F5 Capital v. Pappas

Decision Date26 April 2017
Docket NumberAugust Term, 2016,Docket No. 16-530-cv
Parties 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.
CourtU.S. Court of Appeals — Second Circuit

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, NY 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.

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 United States District Court for the Southern District of New York (Analisa Torres, J .) 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 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.

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 direct class-action claim for equity dilution. The defendants timely removed to federal district court in the Southern District of New York. According to the notice of removal, there was federal jurisdiction over F5's direct, class action dilution claim under the Class Action Fairness Act ("CAFA"), 28 U.S.C. § 1332(d), and supplemental jurisdiction over the non-class, state law claims, 28 U.S.C. § 1367(a). F5 did not contest removal. The defendants jointly moved to dismiss the complaint under Rule 23.1, Fed. R. Civ. P., for failure to plead demand futility. The district court granted the motion, dismissed the complaint with prejudice, and denied F5's implied request for leave to amend the complaint.7

This appeal followed.

DISCUSSION

We review de novo the district court's dismissal of a derivative action for failure to satisfy Rule 23.1, Fed. R. Civ. P., accepting all facts in the complaint as true. Espinoza ex rel. JPMorgan Chase & Co. v. Dimon , 797 F.3d 229, 234-36, 239 (2d Cir.), certified question answered , 124 A.3d 33 (Del. 2015). The parties agree that Delaware law applies.8 See Chau v. Lewis , 771 F.3d 118, 126 (2d Cir. 2014).

For organizational clarity, this opinion proceeds as follows. First, we discuss whether F5's class action dilution claim is properly considered derivative or direct. We conclude that the dilution claim is properly considered derivative, and therefore Rule 23.1's demand requirements apply. We next turn to the two issues of subject matter jurisdiction that arise in connection with the derivative claims. On those two issues, we hold (1) that the district court properly retained jurisdiction over the case after it became clear that CAFA, 28 U.S.C. § 1332(d)(2), could no longer anchor jurisdiction; and (2) that the exception to supplemental jurisdiction in certain diversity cases, 28 U.S.C. § 1367(b), did not preclude the district court from exercising jurisdiction over the derivative state-law claims. Finally, we conclude that F5 failed to plead demand futility as Rule 23.1 requires. We therefore affirm.

I. The Class Action Dilution Claim is Derivative .

F5 Capital brought a putatively direct class-action claim for dilution of its (and the potential class members') ownership interest in Star Bulk. Specifically, F5 alleges that, "[a]s a result of the Oceanbulk Merger and the Excel Transaction ... the interest of Plaintiff in Star Bulk has been diluted and the interest of the Defendants has been increased." Compl. ¶ 141. Before the...

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