Case 2:19-cv-01420-DLR Document 1 Filed 02/28/19 Page 1 of 8

1 Jeremy D. Sosna (MN #290233)

2
Melissa Muro LaMere (MN #0393295)
(Pro Hac Vice applications forthcoming)
3 Maslon LLP
3300 Wells Fargo Center
4 90 South Seventh Street
5 Minneapolis, MN 55402-4140
Telephone: (612) 672-8200
6 Facsimile: (612) 672-8397
Email: jeremy.sosna@maslon.com
7 melissa.murolamere@maslon.com
8
Cynthia A. Ricketts (State Bar No. 012668)
9 Andrew C. Stanley (State Bar. No. 029789)
Sacks, Ricketts & Case LLP
10 2800 N. Central Ave., Suite 1910
11 Phoenix, AZ 85004
Telephone: (602) 385-3370
12 FACSIMILE: (602) 385-3371
Email: cricketts@srclaw.com
13 astanley@srclaw.com
14
IN THE UNITED STATES DISTRICT COURT
15
FOR THE DISTRICT OF ARIZONA
16

17
Kona Grill, Inc., Case No. ______________
18

19 Plaintiff,
v. COMPLAINT
20

21 James Kuhn,

22 Defendant. (Demand for Jury Trial)

23

24
Plaintiff Kona Grill, Inc. (“Plaintiff”) by and through its attorneys, for its
25

26 Complaint against Defendant James Kuhn (“Defendant”) states and alleges as follows:

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28

COMPLAINT
 Case 2:19-cv-01420-DLR Document 1 Filed 02/28/19 Page 2 of 8

1 THE PARTIES
2 1. Kona Grill, Inc. (“Kona Grill”) is a Delaware corporation with its principal
3
place of business and corporate headquarters in Scottsdale, Arizona.
4

5
2. Upon information and belief, James Kuhn is, and has been at all times

6 relevant hereto, an individual residing in the State of Maryland.

7 JURISDICTION AND VENUE
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3. This Court has subject matter jurisdiction under 28 U.S.C. § 1332(a)
9
because there is diversity of citizenship between the parties and the amount in
10

11 controversy, exclusive of interest and costs, exceeds $75,000.

12 4. Venue in this Court is proper pursuant to 28 U.S. § 1391(B)(2).

13
FACTS
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5. Kona Grill owns and operates restaurants throughout the United States and
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Puerto Rico. Kona Grill features a global menu of contemporary American favorites,
16

17 award-winning sushi, and specialty cocktails in an upscale casual atmosphere. James

18 Kuhn was employed by Kona Grill from approximately December 4, 2017, to November
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6, 2018, when he was employed as the Chief Operating Officer and then later as the Chief
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Executive Officer of Kona Grill. Mr. Kuhn was employed as the Chief Executive Officer
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22 of Kona Grill from on or about August 9, 2018, until November 6, 2018.

23 6. Under the Arizona Business Corporation Act, Chapter 10, Section 842,
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officers of a corporation owe a fiduciary duty to the corporation to discharge their duties
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in good faith with the care an ordinarily prudent person in a like position would exercise
26

27 under similar circumstances and in a manner the officer reasonably believes to be in the

28 best interests of the corporation. Ariz. Rev. Stat. Ann. § 10-842.

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1 7. Mr. Kuhn was an officer of Kona Grill during his tenure as the company’s
2
Chief Executive Officer. As an officer of Kona Grill, Mr. Kuhn owed fiduciary duties to
3
Kona Grill under Arizona law.
4

5 8. During his tenure as Chief Executive Officer of Kona Grill beginning in

6 August 2018 and until his termination on November 6, 2018, Mr. Kuhn repeatedly
7
breached the fiduciary duties owed to Kona Grill and failed to conduct the business
8
affairs of Kona Grill in a manner that any reasonable person in a like position could
9

10 possibly believe was in the best interests of the Company. Mr. Kuhn’s failure to exercise

11 his duties as Chief Executive Officer in good faith has resulted in significant reputational
12
harm to the Company and accelerated and exacerbated Kona Grill’s declining financial
13
position in the marketplace. Simply put, Mr. Kuhn’s breaches of his fiduciary duties
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15 have put Kona Grill in a more perilous financial state, one from which it may be difficult

16 to recover.
17
9. For example, during his tenure as CEO, Mr. Kuhn knowingly and
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intentionally caused a number of Kona Grill restaurants to become woefully understaffed.
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20 At Mr. Kuhn’s direction, and without the knowledge of Kona Grill’s Board of Directors

21 (the “Board”), Mr. Kuhn directed that employees who left employment with the
22
Company were not to be replaced, purportedly as a cost-saving measure for Kona Grill.
23
Mr. Kuhn’s directive not to fill open positions left many of the restaurant locations
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25 without sufficient staff to support the operations at the restaurant or provide the level of

26 customer service expected at such upscale casual restaurants. Mr. Kuhn’s reckless
27
decision to intentionally understaff restaurant locations resulted in long wait times for
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1 food and drink orders for customers, which, upon information and belief, resulted in
2
further declining same-store sales, as well as harm to the reputation and sales of Kona
3
Grill, Inc. During Mr. Kuhn’s tenure as CEO, Kona Grill had the worst same-store sales
4

5 (a standard measure of financial success in the restaurant industry) of any publicly-traded

6 restaurant company in the United States. Indeed, the decline in same-store sales during

7
this time was unprecedented for Kona Grill.
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10. Mr. Kuhn took other actions that caused significant harm to Kona Grill and
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10 could not reasonably be believed to be in the best interests of the company. Among other

11 things, Mr. Kuhn (a) inexplicably eliminated the condiment wasabi from many sushi

12
dishes, which is astounding given the ubiquitous nature of wasabi in virtually every sushi
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restaurant and the expectation of virtually every customer that sushi dishes would be
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15 accompanied by wasabi; (b) ended the Company’s long-standing and wildly successful

16 Happy Hour promotion, even though it was known by Mr. Kuhn to be a critical factor in

17
driving traffic at its restaurant locations; and (c) added poor quality food items to the
18
menu that were inconsistent with the Company’s high quality standards, which further
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20 diminished Kona Grill’s reputation and, upon information and belief, accelerated the

21 decline of same-store sales (a critical measure of financial success in the restaurant

22
industry). Mr. Kuhn never disclosed any of these actions to the Board of Directors.
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11. In an effort to artificially improve EBITDA1 (not coincidentally, the
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25 financial criteria on which Mr. Kuhn’s 2018 bonus was to be measured), Mr. Kuhn—

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27 1
EBITDA, which stands for “earnings before interest, taxes, depreciation and amortization,” is a
28 commonly-used measure of a company’s overall financial performance.

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1 without disclosing to the Board—directed the Company not to pay its outstanding
2
invoices in the ordinary course, including invoices to critical vendors from which Kona
3
Grill purchased products and services that were necessary to successfully operate the
4

5 restaurant locations. The accounts payable grew to $2.5MM, which put Kona Grill in a

6 difficult position with many of its most important vendors. The effect of Mr. Kuhn’s
7
direction to not pay vendors in a timely fashion could have been catastrophic for the
8
Company—if food vendors are not paid in the restaurant business, these vendors may
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10 simply stop providing certain food items that are essential to Kona Grill’s ability to

11 operate. In addition, Mr. Kuhn shockingly directed that the Company cease engaging in
12
certain core activities that are standard and necessary in the restaurant industry, including
13
pest control services, cleaning beer lines, and sharpening knives. Upon information and
14

15 belief, Mr. Kuhn made these reckless business decisions to increase adjusted EBITDA so

16 that Mr. Kuhn would reap the benefits of a higher bonus payout, even though Mr. Kuhn
17
knew or should have known that these business decisions were not in the best interests of
18
Kona Grill and threatened Kona Grill’s ability to successfully drive customer traffic to its
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20 restaurant locations. Upon information and belief, Mr. Kuhn’s directives in this regard

21 were made solely for personal gain—namely, to artificially improve EBITDA and,
22
concomitantly, Mr. Kuhn’s potential 2018 bonus payout. Again, Mr. Kuhn failed to
23
inform the Board that he had stopped paying bills and had cut critical and necessary
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25 services.

26 12. Mr. Kuhn frequently consumed alcohol on the Company’s properties, even
27
going so far as to unilaterally close restaurants early so that he could drink at the
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1 restaurant bar (at the expense of additional sales from patrons to the restaurant from the
2
general public). On at least one occasion, Mr. Kuhn drove one of the Company’s
3
catering vehicles after drinking alcohol at one of Kona Grill’s restaurant locations. Mr.
4

5 Kuhn’s decision to drive a company vehicle after drinking was reckless, unreasonable,

6 and not in the best interests of Kona Grill, given that Mr. Kuhn could have created

7
substantial exposure and significant reputation damage to Kona Grill had he been
8
involved in an accident while driving under the influence.
9

10 COUNT I: BREACH OF STATUTORY FIDUCIARY DUTIES

11 (Violation of Ariz. Rev. Stat. Ann. § 10-842)

12 13. Kona Grill restates and incorporates by reference Paragraphs 1-12 of the
13
Complaint as if fully set forth herein.
14
14. At all times relevant hereto, Defendant James Kuhn was an “officer” of
15

16 Kona Grill under the Arizona Business Corporation Act, which, among other things,

17 codifies common law fiduciary duties owed by an officer to a corporation.

18
15. Defendant James Kuhn owed fiduciary duties to Kona Grill, including
19
those set forth in Ariz. Rev. Stat. Ann. § 10-842.
20

21 16. Mr. Kuhn failed to discharge his duties as CEO in good faith because on a

22 number of occasions he took actions for his own personal financial benefit, even when

23
those actions were certain to cause harm to Kona Grill. These actions include but are not
24
limited to his decisions to artificially improve EBITDA, the financial criteria on which
25

26 his personal bonus was calculated, by understaffing restaurants and cutting important,

27 necessary expenses.

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1 17. Mr. Kuhn failed to act with the care an ordinarily prudent person in a like
2
position would exercise as CEO of Kona Grill. These failures include his inexplicable
3
decision to close Kona Grill restaurant locations for the express and sole purpose of his
4

5 desire to consume alcoholic beverages at the restaurant and his decision to take a vehicle

6 belonging to Kona Grill and drive it after at least one of these drinking episodes.

7
18. Mr. Kuhn failed to act in a manner he reasonably believed to be in the best
8
interests of the corporation, as evidenced by his decisions to lower the quality of the food,
9

10 service, and physical conditions at Kona Grill restaurant locations, all the while

11 maximizing his own personal bonus by artificially improving the financial measure by

12
which his bonus was calculated.
13
19. Mr. Kuhn’s actions constitute repeated breaches of his fiduciary duties to
14

15 Kona Grill, as those duties are codified in Ariz. Rev. Stat. Ann. § 10-842.

16 20. Kona Grill has been damaged by Mr. Kuhn’s breaches of his fiduciary
17
duties. This damage includes (1) harm to its reputation with customers, investors, and
18
vendors; and (2) an unprecedented decline in same-store sales during his tenure as CEO,
19

20 which has resulted in significant loss of revenue. As a result of the breaches by Mr.

21 Kuhn, Kona Grill has been harmed in amount exceeding $75,000, exclusive of interest

22
and attorneys’ fees and costs.
23
PRAYER FOR RELIEF
24
WHEREFORE, Defendant Kona Grill respectfully requests that the Court enter an
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26 Order granting the following relief:

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 Case 2:19-cv-01420-DLR Document 1 Filed 02/28/19 Page 8 of 8

1 1. Entering a judgment in Kona Grill’s favor and against James Kuhn in an

2
amount that exceeds $75,000 and in an amount to be established at trial, plus
3
prejudgment interest and post-judgment interest;
4

5 2. Awarding Plaintiff its reasonable expenses of litigation, including

6 attorneys’ fees, costs, and disbursements; and

7
3. Awarding such other and further relief as the Court deems just, proper, and
8
equitable.
9

10 DEMAND FOR JURY

11 Pursuant to Federal Rule of Civil Procedure 38, Defendant demands a trial by jury
12 on all issues so triable.
13

14 Dated: February 28, 2019 Respectfully submitted,

15
SACKS, RICKETTS & CASE LLP
16
By: /s/Andrew C. Stanley
17 Cynthia A. Ricketts
Andrew C. Stanley
18
and
19

20 MASLON LLP

21 Jeremy D. Sosna (MN #290233)*

Melissa Muro LaMere (MN #0393295)*
22
*Pro Hac Vice Application forthcoming
23
ATTORNEYS FOR PLAINTIFF KONA
24
GRILL, INC.
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26

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