Deal v. Tugalo Gas Co.

• Citation: 991 F.3d 1313
• Decision Date: 19 March 2021
• Docket Number: No. 19-14336,19-14336
• Parties: William R. DEAL, Plaintiff - Appellant, v. TUGALO GAS COMPANY, INC., Thomas Gilmer, Sarah Gilmer Payne, Etheldra Gilmer, Bruce Stancil, Jr., et al., Defendants - Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

991 F.3d 1313

William R. DEAL, Plaintiff - Appellant, v. TUGALO GAS COMPANY, INC., Thomas Gilmer, Sarah Gilmer Payne, Etheldra Gilmer, Bruce Stancil, Jr., et al., Defendants - Appellees.

No. 19-14336

United States Court of Appeals, Eleventh Circuit.

March 19, 2021

G. Marshall Kent, Jr., Steven Duncan Henry, Fox Rothschild, LLP, Atlanta, GA, for Plaintiff - Appellant.

Douglas Lee Clayton, Lauren DeLap Woodrick, Swift Currie McGhee & Hiers, LLP, Atlanta, GA, for Defendant - Appellee Tugalo Gas Company, Inc.

Matthew A. Cathey, David A. Sleppy, Dennis T. Cathey, Cathey & Strain, LLC, Cornelia, GA, for Defendant - Appellee Thomas Gilmer.

Amy K. Weber, Dame Law, PC, Atlanta, GA, John M. Gross, Taylor English Duma, LLP, Atlanta, GA, for Defendant - Appellee Sarah Gilmer Payne, Etheldra Gilmer, Bruce Stancil, Jr.

Before MARTIN, NEWSOM and BRANCH, Circuit Judges.

NEWSOM, Circuit Judge:

This kitchen-sink appeal stems from a district court's rejection of a kitchen-sink lawsuit. William Deal owns shares in a family-owned Georgia corporation, Tugalo Gas Company. Deal sued Tugalo, his cousin and Tugalo President Thomas Gilmer, and Tugalo's directors in a 17-count complaint, alleging (in essence) that Gilmer misappropriated corporate funds and that the company's board let it happen. In two separate orders issued about a year apart, the district court rejected all of Deal's substantive claims—some on a motion to dismiss and the remainder at summary judgment. The district court separately declined to adjudicate three equitable counts—for judicial dissolution, an accounting, and appointment of an auditor—under the long-lost (or nearly lost) " Burford abstention" doctrine.

On appeal, Deal presents a litany of arguments spanning eight separate issues arising out of the district court's two orders. Because the district court correctly disposed of all of Deal's substantive claims, we will affirm in substantial part. But because the district court shouldn't have abstained under Burford from deciding the three equitable counts, we will also reverse in part and remand for further proceedings.

I

A

Tugalo Gas Company is a closely held, family-owned Georgia corporation. Plaintiff William Deal alleges that his cousin and Tugalo President Thomas Gilmer misused company funds to pay for personal expenses. He also asserts that other defendants in the case—Tugalo shareholders, directors, and employees, some of whom are related to Deal and Gilmer—either abetted Gilmer's misconduct or engaged in wrongdoing of their own.

Through a holding company, Deal first made demand on Tugalo's board in 2012, alleging corporate fraud based on Gilmer's use of company money to pay personal expenses. Without waiting for Tugalo's board to investigate his claim, Deal went ahead with a direct shareholder action against Gilmer. That suit was dismissed when the court found that Deal's direct suit was improper. Undeterred, Deal made demand on Tugalo's board again in 2017, once again alleging misconduct by Gilmer and others. In response to Deal's allegations, Tugalo formed a Demand Review Committee (DRC), which determined that a shareholder derivative action was not in Tugalo's best interest.

Deal then filed the suit that underlies this appeal.

B

Deal's complaint asserted a laundry list of claims, totaling 17 counts against seven defendants, including Tugalo. The counts were a mix of direct and derivative claims and requests for equitable relief. In response to Deal's complaint, Tugalo's board appointed a Litigation Review Committee (LRC) consisting of Carlton H. Jones, III, who had earlier served on the DRC, and Robert Aycock, an independent director. The LRC recommended that Tugalo move to dismiss Deal's action—at least to the extent it pleaded derivative claims—which Tugalo then asked the district court to do.

The district court resolved Deal's case in two orders. First, at the motion-to-dismiss stage, the court held that about half of Deal's counts could be pursued only derivatively and then dismissed them because the LRC—after a reasonable, good faith investigation—had concluded that a shareholder derivative action wasn't in Tugalo's best interest. Second, at summary judgment, the district court ruled for Tugalo on the remaining counts, abstained from adjudicating any equitable counts, and entered judgment in Tugalo's favor. In both orders, the district court denied Deal's requests to postpone decision while he sought additional discovery.

II

On appeal, Deal challenges pretty much every ruling that didn't go his way. We'll first address the issues arising out of the motion-to-dismiss order and then turn to the summary-judgment order.

A

We start with Deal's derivative claims. Our review of the district court's dismissal of those claims presents the most involved issue in this appeal, as it implicates the sometimes convoluted process by which a shareholder makes "demand" on a corporation as a prerequisite to bringing a derivative action. We'll briefly summarize that process and then assess the district court's dismissal of Deal's derivative counts.

A corporation's directors and officers owe fiduciary duties to the company; if a shareholder believes that they have breached those duties, he can bring a "derivative suit" on behalf of the corporation, for the harm done to it. See Stephen M. Bainbridge, Corporate Law 207 (3d ed. 2002). In a derivative suit, the cause of action belongs to the corporation, rather than to the individual shareholder-plaintiff, and any recovery thus goes to it. Id . Because the cause of action is ultimately the corporation's own, a shareholder can bring suit only in the event that a company's board chooses not to pursue litigation. Id . at 225. Thus, to bring a derivative suit, the shareholder usually must first make "demand" on the corporation—that is, ask the board to bring a suit on the company's behalf. Id . By contrast, if a shareholder believes that he has been harmed in his individual capacity and separately from any injury to the corporation, then he can bring a "direct suit." Id . at 205. Because in that instance the injury is personal to the shareholder, there is no demand requirement, but there are other hurdles—among them, the shareholder must show that his injury is distinct from any that the corporation or other shareholders have suffered. Id . at 205–06.

State law governs the process for bringing derivative suits and, in particular, for making demand. See Kamen v. Kemper Fin. Servs. Inc. , 500 U.S. 90, 101, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991). Under Georgia law, which applies here, a shareholder can file a derivative suit if, and only if, (1) he has made a written demand on the corporation "to take suitable action" and (2) the corporation has refused to do so. O.C.G.A. § 14-2-742. If, following rejection of his demand, the shareholder proceeds to file a derivative suit, the corporation may then move to dismiss it if a special committee made up of independent directors—which, consistent with Tugalo's nomenclature, we'll call a "litigation review committee" (LRC)— "ma[kes] a determination in good faith after conducting a reasonable investigation upon which its conclusions are based that the maintenance of the derivative suit is not in the best interests of the corporation." O.C.G.A. § 14-2-744(a). In order to proceed, the shareholder-plaintiff must then come forward with evidence showing that the LRC wasn't independent or didn't make its determination to recommend dismissal in good faith after a reasonable investigation. See Thompson v. Scientific Atlanta, Inc. , 275 Ga.App. 680, 621 S.E.2d 796, 799 (2005).

Now, to Deal's complaint. Deal brought Counts I, II, VI, VII, IX, X, XI, XIII, XIV, XV, XVI, and XVII—a mix of breach-of-fiduciary-duty, abuse-of-control, unlawful-conveyance, conversion, unjust-enrichment, and similar claims—both derivatively and directly. He first contends that the district court erred in dismissing his derivative claims in those counts. The district court dismissed Deal's derivative claims because, in its view, Tugalo's LRC had undertaken a reasonable, good-faith investigation and determined that a derivative action wasn't in the company's best interest. The district court also denied Deal's motion to defer ruling on this issue while he gathered additional discovery.

Deal challenges both of those decisions. With respect to the former, Deal argues that the LRC wasn't independent because it relied too heavily on the previously formed DRC's report and because one of its members, Carlton Jones, had also served on the DRC with Bruce Stancil, one of the defendants in this case. Deal also argues that the LRC didn't undertake a reasonable, good-faith investigation for a multitude of reasons, most of which reduce to his disagreement with the LRC's recommendation to refuse his demand. With respect to the latter, Deal contends that he should have gotten more discovery and that the district court should have deferred ruling on Tugalo's motion to dismiss while he did so. ¹

We'll start with the first issue—and, in particular, with independence. As a general matter, Georgia courts require that a member of an LRC be both disinterested—meaning that he has no personal interest in the challenged transaction—and independent—meaning that he isn't predisposed to favor the defendants because of a personal or other relationship. Benfield v. Wells , 324 Ga.App. 85, 749 S.E.2d 384, 387 (2013). Under Georgia law, a director serving on an LRC can be independent even if (1) he was nominated or elected by non-independent directors, (2) he is a defendant in the derivative proceeding, or (3) he previously approved the action, challenged in the derivative action so long as he didn't receive a benefit from it. O.C.G.A. § 14-2-744(c).

Here, LRC members Jones and Aycock were independent. A majority of the board's independent directors selected them to serve on the LRC, and they were only chosen after the alleged...