Flocco v. State Farm Mut. Auto. Ins. Co., No. 98-CV-135.

Citation752 A.2d 147
Decision Date25 May 2000
Docket NumberNo. 98-CV-135.
PartiesThomas V. FLOCCO, Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, et al., Appellees.
CourtCourt of Appeals of Columbia District

Larry Klayman, with whom Paul J. Orfanedes, Washington, DC, was on the brief, for appellant.

Allan Horwich, with whom Heidi Dalenberg, Jeffrey J. Bushofsky, Chicago, IL, Barbara K. Heffernan, and Debra Ann Palmer, Washington, DC, were on the brief, for appellee State Farm Mutual Automobile Insurance Company.

James W. Ducayet, with whom Walter C. Carlson, Chicago, IL, was on the brief, for appellees Edward B. Rust, Jr. and Vincent J. Trosino.

Richard L. Brusca, with whom Donna L. Wilson, Washington, DC, was on the brief, for appellees President William J. Clinton and Robert S. Bennett.

Before SCHWELB, FARRELL, and WASHINGTON, Associate Judges.

SCHWELB, Associate Judge:

I.

BACKGROUND

This case had its genesis in the alleged encounter between Paula Corbin Jones and then-Governor William Jefferson Clinton at the Excelsior Hotel in Little Rock, Arkansas on May 8, 1991. On May 6, 1994, Ms. Jones filed suit against Mr. Clinton in the United States District Court for the Eastern District of Arkansas, alleging, inter alia, that he had made inappropriate sexual advances towards her in the hotel room and that, upon learning of the suit approximately three years after that encounter, the President had made false and defamatory statements regarding Ms. Jones' character and veracity. Mr. Clinton responded to the suit by asking that all proceedings be stayed until after the expiration of his term as President, but the Supreme Court held that he was not entitled to such a stay. Clinton v. Jones, 520 U.S. 681, 117 S.Ct. 1636, 137 L.Ed.2d 945 (1997). The trial court subsequently granted the President's motion for summary judgment, Jones v. Clinton, 990 F.Supp. 657 (E.D.Ark.1998), but the case was ultimately settled while Ms. Jones' appeal was pending. See Jones v. Clinton, 161 F.3d 528 (8th Cir.1998)

.

The present litigation concerns the applicability to the Jones suit of a liability insurance policy issued to Mr. Clinton in 1992 by State Farm Fire and Casualty Company (State Farm Fire). The policy provides coverage, inter alia, for personal injury caused by the insured's "libel, slander or defamation of character," but excludes coverage for damages the insured is required to pay if the insured acted "with the specific intent to cause harm or injury." The policy also excludes coverage for "any loss caused by illegal discrimination." In June 1995, the President's attorney, Robert S. Bennett, Esquire, requested State Farm Fire to determine whether the policy provided coverage to the President in connection with Ms. Jones' action. State Farm Fire responded affirmatively to Mr. Bennett's inquiry and provided reimbursement for certain expenses incurred in the defense of the Jones litigation.

According to the complaint in this case, the plaintiff, Thomas V. Flocco, is the holder of a personal liability insurance policy issued to him by State Farm Fire. Mr. Flocco has brought this suit against three categories of defendants:

1. State Farm Mutual Automobile Insurance Company (State Farm Mutual), which is the parent company of State Farm Fire, and which owns all of State Farm Fire's stock;

2. Edward Rust and Vincent Trosino, who are alleged to be directors and high-ranking officers of State Farm Fire and of State Farm Mutual; and

3. President Clinton and his attorney, Robert S. Bennett.

State Farm Fire was not joined as a defendant and is not a party to the case.

Characterizing his suit as a "policyholder's derivative action,"1 Flocco claims in substance that Ms. Jones' allegations against President Clinton did not fall within the coverage of the President's policy. Flocco further alleges, on information and belief, that all of the defendants knew that this was so, but that Rust and Trosino nevertheless authorized the payment of more than $1,100,000 in State Farm Mutual's funds to reimburse President Clinton and Mr. Bennett for expenses incurred or to be incurred in defending the President against Ms. Jones' suit. Flocco asserts that the conduct of defendants Rust and Trosino constituted a waste of corporate assets. He also alleges that the individual defendants converted money belonging to State Farm Mutual to the use and benefit of defendants Clinton and Bennett; Rust and Trosino are alleged to have participated in this conversion by causing the money to be wrongfully paid, and Clinton and Bennett are said to have converted the money by accepting it notwithstanding their alleged knowledge that they had no right to receive it.

All of the defendants filed pretrial motions to dismiss the complaint. On December 17, 1997, the trial judge issued a 23-page written order disposing of the case. The judge dismissed the plaintiff's claims against State Farm Mutual without prejudice. The judge noted that Flocco had not made a pre-suit demand for remedial action by the directors either of State Farm Mutual or of State Farm Fire. The judge further noted that Flocco had failed to join State Farm Fire as a defendant in the action, and that State Farm Fire was an indispensable party. The judge concluded that these omissions precluded Flocco from maintaining a policyholder's derivative action against State Farm Mutual. The judge dismissed, with prejudice, Mr. Flocco's claims against President Clinton and Mr. Bennett, holding as a matter of law that the conduct of these defendants, as described in the complaint, did not constitute conversion of State Farm Mutual's property. Finally, the judge dismissed, also with prejudice, Flocco's claims against defendants Rust and Trosino, holding that the court lacked personal jurisdiction over these defendants under the District's long-arm statute.

Flocco now asks this court to reverse the decision of the trial court and to order the reinstatement of his claims against all defendants. With respect to Rust and Trosino, we conclude that the dismissal of the action should have been with prejudice as to further proceedings in the District of Columbia but without prejudice as to proceedings in a forum with personal jurisdiction over these defendants. In all other respects, and especially in light of events that have transpired since the entry of the trial judge's decision, we affirm.

II.

THE VIABILITY OF FLOCCO'S DERIVATIVE ACTION
A. The procedural issues.

On appeal, Flocco asserts essentially that he has complied with all prerequisites to the institution of his action, that any defects could readily have been cured by amendment of his pleading, and that the trial judge erred in dismissing the action. The defendants respond that Flocco was not entitled to maintain this derivative action because, assuming that such a suit may be brought by a policyholder at all,2 Flocco has failed to comply with two essential procedural prerequisites. First, the defendants claim that Flocco was required, as a precondition to maintaining a derivative action, to make a demand for remedial action on the directors both of State Farm Mutual and of State Farm Fire. The defendants assert that Flocco failed to make the requisite demand on either company before instituting his action; that although Flocco alleged in his complaint that a demand on State Farm Mutual would have been futile, this allegation was insufficient as a matter of law; that, in any event, Flocco waived his claim of futility, after the entry of the trial court's order, by making demands both on State Farm Fire and on State Farm Mutual; and that for all of these reasons, the suit cannot be maintained. Second, the defendants contend that State Farm Fire was an indispensable party to Flocco's action, that Flocco failed to join State Farm Fire as a defendant, and that the case therefore cannot proceed. We address these contentions in turn.

B. Choice of law.

Both State Farm Mutual and State Farm Fire are companies organized under the laws of the State of Illinois. The trial judge held, and we agree, that under the District's choice-of-law rules, the viability of Flocco's derivative action must therefore be determined by application of Illinois law. See Labovitz v. The Washington Times Corp., 900 F.Supp. 500, 503 (D.D.C. 1995),

aff'd,

335 U.S.App.D.C. 296, 172 F.3d 897 (1999); cf. Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 548-49, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949) (in derivative actions, the question whether a stockholder has standing to sue on behalf of the corporation is controlled by the law of the state of organization).

C. The demand requirement, futility, and waiver.

"The directors of a corporation and not its shareholders3 manage the business and affairs of the corporation." Levine v. Smith, 591 A.2d 194, 200 (Del.1991). In a derivative action, the shareholder seeks to assert, on behalf of the corporation, a claim belonging not to him but to the corporation. Id. "The right of a stockholder to file a bill to litigate corporate rights is, therefore, solely for the purpose of preventing injustice where it is apparent that material corporate rights would not otherwise be protected." Zapata Corp. v. Maldonado, 430 A.2d 779, 784 (Del.1981) (quoting Sohland v. Baker, 141 A. 277, 282 (Del.1927)).

"The decision to bring a law suit or to refrain from litigating a claim on behalf of a corporation is a decision concerning the management of the corporation." Levine, supra, 591 A.2d at 200 (quoting Spiegel v. Buntrock, 571 A.2d 767, 773 (Del.Super.Ct.1990)). Accordingly, "[b]efore a stockholder should be permitted to bring suit ... he should show to the satisfaction of the court that he has exhausted all of the means within his reach to obtain within the corporation itself the redress of his grievances or action in conformity [with] his wishes." Scalzo v. Commercial Trust & Sav. Bank, 239 Ill.App. 330, 338 (1925). Specifically, the...

To continue reading

Request your trial
47 cases
  • State Farm Gen. Ins. Co. v. Lara
    • United States
    • California Court of Appeals
    • 29 Octubre 2021
    ...be disregarded only in narrowly defined circumstances and only when the ends of justice so require"]; Flocco v. State Farm Mut. Auto. Ins. Co. (D.C. App. 2000) 752 A.2d 147, 155 [rejecting arguments that "State Farm Mutual and State Farm Fire [were] one and the same" and challenging "separa......
  • Kopff v. Battaglia
    • United States
    • United States District Courts. United States District Court (Columbia)
    • 29 Marzo 2006
    ...individual corporate officers or employees "just because the court has jurisdiction over the corporation," Flocco v. State Farm Mut. Auto. Ins. Co., 752 A.2d 147, 162 (D.C.2000), in cases where the individuals are "more than employees of the corporation," courts have recognized an exception......
  • Akhmetshin v. Browder, 19-7129
    • United States
    • United States Courts of Appeals. United States Court of Appeals (District of Columbia)
    • 13 Abril 2021
    ...out solely in a corporate capacity" within a forum are removed from the jurisdictional analysis. Flocco v. State Farm Mut. Auto. Ins. Co., 752 A.2d 147, 163 (D.C. 2000) (quoting Wiggins v. Equifax Inc., 853 F. Supp. 500, 503 (D.D.C. 1994)). Akhmetshin argues that the doctrine cannot preclud......
  • Akhmetshin v. Browder
    • United States
    • United States Courts of Appeals. United States Court of Appeals (District of Columbia)
    • 22 Septiembre 2020
    ...out solely in a corporate capacity" within a forum are removed from the jurisdictional analysis.Flocco v. State Farm Mut. Auto. Ins. Co., 752 A.2d 147, 163 (D.C. 2000) (quotingWiggins v. Equifax Inc., 853 F.Supp. 500, 503 (D.D.C. 1994)). Akhmetshin argues that the doctrine cannot preclude c......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT