Country Nat. Bank v. Mayer

• Citation: 788 F. Supp. 1136
• Decision Date: 30 March 1992
• Docket Number: No. Civ. S-90-1480 LKK.,Civ. S-90-1480 LKK.
• Parties: COUNTRY NATIONAL BANK, Plaintiff, v. Marshall S. MAYER, Defendant. and related counterclaim and third-party action.
• Court: U.S. District Court — Eastern District of California

788 F. Supp. 1136

COUNTRY NATIONAL BANK, Plaintiff, v. Marshall S. MAYER, Defendant. and related counterclaim and third-party action.

No. Civ. S-90-1480 LKK.

United States District Court, E.D. California.

March 30, 1992.

COPYRIGHT MATERIAL OMITTED

Paul H. Dawes, Timothy P. Crudo, Latham & Watkins, San Francisco, Cal., for plaintiff and counterdefendant Country Nat. Bank and third party defendant John Oakes.

David L. Edwards, Redding, Cal., Michael L. Wachtell, G. Forsythe Bogeaus, Buchalter, Nemer, Fields & Younger, Los Angeles, Cal., for defendant, counterclaimant and third party plaintiff Marshall S. Mayer.

ORDER

KARLTON, Chief Judge Emeritus.

This matter is before the court on the motion of Country National Bank and certain of the Bank's directors to dismiss Marshall S. Mayer's second amended counterclaim and third-party complaint for failure to state a claim. For the reasons explained herein, the motion is GRANTED in part and DENIED in part.

I PROCEDURAL BACKGROUND

Plaintiff Country National Bank ("Bank") filed suit in state court against defendant Marshall S. Mayer, a shareholder and a former member of the Bank's board of directors, alleging that Mayer violated the Change in Bank Control Act of 1978, 12 U.S.C. § 1817(j), by failing to timely report acquisition of more than 10 percent of the Bank's stock. The Bank also alleges that Mayer is liable under the Securities and Exchange Act of 1934, 15 U.S.C. § 78a, for insider trading with regard to a prospective purchase of the Bank's shares.

Defendant removed the action to this court, answered the complaint, and filed a counterclaim against the Bank and a third-party complaint against John O. Oakes, President and Chief Loan Officer of the Bank. The counterclaim alleged four causes of action: (1) a shareholder's derivative action; (2) intentional infliction of emotional distress; (3) negligent infliction of emotional distress; and (4) interference with prospective economic advantage.

The Bank and Oakes moved to dismiss the countercomplaint and third-party complaint pursuant to Fed.R.Civ.P. 12(b)(6). In response to the motion, Mayer lodged a first amended counterclaim and third-party complaint which substituted defamation for the fourth claim. I granted the Bank's and Oakes' motion to dismiss the shareholder derivative suit on the ground that Mayer's conclusory allegations of demand and futility failed to state a claim based on federal law. I also dismissed the claims for intentional and negligent infliction of emotional distress. I denied the Bank's and Oakes' motion to dismiss the defamation claim, and granted leave to amend.

Mayer timely filed a second amended counterclaim against the Bank and a third-party complaint ("SAC") against 11 directors of the board.¹ Mayer's first claim is a shareholder derivative action which is substantially similar to that alleged in his previous complaint, although he includes new facts relative to demand and futility. Mayer also realleges his claim for defamation.

The directors and the Bank again moved to dismiss the derivative action for failure to state a claim premised on an assertion of insufficient demand upon the Bank's board of directors and failure to show that such a demand would have been futile. As to the defamation claim, the directors and Bank seek dismissal on the ground that Mayer's counterclaim does not allege that the defamatory statement is untrue. I continued the hearing on the motion to permit the parties to submit supplemental briefing on the question of which law governs the court's determination of sufficiency of demand, in light of Kamen v. Kemper Financial Services, Inc., ___ U.S. ___, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991), coincidentally decided the same day I dismissed the first amended counterclaim and third-party complaint with leave to amend. A further hearing was held, and the matter is disposed of herein.

II STANDARDS ON A MOTION TO DISMISS

On a motion to dismiss, the allegations of the complaint must be accepted as true. Cruz v. Beto, 405 U.S. 319, 322, 92 S.Ct. 1079, 1082, 31 L.Ed.2d 263 (1972). The court is bound to give the plaintiff the benefit of every reasonable inference to be drawn from the "well-pleaded" allegations of the complaint. Retail Clerks International Ass'n v. Schermerhorn, 373 U.S. 746, 753 n. 6, 83 S.Ct. 1461, 1466 n. 6, 10 L.Ed.2d 678 (1963). Thus, the plaintiff need not necessarily plead a particular fact if that fact is a reasonable inference from facts properly alleged. Id. See also Wheeldin v. Wheeler, 373 U.S. 647, 648, 83 S.Ct. 1441, 1443, 10 L.Ed.2d 605 (1963) (inferring fact from allegations of complaint).

In general, the complaint is construed favorably to the pleader. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974). So construed, the court may not dismiss the complaint for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim which would entitle him or her to relief. Hishon v. King & Spaulding, 467 U.S. 69, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957)). In spite of the deference the court is bound to pay to the plaintiff's allegations, however, it is not proper for the court to assume that "the plaintiff can prove facts which he or she has not alleged, or that the defendants have violated the ... laws in ways that have not been alleged." Associated General Contractors v. California State Council, 459 U.S. 519, 526, 103 S.Ct. 897, 902, 74 L.Ed.2d 723 (1983).

III SHAREHOLDER DERIVATIVE ACTION

A. Federal Rule of Civil Procedure 23.1

The directors and Bank move to dismiss the shareholder derivative claim arguing that Mayer failed to plead with sufficient particularity that before he filed suit, an adequate demand was made that the directors themselves bring suit, or that such a demand is excused. Below, I sketch the derivation of the demand/futility rule and determine which law governs its application.

"The derivative form of action permits an individual shareholder to bring `suit to enforce a corporate cause of action against officers, directors, and third parties.'" Kamen, ___ U.S. ___, ___, 111 S.Ct. 1711, 1716, 114 L.Ed.2d 152, 163 (quoting Ross v. Bernhard, 396 U.S. 531, 534, 90 S.Ct. 733, 736, 24 L.Ed.2d 729 (1970)). To prevent abuse of the shareholder's right to bring suit to protect the interests of the corporation from directors' and managers' "misfeasance and malfeasance," equity courts established the requirement that the shareholder demonstrate that it demanded that the corporation itself bring suit, and that the demand was refused or otherwise excused. Kamen, ___ U.S. at ___-___, 111 S.Ct. at 1716-17, 114 L.Ed.2d at 163-64.²

The demand requirement is accommodated by Fed.R.Civ.P. 23.1, which provides,

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 complaint shall ... 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 the reasons for the plaintiff's failure to obtain the action or for not making the effort.

In Kamen, the Supreme Court clarified the meaning and application of Rule 23.1. The Court explained that although the Rule contemplates a demand requirement and the possibility that the demand may be excused in shareholder derivative suits brought in federal court, it does not "create a demand requirement of any particular dimension." ___ U.S. at ___, 111 S.Ct. at 1716, 114 L.Ed.2d at 164.³ "Rule 23.1 speaks only to the adequacy of the representative shareholder's pleadings." Id.

Although Rule 23.1 itself has no substantive element, such an element exists. The Supreme Court held in Kamen that the "contours of the demand requirement in a derivative action founded on a federal statute are governed by federal law." Id. ___ U.S. at ___, 111 S.Ct. at 1717, at 165. Nonetheless, the Court explained that the content of the federal rule relative to the demand requirement is not "wholly the product of a federal court's own devising." Id. Only when the federal remedial scheme at issue "evidences a distinct need for nationwide legal standards," or "when express provisions in analogous statutory schemes embody congressional policy choices readily applicable to the matter at hand," should a federal court attempt to develop a federal rule. Id. Otherwise, the court should "`incorporate state law as the federal rule of decision,' unless `application of the particular state law in question would frustrate specific objects of the federal programs.'" Id. (quoting United States v. Kimbell Foods, Inc., 440 U.S. 715, 728, 99 S.Ct. 1448, 1458, 59 L.Ed.2d 711 (1979)).⁴

The Supreme Court explained that the presumption that state law is incorporated into federal common law as the rule of decision is particularly compelling in the area of corporate law. Kamen, ___ U.S. at ___, 111 S.Ct. at 1717, 114 L.Ed.2d at 165; see also Burks v. Lasker, 441 U.S. 471, 478, 99 S.Ct. 1831, 1837, 60 L.Ed.2d 404 (1979) (noting that corporations, as a rule, are creatures of state law). Consequently, the Court held that:

Gaps in federal statutes bearing on the allocation of governing power within the corporation should be filled with state law "unless the state law permits action prohibited by those statutes, or unless the application of state law would be inconsistent with the federal policy underlying the cause of action."

Kamen, ___ U.S. at ___, 111 S.Ct. at 1717-18, 114 L.Ed.2d at 166 (quoting Burks, 441 U.S. at 479, 99 S.Ct. at 1837). As the Court noted in Kamen, the law prescribing the nature and extent of a demand requirement and a futility exception to the demand requirement "relate to the allocation of governing powers within the corporation," because those rules...