Lewis v. Chiles
| Citation | 719 F.2d 1044 |
| Decision Date | 04 November 1983 |
| Docket Number | No. 82-3486,82-3486 |
| Parties | Harry LEWIS, Plaintiff-Appellant, v. Earle A. CHILES, Howard Burnett, Virgil Campbell, Earl M. Chiles, Cyril K. Green, et al., Defendants-Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
Irving Bizar, Pincus, Munzer, Bizar & D'Alessandro, New York City, Bruce M. Hall, Portland, Or., for plaintiff-appellant.
James N. Westwood, Miller, Nash, Yerke, Wiener & Hager, Barbee B. Lyon, Tonkon, Torp, Marmaduke & Booth, Robert L. Allen, Morrison, Dunn, Carney, Allen & Tongue, James H. Clarke, Spears, Lubersky, Campbell & Bledsoe, Henry Kantor, Phil Goldsmith, John D. Ryan, Portland, Or., for defendants-appellees.
Appeal from the United States District Court for the District of Oregon.
Before SNEED, FARRIS and CANBY, Circuit Judges.
Harry Lewis, a citizen of New York and a stockholder in Fred Meyer, Inc., an Oregon corporation, filed this shareholder derivative action on June 18, 1980. Federal jurisdiction was based on diversity of citizenship. 28 U.S.C. Sec. 1332. During the pendency of the action the shareholders of Fred Meyer, Inc., approved the sale of the corporation's assets to two companies for a price of fifty-five dollars per share. The business was sold as a going concern, and the derivative claim was specifically included in the assets sold. The defendants moved for summary judgment on the ground that Lewis no longer had standing to prosecute the suit. The district court granted their motions on June 8, 1982. The court subsequently denied Lewis's request for attorneys' and accountants' fees. We affirm.
Lewis's primary allegations were that unauthorized bonuses had been paid to the corporation's senior officers; that, in order to decrease his personal income tax liability, Fred G. Meyer appropriated a corporate opportunity by purchasing a building which he later leased to Fred Meyer Savings and Loan Association, a subsidiary of Fred Meyer, Inc.; and that the corporation, without independent appraisal, bought Fred G. Meyer's interests in real estate companies from the Meyer Estate at a vastly inflated price for the benefit of the Estate and the Meyer family. Lewis contends that these three violations of the shareholders' trust resulted in an injury to the corporation of approximately ten million dollars. His claims withstood a motion for summary judgment in December 1980.
During the discovery stage of the lawsuit, the sale transaction moved forward. In September 1980 the Board of Directors of Fred Meyer, Inc. received a letter from KKR Associates expressing interest in acquiring all of the outstanding stock of Fred Meyer, Inc. at a price of forty-five dollars per share. The KKR plan called for participation by Fred Meyer, Inc. management in the ownership of the new entity. The Directors turned down the proposal. On June 3, 1981, the corporation announced that it had received an unsolicited offer from KKR at fifty-five dollars per share. Later that month the Board established a special committee of outside directors to evaluate the offer and report its recommendations. The special committee voted on July 21 to recommend that the Board authorize representatives of the corporation to enter into negotiations with KKR. The following day the full Board voted to authorize the negotiations recommended by the special committee. In its final form the transaction involved the sale of all corporate assets to two entities organized by KKR, Fred Meyer, Inc. Acquisition Corp. and Fred Meyer Real Estate Properties, Ltd. Nine executive officers of Fred Meyer, Inc., five of whom were also directors, subscribed to 265,000 shares of Acquisition Corp. common stock, roughly three percent of the shares to be issued, at six dollars per share. They also had an option to purchase additional shares at the same price. The same officers and directors also purchased limited and general partnership interests in Fred Meyer Real Estate Properties, Ltd. The transaction was structured so that Acquisition Corp. would purchase the operating business of Fred Meyer, Inc. and Fred Meyer Real Estate Properties, Ltd. would purchase real estate, leaseholds, leasehold improvements, and certain other fixed assets. The purchase agreement provided that the nine executive officers would be retained by Acquisition Corp. on roughly the same terms as they had previously enjoyed. Acquisition Corp. further agreed to indemnify the officers and directors of Fred Meyer, Inc. for defense costs and any liability incurred as a result of derivative litigation.
On August 25, 1981, the Board of Directors, upon the recommendation of the special committee, unanimously approved the sale agreement. In November 1981 Kidder Peabody & Co., the Board's principal financial advisor, determined that the fifty-five dollar per share price was fair to Fred Meyer, Inc.'s common stockholders. The Board obtained a similar opinion from Merrill
Lynch White Weld Capital Markets Group. The Board then proceeded to issue to all Fred Meyer, Inc. shareholders a proxy statement and notice of a special meeting at which the proposed agreement would be presented. The proxy statement explained that the Lewis litigation was in the discovery stage and that if the transaction were consummated, the present shareholders would not benefit from any recovery. The proxy statement also apprised shareholders of actual or potential conflicts of interest involving the nine officers who were going to take part in the transaction. A majority of the shareholders voted for the sale at the special meeting on December 10, 1981.
1. Standing. The district court ruled that state law governed the question of Lewis's standing to bring a derivative action following the sale of the assets. Federal courts have divided on this question. Compare Kenrich Corp. v. Miller, 377 F.2d 312, 314 (3d Cir.1967), and Susman v. Lincoln American Corp., 550 F.Supp. 442, 445-46 (N.D.Ill.1982) with Lewis v. Knutson, 699 F.2d 230, 236-38 (5th Cir.1983). Fed.R.Civ.P. 23.1 requires that a derivative plaintiff be a shareholder at the time of the alleged wrongful acts and that the plaintiff retain ownership of the stock for the duration of the lawsuit. This latter requirement, although not expressly stated in the rule, has been inferred from its language. 1 However, as a practical matter, the continuous ownership requirement stems from the equitable nature of derivative litigation which allows a shareholder "to step into the corporation's shoes and to seek in its right the restitution he could not demand in his own." Cohen v. Beneficial Loan Corp., 337 U.S. 541, 548, 69 S.Ct. 1221, 1226, 93 L.Ed. 1528 (1949). This equitable principle reflects a shareholder's real interest in obtaining a recovery for the corporation which increases the value of his holdings. Lewis v. Knutson, 699 F.2d at 238; Schilling v. Belcher, 582 F.2d 995, 1002 (5th Cir.1978). Since Lewis received cash for his shares in Fred Meyer, Inc. instead of shares in the acquiring companies, he could not benefit from any recovery. 2 His derivative suit was an intangible asset of Fred Meyer, Inc. which passed to the acquiring companies with the sale of Fred Meyer, Inc.'s other assets. After the sale only Acquisition Corp., Fred Meyer Real Estate Properties, Ltd., and their respective shareholders and partners, could have had an interest in pursuing the claims. See Bosse v. Crowell Collier & Macmillan, 565 F.2d 602, 613 (9th Cir.1977).
The district court looked to the substantive law of Oregon, the state of Fred Meyer Inc.'s incorporation, to resolve the standing issue. O.R.S. 57.630(1) provides that any existing claim survives the dissolution of a corporation. 3 While the court ruled that this statute allows a derivative claim to continue, it found that the statutory language offered no guidance as to who has standing to assert the claim. 4 We accord substantial deference to a district court's interpretation of the law of the state in which it sits. Fleury v. Harper & Row Publishers, Inc., 698 F.2d 1022, 1026 (9th Cir.1982). No Oregon court has yet interpreted this provision as it relates to shareholder standing. The district court therefore applied general principles and held that Lewis lacked standing. This interpretation of how an Oregon court would decide the question is not clearly erroneous. See id. Since it does not conflict with the federal policy, we need not decide whether federal or state law controls.
Lewis asserts that the officers and directors of Fred Meyer, Inc. took advantage of the sale of the corporation's assets as a means of insulating themselves from liability in his suit. See Watson v. Button, 235 F.2d 235 (9th Cir.1956). He contends further that the alleged wrongdoers deprived the shareholders of the value of the derivative claims by transferring his cause of action for no consideration. Lewis thus seeks to analogize his case to those in which courts have invoked their equitable powers to allow shareholders to maintain derivative actions after the dissolution of a corporation when officers or directors breached their fiduciary duty in connection with a takeover. See Independent Investor Protective League v. Time, Inc., 50 N.Y.2d 259, 406 N.E.2d 486, 428 N.Y.S.2d 671 (1980); Albert v. Salzman, 41 A.D.2d 501, 344 N.Y.S.2d 457 (App.Div.1973). We have thoroughly reviewed the record. We reject the argument. The proxy statement informed the shareholders that those officers and members of the Board of Directors who were defendants in Lewis's suit may have had conflicting interests. It also indicated that current shareholders would not benefit from any recovery if they approved the transaction. Further, George R. Roberts, a general partner in KKR, stated in an affidavit that Acquisition Corp. and Fred Meyer Real Estate Properties, Ltd., believed Lewis's derivative claims had no value. The shareholders were fully...
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