Burt on Behalf of McDonnell Douglas v. Danforth

• Decision Date: 12 July 1990
• Docket Number: No. 89-1276C(1).,89-1276C(1).
• Citation: 742 F. Supp. 1043
• Parties: Oliver BURT, Jr. on Behalf of McDONNELL DOUGLAS CORP., Plaintiff, v. William H. DANFORTH, et al., Defendants.
• Court: U.S. District Court — Eastern District of Missouri

742 F. Supp. 1043

Oliver BURT, Jr. on Behalf of McDONNELL DOUGLAS CORP., Plaintiff, v. William H. DANFORTH, et al., Defendants.

No. 89-1276C(1).

United States District Court, E.D. Missouri, E.D.

July 12, 1990.

COPYRIGHT MATERIAL OMITTED

Michael McCabe, Alan Schulman, William Lerach, Milberg, Weiss, Bershad, Specthrie & Lerach, San Diego, Cal., Richard Kilsheimer, Kaplan & Kilsheimer, New York City, Mark Hirschfeld, Clayton, Mo., for plaintiff.

Henry Rossbacher, Sullivan, Walsh, Rossbacher & Wood, Los Angeles, Cal., Veryl Riddle, Bryan, Cave, McPheeters & McRoberts, Michael Skinner, Armstrong, Teasdale, Schlafly, Davis & Dicus, St. Louis, Mo., William Conkle, Conkle & Olesten, Los Angeles, Cal., Kenneth Heininger, McDonnell Douglas Corp., St. Louis, Mo., for defendants.

MEMORANDUM

NANGLE, District Judge.

Plaintiff, a citizen of South Carolina and a minority shareholder in McDonnell Douglas Corporation ("McDonnell Douglas"), originally filed this stockholder derivative action on behalf and for the benefit of McDonnell Douglas in the Superior Court of the State of California in Los Angeles County. Plaintiff's original complaint named as defendants the individual directors and officers of McDonnell Douglas' Board of Directors, government officials, former government officials, defense consultants and "Does 1 through 200, inclusive". McDonnell Douglas Corporation was also named as a nominal defendant. Two of the government officials removed the action to the United States District Court for the Central District of California on the basis of 28 U.S.C. §§ 1441, 1442 and 1442a. Subsequently, Judge Ronald S.W. Lew of the United States District Court for the Central District of California dismissed Deputy Assistant Air Force Secretary Victor D. Cohen as a defendant, without prejudice, pursuant to Rule 12(b)(6) Fed.R.Civ.P. In addition, Judge Lew found that California's courts lacked personal jurisdiction over a number of McDonnell Douglas' corporate officers and directors and that of the thirty-nine named defendants, only five had significant California connections. For these reasons and because Judge Lew found that the bulk of evidence, witnesses and defendants were located in Missouri, this matter was transferred to the United States District Court for the Eastern District of Missouri pursuant to 28 U.S.C. § 1404. Plaintiff has subsequently dismissed his claims against the remaining government official and defense consultant defendants. This matter is now before the Court on defendants' various motions to dismiss plaintiff's complaint.

Plaintiff's complaint alleges intentional breach of fiduciary duties (Count I), negligent breach of fiduciary duties (Count II), violations of the California Corporations Code Section 2216 (Count III) and violations of the California Business and Professions Code Sections 17200-17208 (Count IV). Defendants, including nominal defendant McDonnell Douglas, have filed motions to dismiss for plaintiff's failure to comply with Rule 23.1 in failing to make a demand upon McDonnell Douglas' Board of Directors to take corrective action prior to the filing of this lawsuit. The director defendants also move to dismiss all counts of plaintiff's complaint on the basis that they fail to state a claim upon which relief can be granted. The Court will discuss each of defendants' motions separately.

Prior Demand Under Rule 23.1

Rule 23.1 of the Federal Rules of Civil Procedure provides in pertinent part:

In a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint shall be verified and allege ... with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for the plaintiff's failure to obtain the action or for not making the effort. (emphasis added.)

Plaintiff devotes five pages of his complaint to "derivative allegations" for the purpose of complying with Rule 23.1. The bulk of these allegations are committed to plaintiff's reasons for failing to make a prior demand on the McDonnell Douglas Board of Directors ("the Board") and allegations in support of plaintiff's conclusion that such a demand would have been futile. Nonetheless, defendants argue that plaintiff's lengthy allegations with regard to futility are conclusory and that they fail to state sufficient grounds for making a prior demand under federal and state law.

As a threshold matter, this Court must first resolve the parties' dispute with respect to what law governs this issue. The "if necessary" requirement in Rule 23.1 means "that the necessity of making a demand on the shareholders or members should be governed by the applicable state law." Allright Missouri, Inc. v. Billeter, 829 F.2d 631, 639 (8th Cir.1987). Defendants argue that this Court can look either to federal law to determine whether plaintiff's pleading of futility comports with Rule 23.1, or to the law of Maryland, McDonnell Douglas' state of incorporation. Plaintiff argues that the law of California controls this issue. In addition, plaintiff argues that under Van Dusen v. Barrack, 376 U.S. 612, 84 S.Ct. 805, 11 L.Ed.2d 945 (1964), this Court must apply California choice-of-law principles to determine what forum's law controls.

Generally, a federal court sitting in diversity applies the choice-of-law rules of the forum state. Potter v. St. Louis-San Francisco Ry. Co., 622 F.2d 979, 981 (8th Cir.1980); Buck v. American States Life Ins. Co., 723 F.Supp. 155, 156 (E.D.Mo. 1989). Nonetheless, in Van Dusen v. Barrack, 376 U.S. 612, 84 S.Ct. 805, 11 L.Ed.2d 945 (1964), the United States Supreme Court held that where a defendant successfully transfers a case that has been properly brought in the original district to another district pursuant to § 1404(a), the choice-of-law rules of the transferor district must be applied. Federal courts, however, have consistently found that when a case is transferred due to a defect in venue or personal jurisdiction, Van Dusen is inapplicable, and the choice-of-law rules of the forum court must be applied. See, e.g., Manley v. Engram, 755 F.2d 1463, 1467 and n. 10 (11th Cir.1985); Roofing & Sheet Metal Services, Inc. v. La Quinta Motor Inns, Inc., 689 F.2d 982, 991-92 (11th Cir. 1982); Ellis v. Great Southwestern Corp., 646 F.2d 1099, 1108, 1110 (5th Cir.1981). In the case at bar, Judge Lew specifically found that personal jurisdiction was lacking with respect to numerous defendants. Thus, this case was not "properly brought" in the Central District of California, and Van Dusen does not apply. Accordingly, this Court will apply Missouri's choice-of-law rules in determining what state's law controls in this case.

With respect to the question of whether plaintiff should be excused from making a prior demand on the Board, Missouri courts have held that the law of the state of incorporation must be applied to breach of fiduciary duty claims against corporate officers. See Ranch Hand Foods v. Polar Pak Foods, Inc., 690 S.W.2d 437, 444 (Mo.App.1985) citing St. Louis Union Trust Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 562 F.2d 1040, 1054 (8th Cir.1977), and Restatement (Second) of Conflict of Laws § 309. Therefore, because McDonnell Douglas is a Maryland corporation, the law of Maryland will be applied to determine whether plaintiff offers sufficient reasons to excuse his failure to make a prior demand on the Board.¹ Furthermore, while federal law may be instructive in determining whether plaintiff states grounds excusing a prior demand on the Board, it only controls with regard to whether plaintiff has alleged such grounds with sufficient particularity in accordance with Rule 23.1. See, e.g., Starrels v. First National Bank of Chicago, 870 F.2d 1168, 1170-1171 (7th Cir.1989).

Maryland courts have held that the prior demand requirement "must be applied in a practical, common-sense manner." McQuillen v. National Cash Register Co., 22 F.Supp. 867, 874 (D.Md.1938). No prior demand is required when it would be futile. Parish v. Maryland and Virginia Milk Producers Association, 250 Md. 24, 242 A.2d 512, 544 (App.1968); Eisler v. Eastern States Corp., 182 Md. 329, 35 A.2d 118, 119 (1943). When the directors' prosecution of a plaintiff's claims would result in the directors' prosecuting themselves, an appeal to the directors would clearly be futile. Id.; see also, Parish, 242 A.2d at 545. In such a situation, the directors' interests are "antagonistic" to those of the plaintiff. McQuillen, 22 F.Supp. at 874. Similarly, where a majority of the board of directors is charged with actively participating in the wrongdoing, demand is excused. Zimmerman v. Bell, 585 F.Supp. 512 (D.Md.1984); Parish, 242 A.2d at 545, citing 13 Fletcher, Cyclopedia of Corporations, § 5965 at p. 471. Finally, if the wrong alleged in a derivative action could not have been ratified by a majority of the stockholders, as in the case of fraud, prior demand upon the stockholders is excused. Parish, 242 A.2d at 546, citing 16 Am. Jur.2d Corporations, § 542, pp. 78-79.

In contrast, federal courts have consistently held that merely naming the entire board of directors as defendants is insufficient, in and of itself, to excuse demand under Rule 23.1. See Lewis v. Graves, 701 F.2d 245, 248 (2d Cir.1983); Lewis v. Curtis, 671 F.2d 779, 784-85 (3rd Cir.1982); Greenspun v. Del E. Webb Corp., 634 F.2d 1204, 1210 (9th Cir.1980); In re Kauffman Mutual Fund Actions, 479 F.2d 257, 265 (1st Cir.1973); Matter of Consumers Power Co. Derivative Litigation, 111 F.R.D. 419, 421 and 426 (E.D. Mich.1986); Lewis v. Sporck, 612 F.Supp. 1316, 1322 (N.D.Cal.1985). The board's mere approval or acquiescence to the challenged conduct does not...