Sollins Lambrechet v. O?Neal

11-1589; 11-1285
Sollins; Lambrechet v. O’Neal
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED
ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE
PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A
DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN
ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST
SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
1 At a stated term of the United States Court of Appeals
2 for the Second Circuit, held at New York Law School, 185
3 West Broadway, in the City of New York, on the 4th day of
4 December, two thousand twelve.
5
6 PRESENT: DENNIS JACOBS,
7 Chief Judge,
8 ROBERT A. KATZMANN,
9 DEBRA A. LIVINGSTON,
10 Circuit Judges.
11
12 - - - - - - - - - - - - - - - - - - - -X
13 N.A. LAMBRECHT, Derivatively on
14 Behalf of Nominal Defendant BANK OF
15 AMERICA CORPORATION and Double
16 Derivatively on Behalf of Nominal
17 Defendant MERRILL LYNCH & CO., INC.,
18
19 Plaintiff-Appellant,
20
21 -v.- 11-1285
22
23 E. STANLEY O’NEAL, AHMASS L.
24 FAKAHANY, GREGORY J. FLEMING, DO WOO
25 “DOW” KIM, OSMAN SEMERCI, DOUGLAS J.
26 MALLACH, JOHN A. THAIN, KENNETH D.
27 LEWIS, BRIAN T. MOYNIHAN, JOSEPH L.
1
1 PRICE, GREGORY L. CURL, and JEFFREY
2 N. EDWARDS,
3
4 Defendants-Appellees
5
6 -and-
7
8 MERRILL LYNCH & CO., INC., and BANK
9 OF AMERICA CORPORATION,
10
11 Nominal Defendants-
12 Appellees.
13
14 - - - - - - - - - - - - - - - - - - - -X
15 S. LEONARD SOLLINS, as representative
16 for the estate of MIRIAM LOVEMAN,
17 Derivatively on Behalf of Nominal
18 Defendant BANK OF AMERICA CORPORATION
19 and Double Derivatively on Behalf of
20 Nominal Defendant MERRILL LYNCH &
21 CO., INC.,
22
23 Plaintiff-Appellant,
24
25 -v.- 11-1589
26
27 E. STANLEY O’NEAL, JOHN A. THAIN,
28 AHMASS L. FAKAHANY, GREGORY J.
29 FLEMING, JEFFREY N. EDWARDS, CAROL T.
30 CHRIST, ARMANDO M. CODINA, VIRGIS W.
31 COLBERT, ALBERTO CRIBIORE, JOHN D.
32 FINNEGAN, JUDITH MAYHEW JONAS, JOSEPH
33 W. PRUEHER, ANN N. REESE, CHARLES O.
34 ROSSOTTI, and AULANA L. PETERS,
35
36 Defendants-Appellees
37
38 -and-
39
40 BANK OF AMERICA CORPORATION and
41 MERRILL LYNCH & CO., INC.,
42
43 Nominal Defendants-
44 Appellees.
45
46 - - - - - - - - - - - - - - - - - - - -X
2
1 FOR APPELLANT LAMBRECHT: Jonathan W. Cuneo, Cuneo Gilbert
2 & Laduca, LLP, Washington D.C.
3 (Matthew E. Miller, Cuneo
4 Gilbert & Laduca, LLP,
5 Washington D.C.; Richard D.
6 Greenfield, Greenfield & Goodman
7 LLC, New York, NY; Adam Balick,
8 Balick & Balick, LLC,
9 Wilmington, DE; Bartholemew J.
10 Dalton, Dalton & Associates,
11 Wilmington, DE, on the brief).
12
13 FOR APPELLANT SOLLINS: David A.P. Brower, Brower Piven,
14 P.C., New York, NY.
15
16 FOR APPELLEES: Jay B. Kasner, Skadden, Arps,
17 Slate, Meagher & Flom LLP, New
18 York, NY (Paul J. Lockwood,
19 Scott D. Musoff, Skadden, Arps,
20 Slate, Meagher & Flom LLP, New
21 York, NY; Gregory A. Markel,
22 Cadwalader, Wickersham & Taft
23 LLP, New York, NY; Michael J.
24 Chepiga and Sarah L. Dunn,
25 Simpson Thacher & Bartlett LLP,
26 New York, NY; Jonathan D. Polkes
27 and Stephen A. Radin, Weil
28 Gotshal & Manges LLP, New York,
29 NY; Richard D. Bernstein,
30 Willkie Farr & Gallagher LLP,
31 Washington D.C.; James C. Dugan,
32 Willkie Farr & Gallagher LLP,
33 New York, NY; Andrew J. Levander
34 and David S. Hoffner, Dechert
35 LLP, New York, NY; James N.
36 Benedict, Milbank, Tweed, Hadley
37 & McCloy LLP, New York, NY;
38 William Michael Moran, McCarter
39 & English, LLP, New York, NY;
40 Andrew J. Ceresney and Colby A.
41 Smith, Debevoise & Plimpton LLP,
42 Washington, DC; Lucia Chapman,
43 Law Office of Henry Putzel, III,
44 New York, NY; Richard D. Winberg
3
1 and Eli J. Mark, Morvillo,
2 Abramowitz, Grand, Iason, Anello
3 & Bohrer, P.C., New York, NY;
4 Hollis Gonerka Bart, Brian
5 Dunefsky, and Chaya Weinberg-
6 Brodt, Withers Bergman LLP, New
7 York, NY; William H. Jeffress,
8 Julia Evans Guttman, and Maureen
9 P. Reid, Baker Botts LLP, New
10 York, NY; Richard M. Strassberg
11 and Mary K. Dulka, Goodwin
12 Procter LLP, New York, NY, on
13 the brief)
14
15 Appeal from a judgment of the United States District
16 Court for the Southern District of New York (Rakoff, J.).
17
18 UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED
19 AND DECREED that the judgment of the district court be
20 AFFIRMED.
21
22 N.A. Lambrecht and S. Leonard Sollins appeal an order
23 of the district court dismissing two double derivative
24 actions brought on behalf of Bank of America Corporation
25 (“BofA”) and its wholly owned subsidiary Merrill Lynch & Co.
26 (“Merrill”) following a merger of the two companies on
27 January 1, 2009 (“the Merger”). We assume the parties’
28 familiarity with the underlying facts, the procedural
29 history, and the issues presented for review.
30
31 We review dismissals pursuant to Rule 12(b)(6) of the
32 Federal Rules of Civil Procedure de novo. See Velez v.
33 Levy, 401 F.3d 75, 84 (2d Cir. 2005). Where “determination
34 of the sufficiency of allegations of futility depends on the
35 circumstances of the individual case, the standard of review
36 for dismissals based on Fed. R. Civ. P. 23.1 is abuse of
37 discretion.”1 Halebian v. Berv, 590 F.3d 195, 203 (2d Cir.
1
Lambrecht and Sollins challenge our use of an abuse
of discretion standard for assessing the sufficiency of
allegations under Rule 23.1 and instead urge that de novo
review is more appropriate here. We decline to decide the
issue, as the appellants’ claims would fail under either
standard.
4
1 2009) (citation omitted). Under Rule 23.1, a plaintiff must
2 “state with particularity . . . any effort by the plaintiff
3 to obtain the desired action from the directors or
4 comparable authority . . . and . . . the reasons for not
5 obtaining the action or not making the effort.” Fed. R.
6 Civ. P. 23.1(b)(3).
7
8 On March 28, 2011, the United States District Court for
9 the Southern District of New York (Rakoff, J.) dismissed
10 Sollins’ and Lambrecht’s complaints for different, but
11 related, reasons. The court determined, first, that
12 Sollins–-whose predecessor-in-interest filed the action
13 without making pre-suit demand upon the Board--had failed to
14 establish demand futility. The court also held that
15 Lambrecht, who made three demands upon the BofA Board, was
16 unable to show that the Board had wrongfully refused her
17 request to pursue claims against Merrill’s former officers
18 and directors. We see no error in those rulings.
19
20 In a post-merger double derivative action, “the claim
21 is now (post merger) the property of the acquiring
22 corporation, [and] that corporation is now the only party
23 with standing to enforce the claim.” Lambrecht v. O’Neal, 3
24 A.3d 277, 284 (Del. 2010).2 Accordingly, a “double
25 derivative suit cannot go forward except in the unusual case
26 where the parent company board is shown to be incapable of
27 deciding impartially whether or not to enforce the claim
28 that the parent company now (indirectly) owns.” Id. at 290.
29 To satisfy this standard, a plaintiff must put forth
30 particularized allegations that “create a reasonable doubt
31 that, as of the time the complaint is filed, the board of
32 directors could have properly exercised its independent and
33 disinterested business judgment in responding to a demand.”
34 Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993).
35
36 Notwithstanding Sollins’ arguments to the contrary,
37 “[d]emand futility analysis is conducted on a claim-by-claim
38 basis.” Beam v. Stewart, 833 A.2d 961, 977 n.48 (Del. Ch.
39 2003), aff’d, 845 A.2d 1040 (Del. 2003). Thus, “[e]ach
40 derivative claim for which no demand was made on the board
41 must be evaluated independently to determine whether demand
2
The parties agree that Delaware law governs our
substantive legal analysis.
5
1 was futile as to that claim.” MCG Capital Corp. v. Maginn,
2 No. 4521-CC, 2010 WL 1782271, at *7 (Del. Ch. May 5, 2010).
3 Sollins brought five claims relating to BofA’s activities in
4 connection with the Merger, but these claims were dismissed
5 as part of a settlement. The majority of the remaining
6 claims (Counts I - XI) relate to Merrill’s pre-Merger
7 investment activities, while one claim (Count XII) relates
8 to Merrill’s distribution of approximately $3.4 billion in
9 employee bonuses in 2008.
10
11 Sollins suggests that BofA became “complicit” in the
12 wrongdoing relating to Merrill’s pre-Merger forays into the
13 subprime market by agreeing to allow Merrill to pay bonuses
14 at 2007 levels; agreeing to indemnify each present and
15 former director of Merrill for pre-Merger misconduct;
16 approving the Merger without determining the amount of
17 Merrill’s growing losses; failing to fully inform investors
18 of these losses; and consummating the Merger despite grave
19 reservations about Merrill’s financial position. But
20 Sollins’ arguments are misplaced. Sollins could have, and
21 did, assert claims based on the above-described actions that
22 the BofA Board took when entering into the Merger with
23 Merrill. Those claims settled. As the district court
24 correctly stated, Sollins cannot simply bootstrap his
25 subprime claims against Merrill onto these Merger-related
26 allegations against BofA in an attempt to circumvent the
27 demand requirement. See In re Bear Stearns Cos., Inc. Sec.,
28 Derivative, and ERISA Litig., No. 08-MDL-1963, 2011 WL
29 4063685, at *5 (S.D.N.Y. Sept. 13, 2011) (rejecting
30 plaintiff’s argument that “the JPMorgan Board was complicit
31 in and ratified the wrongdoing at Bear Stearns” in
32 attempting to justify its failure to make demand on the
33 JPMorgan Board).
34
35 In any event, because BofA’s directors are protected by
36 an exculpatory provision in the company’s articles of
37 incorporation, Sollins cannot demonstrate even a “mere
38 threat of personal liability” facing the BofA Board for
39 Merrill’s alleged pre-Merger misconduct, let alone a
40 “substantial likelihood.” Rales, 634 A.2d at 936.
41
42 Sollins’ demand futility argument with respect to Count
43 XII is a bit more troublesome. Unlike the wrongful acts
44 alleged in Counts I through XI, in which the BofA Board
45 clearly had no involvement, Count XII asserts a claim for
6
1 corporate waste in connection with the 2008 bonuses, which
2 were a subject of pre-Merger negotiations between the
3 Merrill and BofA Boards. In addition, a district court in
4 this circuit has concluded that the BofA Board faced a
5 substantial likelihood of liability under Section 14(a) and
6 Rule 14a-9 of the Exchange Act for its alleged failure to
7 adequately disclose these bonuses to shareholders in an
8 October 31, 2008 joint proxy statement. See In re Bank of
9 Am. Corp. Sec., Derivative, & ERISA Litig., 757 F. Supp. 2d
10 260, 329-31 (S.D.N.Y. 2010) (Castel, J.).
11
12 But the case before Judge Castel arose in a different
13 context. There, BofA shareholders filed direct and
14 derivative claims against the BofA Board for, inter alia,
15 alleged misstatements and omissions in the 2008 joint proxy,
16 whereas here Merrill shareholders seek to assert claims
17 against the Merrill Board for corporate waste. Even
18 assuming that the BofA Board would be unable to impartially
19 assess certain disclosure allegations being brought against
20 BofA’s officers and directors, that assumption is
21 insufficient here to demonstrate the BofA Board’s inability
22 to consider claims against the Merrill Board for its pre-
23 Merger bonus distribution scheme. Due to the strong
24 possibility that the BofA Board could pursue a claim against
25 the Merrill Board for corporate waste without substantially
26 undermining its ability to defend against disclosure
27 allegations under Section 14(a), Sollins has not shown a
28 “substantial likelihood of director liability.” Aronson v.
29 Lewis, 473 A.2d 805, 815 (Del. 1984). Accordingly, the
30 connection between Count XII and any disclosure-related
31 liability facing the BofA Board is too attenuated to excuse
32 demand under these circumstances.
33
34 As to Lambrecht’s arguments, a board’s refusal to act
35 on a shareholder’s demands is analyzed under the business
36 judgment rule. Levine v. Smith, 591 A.2d 194, 200 (Del.
37 1991), overruled on other grounds, Brehm v. Eisner, 746 A.2d
38 244 (Del. 2000). That rule establishes “a presumption that
39 in making a business decision the directors of a corporation
40 acted on an informed basis, in good faith and in the honest
41 belief that the action taken was in the best interests of
42 the company.” Aronson, 473 A.2d at 812 (citing Kaplan v.
43 Centex Corp., 284 A.2d 119, 124 (Del. Ch. 1971)). To
44 overcome this presumption, a plaintiff must “carry the
45 considerable burden of showing that the decision not to
7
1 bring the lawsuit was made in bad faith or was based on an
2 unreasonable investigation.” RCM Sec. Fund, Inc. v.
3 Stanton, 928 F.2d 1318, 1328 (2d Cir. 1991).
4
5 Lambrecht’s claims do not surmount this high bar. By
6 making a demand upon the Board, she has conceded the Board’s
7 independence. See Rales v. Blasband, 634 A.2d 927, 935 n.12
8 (Del. 1993). This independent Board delegated the task of
9 investigating Lambrecht’s claims to an audit committee,
10 which ultimately concluded that it was not in the company’s
11 best interests to pursue Lambrecht’s claims. In particular,
12 the committee cited [i] the possible compromise of pending
13 litigation and ongoing government inquiries involving BofA;
14 and [ii] the low probability of recovery against Merrill’s
15 former directors and officers in light of an exculpatory
16 clause in Merrill’s certificate of incorporation and the
17 difficulty of prevailing on a Caremark claim under Delaware
18 law. Given the foregoing, the district court was well
19 within its discretion in concluding that Lambrecht failed to
20 demonstrate that the Board either acted in bad faith or
21 conducted an unreasonable investigation.
22
23 Finding no merit in either Lambrecht’s or Sollins’
24 remaining arguments, we hereby AFFIRM the judgment of the
25 district court.
26
27
28 FOR THE COURT:
29 CATHERINE O’HAGAN WOLFE, CLERK
30
8