C.J., Keenan, Koontz, Kinser, Lemons, and 
Agee, JJ., and Russell, S.J. 
 
WILLIAM D. STOCKBRIDGE 
             OPINION BY 
SENIOR JUSTICE CHARLES S. RUSSELL 
v.  Record No. 041716  
           April 22, 2005 
 
GEMINI AIR CARGO, INC. 
 
FROM THE CIRCUIT COURT OF LOUDOUN COUNTY 
Hon. Burke F. McCahill, Judge 
 
 
This appeal involves an action by a stockholder and 
former employee of a Delaware corporation to recover damages 
for breach of the corporation's contract to repurchase his 
shares.  The precise question before us is whether the trial 
court erred in granting summary judgment in the corporation's 
favor by relying on Section 160 of the Delaware General 
Corporation Law, Del. Code Ann. Tit. 8, § 160(a) ("Section 
160"), which prohibits the repurchase of a corporation's own 
stock while its capital is impaired.  It is undisputed that 
because the controversy involves the internal affairs of the 
corporation, the laws of Delaware, the state of incorporation, 
apply. 
Facts and Proceedings 
 
Because the trial court granted summary judgment, the 
facts will be summarized in the light most favorable to the 
non-moving party, William D. Stockbridge.  Renner v. Stafford, 
245 Va. 351, 353, 429 S.E.2d 218, 220 (1993).  Stockbridge is 
a founder, former president and former chief executive officer 
of Gemini Air Cargo, Inc. (Gemini), a Delaware corporation 
having its principal place of business in Virginia.  
Stockbridge served as chairman of Gemini’s board of directors 
until March 29, 2002, when Gemini terminated his employment 
without cause.  He owned 10,376 shares of its voting common 
stock when this action was filed.  All the shares had been 
issued in 1999 at a par value of $503.11 per share. 
 
Gemini had entered into a stockholder’s agreement with 
Stockbridge and others when the shares were issued in 1999. 
The agreement provided, in pertinent part: 
In the event of a Termination Without Cause . . . for a 
period of sixty (60) days following the date of such 
Termination Without Cause, such Stockholder shall have 
the option to sell . . . to the Company all, but not less 
than all, of the Restricted Shares and Vested Options 
. . . held by such Stockholder . . .(“Put Right”). The 
Put Right shall be exercised in each case by a written 
notice (“Put Notice”) to the Company given in accordance 
with Section 8(f) of this Agreement on or prior to the 
last date on which the Put Right may be exercised by such 
Stockholder. 
 
The agreement also provided that a stockholder’s “Put Right” 
would “not be exercisable” if the board of directors 
determined, in good faith, that the repurchase of shares was 
“prohibited . . . by applicable law” or would constitute a 
breach of any loan agreement to which the corporation was a 
party or if “the Company is not otherwise able to obtain the 
consent of its senior lender to such repurchase.”  The 
agreement termed these conditions “Repurchase Disabilities.” 
 
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The agreement provided that any repurchase of shares 
pursuant to the “Put Right” was to take place within 60 days 
of the receipt of the “Put Notice” by Gemini, but that the 
time for performance would be extended pending receipt of any 
required governmental approval, pending determination of the 
“Put Purchase Price” or pending resolution of any “Repurchase 
Disability.”  Gemini was required to give the stockholder 
notice in writing if it determined that a “Repurchase 
Disability” existed and to send the stockholder a 
“Reinstatement Notice” as soon as practicable after the 
disability was removed. 
 
On May 23, 2002, Stockbridge’s counsel sent a letter to 
Gemini exercising his “Put Right” to sell his 10,376 shares to 
the corporation.  Receiving no response, Stockbridge’s counsel 
wrote again, on September 16, 2002, requesting a reply from 
Gemini and expressing his opinion that the stock had the value 
of $503.11 per share when he exercised his “Put Right.”  
Again, Gemini made no response but referred the matter to 
Gregory S. Ledford, a member of its board of directors.  On 
October 10, 2002, Stockbridge’s counsel wrote to Gemini 
asserting a claim for $5,220,269.36, based on Stockbridge’s 
valuation of his shares.  Ledford responded, for Gemini, that 
the corporation did not agree with the valuation asserted by 
 
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Stockbridge but that it was “willing and will continue to 
cooperate with respect to determination of Fair Market Value.” 
 
Stockbridge’s counsel wrote again to Ledford on 
December 11, 2002, on January 6, 2003 and on January 15, 2003, 
requesting that the determination of the fair market value of 
the stock be made by an independent appraiser, pursuant to the 
terms of the stockholder’s agreement, and suggesting such an 
appraiser by name together with a statement of his 
qualifications.  Ledford never responded in writing, but left 
a voice mail message for Stockbridge’s counsel indicating 
agreement to the appraiser counsel had suggested.  Gemini, 
however, never cooperated with the appraiser and refused to 
furnish him with the data needed for his evaluation of the 
stock. 
 
Later, Gemini attempted to revoke its agreement to submit 
the valuation issue to the appraiser.  Stockbridge brought 
this action on June 3, 2003, by motion for judgment to recover 
damages for breach of contract.  After suit was filed, Gemini, 
for the first time, sent Stockbridge a “Disability Notice” 
pursuant to the stockholder’s agreement asserting that the 
corporation was “under significant financial distress” and 
that “at all times since Mr. Stockbridge exercised his Put 
Right, the Company has been prohibited by the terms of the 
 
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senior credit facility from repurchasing any equity 
securities.” 
 
Gemini responded to the motion for judgment by filing a 
plea in bar, asserting that any repurchase of its stock would 
violate Section 160(a) and that it would also be prohibited by 
the terms of the stockholder’s agreement because it would 
breach the terms of a loan agreement.  The plea asserted that 
those conditions constituted a “Repurchase Disability” under 
the terms of the stockholder’s agreement and that such a 
disability “precludes this action for specific performance of 
the Agreement.”∗
 
At a hearing on the plea in bar, Gemini called a single 
witness, its current chief operating officer, who testified 
that from the date of Stockbridge’s “Put Notice” until the 
time of the hearing, Gemini’s financial records showed a 
negative capital surplus.  Gemini argued that this was 
dispositive of the case because of the effect of Section 160, 
which provides, in pertinent part: 
[N]o corporation shall . . . [p]urchase or redeem its own 
shares of capital stock . . . when the capital of the 
corporation is impaired or when such purchase or 
                     
∗ Stockbridge pointed out at the hearing on the plea in 
bar that he was not seeking specific performance of the 
agreement, but was seeking damages at law for its breach. 
Gemini abandoned its claim that the “repurchase disability” 
was a bar to Stockbridge’s recovery and elected to proceed on 
the sole claim that Delaware law barred the action. 
 
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redemption would cause any impairment of the capital of 
the corporation. 
 
The Supreme Court of Delaware has held that a repurchase 
impairs capital “if the funds used in the repurchase exceed 
the amount of the corporation’s ‘surplus,’ defined...to mean 
the excess of net assets over the par value of the 
corporation’s issued stock.”  Klang v. Smith’s Food & Drug 
Ctrs. 702 A.2d 150, 153 (Del. 1997). 
 
At the hearing on the plea in bar, Stockbridge conceded 
that the corporation’s books showed a capital impairment but 
argued that the books did not tell the whole story.  Relying 
on Klang, he pointed out that under Delaware law, “the books 
of a corporation do not necessarily reflect the current values 
of its assets and liabilities,” id. at 154, and that he was 
entitled to try the issue of Gemini’s true financial condition 
before a jury. 
 
At the conclusion of the hearing, the trial court made a 
finding that “there was a negative capital surplus shown by 
the evidence” but requested briefs as to the legal conclusion 
to be drawn.  After reviewing the briefs of counsel, the 
court, by letter opinion, overruled the plea in bar on the 
ground that it was essentially a plea of the general issue and 
that such pleas were abolished by our Rule 3:5.  The case was 
 
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set for a jury trial and Gemini was directed to file its 
grounds of defense. 
 
Gemini then filed a motion for summary judgment asserting 
the same grounds as those raised by its overruled plea in bar.  
At a hearing on the motion for summary judgment, Stockbridge 
pointed out that discovery had demonstrated bad faith on 
Gemini’s part:  Notwithstanding its claim that its capital was 
at all pertinent times impaired, it had allowed another former 
employee to exercise his “Put Right” five months after 
Stockbridge had given his “Put Notice,” repurchasing that 
employee’s stock at $503 per share, substantially the 
valuation Stockbridge claimed; Gemini had rewarded its 
officers with substantial bonuses in 2003; Gemini’s board had 
never asserted any capital impairment until after suit was 
filed, but had instead offered to “continue to cooperate with 
respect to the determination of Fair Market Value.”  
 
Stockbridge also contended that Gemini had waived any 
defenses it might have had under Delaware law or under the 
stockholder’s agreement by failing to raise them timely and, 
instead, pretending to consider his “Put Notice” for over a 
year.  He pointed out that the minutes of Gemini’s board 
showed no record of any consideration of his “Put Notice” at 
all and that Ledford, the director to whom the matter was 
referred, had testified that he could not recall any 
 
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discussion of “capital impairment” at any board meetings 
before suit was filed. 
 
The court stated that it had made a finding “based on the 
evidence at the plea in bar hearing, that the Defendant had a 
negative capital surplus on May 23, 2002, which was the put 
date . . . and continuing up to the present. . . .”  Relying 
on the applicable law of Delaware, the court equated that 
finding with a determination that Gemini’s capital had been 
impaired.  The court therefore held that “while the contract 
is not void it is presently unenforceable under §160 of the 
applicable Delaware Code” and granted Gemini’s motion for 
summary judgment.  We awarded Stockbridge this appeal. 
Analysis 
A. Summary Judgment 
 
The trial court made a finding of fact at the hearing on 
the plea in bar that was based entirely on the state of 
affairs shown on the face of the corporation’s books.  The 
Delaware courts, in applying Section 160, have held that the 
books of a corporation may not accurately reflect its true 
financial condition.  The Supreme Court of Delaware, in Klang, 
noted that unrealized appreciation or depreciation could 
readily render book numbers inaccurate.  702 A.2d at 154. 
Further, it is clear that an adverse party has the right to 
question whether the corporation’s statement of its financial 
 
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condition was made in good faith.  An allegation of fraud or 
bad faith in a corporation’s representations of its financial 
condition presents an issue of fact, not a question of law. 
 
Gemini asserted in the trial court and on appeal that 
Stockbridge had conceded, in arguments before the trial court, 
that Gemini had a negative capital surplus.  The trial court 
observed, in ruling on the motion for summary judgment, that 
Stockbridge had made such a concession.  We do not so read the 
record.  Stockbridge indeed conceded that the corporation’s 
books showed a negative capital surplus, but he at all times 
contended that the books were not a verity.  Stockbridge 
argued that the burden was on Gemini to prove, as an 
affirmative defense, that its capital was impaired and that he 
had a right to a jury trial on the issue. 
 
Further, the court’s reliance, in granting summary 
judgment based on its finding of fact made during the plea in 
bar hearing was inconsistent with its final ruling on the plea 
in bar.  The trial court overruled the plea in bar on the 
ground that it constituted nothing more than a plea of the 
general issue and that such pleas had been abolished by our 
Rule 3:5.  At common law, a plea of the general issue was a 
traverse, a general denial of the plaintiff’s whole 
declaration or an attack upon some fact the plaintiff would be 
required to prove in order to prevail on the merits.  It had 
 
9
the effect of challenging the plaintiff to go to trial and 
prove his case.  See Dudley v. Carter Red Ash Colliers Co., 
125 Va. 701, 705, 100 S.E. 466, 467 (1919); Big Sandy & C.R. 
Co. v. Ball, 133 Va. 431, 437-38, 113 S.E. 722, 725 (1922); 
Kent Sinclair & Leigh B. Middleditch, Jr., Virginia Civil 
Procedure § 9.8 (4th ed. 2003).  Thus, after making its 
finding with respect to Gemini’s financial condition at the 
hearing on the plea in bar, the trial court negated that 
finding by ruling, in effect, that Gemini’s defenses were not 
properly raised by a plea in bar, but instead, were proper 
subjects for determination by a jury. 
 
We have repeatedly held that summary judgment is a 
drastic remedy, available only where there are no material 
facts genuinely in dispute.  Smith v. Smith, 254 Va. 99, 103, 
487 S.E.2d 212, 215 (1997); Slone v. General Motors Corp., 249 
Va. 520, 522, 457 S.E.2d 51, 52 (1995).  It should not be used 
to short-circuit litigation by deciding disputed facts without 
permitting the parties to reach a trial on the merits.  
Renner, 245 Va. at 352, 429 S.E.2d at 219.  For these reasons, 
we conclude that the trial court erred in granting summary 
judgment.  Because the case must be remanded, we will discuss 
other issues that may affect further proceedings in the trial 
court. 
B. Corporation’s Standing to Assert Section 160 
 
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Stockbridge argues here, as he did in the trial court, 
that the Delaware Legislature never intended Section 160 to 
benefit corporations.  He points to the Delaware court’s 
language in Klang:  “It is helpful to recall the purpose 
behind Section 160.  The General Assembly enacted the statute 
to prevent boards from draining corporations of assets to the 
detriment of creditors and the long-term health of the 
corporation.”  702 A.2d at 154.  An authoritative treatise 
states flatly:  “The corporation itself cannot have the 
purchase declared illegal, in states where such a purchase is 
allowable under some conditions, even if injured shareholders 
or creditors might have that right.”  6A William M. Fletcher, 
Cyclopedia of the Law of Private Corporations § 2861, at 477 
(perm. ed. 1997 rev. vol.).  See also Askanase v. Fatjo, 130 
F.3d 657, 675 (5th Cir. 1997) (refusing to find a violation of 
Delaware’s § 160 even where a corporation’s capital was 
impaired because to do so would not be within the statutory 
purpose); In re Reliable Mfg. Corp., 703 F.2d 996, 1001 (7th 
Cir. 1983) (the statute’s underlying purpose should be 
considered in determining whether to apply it); Minnelusa Co. 
v. Andrikopoulos, 929 P.2d 1321, 1324 (Colo. 1996) (“the 
validity of a corporate stock repurchase may be attacked only 
by persons who are injured or prejudiced thereby and not by 
the corporation itself”). 
 
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The foregoing authorities represent a clear majority view 
in jurisdictions applying Delaware’s Section 160 or similar 
laws adopted by other states.  Nevertheless, Gemini points out 
that the cited cases all address situations in which the 
repurchase of stock had been concluded and was sought to be 
undone at the behest of the corporation.  Gemini argues that 
in the present case, the corporation is relying on Section 160 
only in order to protect its directors from being compelled to 
do, or penalized for their failure to do, an unlawful act that 
would subject them to personal liability under Delaware law, 
specifically Section 174(a) of Title 8 of the Delaware Code 
Annotated. 
 
Notwithstanding the persuasiveness of the authorities, we 
are unwilling to adopt an inflexible rule that a corporation 
may not in any circumstances assert Section 160, or similar 
laws, to avoid a stock repurchase while its capital is 
impaired.  Directors have a fiduciary duty to manage the 
corporation’s affairs with the utmost good faith in the best 
interests of all its shareholders and of the long-term health 
of the corporation itself.  Whether they have done so in a 
particular case is a question of fact.  We hold that Gemini 
may avail itself of Section 160 as an excuse for non-
performance of its contract with Stockbridge if it carries its 
burden of proving, as an affirmative defense, that its capital 
 
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was impaired at all pertinent times.  Gemini may not avail 
itself of this defense, however, if its capital impairment was 
procured by bad faith on the part of its directors, officers 
or agents, or if they acted in bad faith with respect to 
Stockbridge’s “Put Right.”  The burden of proof on the issue 
of bad faith is on Stockbridge. 
C. Waiver 
 
The defense that may be afforded by Section 160 is 
created by operation of law, is independent of the terms of 
the contract between the parties and cannot be waived.  
Gemini, however, also asserts defenses based upon the 
provisions of the stockholder’s agreement:  The “Repurchase 
Disabilities” which it invoked after Stockbridge had filed 
this suit.  In its pleadings, Gemini relied on two such 
disabilities: (1) that the repurchase was “prohibited by 
applicable law” (Section 160) and (2) that it would constitute 
a breach of a loan agreement to which Gemini was a party. 
Either of these conditions, if proved, would have afforded 
Gemini an excuse for non-performance under the terms of the 
agreement. 
 
Waiver arises from the intentional relinquishment of a 
known right.  Virginia Tech. v. Interactive Return Service, 
Inc., 267 Va. 642, 651-52, 595 S.E.2d 1, 6 (2004).  The 
“disability notice” given by Gemini to Stockbridge mentioned 
 
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only the second of its contract defenses, the effect of “the 
terms of the senior credit facility,” presumably referring to 
a loan agreement.  Thus its first contract defense, the effect 
of Section 160 purely as a contract defense, was waived by 
Gemini’s failure to assert it as a “Repurchase Disability” 
pursuant to the terms of the stockholder’s agreement. 
 
Gemini also waived its contract defense that a repurchase 
would violate the terms of a loan agreement by its failure to 
make any timely assertion of it.  The facts leading to this 
conclusion are undisputed. 
 
Generally, corporate directors have an affirmative duty 
to become acquainted with the corporation's business so as to 
enable themselves to carry out their fiduciary obligations.  3 
Fletcher, supra § 840, at 199.  A failure to make reasonable 
inquiry or inadequate monitoring by a director may constitute 
a breach of duty.  3A Fletcher, supra § 1034.80, at 25.  Thus, 
directors are presumed to have a reasonable degree of 
knowledge of the facts plainly appearing on the face of the 
corporate records.  Id. § 1060, at 99. 
 
Because the board of directors of a Delaware corporation 
has the legal responsibility to manage its business for the 
benefit of the corporation and its shareholders with “due 
care, good faith, and loyalty,” Malone v. Brincat, 722 A.2d 5, 
10 (Del. 1998), Gemini’s board was at all times charged with 
 
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constructive knowledge of its general financial condition, 
including knowledge of the terms of any loan agreements to 
which the corporation was a party.  Its duty under the 
stockholder’s agreement was either to repurchase Stockbridge’s 
shares within 60 days of receipt of his “Put Notice” or, if 
the board determined in good faith that a repurchase 
disability existed, to give him a “Disability Notice” and 
thereafter to repurchase his stock “as soon as reasonably 
practicable after all Repurchase Disabilities cease[d] to 
exist.” 
 
Because the agreement provided no deadline for the 
issuance of a “Disability Notice,” we interpret its provisions 
to require that such notice be issued within a reasonable time 
after the operative facts became known to the board.  When it 
received Stockbridge’s “Put Notice,” the board had 
constructive notice of the corporation’s affairs and the terms 
of any loan agreements to which it was a party.  See Skouras 
v. Admiralty Enterprises, Inc., 386 A.2d 674, 682 (Del. Ch. 
1978) (while a member of its board, a director is not only in 
a position to have first-hand knowledge of the corporation's 
transactions but also has a fiduciary duty to investigate its 
affairs).  The board was thus deemed to be immediately aware 
of any “Repurchase Disability” then existing.  It was then 
incumbent upon the board, under its fiduciary duty to the 
 
15
corporation and all its stockholders, as well as to 
Stockbridge under the stockholder's agreement, within a 
reasonable time to give Stockbridge notice of any disability 
upon which it intended to rely.  Instead, Gemini lapsed into 
silence for five months and then, without asserting any 
"Repurchase Disability," offered to cooperate with Stockbridge 
in ascertaining the fair market value of his stock in order 
that the repurchase could proceed.  Later, Gemini, through its 
designated agent, agreed to the selection of an independent 
appraiser for that purpose but failed to perform that 
agreement and remained silent for another seven months until 
Stockbridge filed this action, when Gemini, for the first 
time, asserted a "Repurchase Disability." 
 
Two elements are necessary to establish waiver:  
Knowledge of the facts basic to the exercise of the right and 
the intent to relinquish the right.  Virginia Tech, 267 Va. at 
651-52, 595 S.E.2d at 6.  An implied waiver must be 
established by clear and convincing evidence.  Baumann v. 
Capozio, 269 Va. ___, ___, ___ S.E.2d ___, ___ (this day 
decided). Here, that standard is met.  Because of the board’s 
constructive knowledge of the corporation’s affairs, it had 
knowledge of the facts basic to the exercise of its right to 
invoke a "Repurchase Disability."  Because the board also had 
the fiduciary duty to act with fidelity to the interests of 
 
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the corporation and its stockholders, see  Malone, 722 A.2d at 
7, 10-11, and failed to invoke a "Repurchase Disability" for 
their protection for over a year after receiving Stockbridge’s 
“Put Notice,” it will be presumed to have intended to 
relinquish its right to do so.  Accordingly, we hold that 
Gemini waived its contractual defenses under the stockholder’s 
agreement. 
Conclusion 
 
For the foregoing reasons, we will reverse the judgment 
of the trial court and remand the case for further proceedings 
consistent with this opinion. 
Reversed and remanded. 
 
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