Hirsch v. Jones Intercable, Inc.

• Decision Date: 28 June 1999
• Docket Number: No. 99SA30.,99SA30.
• Citation: 984 P.2d 629
• Parties: In re David HIRSCH, Marty, Inc. Pension Plan (By Its Trustee And Beneficiary, Martinury), and Jonathan and Eileen Fussner, derivatively on behalf of Cable TV Fund 12-B, Ltd., Cable TV Fund 12-C, Ltd., and Cable TV Fund 12-D, Ltd., Plaintiffs, v. JONES INTERCABLE, INC., Defendant, and Cable TV Fund 12-BCD Venture, Cable TV Fund 12-b, Ltd., Cable TV Fund 12c, Ltd., And Cable TV 12-d, Ltd., Nominal Defendants.
• Court: Colorado Supreme Court

984 P.2d 629

In re David HIRSCH, Marty, Inc. Pension Plan (By Its Trustee And Beneficiary, Martinury), and Jonathan and Eileen Fussner, derivatively on behalf of Cable TV Fund 12-B, Ltd., Cable TV Fund 12-C, Ltd., and Cable TV Fund 12-D, Ltd., Plaintiffs, v. JONES INTERCABLE, INC., Defendant, and Cable TV Fund 12-BCD Venture, Cable TV Fund 12-b, Ltd., Cable TV Fund 12c, Ltd., And Cable TV 12-d, Ltd., Nominal Defendants.

No. 99SA30.

Supreme Court of Colorado, En Banc.

June 28, 1999.

Wolf & Slatkin, Raymond P. Micklewright, Denver, Colorado, Robert J. Dyer, III, Kip B. Shuman, Denver, Colorado, for Plaintiffs.

Davis, Graham & Stubbs, LLP, John M. Roche, Andrew M. Low, Alan M. Loeb, Denver, Colorado, Attorneys for Defendant. Justice KOURLIS delivered the Opinion of the Court.

Petitioner Jones Intercable, Inc. (Jones), the Defendant below, is the general partner of three limited partnerships. Jones seeks relief from the district court's ruling refusing to dismiss a derivative action brought by the limited partners of those partnerships, who are the Respondents in this action and the Plaintiffs below, despite the fact that the limited partners did not make a demand upon Jones prior to filing suit. Jones also seeks relief from the district court's decision not to dismiss Respondents' action on the basis of the report of an Independent Counsel whom the court appointed to review and report on Respondents' derivative claims. We issued a rule to show cause under C.A.R. 21, directing Respondents to show cause why the relief requested by Jones should not be granted.

We conclude that because the allegations of this particular complaint sufficiently established that demand upon Jones would have been futile in this case, the district court did not err in refusing to dismiss Respondents' actions for failure to make demand. We further conclude that under the Colorado Uniform Limited Partnership Act of 1981, the rights of the parties as to derivative actions are much like those of shareholders. We evaluate the action accordingly, and follow the New York approach governing court involvement in corporate derivative actions. That is, once a special litigation committee (SLC) is duly appointed by the general partner and acts on behalf of the partnership in seeking to dismiss the action brought in the name of the limited partnership, the trial court's role is limited to determining the authority, independence, and good faith of the SLC. Because no Colorado case had set out this standard previously, the trial court did not make such an inquiry and findings here. Accordingly, we return the case to the trial court for that inquiry and for further proceedings consistent with this opinion.

I.

Jones is a publicly owned Colorado corporation that owns, operates, and manages cable television systems. It is the general partner of three limited partnerships called Cable TV Fund 12-B, Ltd.; Cable TV Fund 12-C, Ltd.; and Cable TV Fund 12-D, Ltd. (the Funds). Jones formed these partnerships in order to acquire, develop, and operate cable television systems.

In 1986, the three partnerships entered into a joint venture, known as Cable TV Fund 12-BCD Venture (the Venture), "for the purpose of acquiring, owning, managing, and otherwise dealing with community antenna television systems and matters related thereto." The Funds entered into this agreement pursuant to the Colorado Uniform Limited Partnership Act of 1981, sections 7-62-101 to -1201, 2 C.R.S. (1998). The agreement provided that all decisions regarding the management and affairs of the Venture were to be made by Jones in its capacity as general partner of each of the Funds. The agreement further provided that the Venture could enter into a purchase and sale agreement for the acquisition of cable television systems in which the Venture was the seller and Jones was the buyer. The identical limited partnership agreements governing each of the Funds comprising the Venture provided that any of the Funds (as limited partnerships) could sell a system to Jones (as the general partner of the Funds) provided that the price paid to the Fund under such a circumstance would be the average of three separate independent appraisals of the particular partnership property.

In 1986, the Venture acquired a cable television system known as the "Tampa System" for approximately $42,000,000. On August 11, 1995, Jones and the Venture entered into an agreement for Jones to purchase the Tampa System from the Venture for $110,395,667,¹ an amount representing the average of the three independently conducted appraisals that had been completed earlier in the year. On that same day, Jones entered into an asset exchange agreement with the Time-Warner Entertainment Advance/Newhouse Partnership (TWEAN), pursuant to which Jones conveyed to TWEAN the Tampa System, two other cable systems, and $3,500,000 in cash in exchange for a number of TWEAN's cable systems.

On August 22, 1997,² Respondents initiated a derivative action against Jones, alleging that Jones's actions in engaging in those transactions constituted: (1) a breach of fiduciary duty to the Venture, the Funds, and the limited partners in the Funds; (2) a breach of contract (i.e., a breach of the joint venture agreement and the limited partnership agreements); and (3) a breach of the covenant of good faith and fair dealing implicit in the joint venture agreement and the limited partnership agreements. Specifically, Respondents allege that the three appraisals from which Jones arrived at a purchase price for the Tampa System "grossly understate[d] the true value of the Tampa System." Respondents contend that geographical considerations regarding other cable systems already owned by TWEAN rendered especially valuable the property that Jones offered to exchange to TWEAN. As a result, Respondents claim that in that exchange, Jones received property worth $41,000,000 more than the property it traded to TWEAN. Respondents calculate that because the Tampa System represented approximately sixty-three percent of the consideration Jones traded to TWEAN in the exchange, the value of the Tampa System when Jones purchased it from the Venture should have been increased by sixty-three percent of the $41,000,000 profit that Jones allegedly received in the TWEAN exchange.

II.

Respondents brought a derivative complaint in the district court, and initially they did not make demand upon Jones. Rather, they made the following allegations regarding futility of demand:

1. Jones Intercable is interested in the transactions in question and has inherent conflicts of interest;

2. [T]he challenged transaction is not the product of arms-length negotiations but rather is a self-dealing transaction in which Jones Intercable stands on both sides; and

3. [T]he transaction has been completed.

Jones responded with a motion for summary judgment, arguing that Respondents did not meet the requirements for pursuing a derivative action under C.R.C.P. 23.1. Specifically, Jones argued that Respondents' allegations of futility of demand were insufficient as a matter of law. Jones contended that the fact that demand in Respondents' case would entail asking Jones to sue itself did not render demand futile because Jones was governed by a board of directors, a majority of whom were disinterested as defined by Jones's shareholders agreement.³

The trial court denied Jones's motion for summary judgment, concluding "that genuine issues of material fact exist as to whether or not the plaintiff has established whether there is futility in moving forward." The trial court then ordered that Respondents file a demand on Jones, and that Jones appoint an independent counsel, subject to court approval, "to review, consider and report on the demand."⁴

Pursuant to the court's order, Respondents subsequently made demand upon Jones, requesting that Jones authorize the continued prosecution of the action upon a determination that Respondents' claims against Jones were litigable.⁵ Jones notified Respondents and the court that its Board of Directors had appointed an attorney, David G. Palmer, to investigate Respondents' claims.⁶ Respondents had no objection to Jones's selection of Palmer, and Jones moved for the court to appoint Palmer as Independent Counsel. Upon the stipulation of counsel, the court appointed Palmer.

The Independent Counsel submitted a report to the court, in which he concluded that "Plaintiffs' claims are not meritorious and are not supported by a preponderance of the evidence," and that therefore it would not be "appropriate or desirable" for Jones's Board of Directors to pursue the claims set forth in Plaintiffs' complaint.⁷ In light of the Independent Counsel's conclusion, Jones made a motion seeking dismissal or summary judgment. Jones argued that pursuant to the business judgment rule, a trial court must dismiss a derivative action where a special litigation committee or an independent counsel has concluded that the action is without merit.

The trial court rejected this argument. The court refused to accept the Independent Counsel's report "as the final factual determination in this case," and denied Jones's motion for summary judgment, apparently concluding that issues of fact existed as to Respondents' claims.

Pursuant to C.A.R. 21, Jones now seeks review of two of the trial court's rulings. First, Jones contends that the trial court erred in failing to dismiss the complaint initially, because Respondents failed to make a demand on Jones and failed to prove that such a demand would have been futile. Second, Jones argues that the trial court erred in refusing to dismiss the complaint in the second instance in light of the fact that the Independent Counsel concluded that Respondents' derivative claims were without merit.

III.

In the corporate context,⁸ a derivative action is a mechanism by which shareholders can sue on behalf of a corporation when those in control of the...