856 F.3d 61 (2nd Cir. 2017), 16-530-cv, F5 Capital v. Pappas

Docket Nº:16-530-cv
Citation:856 F.3d 61
Opinion Judge:Gerard E. Lynch, Circuit Judge :
Party Name:F5 CAPITAL, a Cayman Islands Corporation, Plaintiff-Appellant, - v. - PETROS PAPPAS, MILENA MARIA PAPPAS, ROGER SCHMITZ, TOM SOFTELAND, SPYROS CAPRALOS, KOERT ERHERDT, RENEE KEMP, RAJATH SOURIE, EMILY STEPHENS, STELIOS ZAVVOS, OAKTREE VALUE OPPORTUNITIES FUND, L.P., OAKTREE OPPORTUNITIES FUND IX DELAWARE, L.P., OAKTREE CAPITAL MANAGEMENT, L.P.,...
Attorney:MARK C. RIFKIN (Benjamin Y. Kaufman, Michael Liskow, on the brief), Wolf Haldenstein Adler Freeman & Herz LLP, New York, NY, for plaintiff-appellant F5 Capital. DAVID W. BROWN (Andrew J. Ehrlich, Gregory F. Laufer, on the brief), Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for Oat...
Judge Panel:Before: CALABRESI, RAGGI, and LYNCH, Circuit Judges.
Case Date:April 26, 2017
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
FREE EXCERPT

Page 61

856 F.3d 61 (2nd Cir. 2017)

F5 CAPITAL, a Cayman Islands Corporation, Plaintiff-Appellant, -

v.

- PETROS PAPPAS, MILENA MARIA PAPPAS, ROGER SCHMITZ, TOM SOFTELAND, SPYROS CAPRALOS, KOERT ERHERDT, RENEE KEMP, RAJATH SOURIE, EMILY STEPHENS, STELIOS ZAVVOS, OAKTREE VALUE OPPORTUNITIES FUND, L.P., OAKTREE OPPORTUNITIES FUND IX DELAWARE, L.P., OAKTREE CAPITAL MANAGEMENT, L.P., OAKTREE OPPORTUNITIES FUND IX (PARALLEL 2), L.P., MONARCH ALTERNATIVE SOLUTIONS MASTER FUND LTD., MONARCH CAPITAL MASTER PARTNERS II-A L.P., MONARCH CAPITAL MASTER PARTNER II L.P., MONARCH DEBT RECOVERY MASTER FUND, LTD., MONARCH OPPORTUNITIES MASTER FUND, LTD., P MONARCH RECOVERY LTD., STAR SYNERGY L.L.C., STAR OMAS L.L.C., OAKTREE OBC HOLDINGS L.L.C., OAKTREE DRY BULK HOLDINGS L.L.C., MILLENNIA L.L.C., MILLENNIA HOLDINGS L.L.C., MIRABEL SHIPHOLDING & INVEST LIMITED, MIRACH SHIPPING COMPANY LIMITED, HERON VENTURES LTD., OCEANBULK CARRIERS L.L.C., BLUESEA INVEST AND HOLDING LIMITED, MONARCH ALTERNATIVE CAPITAL LP, STAR BULK CARRIERS CORP., Defendants-Appellees, BLUESEA OCEANBULK SHIPPING L.L.C., Defendant

16-530-cv

United States Court of Appeals, Second Circuit

April 26, 2017

Argued December 6, 2016

As Amended April 26, 2017.

Page 62

[Copyrighted Material Omitted]

Page 63

[Copyrighted Material Omitted]

Page 64

[Copyrighted Material Omitted]

Page 65

[Copyrighted Material Omitted]

Page 66

[Copyrighted Material Omitted]

Page 67

[Copyrighted Material Omitted]

Page 68

F5 Capital (" F5" ) brought a shareholder derivative action on behalf of Star Bulk Carriers Corp. (" Star Bulk" ), alleging that individual members of Star Bulk's board and affiliated entities improperly exploited their control of the corporation in entering into three separate self-dealing transactions. F5's complaint included four causes of action, three of which were derivative and one of which purported to be a direct class-action claim for wrongful equity dilution. F5 did not seek intracorporate remedies by making a pre-suit demand on Star Bulk's board of directors. In dismissing F5's complaint, the district court concluded that the dilution claim was properly derivative under Delaware law and that F5 failed to plead demand futility under Rule 23.1(b)(3)(B), Fed.R.Civ.P., as to any of the claims. For the reasons set forth in this opinion, we conclude that (1) F5's dilution claim was properly derivative, not direct; (2) the district court had subject matter jurisdiction to adjudicate the non-class, derivative claims; and (3) F5 did not allege facts sufficient to excuse it from making a pre-suit demand. The judgment of the district court is therefore AFFIRMED.

MARK C. RIFKIN (Benjamin Y. Kaufman, Michael Liskow, on the brief), Wolf Haldenstein Adler Freeman & Herz LLP, New York, NY, for plaintiff-appellant F5 Capital.

DAVID W. BROWN (Andrew J. Ehrlich, Gregory F. Laufer, on the brief), Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for Oatkree defendants-appellees.

Tariq Mundiya, Matthew W. Edwards, Willkie Farr & Gallagher LLP, New York, NY, for Monarch defendants-appellees and defendant-appellee Roger Schmitz.

Bruce G. Paulsen, Jeffrey M. Dine, Michael B. Weitman, Seward & Kissel LLP, New York, N.Y. for Pappas defendants-appellees and defendants-appellees Tom Softeland, Spyros Capralos, Koert Erhardt, Stelios Zavvos, Star Synergy LLC, Star Omas LLC, Millennia LLC, Millennia Holdings LLC, Mirabel Shipholding & Invest Limited, Mirach Shipping Company Limited, Heron Ventures Ltd., Oceanbulk Carriers LLC, and Bluesea Invest and Holding Limited.

Before: CALABRESI, RAGGI, and LYNCH, Circuit Judges.

OPINION

Page 69

Gerard E. Lynch, Circuit Judge :

F5 Capital (" F5" ) brought this shareholder derivative action on behalf of Star Bulk Carriers Corp. (" Star Bulk" ), alleging that individual members of Star Bulk's board and affiliated entities improperly exploited their control over the corporation in executing three separate transactions. Those transactions, according to F5, were infected with self-dealing and were not undertaken to serve the corporation's best interests. F5's complaint included four causes of action, three of which were derivative and one of which purported to be a direct class-action claim for wrongful equity dilution. F5 did not seek intracorporate remedies by making a pre-suit demand on Star Bulk's board of directors.

In dismissing F5's complaint, the district court concluded that the dilution claim was properly derivative under Delaware law and that F5 failed to plead demand futility under Rule 23.1(b)(3)(B), Fed. R. Civ. P., as to any of the claims. For the reasons set forth in this opinion, we conclude that (1) F5's dilution claim was properly derivative, not direct; (2) the district court had subject matter jurisdiction to adjudicate the non-class, derivative claims; and (3) F5 did not allege facts sufficient to excuse it from making a pre-suit demand. We therefore AFFIRM the judgment of the district court.

BACKGROUND

The following facts are taken from the complaint and we accept them as true for the purposes of this opinion. F5 is a Cayman Islands corporation that invests in international shipping companies. Star Bulk is a global shipping company that uses sea vessels to ship dry bulk cargos including iron ore, coal, and grains. Star Bulk is incorporated in the Marshall Islands and maintains its executive office in Athens, Greece. The owner of F5, Hsin Chi Su, was a minority shareholder in Star Bulk and served in management positions at Star Bulk until October 2008. After he and defendant Petros Pappas, another key player in Star Bulk's management, had a falling out resulting from a business dispute, the defendants worked to exclude Su from a leadership role at Star Bulk through several self-dealing transactions that F5 claims harmed the corporation and its minority shareholders.

The allegedly offending transactions are as follows. First, Star Bulk acquired Oceanbulk Carriers LLC and its fleet of vessels in a merger (" Oceanbulk Merger" ).[1] Oceanbulk was a new company and, prior to the merger, it reported significant financial

Page 70

losses. F5 contends that the merger was an unwise business decision that allowed certain defendants to consolidate their control of Star Bulk to the detriment of the other shareholders.2 Specifically, the merger was " meant to reward the Pappas Defendants and their cohorts through increased shareholder control and new sweetheart management positions at Star Bulk." Compl. ¶ 86. In consummating the merger, Star Bulk incurred $1.3 billion in debt and needed to raise an additional $614 million in capital. According to F5, those monetary commitments threatened Star Bulk's financial health and risked other injuries to the minority shareholders.3 F5 voted against the merger, but 95.6% of Star Bulk's shareholders approved the transaction.

Second, Star Bulk purchased 34 dry bulk vessels from Excel Maritime Carriers Ltd. (" Excel Transaction" ), at what F5 claims was a dramatically inflated price. Because the Excel Transaction was not structured as a merger, Star Bulk's board voted on the transaction, but its shareholders did not. Third and finally, F5 alleges on information and belief that Star Bulk entered into service contracts with entities affiliated with Pappas at three times the going rate for the ship maintenance services included in the contracts (" Service Contracts" ). More specific facts concerning each transaction will be discussed as necessary below.

A further introductory word about the parties in this action is warranted. The complaint names as defendants not only the nine members of Star Bulk's board, but also several corporate and other entities with which certain of those defendants are affiliated. As the parties do, we divide those entities into three groups. The first group is the " Pappas Defendants," which includes Petros Pappas, his daughter Milena Pappas, and several entities that they own.4 See Compl. ¶ ¶ 42-47. The second group of defendants, the " Oaktree Defendants," includes Oaktree Capital Management, L.P. and several related entities.5 See Compl. ¶ ¶ 27-33. Three of the individual defendants--Sourie, Kemp, and Stephens--were Oaktree employees who were appointed to Star Bulk's board after the Oceanbulk Merger. The third group of defendants, the " Monarch Defendants," includes Monarch Alternative Capital LP and affiliated entities.6 See Compl. ¶ ¶ 34-41. Schmitz, an individual defendant, is a Monarch employee.

Page 71

F5 originally filed its complaint in the Supreme Court of the State of New York in New York County. The complaint asserted the following causes of action: (1) a derivative claim against the individual defendants for breach of fiduciary duty; (2) a derivative claim against all other defendants for aiding and abetting the breach of fiduciary duty; (3) a derivative claim against the individual defendants for corporate waste; and (4) a...

To continue reading

FREE SIGN UP