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Freihofer v. Vermont Country Foods, Inc.

United States District Court, D. Vermont

July 9, 2019

VERMONT COUNTRY FOODS, INC., NEW ENGLAND COUNTRY FOODS, LLC, M. PETER THOMSON, individually and as President and Director of Vermont Country Foods, Inc. and Managing Member of New England Country Foods, LLC, Defendants.


          William K. Sessions III District Court Judge

         Plaintiff Charles Freihofer brings this private federal securities action against Defendants Vermont Country Foods, Inc. (“VCF”), New England Country Foods, LLC (“NECF”), and Defendant Peter Thomson pursuant to § 10(b) of the Securities and Exchange Act of 1934 (“Exchange Act”). Freihofer's allegations essentially consist of two claims: (1) that Defendants withheld information and made fraudulent misrepresentations as they transferred all valuable assets from VCF to NECF, and (2) that Defendants must provide him with certain documentation and an accounting. Defendants now move for summary judgment, arguing that Freihofer's fraud claim is barred by a five-year statue of repose, that his requests for documents are moot, and that he is not entitled to an accounting. For the reasons set forth below, the motion for summary judgment (ECF No. 35) is granted.


         In April 1995, after discussions with VCF President Peter Thomson, Freihofer invested $100, 000 in VCF. This initial investment granted Freihofer 11, 103.22 VCF shares, with $70, 000 of the investment booked as debt owed to him by VCF. Over the following five years, Freihofer made additional investments in VCF such that by mid-2000 he owned 34, 346.55 shares and VCF owed him $164, 900.

         On December 31, 2000, all debt owed to Freihofer was converted into equity. Freihofer agreed to the conversion in writing. After the conversion, he owned 96, 787.57 VCF shares.

         In February 2002, Freihofer loaned VCF and Thomson $25, 000. In April 2002, after VCF failed to repay the loan, Freihofer resigned from the company's board of directors. He alleges that he was compelled to resign not only because of the unpaid loan, but also because VCF and Thomson consistently failed to follow VCF's bylaws with respect to shareholder meetings, votes on resolutions, and distribution of information to shareholders. Freihofer claims that after he resigned, VCF stopped sending him information about the company despite his status as a shareholder.

         Freihofer did not make any further investments or provide any additional loans to VCF. He did threaten legal action to enforce his rights under the $25, 000 loan.

         In early 2005, VCF entered into a workout agreement allegedly to satisfy claims of creditors. During that same time period, Thomson and VCF created NECF. VCF product lines and intellectual property were licensed to NECF, and VCF shareholders were given ownership interests in NECF. Freihofer did not authorize or consent to the transfer of his shares from VCF to NECF.

         Freihofer asserts that beginning in 2006, when he first learned of the existence of NECF, [1] to the present day, Defendants have offered a variety of reasons for the formation of NECF. Those reasons have included: that NECF was established in order to comply with a new state law requiring a company using the word “Vermont” in its corporate name to actually produce products in Vermont; that VCF was a holding company for NECF; that NECF was formed to protect VCF from having to file for Chapter 11 bankruptcy; and that VCF was acting as a tax shelter due to its operating loss. Freihofer claims that those stated reasons were false and fraudulent, and that NECF was in fact established to transfer all value out of VCF into a single-member managed entity. That single-member entity allegedly enhanced Thomson's ability to direct and manipulate the course of the company without interference from shareholders.

         Thomson communicated VCF's role as a holding company for NECF, with an exclusive licensing agreement granted to NECF, in a letter to Freihofer dated February 13, 2009. Freihofer asserts that Thomson's communications with him ceased entirely after approximately January 2011. Despite this lack of communication, Freihofer submits that the scheme to defraud and misguide him has continued to the present day. For support, he cites “back room” private communications among Thomson and NECF's executive committee members, including Albert Freihofer, David Gibbons, and James Gibbons.

         Examples of such “back room” communications include communications between Thomson and James Gibbons in the summer of 2010, in which the two discussed the equity positions of VCF and NECF. Freihofer contends that in those communications, Thomson joked about the ease of manipulating VCF and forming NECF. In a September 2011 email to James Gibbons, Albert Freihofer, and David Gibbons, Thomson reportedly discussed the potential for his equity positions. In March 2014, Thomson emailed James Gibbons to discuss establishing restricted stock units, which Freihofer characterizes as an effort “to manipulate the assets and net operating loss of Defendant VCF.” ECF No. 41-2.

         Freihofer alleges that Defendants' fraudulent scheme is further evidenced by the distribution of Schedule K-1 Tax forms to the members of NECF's executive committee, but not to Freihofer, for the years 2005 through 2011. In 2014, Albert Freihofer was reportedly unable to obtain additional Schedule K-1 Tax forms from Thomson. In 2018, Thomson acknowledged to NECF executive committee members that he had been under audit by the Internal Revenue Service, and opined that it might be time to reorganize and restructure VCF.

         Freihofer filed his Complaint in this case on August 7, 2017. In addition to alleging misrepresentations and omissions, the Complaint claims that Defendants breached Freihofer's right under Vermont law to examine the corporate records, and that he is ...

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