Abella v. Universal Leaf Tobacco Co., Inc.

• Decision Date: 07 September 1982
• Docket Number: Civ. A. No. 79-0073-R.
• Court: U.S. District Court — Eastern District of Virginia
• Parties: Frank J. ABELLA, Jr., Plaintiff, v. UNIVERSAL LEAF TOBACCO CO., INC., et al., Defendants.

546 F. Supp. 795

Frank J. ABELLA, Jr., Plaintiff, v. UNIVERSAL LEAF TOBACCO CO., INC., et al., Defendants.

Civ. A. No. 79-0073-R.

United States District Court, E. D. Virginia, Richmond Division.

September 7, 1982.

Alan E. Bandler, Kass, Goodkind, Wechsler & Labaton, New York City, G. Rodney Sager, Richmond, Va., for plaintiff.

Wm. C. Sterling, Jr., Wachtell, Lipton, Rosen & Katz, New York City, Frank B. Miller, III, Sands, Anderson & Miller, James C. Roberts, Mays, Valentine, Davenport & Moore, Richmond, Va., for defendants.

MEMORANDUM

MERHIGE, District Judge.

The Court has previously denied a motion filed by the defendant Universal Leaf Tobacco Co., Inc. ("Universal") to dismiss the complaint herein, or, in the alternative, to grant it summary judgment. See Abella v. Universal Leaf Tobacco Co., 495 F.Supp. 713 (E.D. Va. 1980) ("Abella I"). The Court granted Universal a certificate for interlocutory appeal, but the Court of Appeals for the Fourth Circuit denied Universal's motion for leave to appeal. Universal now renews its motion in light of developments in Delaware law since Abella I, as described infra. Additionally, the individual defendant directors of Universal ("the Directors") now move for summary judgment.

Since the facts surrounding this case were set out in some detail in Abella I, supra, a brief summary should suffice here. Plaintiff, a citizen of New Jersey, owns stock in Universal, a Virginia corporation. He brings this derivative action to recover from the Directors, none of whom are New Jersey citizens, approximately 1.2 million dollars Universal paid to Congoleum Corporation ("Congoleum") in exchange for Congoleum's abandoning its attempt to take over Universal. Additionally, the plaintiff seeks to recover Universal's expenses in fighting the takeover bid; to remove the Directors as directors, officers, and employees; and to have a receiver appointed to manage Universal until a new board of directors is installed. Plaintiff alleges that the Directors' actions violated their fiduciary duties to Universal under Virginia law and violated § 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(e) ("the 1934 Act").

Plaintiff invokes this Court's jurisdiction under § 27 of the 1934 Act, 15 U.S.C. § 78aa, under diversity jurisdiction provided in 28 U.S.C. § 1332, and under the Court's pendent jurisdiction over state law claims.

I. UNIVERSAL'S RENEWED MOTION TO DISMISS

A. Special Litigation Committee

In Abella I, this Court rejected Universal's contention that the Court was bound by the determination of Universal's Special Litigation Committee (SLC) to the effect that the plaintiff's suit should be dismissed for the reason that the SLC had decided that maintaining the suit would not be in the best interests of Universal and its shareholders. Universal claimed that the SLC's decision was shielded from the Court's scrutiny by the business judgment rule. In finding no connection between the business judgment rule and the dismissal of a shareholder derivative suit, the Court was guided by Maldonado v. Flynn, 413 A.2d 1251 (Del. Ch. 1980). See 495 F.Supp. at 717.¹ Maldonado has since been reversed sub nom. Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981).

In light of this development, Universal has renewed its motion to dismiss the complaint, or, in the alternative, for summary judgment. In his response to the Directors' motion for summary judgment, discussed infra, plaintiff asserts without supporting authority that the defendants may not relitigate the denial of their prior motion. This claim is plaintiff's only apparent response to Universal's motion and, in the Court's view, is not well taken. The Court has discretion to allow Universal to renew its motion. See generally 6 J. Moore, Moore's Federal Practice ¶ 56.142 (2d ed. 1982).

The Zapata decision fully justifies the Court's reconsideration of the effect of a special litigation committee's determination that a shareholder derivative suit should be dismissed. The Zapata decision has, as one might have anticipated, provoked considerable commentary. See, e.g., Block & Prussin, The Business Judgment Rule and Shareholder Derivative Actions: Viva Zapata?, 37 Bus. Law. 27 (1981); Note, Zapata Corp. v. Maldonado: A Limitation on the Use of Delaware's Business Judgment Rule in Shareholder Derivative Suits, 6 Del. J. Corp. L. 80 (1981); Comment, Zapata Corp. v. Maldonado: Restricting the Power of Special Litigation Committees to Terminate Derivative Suits, 68 Va. L. Rev. 1197 (1982) ("Comment, Restricting the Power"); Case Comment, Directors' Business Judgment in Terminating Derivative Suits Subject to Judicial Review, 59 Wash. U.L.Q. 1425 (1982). More importantly, Zapata has been recognized as authoritative by a number of courts. See, e.g., Maldonado v. Flynn, 671 F.2d 729 (2d Cir. 1982) (per curiam) (remanding Maldonado v. Flynn, 485 F.Supp. 274 (S.D.N.Y. 1980), so District Court might proceed to apply Zapata principles); Zilker v. Klein, 540 F.Supp. 1196, 1198 (N.D. Ill. 1982); Stein v. Bailey, 531 F.Supp. 684, 691 (S.D.N.Y. 1982) (Delaware law); Watts v. Des Moines Register & Tribune, 525 F.Supp. 1311, 1324-29 (S.D. Iowa 1981) (Iowa law); cf. Joy v. North, 519 F.Supp. 1312, 1317-19 (D. Conn. 1981) (Connecticut law; following Zapata as to some points but not adopting Zapata approach altogether).

In the original Maldonado case, which the Court relied upon in Abella I, an "Independent Investigation Committee" composed solely of two newly appointed directors recommended dismissal of a shareholder derivative suit alleging self-dealing on the part of the directors. The Court of Chancery refused to give weight to that recommendation, holding that "the business judgment rule is irrelevant to the question of whether the Committee has the authority to compel the dismissal of this suit." 413 A.2d at 1257. The court went on to find that the shareholder had an individual right to maintain the derivative action. Id. at 1262.

The Delaware Supreme Court began its analysis² by rejecting the latter proposition, finding instead that the shareholder had only a right to initiate the suit, not an absolute right to control it. 430 A.2d at 782-83. It then found that Delaware statutes giving the board its broad powers, including by implication the power to control corporate litigation and expressly the power to delegate its authority to a committee, conferred on the "independent committee composed of disinterested board members the authority to move to dismiss derivative litigation that is believed to be detrimental to the corporation's best interest." 430 A.2d at 786. The court, however, still declined to defer to the board and committee to the extent that the majority of courts that have considered the issue have done.³ Instead, the court placed on the corporation the burden of proving the committee's independence, good faith, and reasonable investigation, rather than presuming those elements to be present. Id. at 788 & n. 17. Further, and most significantly, the court directed the trial court to apply its own "independent business judgment" to decide whether to dismiss the suit, id. at 789, taking into account "`many factors — ethical, commercial, promotional, public relations, employee relations, fiscal as well as legal,'" id. at 788 (quoting Maldonado v. Flynn, 485 F.Supp. at 285).

As in Abella I, see 495 F.Supp. at 716, this Court now assumes the role of a Virginia court and applies the relevant Virginia law. The Court must give due weight to Zapata and the line of cases following it and consider the extent to which a Virginia court would be likely to rule similarly.

The Code of Virginia contains provisions substantially the same as the Delaware provisions the Zapata court construed. Just as Del. Code Ann. tit. 8, § 141(a), see Zapata, 430 A.2d at 782 n. 6, entrusts the management of the business and affairs of a corporation to its board of directors, Va. Code § 13.1-35 uses the same operative language for the same purpose.⁴ Similarly, Delaware allows the board of directors to delegate all of its authority to a committee of one or more directors in Del. Code Ann. tit. 8, § 141(c), see Zapata, 430 A.2d at 785 n. 13; Virginia allows such delegation to a committee of two or more directors pursuant to Va. Code § 13.1-40.⁵ A comparison of the Delaware case law cited in Zapata and comparable Virginia case law reveals further similarities in the states' treatment of, for example, the power to initiate derivative suits⁶ and the demand requirement.⁷

In addition to considering these factors pushing toward acceptance of the Delaware treatment, this Court must consider the significance of rejecting that treatment. As Zapata indicates, see 430 A.2d at 782, the Court of Chancery opinion, Maldonado v. Flynn, 413 A.2d 1251 (Del. Ch. 1980), together with Maher v. Zapata Corp., 490 F.Supp. 348 (S.D. Tex. 1980), and Abella I, represented the "minority" rule on the treatment of determinations by special litigation committees. See also Abella I, 495 F.Supp. at 717. Zapata endeavored to find a middle course between the "minority" rule and the "majority" rule. See 430 A.2d at 787-88; note 3 supra. But since the Delaware Supreme Court reversed the Court of Chancery in Zapata, and Maher, which was construing Delaware law, has become a questionable precedent, see note 1 supra, the "minority" position is apparently now occupied only by Abella I, which has become a minority of one (I). To adhere to the holding of Abella I despite the teachings of Zapata would be to assert that Virginia would impose the most restrictive rule in the nation concerning a corporation's power to terminate shareholder derivative suits. The Court simply finds no justification in Virginia law for such an assertion.

Most importantly, the Court finds the reasoning in the Zapata opinion persuasive. The Delaware Supreme Court showed its sensitivity to the danger of giving minority...