Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_15-cv-02696/USCOURTS-cand-4_15-cv-02696-0/pdf.json

Nature of Suit Code: 791
Nature of Suit: Employee Retirement Income Security Act (ERISA)
Cause of Action: 28:1132 E.R.I.S.A.

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UNITED STATES DISTRICT COURT 

FOR THE NORTHERN DISTRICT OF CALIFORNIA 

OAKLAND DIVISION 

FRANK MCBRIDE, III, 

 Plaintiff, 

 vs. 

PENTAGON TECHNOLOGIES GROUP, 

INC., et al., 

 Defendants. 

Case No: C 15-2696 SBA 

ORDER DENYING DEFENDANTS’ 

MOTIONS TO DISMISS

Dkt. 4, 9. 

Plaintiff Frank A. McBride (“McBride” or “Plaintiff”) brings this diversity 

jurisdiction action against his former employer, Pentagon Technologies Group, Inc. 

(“Pentagon”), claiming that he is owed deferred compensation under the terms of his Equity 

Deferred Compensation Agreement (“EDC Agreement”). Also named as party-defendants 

are Baird Capital Partners III Limited Partnership, BCP III Special Affiliates Limited 

Partnership, BCP III Affiliates Fund Limited Partnership (collectively “BCP Partnerships”) 

and Baird Capital Partners Management Company III, L.L.C. (“Baird Capital Partners”), 

which purchased a majority interest in Pentagon in July 2000.1

 

The parties are presently before the Court on Pentagon and Baird’s respective 

motions to dismiss for failure to state a claim upon which relief can be granted, pursuant to 

Federal Rule of Civil Procedure 12(b)(6). Dkt. 4, 9. Having read and considered the 

papers filed in connection with this matter and being fully informed, the Court hereby 

DENIES the motions for the reasons set forth below. The Court, in its discretion, finds this 

matter suitable for resolution without oral argument. See Fed. R. Civ. P. 78(b); N.D. Cal. 

Civ. L.R. 7-1(b). 

 1 Baird Capital Partners is the general partner of each of the BCP Partnerships, and 

utilized each of those partnerships to invest in Pentagon. See First Am. ComplaintCorrected) (“FAC”) ¶¶ 4, 5. Baird Capital Partners and the BCP Partnerships collectively 

are referred to as “Baird.” 

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I. BACKGROUND 

A. FACTUAL SUMMARY

This case arises out of McBride’s employment with Pentagon, where he served as its 

Chief Executive Officer from 1998 to 2008. Order at 2, Dkt. 20. Pentagon, which “sells 

products and services that improve the front-end process tools used in the manufacturing of 

semiconductors,” was incorporated in Ohio in 1998 and established its headquarters in 

Northern California. Id. at 5; FAC ¶¶ 11, 12. At the time Pentagon was formed, Plaintiff 

was awarded a 9% equity stake in the company. Id. ¶ 12. 

In 2000, Baird purchased majority interest in Pentagon for approximately $22 

million. Id. ¶ 13. In connection with Baird’s investment, Plaintiff entered into the EDC 

Agreement, under which he was given the economic value of his equity stake in Pentagon 

through a combination of common stock and deferred compensation. Id. ¶¶ 15-16. The 

amount of Plaintiff’s initial deferred compensation was $1,936,398.60, which was credited 

to a Deferral Contributions Account. Id. ¶ 17. The EDC Agreement states that the Deferral 

Contributions Account is “a bookkeeping account maintained by the Company and shall 

reflect the Deferred Compensation.” Id. ¶ 17; Obselik Decl. Ex. 1 (EDC Agt.) ¶ 2.2, Dkt. 

4-1. The Deferral Contributions Account is characterized as an unsecured liability of 

Pentagon, wherein “[Plaintiff] is solely an unsecured creditor of the Company with respect 

to any amount payable to him under this Agreement.” FAC ¶ 17; EDC Agt. 3.1. 

The Deferral Contributions Account was to be invested in “one or more Permitted 

Investments as of the date of [the EDC] Agreement.” Id. ¶ 18. A “Permitted Investment” 

is defined as “shares of Series A Preferred Stock, par value $.01 per share, of the Company, 

and thereafter such funds, investments or other assets of equal fair market value as may be 

approved by the Committee from time to time for purposes of this Agreement.” Id.; EDC 

Agt. § 1.14. The term “Committee” refers to “the Compensation Committee of the Board 

of Directors or, if none exists, the entire Board of Directors.” FAC ¶ 18; EDC Agt. ¶ 1.7.2

 

 2 According to Plaintiff, the Pentagon Compensation Committee was controlled by 

Baird, through its agents. FAC ¶ 19. 

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The balance in the Deferral Contributions Account was payable to Plaintiff, inter alia, as of 

July 17, 2010, or upon the occurrence of specified events, including a “BCP Liquidity 

Event.” FAC ¶ 22; EDC Agt. § 4.2. A BCP Liquidity Event refers to a transaction in 

which Baird received at least 80% of the value of its investment in the Company’s Series A 

preferred stock (or replacement securities). FAC ¶ 22; EDC Agt. § 1.4. 

In August 2002, Pentagon’s Board amended the Company’s articles of incorporation 

to provide for the issuance of a new Series B stock, which carried a dividend rate of 25%. 

FAC ¶ 23. The following year in October 2003, the Board authorized the issuance of new 

Series C stock, which carried a 10% dividend and a 7-to-1 return on redemption. Id. ¶ 25. 

Both the new Series B and Series C stock were senior to Series A stock. Id. ¶ 26. In 2006, 

Pentagon declared a $10 million dividend on its Series B and Series C stock. Id. ¶ 27. 

Pentagon borrowed most of the funds from its bank lending group to pay the dividend, most 

of which went to Baird. Id. 

In 2008, Irv Pfister, a partner in Baird Capital Partners and the Chairman of the 

Board, “forced” Plaintiff to resign his position. Id. ¶ 28. As part of his separation, Plaintiff 

was required to surrender his common stock, options and management appreciation rights. 

Id. Plaintiff retained his Series B preferred stock and deferred compensation. Id. 

In May 2010, Plaintiff contacted Pentagon in anticipation of the July 17, 2010 

deadline for the payment of his deferred compensation. Id. ¶ 29. In response, Rob Ospalik 

(“Ospalik”), a partner with of Baird Capital Partners told Plaintiff that Pentagon lacked the 

money to pay his deferred compensation and that all excess cash was being paid to the 

banks. Id. ¶ 30. Ospalik further stated that Plaintiff would not receive any payout until 

there was a liquidity event and that all “participants” would be paid equally after the banks 

were paid. Id. 

On July 15, 2010, two days prior to the due date for deferred compensation payout, 

Ospalik sent Plaintiff a Subordination Agreement. Id. ¶ 31. Ospalik told Plaintiff that the 

Pentagon Board of Directors was requiring him to subordinate his rights, pursuant to § 6.6 

of the EDC Agreement. Id. In particular, the draft Subordination Agreement specified that 

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Plaintiff’s right to the payment under the EDC Agreement is deemed subordinate to 

Pentagon’s obligations to its senior lending group. Id. ¶ 32. 

Plaintiff proposed modifications to the Subordination Agreement to confirm his right 

to receive deferred compensation and limit the subordination period. Id. ¶ 33. By letter 

dated August 11, 2010, Ospalik rejected the requested changes. Id. ¶ 36. He added that 

Plaintiff’s Deferral Compensation Account was worthless because it was deemed invested 

in Pentagon Series A Preferred Stock, which had “no value.” Id. Opsalik warned Plaintiff 

that if he did not sign the Subordination Agreement, Pentagon would declare him to be in 

breach of the EDC Agreement. Id. ¶ 34. Plaintiff signed the Subordination Agreement, 

without modification. Id. ¶ 35. Plaintiff asserts that Opsalik’s claim that his Deferral 

Compensation Account had no value is contradicted by Pentagon’s financial statements. 

Id. ¶ 37. 

In May 2011, Baird, as Pentagon’s majority shareholder, sponsored a proposal to 

eliminate all outstanding shares of Pentagon stock. Id. ¶ 80. In its stead, the holders of 

Series C preferred shares, which was principally or entirely Baird, would be issued voting 

common stock. Id. The effect of this arrangement was to maintain Baird’s interest in 

Pentagon while extinguishing the interests of all other shareholders. Id. Plaintiff alleges 

that Baird’s action was “the final step in its plan to deny [him] his rights as a 

shareholder . . . in Pentagon. Id. 

B. PROCEDURAL HISTORY

On December 1, 2014, Plaintiff filed the instant action in the Northern District of 

Ohio, alleging six claims for relief against Pentagon and Baird. The first through third 

claims of the original Complaint alleged violations of the Employee Retirement Income 

Security Act (“ERISA”), 29 U.S.C. §§ 1001 et seq. The remaining claims were for 

declaratory relief to declare that the Subordination Agreement is unconscionable (fourth 

claim); breach of contract based on Pentagon’s refusal to pay the value of his Series B 

shares as required by the Pentagon Subscription Agreement (“Subscription Agreement”), 

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dated August 14, 2002 (fifth claim); and breach of fiduciary duty against Baird, based on 

his position as a majority shareholder of Pentagon (sixth claim). 

In response to the Complaint, Pentagon filed a motion to dismiss under Rule 

12(b)(6) for failure to state a claim, and Rule 12(b)(3) and 28 U.S.C. § 1406(a) for 

improper venue. Dkt. 9. Alternatively, Pentagon moved to transfer venue to the Northern 

District of California for the convenience of the parties and witnesses, pursuant to 28 

U.S.C. § 1404(a). Baird separately moved under Rule 12(b)(6) to dismiss claims three and 

four and the “majority” of claim six. Dkt. 4 at 1. 

Before briefing on Defendants’ motions was completed, Plaintiff filed a First 

Amended Complaint (“FAC”), which eliminated the ERISA claims and added claims for 

breach of contract and breach of the covenant of good faith and fair dealing based on the 

EDC Agreement. Dkt. 11, 12, 18. Though acknowledging that Plaintiff had filed an 

amended pleading, Defendants filed their respective reply briefs, noting that the parties had 

agreed to adjudicate the motions in relation to the original complaint. Dkt. 16 at 1 n.1. On 

June 11, 2015, the Ohio District Court granted Pentagon’s alternative § 1404(a) motion, 

resulting in the transfer of the action to this District. The parties have now requested that 

the Court address the arguments for dismissal presented in their previously filed motions 

that were not addressed by the Ohio District Court. Dkt. 44, 45.3

 

II. DISCUSSION 

A. BREACH OF CONTRACT AND BREACH OF THE COVENANT OF GOOD FAITH 

AND FAIR DEALING (EDC AGREEMENT) 

In his first claim, Plaintiff alleges that Pentagon breached the EDC Agreement by 

failing to disburse the balance in his Deferral Contributions Account, which, as of July 17, 

2010, was valued at $6,297,939.30. FAC ¶¶ 42-44. Plaintiff’s second claim for breach of 

 3 The Court notes that upon its filing, the FAC became the operative pleading. 

Ferdik v. Bonzelet, 963 F.2d 1258, 1262 (9th Cir. 1992) (stating that it is a “wellestablished doctrine that an amended pleading supersedes the original pleading.”). As such, 

the Court construes the arguments presented in the instant motions as being directed to the 

claims alleged in the FAC, not the original complaint. 

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the covenant of good faith and fair dealing alleges that Pentagon acted in bad faith in 

relation to the EDC Agreement through various acts, such as threatening the loss of his 

deferred compensation if he refused to sign the Subordination Agreement. Id. ¶ 52. 

A breach of contract claim under Ohio law has four elements: (1) the existence of a 

contract; (2) the plaintiff’s performance; (3) the defendant’s breach; and (4) damages. 

Pavlovick v. Nat’l City Bank, 435 F.3d 560, 565 (6th Cir. 2006) (interpreting Ohio law).4

 

The implied covenant of good faith and fair dealing is violated “when a party acts in a 

manner which would deprive the other party of the right to receive the benefits of their 

agreement.” PepsiCo, Inc. v. Cent. Inv. Corp., Inc., 268 F.Supp.2d 962, 967 (S.D. Ohio 

2001) (citations omitted). 

The original complaint alleged a breach of contract claim based on the Subscription 

Agreement only. The FAC added a second contract claim based on the EDC Agreement, 

which is set forth as the First Claim for Relief. Because Pentagon’s motion to dismiss was 

directed to the original complaint, it contains no argument regarding the EDC Agreement. 

Although Pentagon now argues in its reply that Plaintiff’s claim based on the EDC 

Agreement should be dismissed, Pentagon’s Reply at 12-13, Dkt. 17, the Court does not 

consider arguments that were not first presented in the moving papers, see Zamani v. 

Carnes, 491 F.3d 990, 997 (9th Cir. 2007) (“[A court] need not consider arguments raised 

for the first time in a reply brief.”). Pentagon’s motion to dismiss Plaintiff’s first claim for 

breach of contract is therefore DENIED. However, because a claim for breach of the 

covenant of good faith and fair dealing is not an independent claim, the Court sua sponte 

dismisses such claim. See McCubbins v. BAC Home Loans Servicing, L.P., No. 2:11-cv547, 2012 WL 140218, at *46-47 (S.D. Ohio Jan. 18, 2012) (noting that a claim for breach 

of the covenant of good faith and fair dealing is subsumed in a claim for breach of contract, 

and cannot be asserted as a stand-alone claim). The Court grants Plaintiff leave to amend 

 4 The EDC Agreement contains a choice of law clause, which specifies that it “shall 

be construed in accordance with the law of the state of Ohio, to the extent not preempted by 

any applicable federal law.” EDC Agt. § 6.9. None of the parties dispute the applicability 

or enforceability of this clause. 

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his breach of contract claim to incorporate allegations that Pentagon breached the covenant 

of good faith and fair dealing. 

B. DECLARATORY JUDGMENT (RESCISSION)

In his third claim for declaratory judgment, Plaintiff seeks rescission of the 

Subordination Agreement on the ground that it is unconscionable. FAC ¶¶ 56, 61. 

Defendants contend that Plaintiff’s claim is barred by the doctrine of laches. “Laches is an 

equitable time limitation on a party’s right to bring suit, resting on the maxim that one who 

seeks the help of a court of equity must not sleep on his rights.” Jarrow Formulas, Inc. v. 

Nutrition Now, Inc., 304 F.3d 829, 835 (9th Cir. 2002) (internal citations and quotation 

marks omitted). 

“To successfully invoke the doctrine the party invoking it must establish by a 

preponderance of the evidence the following four elements: (1) unreasonable delay or lapse 

of time in asserting a right; (2) absence of an excuse for the delay; (3) knowledge, actual or 

constructive, of the injury or wrong; and (4) prejudice to the other party.” Sims v. 

Anderson, 38 N.E.3d 1123, 1130 (Ohio Ct. App. 2015). At the motion to dismiss stage, a 

defendant seeking dismissal based on a laches defense “must rely exclusively upon the 

factual allegations set forth in the complaint.” Kourtis v. Cameron, 419 F.3d 989, 1000 

(9th Cir. 2005), abrogated on other grounds in Taylor v. Sturgell, 553 U.S. 880 (2008). 

Defendants contend that Plaintiff was contractually obligated to sign the 

Subordination Agreement under § 6.6 of the EDC Agreement, and therefore, his request to 

rescind the Subordination Agreement is tantamount to seeking to rescind the EDC 

Agreement. In that regard, Defendants assert that it is too late for Plaintiff to challenge the 

EDC Agreement because they have “undergone a number of refinancing and restructuring 

transactions” in the fifteen years since its execution. See Baird Mot. at 12 (citing Compl. 

¶ 39). The Court is unpersuaded that Defendants’ laches defense can be adjudicated based 

on pleadings. Even if Defendants are correct that Plaintiff is, in effect, challenging part of 

the EDC Agreement, the mere passage of time is insufficient to establish the requisite 

prejudice for a laches defense. See State ex rel. Meyers v. Columbus, 71 Ohio St.3d 603, 

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605 (1995) (“Prejudice will not be inferred from a mere lapse of time.”). Moreover, the 

allegation that Pentagon entered into financial transactions subsequent to the execution of 

the EDC Agreement, standing alone, fails to establish that Defendants suffered prejudice as 

a result. See Kinney v. Mathias, 10 Ohio St.3d 72, 75 (1984) (holding that the father’s 

change of financial position was, “as a matter of law, insufficient to rise to the level of 

prejudice necessary to invoke the doctrine of laches.”); State ex rel. Doran v. Preble Cty. 

Bd. of Commrs., 995 N.E.2d 239, 246 (Ohio Ct. App. 2013) (citation and internal 

quotations omitted) (“What constitutes material prejudice is primarily a question of fact to 

be resolved through a consideration of the special circumstances of each case.”). 

Defendants’ motion to dismiss Plaintiff’s claim for declaratory judgment is therefore 

DENIED.5

 

C. BREACH OF CONTRACT (SUBSCRIPTION AGREEMENT) 

In his fourth claim, Plaintiff alleges that Pentagon breached the Subscription 

Agreement by refusing “to redeem the shares for their value, including accrued dividends” 

after he tendered his Series B shares for redemption. FAC ¶ 79. He further alleges that 

“Pentagon’s purported elimination of Series B preferred shares in May 2011 was manifestly 

unfair and a breach of the company’s duty of good faith and fair dealing to the Series B 

shareholders.” Id. ¶ 67. The pertinent sections of the Series B Subscription Agreement 

state: 

3. Redemption 

(a) Mandatory Redemption. Except and to the extent 

prohibited by applicable law, the Corporation shall redeem all 

shares of Series B Preferred Stock outstanding on December 31, 

2006 by paying each such sum of the Series B Liquidation 

Value plan an amount equal to the dividends accrued but unpaid 

thereon (the “Redemption Price”). 

(b) . . . . 

 5 Pentagon also argues that “[it], its lenders and its investors have substantially 

changed positions in reliance on the Subordination Agreement.” Pentagon Mot. at 18. As 

noted, simply changing positions does not necessarily establish prejudice. 

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(c) Default. If the Corporation fails to redeem the 

Series B Preferred Stock by December 31, 2006, dividends shall 

accrue on the Series B Preferred Shares at the Dividend 

Payment Amount plus 2%, and such dividends shall accrue up 

and until such time as the Redemption Price of all of the 

outstanding Series B Preferred Shares is paid in full. Dividends 

accruing after December 31, 2006 may be paid only in cash. 

Christeson Decl. Ex. C (Subscription Agreement) at A-6, ¶ 3(c) (emphasis added), Dkt. 9-2. 

Pentagon argues that its refusal to redeem Plaintiff’s stock is not a breach, but 

merely a “default” that entitles him to nothing more than a 2% increased dividend. The 

Court disagrees. As set forth above, the Subscription Agreement provides that Pentagon 

“shall” redeem the stock by December 31, 2006. Under the “default” provision, the 

consequence of failing to timely redeem the stock is that Pentagon becomes obligated to 

pay an increased dividend. Nothing in the agreement, however, states that the payment of 

such dividend obviates Pentagon’s contractual obligation to redeem the stock. Indeed, the 

provision that the enhanced dividend shall continue to accrue “until such time as the 

Redemption Price of all of the outstanding Series B preferred shares is paid in full” 

underscores that Plaintiff’s right to redeem continues to exist in tandem with the accrual of 

additional dividends. 

With regard to Plaintiff’s related bad faith claim regarding the elimination of Series 

B preferred shares in May 2011, see FAC ¶ 67, Pentagon asserts, in effect, that Plaintiff 

assumed the risk that his stock would lose value, see Pentagon Mot. at 20. This 

mischaracterizes Plaintiff’s claim. The pleadings specifically allege that Pentagon used its 

position as the majority shareholder of Pentagon to eliminate the interests of other 

shareholders, including those of Plaintiff. FAC ¶¶ 38, 39, 80, 81. In Plaintiff’s view, the 

loss of stock value was not attributable to natural market forces, but rather was a deliberate 

course of conduct by Baird to undermine his interests as a minority shareholder. As such, 

for purposes of the instant motion, Plaintiff has sufficiently alleged a claim for breach of 

duty of good faith and fair dealing. Baird’s motion to dismiss Plaintiff’s Fourth Claim for 

Breach of Contract is therefore DENIED. 

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D. BREACH OF FIDUCIARY DUTY

Plaintiff’s fifth claim for breach of fiduciary duty is directed against Baird. He 

alleges that Baird, as a majority shareholder, owed a fiduciary duty to minority 

shareholders, such as himself. FAC ¶ 73. According to the FAC, since 2006, Baird has 

pursued a “scheme to control Pentagon” for its own benefit, to Plaintiff’s detriment. Id. 

¶ 74. Baird allegedly “took the final step in its plan to deny McBride his rights as a 

shareholder” in May 2011 when it effectively eliminated the value of his Deferral 

Contributions Account. Id. ¶ 80. 

“The elements for a breach of fiduciary duty claim are: (1) the existence of a duty 

arising from a fiduciary relationship; (2) a failure to observe the duty; and (3) an injury 

resulting proximately therefrom.” Camp St. Mary’s Ass’n of W. Ohio Conference of the 

United Methodist Church, Inc. v. Otterbein Homes 176 Ohio App.3d 54, 68 (Ohio Ct. App. 

2008) (internal quotation marks omitted). “A claim of breach of a fiduciary duty is 

basically a claim of negligence, albeit involving a higher standard of care.” Strock v. 

Pressnell, 38 Ohio St.3d 207, 216 (1988). Under Ohio law, claims for breach of fiduciary 

duty are governed by the four-year statute of limitations set forth in Ohio Revised Code 

§ 2305.09(D). 

Baird contends Plaintiff’s breach of fiduciary claim should be dismissed insofar as it 

is premised on any conduct occurring outside the four-year limitations period, i.e., prior to 

December 31, 2010. See Baird Mot. at 14-15. Plaintiff responds that he is not seeking 

damages based on specific conduct occurring prior to that date, but that those actions are 

alleged because they culminated in Baird’s efforts in May 2011 to eliminate the preferred 

stock upon which his deferred compensation was based. Since Plaintiff is not predicating 

his breach of fiduciary claim on pre-December 31, 2010 conduct, Baird’s motion to dismiss 

is unnecessary. Baird’s motion to dismiss Plaintiff’s Fifth Claim for Relief is therefore 

DENIED. 

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III. CONCLUSION 

For the reasons set forth above, 

IT IS HEREBY ORDERED THAT Baird and Pentagon’s respective motions to 

dismiss are DENIED. The Court sua sponte dismisses Plaintiff’s Second Claim for Relief, 

and grants Plaintiff leave to amend to incorporate the allegations set forth therein into his 

First Claim for Relief for breach of contract. Plaintiff shall file a Second Amended 

Complaint within twenty-one (21) days of the date this Order is filed. Defendants shall file 

a responsive pleading within fourteen (14) days of the date Plaintiff files his Second 

Amended Complaint. 

IT IS SO ORDERED. 

Dated: 12/22/15 ______________________________ 

SAUNDRA BROWN ARMSTRONG 

Senior United States District Judge 

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