California State Teachers' Retirement v. Don L. Blankenship

No. 14-1339 – California State Teachers’ Retirement System et al v. FILED
Blankenship et al May 25, 2018
released at 3:00 p.m.
EDYTHE NASH GAISER, CLERK
WORKMAN, C. J., joined by TABIT, Judge, dissenting: SUPREME COURT OF APPEALS
OF WEST VIRGINIA
There are few tenets of civil procedure as well-established as the rule of
liberality in permitting amendments of a complaint. In an action as substantively and
procedurally complex—as well as inevitably protracted—as the case at bar, the equity
and necessity of such liberality is made plain. The majority’s rejection of petitioners’
entirely reasonable attempt to amend their complaint to comport with newly-discovered
facts which were previously well beyond their reach smacks of blatant result-orientation.
As is evident from even a casual read of the opinion, the majority—rather than confining
itself to the allegations viewed in the light most favorable to petitioners—indulges itself
in the entire universe of facts adduced to date in limited discovery and in other litigation,
draws inferences and makes conclusions thereon, and summarily declares respondents to
be the victors. Because the Rule 12(b)(6) stage is indisputably not the appropriate setting
for such factual assessments, nor is it this Court’s role to sit as a trier of fact, I dissent.
After the tragically well-known explosion at the Upper Big Branch mine
owned and operated by Massey Energy Company (“Massey”) which killed twenty-nine
miners, petitioners filed a derivative shareholder action against Massey directors and
officers alleging that they breached their fiduciary duties by failing to comply with
worker safety laws. Contemporaneous with this action, other shareholders filed
derivative actions in Delaware. Those Delaware derivative actions have continued along
1
a track parallel to the instant action; however, the instant action was stayed for a long
period of time pending the federal prosecution of Don Blankenship and the bankruptcy of
Alpha Natural Resources Inc. (“Alpha,” Massey’s successor).
Subsequent to the explosion and petitioners’ original complaint in this
action, Massey undertook a merger with Alpha. Subsequent to that merger, additional
discovery was obtained, along with newly-available evidence from the federal
prosecution, allegedly revealing that certain Massey directors and/or officers orchestrated
the merger to ensure their most culpable employees (certain mine superintendents) and
officers had continued employment and could therefore protect themselves by controlling
the investigation into the explosion. Petitioners allege that a higher bidder was
discouraged because Alpha had agreed to a “social contract” which involved retention of
these culpable employees. Petitioners allege this was all done to limit the personal
liability of these individuals with respect to the explosion.
Petitioners now seek to amend their long-ago-filed complaint to assert facts
in support of causes of action previously unavailable to them before receipt of this new
discovery and information. In particular, petitioners seek to advance a derivative
shareholder claim which may survive the merger for damages to the company and a
“direct” claim for damages to the shareholders individually. For reasons that the majority
attempts to obfuscate, it has determined—as a matter of fact and law at the 12(b)(6)
stage—that petitioners have neither a viable cause of action nor the right to amend their
2
complaint to even allege such a cause of action. In short, the majority has reviewed the
cobbled-together evidence from various proceedings and determined, before even being
permitted to amend their complaint, that petitioners cannot win under any circumstance.
Making this bold proclamation before full discovery is even conducted seems less like
legal analysis and more like reverse-engineering the outcome.
As this Court has made clear:
Rule 15(a) of the Rules of Civil Procedure provides that leave
to amend a pleading “shall be freely given when justice so
requires.” We recognize that the provision quoted should be
liberally construed in order to promote substantial justice and,
in accordance with the requirement of R.C.P. 1, in such a
manner as “to secure the just, speedy, and inexpensive
determination of every action.” Cotton States Mutual
Insurance Co. v. Bibbee, 147 W.Va. 786, pt. 6 syl., 131
S.E.2d 745. The Rules of Civil Procedure substantially
recognize the preexisting law of this state in relation to
liberality in permitting amendments of pleadings and in
relation to the scope of the trial court's discretion in
permitting or refusing leave to amend.
Perdue v. S. J. Groves & Sons Co., 152 W. Va. 222, 232, 161 S.E.2d 250, 257 (1968). At
base, “[i]f the underlying facts or circumstances relied upon by a plaintiff may be a
proper subject of relief, he ought to be afforded an opportunity to test his claim on the
merits.” Foman v. Davis, 371 U.S. 178, 182 (1962).
Attempting to shoe-horn this case in its present iteration into factually and
procedurally inapposite decisions, the majority makes much use of the companion cases
of In Re Massey Energy Co. Derivative and Class Action Litig., 160 A.3d 484 (Del. Ch.
3
2017) (“Massey II”), and its previous opinion in Manville Pers. Injury Settlement Trust v.
Blankenship, 231 W. Va. 637, 749 S.E.2d 329 (2013) (“Manville”). However, neither is
remotely informative, much less dispositive. In both cases, the plaintiffs wholly failed to
make the specific claims and allegations petitioners herein seek to assert.
First, as to the derivative claim, the majority robotically details at length the
black-letter law reiterated in Manville which holds that a derivative claim is extinguished
by merger, given the requirement of continuity of ownership throughout derivative
litigation. Barely acknowledging the fraud exception at issue here, the majority touts the
Massey II’s court agreement with this general principle and its conclusion that a
derivative claim would not lie in that action.
While it is true that merger ordinarily defeats a shareholder derivative
claim, there are two well-established exceptions, the pertinent one being when “the
merger itself is the subject of a claim of fraud being perpetrated merely to deprive
shareholders of the standing to bring a derivative action.” Lewis v. Anderson, 477 A.2d
1040 (Del. 1984) (emphasis added). As previously noted, the plaintiffs in the Massey II
action did not plead or argue this exception and expressly waived it, as recognized by the
Delaware Chancery Court:
[T]he Complaint does not plead acts from which it would be
reasonable to infer that either of the exceptions to the
continuous ownership rule applies. Indeed, plaintiffs did not
argue in their opposition brief that either exception applies
(thus waiving the claim) and . . . expressly acknowledged
4
they were not contending that the derivative claim survived
the Merger.
Massey, 160 A.3d at 498 (emphasis in original). Therefore, it is clear that the Massey II
court did not actually pass on the question of whether the allegations were sufficient to
invoke this exception to survive a motion to dismiss pursuant to Rule 12(b)(6). 1
Similarly, this Court in Manville found that the complaint “failed to sufficiently allege
that the merger was fraudulent or inequitable.” 231 W. Va. at 647, 749 S.E.2d at 339.
We noted that “nothing in the pleadings, suggesting that the merger was pretextual,
fraudulent or even inequitable, was alleged other than in a cursory manner.” Id. at 646,
749 S.E.2d at 338.
This exception is precisely what petitioners are attempting to amend their
complaint to allege in this case: that the merger was a fraud at its inception. Petitioners
have alleged a scenario wherein the directors and/or officers orchestrated a merger which
not only had the effect of defeating the shareholders’ standing for the derivative suit (a
benefit which the majority ironically confers as a matter of law), but also allowed the
1
Manville was decided in 2013 in an entirely different proceeding involving the
Massey defendants. In Manville, plaintiffs brought a contempt petition against Massey
alleging that it had breached a prior settlement agreement requiring it to enact safety
protocols; it also went a step beyond and attempted to ask for damages on the basis that
the merger was fraudulent, essentially arguing the continuous ownership fraud exception
discussed above, but in the context of a contempt proceeding. This Court found that
there was no continuity of ownership due to the merger, therefore the contempt
proceeding would not lie. As discussed above, the contempt petition did not sufficiently
assert the fraud exception to continuous ownership. This is precisely what petitioners
seek to rectify in the instant proceeding.
5
officers to maintain control over the investigation, shielding themselves from personal
criminal and civil liability. Nonetheless, in the lone scrap of analysis dedicated to the
issue, the majority doggedly focuses on the fact that the merger yielded a profit to the
shareholders, concluding that this fact alone makes petitioners’ claim futile. In so doing,
the majority makes the plainly factual determination that because the shareholders
realized a profit the merger could not have been entered into for the sole purpose of
protecting the officers and/or directors. While certainly evidence that respondents could
argue to defeat the intent requirement of the fraud exception, the profit margin yielded by
the merger is by no means dispositive of the issue of the officers’ and/or directors’
intentions. That determination is a quintessential issue for the finder of fact. It is
exceptionally well-understood that dispositive rulings “should not be utilized in complex
cases, particularly where issues involving motive and intent are present.” Karnell v.
Nutting, 166 W. Va. 269, 273, 273 S.E.2d 93, 96 (1980).
Secondly, as to the “direct” claims 2 , the majority stumbles through the
allegations contained in the complaint, reclassifies it as evidence, and concludes that
petitioners cannot establish a prevailing set of facts. If further bootstraps the Massey II
2
Although less than clear as to the precise construct of their direct claims,
ostensibly available to petitioners is what has been referred to as an “inseparable fraud”
claim. This claim is well-described as a cause of action where “directors cover massive
wrongdoing with an otherwise permissible merger.” Arkansas Teacher Ret. Sys. v.
Caiafa, 996 A.2d 321, 323 (Del. 2010). As such, the focus is not so much on the merits
of the merger, but whether wrongful activity necessitated it. In effect, exactly what
petitioners are alleging here. The majority’s eagerness to declare the profitable nature of
the merger dispositive entirely misses the point of this cause of action.
6
court’s conclusion that the “direct” action likewise cannot be maintained because the
Massey II court found that the facts alleged by those particular shareholders and their
counsel in that particular action did not give rise to such a claim. However, it fails to
note the language in Massey II which clearly identifies the deficiencies in pleading such a
cause of action by the plaintiffs in that case. Critically, petitioners’ newly adduced
evidence is precisely the type of evidence the Massey II court found lacking. For
example, the Massey II court noted that plaintiffs in that case failed to present evidence of
“‘fraudulent conduct that necessitated the merger.’” 160 A.3d at 500. The court noted
the plaintiff’s complaint was “devoid of any allegations that any of the defendants . . .
engaged in misconduct to secure personal benefits for themselves to the detriment of any
Massey stockholder separately or individually.” Id. at 504. Again, this is the exact
evidence petitioners wish to amend their complaint to include.
The majority, in fact, makes much use of this newly-discovered evidence,
utilizing it to summarily try the case at the Rule 12(b)(6) stage. Again, the majority
focuses not on the allegations as construed in the light most favorable to the petitioners,
but the respondent-friendly inferences it chooses to indulge based on the information
attained to date. Referencing yet again the profit yielded from the merger and the
approval of the shareholders of the merger, the majority concludes as a factual matter
before full discovery has even been permitted that petitioners have produced nothing but
“theories” and endorses respondents’ “conclusory” and “speculative” characterizations of
the allegations. The mere use of these terms makes clear that the majority, in its
7
Herculean effort to parse the considerable, yet still underdeveloped evidence adduced to
date, has entirely lost sight of the meaning of the term “allegation” and our pleading
standards, even as to fraud claims.3 More importantly, however, these terms are clearly
demonstrative of the majority’s refusal to construe the allegations in the light most
favorable to petitioner.
Furthermore, based upon the cases cited by the majority, it is likewise clear
that it wholly misunderstands or deliberately chooses to mischaracterize petitioners’
claims. The majority tersely cites from In re MeadWestvaco Stockholders Litig., 168
A.3d 675 (Del. Ch. 2017) in support of its conclusion that petitioners’ “direct” claims are
futile. However, in MeadWestvaco, the shareholders asserted merely that the directors
“‘flew blind’ [into a merger] and left behind $3 billion of value[.]” Id. at 678. Clearly,
under such a circumstance, the profit yielded in the merger is entirely pertinent. Here,
however, petitioners are not complaining merely that the merger undervalued the
company; rather, they are alleging that the entire scheme was an attempt to mitigate civil
and criminal liabilities of certain officers and management-level personnel. In such a
case, “profit” would seem to have only limited relevance, particularly where petitioners
allege the other party to the merger was in some measure complicit in the scheme.
Further, the majority’s reliance on In re Crimson Exploration Inc. Stockholder Litigation
is a similar effort in “cherry-picking” legal support. No. 8541–VCP, 2014 WL 5449419
3
To suggest that petitioners’ extraordinarily detailed 65-page amended complaint
and 102-page proposed second amended complaint lack particularity is laughable.
8
(Del. Ch. Oct. 24, 2014). Like MeadWestvaco, Crimson Exploration made allegations
that the merger consideration was “‘extraordinarily low.’” Id. at *23. However, the
Delaware Chancery Court dismissed the claim in part because it found fatal the
shareholders’ “fail[ure] to allege that a higher price reasonably was available or that there
was another bidder ready and willing to buy Crimson for a higher price.” Id. at *24.
Petitioners, on the other hand, make exactly this allegation in the case at bar.
To suggest that petitioners’ proposed amended complaint—on its face—is
starkly lacking in sufficient allegations of actionable malfeasance on the part of Massey’s
officers, given all that is publicly known (and has been federally adjudicated) about this
tragic incident is flabbergasting to say the least. If petitioners cannot satisfy the high bar
set by the causes of action they seek to plead, that legal issue may be presented and
determined at the summary judgment stage or resolved by the jury, as appropriate. To
refuse petitioners the opportunity to even conduct discovery on their allegations now that
the restraints of the federal prosecution and bankruptcy proceedings have been removed
casts a pall over the majority’s analysis and potential motivations. “[T]he grant or denial
of an opportunity to amend is within the discretion of the [court], but outright refusal to
grant the leave without any justifying reason appearing for the denial is not an exercise of
discretion; it is merely abuse of that discretion and inconsistent with the spirit of the []
Rules.” Foman, 371 U.S. at 182.
9
As the United States Supreme Court noted regarding abusive refusals of
motions to amend, “[i]t is too late in the day and entirely contrary to the spirit of the []
Rules of Civil Procedure for decisions on the merits to be avoided on the basis of [] mere
technicalities.” Id. For the petitioners herein who have endured eight years of litigation,
a litany of investigations, prosecutions, and procedural roadblocks, it is indeed far “too
late in the day” to reject their attempts to test the merits of their complaint just as they
obtain the necessary evidence to present their claims. Petitioners certainly did not endure
these hurdles and delays merely to have a majority of this Court sit as a trier of fact and
adjudicate their claims on an undeveloped record at the Rule 12(b)(6) stage.
Accordingly, I adamantly dissent.
10