Lukas Ex Rel. Miller Energy Resources, Inc. v. McPeak

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 13a0280p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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PATRICK P. LUKAS, derivately on behalf of
Plaintiff-Appellant, --
Miller Energy Resources, Inc.,
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No. 12-6285
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v.
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MERRILL A. MCPEAK, SCOTT M. BORUFF,
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DELOY MILLER, JONATHAN S. GROSS,
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HERMAN GETTELFINGER, DAVID HALL,
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CHARLES M. STIVERS, DON A. TURKLESON,
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DAVID VOYTICKY, and MILLER ENERGY
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RESOURCES, INC.,
Defendants-Appellees. N
Appeal from the United States District Court
for the Eastern District of Tennessee at Knoxville.
No. 3:11-cv-00422—Thomas A. Varlan, District Judge.
Argued: July 24, 2013
Decided and Filed: September 19, 2013
Before: SILER and COLE, Circuit Judges; DOWD, District Judge.*
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COUNSEL
ARGUED: W. Scott Holleman, LEVI & KORSINSKY LLP, New York, New York, for
Appellant. Robert D. Weber, DLA PIPER LLP (US) LLP, Los Angeles, California, for
Appellees McPeak, Miller, Gross, Gettlefinger, Hall, Stivers, Turkleson, Voyticky, and
Miller Energy Resources. Lawrence P. Leibowitz, LEIBOWITZ LAW FIRM,
Knoxville, Tennessee, for Appellee Boruff. ON BRIEF: W. Scott Holleman, LEVI &
KORSINSKY LLP, New York, New York, Al Holifield, HOLIFIELD & ASSOCIATES,
PLLC, Knoxville, Tennessee, for Appellant. Robert D. Weber, DLA PIPER LLP (US)
LLP, Los Angeles, California, Lawrence P. Leibowitz, LEIBOWITZ LAW FIRM,
Knoxville, Tennessee, Stephen A. Marcum, MARCUM & PETROFF, P.C., Huntsville,
Tennessee, for Appellees.
*
The Honorable David D. Dowd, Jr., United States District Judge for the Northern District of
Ohio, sitting by designation.
1
No. 12-6285 Lukas v. McPeak, et al. Page 2
COLE, J., delivered the opinion of the court, in which SILER, J., joined.
DOWD, D. J. (pp. 11–18), delivered a separate dissenting opinion.
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OPINION
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COLE, Circuit Judge. Plaintiff-Appellant Patrick P. Lukas appeals the dismissal
of his derivative suit on behalf of Miller Energy Resources, Inc. (“Miller”). The district
court, applying Tennesee law, dismissed Lukas’s derivative suit against Miller and nine
of its directors because Lukas brought suit without first making a demand on the Miller
Board of Directors to pursue this action, as required by Tennessee law. Lukas argues
that the district court erred in rejecting his argument that, under Tennessee law, he was
excused from bringing a demand because such a demand would have been futile. We
affirm the dismissal.
I.
Lukas is a shareholder of Miller, a publicly owned Tennesee corporation
“engaged in the exploration, production and drilling of oil and natural gas.” On
December 16, 2009, Miller announced that it had acquired assets (“Alaska assets”) worth
$325 million for a cost of only $2.25 million. Miller announced several increases in the
value of the Alaska assets over the next nine months, claiming that they were worth over
$1.2 billion in August 2010. The resulting impact on Miller’s financial reports led to
increases in its stock price.
On December 23, 2010, Miller, in recognition of its improved financial
performance, amended its employment agreement with its Chief Executive Officer,
Defendant Scott Boruff, substantially increasing his compensation and giving him stock
options. The Compensation Committee (Defendants Merrill McPeak, Charles Stivers,
and Herman Gettelfinger) recommended the amendment and the Board approved it. At
the time, the Board was composed of the four already-named Defendants, as well as
No. 12-6285 Lukas v. McPeak, et al. Page 3
Defendants Deloy Miller, Jonathan S. Gross, David Hall, Don Turkleson, and David Voyticky.
In the summer of 2011, a series of revelations led Miller’s stock price to
decrease. A website published a report claiming that the Alaska assets—on the books
for $350 million—were worth only $25 to $30 million and offset by $40 million in
liabilities. Then, a series of SEC filings by Miller acknowledged “errors in . . . financial
statements ” and “computational errors,” and advised that the misstatements “may have
a material adverse effect on . . . business and stock price” and “adversely impact
[Miller’s] ability to raise additional capital.” The stock price decreased after the website
report and SEC disclosures.
On August 31, 2011, Lukas filed suit against the above-named Defendants, as
well as Miller itself, in the district court, alleging six counts: (1) breach of fiduciary duty
and disseminating materially false and misleading information; (2) breach of fiduciary
duties for failing to properly oversee and manage the company; (3) unjust enrichment;
(4) abuse of control; (5) gross mismanagement; and (6) waste of corporate assets.
Defendants moved to dismiss on the grounds that (1) Lukas had not made a demand on
the Miller board prior to initiating his suit and (2) Lukas failed to state a valid cause of
action against any of the individual defendants. Lukas opposed the motion, arguing that
demand would have been futile and that he had stated valid claims. The district court
granted the motion on the ground that Lukas “ha[d] not adequately pled specific facts
demonstrating that his failure to make a pre-suit demand . . . should be excused.” Lukas
appeals.
II.
We “review de novo a district court’s dismissal of a plaintiff’s complaint for
failure to state a claim under Rule 12(b)(6).” Kottmyer v. Maas, 436 F.3d 684, 688 (6th
Cir. 2006). We review a district court’s application of state law de novo. See Rawe v.
Liberty Mut. Fire Ins. Co., 462 F.3d 521, 526 (6th Cir. 2006) (citing Salve Regina Coll.
v. Russell, 499 U.S. 225, 231 (1991)).
No. 12-6285 Lukas v. McPeak, et al. Page 4
Defendants argue that the panel should review the district court’s decision for
abuse of discretion because the disposition of the motion to dismiss in this case was
based on findings of fact. Defendants cite a number of cases from other circuits for the
proposition that abuse-of-discretion review applies when the determination of the
sufficiency of allegations of demand futility “depends on the circumstances of the
individual case.” See, e.g., Halebian v. Berv, 590 F.3d 195, 203 (2d Cir. 2009); Kanter
v. Barella, 489 F.3d 170, 175 (3d Cir. 2007). However, we have previously reviewed
demand-futility issues under a de novo standard. See, e.g., McCall v. Scott, 239 F.3d
808, 815–16 (6th Cir. 2001); In re Ferro Corp. Derivative Litig., 511 F.3d 611, 617
(6th Cir. 2008). We do likewise in this case.
In resolving questions of Tennessee law, this Court must first look to the
decisions of the Tennessee Supreme Court. See West v. Am. Tel. & Tel. Co., 311 U.S.
223, 236 (1940). This Court must abide by any directly applicable holding of the
Tennessee Supreme Court, unless the state court itself has “given clear and persuasive
indication that its [earlier] pronouncement will be modified, limited or restricted.” Id.
Where no on-point precedent from the Tennessee Supreme Court is available, this Court
must consider any available precedent from the state appellate courts, whether published
or unpublished:
Where an intermediate appellate state court rests its considered judgment
upon the rule of law which it announces, that is a datum for ascertaining
state law which is not to be disregarded by a federal court unless it is
convinced by other persuasive data that the highest court of the state
would decide otherwise.
Id. at 237; see also Talley v. State Farm Fire & Cas. Co., 223 F.3d 323, 328 (6th Cir.
2000) (stating that the West rule applies “irrespective of whether a state appellate
decision is published or unpublished”). State appellate court precedent is to be
considered particularly persuasive where the Tennessee Supreme Court has refused to
review the decision. See Six Cos. of Cal. v. Joint Highway Dist. No. 13, 311 U.S. 180,
188 (1940); King v. Order of United Commercial Travelers of Am., 333 U.S. 153, 158
n.13 (1948).
No. 12-6285 Lukas v. McPeak, et al. Page 5
Ordinarily, a plaintiff in a shareholder derivative suit must state in his complaint
that, prior to filing suit, he made a written demand on the corporation’s directors
requesting that they pursue the suit on behalf of the corporation or take other suitable
corrective action, and that they refused or ignored his demand. See Tenn. Code Ann.
§ 48-17-401(b); Tenn. R. Civ. P. 23.06. However, Tennessee law recognizes that, in
some circumstances, demand would be futile. In such cases, the plaintiff is excused
from making a pre-suit demand, but the complaint must state “with particularity” why
demand was futile. See Tenn. Code Ann. § 48-17-401; Tenn. R. Civ. P. 23.06. The
contours of Tennessee’s demand-futility standard are at issue in this case.
The district court held that a Tennessee appellate court had set out the “test for
demand futility in Tennessee” that the district court was “bound to follow.” See Lewis
ex rel. Citizens Sav. Bank & Trust Co. v. Boyd, 838 S.W.2d 215 (Tenn. Ct. App. 1992).
The district court read Lewis as adopting a form of the Delaware Supreme Court’s two-
part test for demand futility, known as the Aronson test:
In demand excused cases, the grounds for the shareholder’s claim are
(1) that the board is interested and not independent and (2) that the
challenged transaction is not protected by the business judgment rule.
Lewis, 838 S.W.2d at 222 (citing Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984)).
The district court held that Lukas must meet “both prongs” for demand to be excused,
and that his failure to meet the first prong—to show that a majority of directors were
interested and not independent—made analysis of the second prong unnecessary.
On appeal, Lukas argues that the district court erred in applying the demand-
futility standard from Lewis because the Tennessee Supreme Court has definitively
answered the central question of state law in this case. Lukas cites Deaderick v. Wilson,
wherein the Tennessee Supreme Court held that demand would be excused when “the
corporation is still under the control of those who must be defendants in the suit.”
67 Tenn. 108, 131 (1874) (emphasis omitted). Since the entire board is named in this
suit, Lukas contends demand is excused under Deaderick.
No. 12-6285 Lukas v. McPeak, et al. Page 6
Deaderick has been repeatedly affirmed by the Tennessee Supreme Court. See,
e.g., Boyd v. Sims, 11 S.W. 948, 950 (Tenn. 1889) (“[A] demand of the agents of a
corporation . . . is not necessary if these agents are themselves guilty of the wrongs
complained of . . . it would be contrary to justice to permit the authors of the wrong to
conduct the litigation against themselves as agents of the injured party.”); Wallace v.
Lincoln Sav. Bank, 15 S.W. 448, 449 (Tenn. 1891) (noting in dictum that a shareholder
can bring suit “where the managing agents of the corporation (its officers and directors)
are themselves to be the defendants”); Akin v. Mackie, 310 S.W.2d 164, 168 (Tenn.
1958) (“[Demand] need not be made where the corporation is under the control . . . of
persons who are necessary parties defendant.” (quotation marks omitted)). The
Tennessee Supreme Court has never declared Deaderick abrogated or overruled. We
agree with Lukas that Deaderick remains good law, but we do not read it as holding that
demand is automatically futile whenever a majority of company directors is named in
a derivative suit.
Deaderick and its progeny leave room for the lower Tennessee courts to
“expound[],” Lukas v. McPeak, No. 3:11-CV-422, 2012 WL 4359437, at *5 (E.D. Tenn.
Sept. 21, 2012), as to the scope of the demand-futility exception by leaving important
qualifying language undefined. Deaderick states that demand will be excused “if the
corporation is still under the control of those who must be defendants in the suit.”
67 Tenn. at 131 (emphasis altered); see also Akin, 310 S.W.2d at 168 (“[Demand] need
not be made where the corporation is under the control of the wrongdoers or of persons
who are necessary parties defendant.” (quotation marks omitted) (emphasis added)).
Deaderick did not elaborate on how to distinguish “those who must” be defendants in
the suit from those who are merely named in the suit, probably because the defendants
were very specifically accused of insider trading and scheming to defraud smaller
stockholders, making it obvious that they “must” be defendants. See 67 Tenn. at 112.
Likewise, in Akin, a single controlling shareholder was personally accused of covertly
“deplet[ing]” the company’s treasury and denying minority shareholders an accounting
of the company’s assets, making it obvious that he was a necessary defendant. Akin,
No. 12-6285 Lukas v. McPeak, et al. Page 7
310 S.W.2d at 168. By contrast, it is not at all clear from Lukas’s allegations why the
majority of the board must be defendants.
In Lewis, a Tennessee appellate court “expound[ed]” on how to demonstrate that
a defendant is truly necessary, such that demand may be excused. The court affirmed
the principle in Deaderick:
Thus, the courts have excused the demand requirement when the
corporation’s officers and directors will themselves be defendants or
when the officers and directors are in collusion with those who have
injured the corporation.
838 S.W.2d at 221 (citing Wallace and Deaderick). Shortly thereafter it stated:
In demand excused cases, the grounds for the shareholder’s claim are
(1) that the board is interested and not independent and (2) that the
challenged transaction is not protected by the business judgment rule.
Id. at 222 (citing Aronson, 473 A.2d at 814). These passages in Lewis were only dicta.
See id. at 224 (concluding that the “depth of review should not depend on whether or not
the shareholder made a demand prior to filing suit”); United States v. McMurray,
653 F.3d 367, 375 (6th Cir. 2011) (holding that a statement is non-binding dicta when
it is not necessary to the outcome of a case). However, other Tennessee appellate courts
have applied some version of the Aronson test to plaintiffs pleading demand futility. See
Memphis Health Ctr., Inc. ex. rel. Davis v. Grant, No. W2004-02898-COA-R3-CV,
2006 WL 2088407, at *10 (Tenn. Ct. App. July 28, 2006); Humphreys v. Plant Maint.
Servs., Inc., No. 02A01-98-11-CV-00323, 1999 WL 553715, at *6–7 (Tenn. Ct. App.
July 30, 1999). Thus, the dicta in Lewis became case law, at least for the purpose of
federal courts sitting in diversity. See Talley, 223 F.3d at 328. Lukas does not cite any
post-Lewis Tennessee cases that flatly apply the Deaderick rule.
When resolving unsettled questions of state law, a federal court should attempt
to make sense, not nonsense, of state courts’ holdings. Cf. Things Remembered Inc. v.
Petrarca, 516 U.S. 124, 136 (1995) (Ginsburg, J., concurring). In this case, Lukas
invites us to find that multiple Tennessee appellate courts have repeatedly and grossly
No. 12-6285 Lukas v. McPeak, et al. Page 8
misunderstood applicable Tennessee Supreme Court precedent, even while citing it. On
the other hand, the district court’s reading of Deaderick reasonably reconciles the lower
state court decisions with Deaderick and its progeny. As a federal court sitting in
diversity, we prefer the district court’s approach, which minimizes the danger of
“interrupt[ing] the orderly development and authoritative exposition of state law.”
Factors, Etc., Inc. v. Pro Arts, Inc., 652 F.2d 278, 282 (2d Cir. 1981); see also
Assicurazioni Generali, S.p.A. v. Neil, 160 F.3d 997, 1003 (4th Cir. 1998) (“[O]nly if the
decision of a state’s intermediate court cannot be reconciled with state statutes, or
decisions of the state’s highest court, or both, may a federal court sitting in diversity
refuse to follow it.” (emphasis added)). Accordingly, we agree with the district court
that the proper demand-futility standard is the version of the Aronson test first mentioned
in Lewis.
Lukas also argues, in the alternative, that even under Defendants’ and the district
court’s preferred standard, his complaint adequately pleads demand futility and the
district court erred by applying a conjunctive version of the two-pronged test in Aronson.
He is wrong on both counts.
Although Delaware courts read the Aronson test as disjunctive, requiring a
plaintiff to meet only one of the two prongs to demonstrate demand futility, see Brehm
v. Eisner, 746 A.2d 244, 255 (Del. 2000), Lewis states the rule in the conjunctive, see
838 S.W.2d at 222 (using the word “and” instead of “or”), appearing to require a
plaintiff to meet the requirements of both prongs. The only Tennessee case Lukas cites
in support of a disjunctive test applies Delaware law to a Delaware corporation. See In
re Healthways, Inc. Derivative Litig., No. M2009-02623-COA-R3-CV, 2011 WL
882448, at *3 (Tenn. Ct. App. Mar. 14, 2011). On the other hand, at least one Tennessee
appellate court has quoted the conjunctive test from Lewis. See Humphreys, 1999 WL
553715, at *6. We have done so as well. See McCarthy v. Middle Tenn. Elec.
Membership Corp., 466 F.3d 399, 410 (6th Cir. 2006). Another Tennessee appellate
court appears to have adopted only the first prong of the test, disinterest and
independence. See Memphis Health Ctr., 2006 WL 2088407, at *10 (stating that in
No. 12-6285 Lukas v. McPeak, et al. Page 9
demand-futility cases “the court examines the interest and independence of the corporate
decision-makers”). We do not need to decide between the Humphreys and Memphis
Health Center versions of the test, because both require the plaintiff to demonstrate a
majority of the board to be interested and not independent, a requirement Lukas fails to
meet.
The district court did not err in its disinterest-and-independence analysis. At
best, Lukas’s allegations make out what the district court already acknowledged: that
Boruff’s disinterest and independence may have been compromised. However, Lukas
does not allege any specifics regarding other board members and does not cite any
Tennessee authority supporting his contention that board members’ exposure to potential
liability via allegations consisting primarily of nonfeasance—as opposed to
malfeasance—should suffice to demonstrate a reasonable doubt as to independence and
disinterest. See also In re Healthways, 2011 WL 882448, at *4 (“[W]e will not excuse
demand if the complaint states claims that arise solely out of the duty of care, but may
excuse demand where there are particularized allegations that the directors breached
their duties of loyalty or good faith.”).
Lukas points out that in Memphis Health Center, the court found the allegation
that “Defendants have a direct interest in continuing to breach their fiduciary duty and
violate the Bylaws and federal rules and regulations” sufficiently established a
reasonable doubt as to independence and disinterest, so as to enable the complaint to
survive a motion to dismiss. See 2006 WL 2088407, at *10. However, the complaint
in that case identified a laundry list of specific and ongoing violations by specific board
members, against whom the plaintiff sought an injunction to prevent future violations.
See id. at *2. In this case, Lukas’s allegations vis-a-vis the majority of the board are
general: that they failed to prevent misconduct by Boruff and maintained inadequate
corporate controls. Because Lukas’s allegations are not sufficiently particularized as to
most of the Board, he fails to satisfy the requirements for excusing demand.
No. 12-6285 Lukas v. McPeak, et al. Page 10
III.
For these reasons, we affirm the judgment of the district court.
No. 12-6285 Lukas v. McPeak, et al. Page 11
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DISSENT
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DOWD, D., District Judge, dissenting. I respectfully dissent.
The issue on appeal is whether the district court correctly found that Plaintiff, in
a shareholder derivative action, failed to adequately allege an excuse for pre-suit demand
under Tennessee Rule 23.1 and Tenn. Ann. Code § 48-17-401 (b). The decision turns
upon the question, “What is the Tennessee substantive law requirement for pleading
futility of demand?” To put the questions in terms of the parties’ arguments, “Is the
Tennessee law of refusal governed by older decisional law, or by a Delaware standard
referenced in a Tennessee Appellate Court opinion after the legislature’s adoption of
Tenn. Code Ann. § 48-17-401(b)?”
The “old” law: The Tennessee Supreme Court first addressed the issue of the test for
demand futility in 1874, in the case of Deaderick v. Wilson, 67 Tenn. 108 (1874).
Deaderick held that pre-suit demand is excused when the directors and officers who
would be charged with responding to such a demand had been named as defendants. It
is Plaintiff’s position that Deaderick remains good law and therefore demand was
excused in this case where all of the directors are named as Defendants.
The new law: In Lewis ex rel. Citizens Savings Bank & Trust Co. v. Boyd, 838 S.W.2d
215 (Tenn Ct. App. 1992) a Tennessee appellate court, in dicta, referenced a Delaware
decision, Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984), which states the Delaware
test for demand futility. Defendants contend that this reference, later cases citing the
Aronson test, and the Tennessee legislature’s enactment of Rule 23.06 and Tenn. Code
Ann. § 48-17-401(b), have established Aronson as the new Tennessee law on demand
futility.1
1
There also is dispute in the case as to the terms of the Aronson test; as interpreted by the
Defendants, the Aronson test would require plaintiff to establish a reasonable doubt that “(1) the directors
are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid
exercise of business judgment.” The test, as used in Delaware, is disjunctive, that is, a plaintiff needs to
establish a reasonable doubt as to only one of the elements.
No. 12-6285 Lukas v. McPeak, et al. Page 12
In my view the law on demand refusal in Tennessee is, at best, conflicting, poorly
developed, scant, and in need of clarification by the Tennessee Supreme Court.
I.
There is a Strong, Well-supported Argument that Deaderick Remains Good Law
To make the points quickly:
C Deaderick has never been criticized or circumscribed by any state or federal
court; it has never been overruled, or abandoned by the state supreme court. The
Tennessee Supreme Court has unwaveringly adhered to the Deaderick rule. See,
e.g., Akin v. Mackie, 203 Tenn. 113 (Tenn. 1958).
• Tennessee appellate courts and federal district courts have continued to
recognize that demand is excused when suing a corporation’s directors. The
Plaintiff cites four cases, including Memphis Health Center, Inc. v. Grant, No.
W2004-02898-COA-R3-CV, 2006 WL 2088407, at *10 (Tenn. Ct. App. July 28,
2006) (excusing demand where 8 of 10 directors were named as defendants; the
only demand futility allegations were that demand “would be futile in that the
[board members] have a direct interest in continuing to breach their fiduciary
duty and violate the Bylaws and federal rules and regulations, and therefore, are
not independent.”) See also: In re Direct General Corporation Securities
Litigation, 2005 WL 1895638 *1 (M.D. Tenn. Aug. 3, 2005) (the court cites
Lewis, but states that under Tennessee law that the demand requirement is
excused “when corporation’s officers and directors will themselves be
defendants...” Finding that the complaint named the officers and directors and
alleged breach of fiduciary duties, abuse of control, waste of corporate assets,
etc., the court held the allegations sufficient to excuse demand under Tennessee
law).
• Under Erie the district court must follow Tennessee law as prescribed by the
Tennessee Supreme Court. Federal courts sitting in diversity must apply the law
“as expressed by the highest court of the state.” Coleman v. Western Elec. Co.,
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Inc., 671 F.2d 980, 983 (6th Cir. 1982), citing Clutter v. Johns-Manville Sales
Corp., 646 F.2d 1151 (6th Cir. 1981) This is because the highest court of the
state is the final arbiter of what is state law.
• Federal courts must follow the law as pronounced by the state’s high court
regardless of whether the federal court agrees with such law. Branch v. U.S. Fid.
& Guar., Co., 198 F.2d 2007, 1011 (6th Cir. 1952). The age of the governing
law has no bearing on its authority. As the Third Circuit explained:
When...there is a decision of the Supreme Court of the
Commonwealth which is directly on point, we are bound
by that decision. We must follow the ruling of the
highest court of Pennsylvania even if the precedent is old.
We must do so even if we think that the state Supreme
Court would change its mind were it ever to revisit the
subject. Brown & Root Braun, Inc. v. Bogan, Inc., 54 F.
App’x 542, 547 (3d Cir. 2002) (quoting Microvote Corp.
v. Montgomery County, 942 F. Supp. 1046, 1049 (E.D.
1996)).
• The only scenario in which a federal court may disregard the state high court’s
pronouncement is when that court has itself cast doubt on its prior rulings. In
this case the Tennessee Supreme Court has never cast doubt upon its ruling in
Deaderick.
• The Tennessee Supreme Court has stated that its power to overrule its own
decisions, “is sparingly exercised and only when the reason is compelling.” In
re Estate of McFarland, 167 S.W.3d 299, 306 (Tenn. 2005).
II.
Lewis Did Not Overrule Deaderick or Purport to Set New Substantive
Requirements
A careful reading of Lewis demonstrates it did not overrule Deaderick nor
presume to do so.
No. 12-6285 Lukas v. McPeak, et al. Page 14
First, the Lewis case involved the propriety of dismissal of an action based on a
special litigation committee’s recommendation that the litigation was not in the bank’s
best interests. It did not involve a derivative action. All of the statements regarding
shareholder derivative actions in Lewis are dicta.
Second, Lewis did not criticize or challenge Deaderick. Indeed, in discussing the
nature of a derivative action, generally, the Lewis court cited, and lauded, Deaderick’s
rule:
Thus, the courts have excused the demand requirement when the
corporation’s officers and directors will themselves be defendants or
when the officers and directors are in collusion with those who have
injured the corporation... Deaderick v. Wilson, 67 Tenn. at 130.
Lewis v. Boyd, at 221 (internal citations partially omitted).
The Delaware demand futility test described (but not used) in Lewis significantly
differs from that announced in Tennessee Supreme Court decisions, and the multiple
lower court decisions that relied upon Deaderick. Lewis, as an inferior court, had no
ability to overrule Deaderick, and did not purport to do so.
III.
Despite Deaderick’s Authority, Several Lower Tennessee Courts Have Relied Upon
Lewis and Adopted Some Version of the Aronson Test
Despite Deaderick’s continuing vitality as precedent, several lower courts have
relied upon the dicta in Lewis and adopted some form of the Aronson test as Tennessee’s
test for demand futility in a stockholder derivative case.
The district court stated, “Lewis appears to state the test for demand futility in
Tennessee” because of its citation in McCarthy v. Middle Tennessee Electric Corp.,
466 F.3d 399 (6th Cir. 2006); Lay v. Burley Stabilization Corp., No. 3:09-cv-252, 2010
WL 2639931 (E.D. Tenn. June 28, 2010); DuVall v. Ecoquest International, Inc., No.
4:06 CV 1168, 2007 WL 2811052 (E.D. Mo. September 24, 2007), and Humphreys v.
No. 12-6285 Lukas v. McPeak, et al. Page 15
Plant Maintenance Services, Inc., No. 02A01-98-11-cv-00323, 1999 WL 533715 (Tenn.
Ct. App. July 30, 1999).
Despite this caselaw, there are arguments this handful of cases did not overturn
Deaderick:
Again, to put each matter briefly:
• The repetition of the incorrect legal standard does not lend credence to a non-
binding and inapposite decision.
• None of these cases acknowledged or discussed Lewis as a substantial departure
in Tennessee law. The limited analysis of these cases “means they are without
a great deal of value as persuasive authority.” Versatile Housewares &
Gardening Sys., Inc. v. Thill Logistics Inc., 819 F. Supp. 2d 230 (S.D.N.Y.
2011).
• Lay, DuVall and Humphreys are unpublished opinions and have no precedential
value. Patton v. McHone, 822 S.W.2d 608, 615, n.10 (Tenn. Ct. App. 1991) (an
unpublished opinion of a Tennessee Court of Appeals has no precedential value
except to the parties in the case).
• The citation to Lewis in several of these cases is only in dicta–e.g., in McCarthy,
Lewis is only cited for the proposition that shareholders should make a pre-suit
demand; in Humphreys’s the complaint was dismissed because it was
unverified.
IV.
Defendant Introduces a Novel Argument Regarding Statutory Interpretation: That
the Enactment of Tennessee’s Rule 23.06 and Tenn. Code Ann. § 48-17-401(b)
Abrogate or Modify the Deaderick Rule
In their appellate brief, Defendants argue for the first time that the Tennessee
legislature’s enactment of Rule 23.06 and Tenn. Code Ann. § 48-17-401(b) abrogated
the Deaderick holding, altering the substantive law of Tennessee. Defendants cite no
legislative history in which Deaderick is mentioned. Defendants cite no case holding
that these code sections alter Tennessee’s substantive law on demand refusal. The
Tennessee Supreme Court has not addressed the issue. This novel argument creates a
No. 12-6285 Lukas v. McPeak, et al. Page 16
question of first impression in the interpretation of these state statutes, and addresses it
to a federal court.
There is a strong argument that the adoption of these code sections did not create
a conflict with pre-existing Tennessee law. As the Supreme Court explained in Kamen
v. Kemper Fin. Servs. Inc., 500 U.S. 90, 108-109 (1991), Federal Rule 23.1, which
requires statement “with particularity” of efforts to obtain the desired action from the
directors and “the reasons for not obtaining the action or not making the effort” does not
define the substantive contours of the demand requirement. Tennessee Rule 23.06 is
identical to the federal rule. Similarly, § 48-17-401(b) only requires that a plaintiff in
a derivative action “allege with particularity that demand made, if any, to obtain action
by the board of directors and either that the demand was refused or ignored or why the
person did not make the demand.” These statutes specify the degree of particularity with
which a plaintiff in a derivative action must allege the requirements of the state
substantive law on demand, but they did not specify what the state requirements must
be.
Defendants cite no case law authority discussing the relationship between
Tennessee Rule 23.06 and § 48-17-401(b). The only authority discussing the
relationship between these statutes and Deaderick that has been located, is the Lewis
case, relied upon heavily by Defendants. Lewis described the Deaderick holding as
consistent with—indeed, embodied in—Tennessee’s corporations statute § 48-27-401(b)
and Tennessee’s Rule of Civil Procedure 23.06. Thus, far from finding that these later
statutes modified or repealed the substantive requirements established by the decisional
law, the Lewis court found them to be expressed in the later statutory enactments. But,
concededly, Lewis did not undertake an extended analysis of the relationship, and as
with all of the statements regarding derivative actions in Lewis, the court’s statement is
dicta.
No. 12-6285 Lukas v. McPeak, et al. Page 17
V.
Because of the Conflicting and Scant Case Law The Question of the Substantive
Requirements for Demand Futility in Tennessee Should be Certified to the
Tennessee Supreme Court
Only two things are absolutely clear: 1) no Tennessee court has undertaken a
thoughtful, sustained analysis of the relationship between Deaderick and Aronson or
Deaderick and Tennessee’s corporations statute § 48-27-401(b) and Tennessee’s Rule
of Civil Procedure 23.06, and 2) the question of the substantive requirements of
Tennessee’s demand futility test is exclusively a matter of state law.
When a new and unsettled question regarding state substantive law and state
statutory interpretation is presented, particularly where there is insufficient well-
reasoned authority state law authority to allow the federal court to make a clear and
principled decision, it is appropriate to refer that question to the court that is the ultimate
authority on Tennessee law: the Tennessee Supreme Court. American Bookseller’s
Foundation for Free Expression v. Strickland, 560 F.3d 433, 446 (6th Cir. 2009).
The United States Supreme Court has recognized that “certification of novel or
unsettled questions of state law for authoritative answers by the State’s highest
court...may save ‘time, energy and resources and help build a cooperative judicial
federalism.’” Arizonans for Official English v. Arizona, 520 U.S.43, 77 (1997) citing
and quoting Lehman Brothers v. Schein, 416 U.S. 386, 391, 94 S. Ct. 1741, 1744, 40
L. Ed. 2d 215 (1974). As the Tennessee Supreme Court said in 2012, “[A]nswering
certified questions from federal courts promotes judicial efficiency and comity and also
protects this state’s sovereignty.” Renteria-Villegas v. Metropolitan Government of
Nashville and Davidson County, 382 S.W.3d 318, 320 (Tenn. 2012), citing Haley v.
Univ. of Tenn.-Knoxville, 188 S.W.3d 516, 521 (Tenn. 2006). The Sixth Circuit has
identified still another advantage to certification: referral of uncertain question of state
law to the state supreme court “avoids the potential for friction-generating error.”
Planned Parenthood of Cincinnati Region v. Strickland, 531 F.3d 406, (6th Cir. 2008)
No. 12-6285 Lukas v. McPeak, et al. Page 18
Rather than trying to predict how the Tennessee Supreme Court would rule, I
recommend this court sua sponte certify to the Tennessee Supreme Court, under Rule
23 of the Tennessee Supreme Court Rules, the questions posed initially: What is the
Tennessee substantive requirement for pleading futility of demand? Is it governed by
Deaderick, by a Delaware standard referenced in a Tennessee Appellate Court opinion
after the legislature’s adoption of Tenn. Code Ann. § 48-17-401(b), or some other test?
Only the Tennessee Supreme Court can provide an authoritative answer to these
questions, and it should be allowed to do so.