Kona Enterprises, Inc. v. Estate of Bishop
| Decision Date | 04 June 1999 |
| Docket Number | No. 98-16197.,98-16197. |
| Citation | 179 F.3d 767 |
| Parties | KONA ENTERPRISES, INC., individually and derivatively on behalf of Hanford's, Inc., Nationwide Industries, Inc., Plaintiff-Appellant, and Balanced Value Fund; Tach One, on behalf of Montrose Nationwide Limited Partnership; Wayne M. Rogers; Jack M. Gertino, Plaintiffs, v. ESTATE OF Bernice Pauahi BISHOP, by and through its trustees, Henry H. Peters, Myron B. Thompson, Oswald K. Stender, Richard S.H. Wong, and Lokelani Lindsey; Matsuo Takabuki, individually; William S. Richardson, individually; Myron B. Thompson, individually; Henry H. Peters, Jr., individually; Hanford's Inc.; Nationwide Industries, Inc.; Montrose Nationwide Limited Partnership; Snap Products, Inc.; Hanford's Creations, Inc.; John Does 1-10, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Russell S. Walker, Woodbury & Kesler, Salt Lake City, Utah, for the plaintiff-appellant.
David Schulmeister, C. Michael Hare, Kelly G. LaPorte, Cades Schutte Fleming & Wright, Honolulu, Hawaii, for the defendants-appellees.
Before: FARRIS, NOONAN and GRABER, Circuit Judges.
Background
Kona Enterprises was used as a vehicle for several investors, including Defendants, to gain control of Hanford's, Inc., a seasonal decorations company, and Nationwide, an automobile products manufacturer. We refer to Hanford's and Nationwide collectively as the "Companies." The Bishop Estate provided several letters of credit to avoid foreclosure by the Companies' creditor. After allegedly rejecting alternative financing arrangements, the Bishop Estate bought the Companies' loans. It eventually foreclosed when the loans went unpaid, taking all of the stock and assets of the Companies under the stock pledge agreement.
Kona and its other shareholders1 sued Defendants, alleging breaches of fiduciary duties as well as breaches of the covenant of good faith and fair dealing. Kona also alleged interference with corporate opportunity and corporate governance.2 The district court held that Kona had not asserted any direct claims against Defendants and that it lacked standing to pursue any derivative claims.
Kona asserts two arguments in this appeal: (1) that the district court erroneously held that it had not asserted a direct claim for damages against Defendants, and (2) that to the extent it is required to pursue its claims derivatively, it has standing to do so. If it does not have standing in the traditional sense, it contends the district court erred in not allowing equitable standing under the facts of this case.
Whether Kona can assert a direct claim based on the allegedly wrongful foreclosure of its shares in the Companies is a question of law reviewed de novo. See Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir.1998). Likewise, whether Kona had derivative standing to assert claims on behalf of the Companies is reviewed de novo. See Cohen v. Stratosphere Corp., 115 F.3d 695, 700 (9th Cir.1997).
We conclude that Kona has not asserted any direct claims against Defendants. Kona made clear at oral argument that it seeks only damages equal to its investment in the Companies. The damages Kona seeks represent a diminution in value of the Companies, allegedly resulting from wrongful acts by Defendants. Kona thus seeks recovery for wrongs to the Companies that resulted in a decline in the value of its stock. Kona alleges no disproportionate injury sufficient to make out a direct claim. Further, Kona does not contend the process of foreclosure by Defendants was unlawful and does not seek return of its shares. Therefore, no direct claim has been asserted.
Kona argues it nonetheless has standing to assert derivative claims. It asserts it need not meet the continuous share ownership requirement of Federal Rule of Civil Procedure 23.1 for two reasons. First, it contends that the standing requirements of Rule 23.1 are substantive in nature and under Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), state law should apply to this derivative suit. Second, Kona contends that an equitable exception to Rule 23.1 is appropriate where "a claimant has lost its shares involuntarily through the same wrongful conduct which is the subject of the derivative claims."
Whether Rule 23.1's continuous share ownership requirement is applicable in diversity cases is an issue of first impression in this Circuit. We have discussed the issue in previous decisions, but none of our holdings has required us to resolve it. See, e.g., Sax v. World Wide Press, 809 F.2d 610, 613 (9th Cir.1987) (). Likewise, "the controversy has not been laid to rest by the Supreme Court, although once, speaking generally about former Rule 23(b), the Court suggested that the provision may be given effect in a federal court even though state law contains no comparable requirement." 7C Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 1829, at 78 (2d ed.1986) (citing Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949)).
We agree with our own statement in Sax that Rule 23.1's continuous share ownership requirement is procedural in nature and thus applicable in diversity actions. Cf. id. at 77 (). Accordingly, Kona's failure to own stock in the Companies contemporaneously with bringing suit deprives them of standing to pursue their claims derivatively.
Even if Rule 23.1 were inapplicable in diversity actions, state law would likely cause us to reach the same result. Although the continuous share ownership requirement has been adopted in many jurisdictions, some states, including North Carolina and Pennsylvania, whose law we are urged to apply by Kona, have less demanding standards. Those standards, however, still require share ownership at the time of the transaction(s) complained of and at the time the suit is filed. See, e.g., Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445, 449 (1990) (...
To continue reading
Request your trial
-
In re Sagent Technology, Inc., Derivative Litig.
...standing to sue for misconduct that occurred prior to the time he became a shareholder of the corporation. Kona Enterprises, Inc. v. Estate of Bishop, 179 F.3d 767, 769 (9th Cir.1999). Thus, the complaint must indicate when plaintiffs bought stock in Sagent, and must state that they have ow......
-
Mroz v. Hoaloha Na Eha, Inc.
...23.1. Plaintiffs assert that they were shareholders of New Hoaloha as a result of the 1992 merger of Eha and Old Hoaloha. In Kona Enter., Inc., 179 F.3d at 770, the United States Court of Appeals for the Ninth Circuit indicated that there is a class of cases termed "merger cases" in which e......
-
Kona Enterprises v. Estate of Bishop
...and Nationwide Industries, Inc., an automobile products manufacturer (collectively the "Companies"). See Kona Enter., Inc. v. Estate of Bishop, 179 F.3d 767, 770 (9th Cir. 1999). By early 1991, Kona had acquired 100% of the stock in the Companies. This stock constituted Kona's only valuable......
-
Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust v. Stumpf
...no standing to sue for alleged misconduct that took place before he became a shareholder of the company. Kona Enters., Inc. v. Estate of Bishop, 179 F.3d 767, 769 (9th Cir. 1999). Plaintiffs purchased stock in January and May of 2009. Compl. ¶¶ 30-31. While plaintiffs allege, as background,......
-
Dismissing Derivative Actions in the Federal Courts for Failure to Allege Demand Futility: Choosing a Standard of Appellate Review--abuse of Discretion or De Novo?
...(10th Cir. 2008).282. Bateson v. Magna Oil Corp., 414 F.2d 128, 131 (5th Cir. 1969).283. See infra Part II.B.284. See infra Part II.B.285. 179 F.3d 767, 769 (9th Cir. 1999), cited with approval in Quinn v. Anvil Corp., 620 F.3d 1005, 1012 (9th Cir. 2010).286. See 179 F.3d at 769 (citing Coh......