IN RE BROWNING-FERRIS SHAREHOLDERS DERIVATIVE LIT.

• Decision Date: 03 March 1993
• Docket Number: H-91-3638 and H-91-3568.,Civ. A. No. H-91-3142
• Citation: 830 F. Supp. 361
• Parties: In re BROWNING-FERRIS INDUSTRIES, INC. SHAREHOLDER DERIVATIVE LITIGATION.
• Court: U.S. District Court — Southern District of Texas

830 F. Supp. 361

In re BROWNING-FERRIS INDUSTRIES, INC. SHAREHOLDER DERIVATIVE LITIGATION.

Civ. A. Nos. H-91-3142, H-91-3638 and H-91-3568.

United States District Court, S.D. Texas, Houston Division.

March 3, 1993.

Eugene A. Spector, Philadelphia, PA, Richard D. Greenfield, Greenfield & Chimicles, Haverford, PA, plaintiffs.

Rufus Wallingford, Fulbright & Jaworski, Houston, TX, Samuel J. Buffone, Ropes and Gray, Washington, DC, J. Eugene Clements, Porter & Clements, Houston, TX, W. Boone Vastine, II, Browning Ferris Industries, Houston, TX, for defendants.

MEMORANDUM AND ORDER

ROSENTHAL, District Judge.

This consolidated amended complaint alleges two claims for relief against the individual defendants, officers or members of the Board of Directors of Browning Ferris Industries ("BFI"). Plaintiffs, shareholders of BFI, allege proxy fraud under section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. sec. 78m(a) and Rule 14a-9, 17 C.F.R. § 240 (Count I), and under the disclosure requirements of Delaware law (Count II). Plaintiffs also bring a derivative shareholders' action on behalf of BFI under Rule 23.1 of the Federal Rules of Civil Procedure, alleging breaches of the Delaware law of fiduciary duty. (Count III).

Defendants have moved to dismiss the claims under Rule 12(b)(6), Rule 9(b), and Rule 23.1 of the Federal Rules of Civil Procedure, on three grounds: (1) plaintiffs' failure to state a claim under section 14(a); (2) plaintiffs' failure to meet the Rule 9(b) pleading requirements for fraud; and (3) plaintiffs' failure to meet the pleading requirements for a shareholders' derivative suit. See generally (Docket Entry Nos. 30, 33, 39, 66, 67).

Under Rule 12(b)(6), a claim may not be dismissed unless it appears certain that the plaintiffs cannot prove any set of facts in support of their claim that would entitle them to relief. Benton v. United States, 960 F.2d 19 (5th Cir.1992); Hishon v. King & Spalding, 467 U.S. 69, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984). In a motion to dismiss, the allegations of the complaint must be accepted as true, Cruz v. Beto, 405 U.S. 319, 92 S.Ct. 1079, 31 L.Ed.2d 263 (1972), and the complaint construed favorably to the pleader, Scheuer v. Rhodes, 416 U.S. 232, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974).

The issues presented by the motion to dismiss are whether plaintiffs have alleged sufficient facts in their amended complaint to state federal claims for violations of the 1934 Securities Act, to state pendent state law claims for breach of fiduciary duty, and to satisfy Rule 23.1 pre-complaint demand requirements. After careful review of the facts, parties' submissions, and applicable law, this court concludes that plaintiffs' claims must be dismissed for failure to state a claim under section 14(a). Therefore, this court GRANTS defendants' motions to dismiss. (Docket Entry Nos. 30, 33, 39, 66, 67). Because this court concludes that plaintiffs' amended complaint does not state a claim under section 14(a), the defendants' other two grounds for dismissal are not addressed. Furthermore, all other motions are rendered MOOT by this Order. (Docket Entry Nos. 3, 4, 5, 6, 32, 63, 74).

1. Background

a. The Parties

BFI is a Delaware corporation engaged in solid waste management. The individual defendants are or were officers and/or directors of BFI. Plaintiffs purport to represent two groups of stockholders who own BFI stock and received BFI proxy materials. The first group, the class alleged for the section 14(a) cause of action stated in Count I of the amended consolidated complaint, are those stockholders who presently own BFI common stock and who owned voting shares on any of the record dates for the 1989-91 annual meetings. (Amended Consolidated Complaint, hereafter "Complaint," ¶ 88). The second group, the class alleged for the breach of the Delaware-based duty of disclosure, are those stockholders who presently own BFI common stock and who owned voting shares on any of the record dates for the 1987-91 annual meetings. (Complaint, ¶ 114). Both groups of plaintiffs bring Count III derivatively under Rule 23.1 to recover on behalf of the corporation for alleged violations of fiduciary duties based on Delaware law.

b. Plaintiffs' Alleged Facts

Plaintiffs allege a twenty-five year history of price-fixing and anti-competitive practices on the part of BFI. As a result of these practices, BFI has been the subject of civil and criminal litigation around the country, which plaintiffs claim has been settled at great cost to the company, will expose BFI to future penalties, and has resulted in numerous lost corporate opportunities.

This litigation included a civil antitrust suit by the Ohio Attorney General in 1986 alleging that BFI and its major competitor, Waste Management, Inc., had entered into price-fixing agreements. (Complaint, ¶¶ 46, 51). The Ohio Attorney General's antitrust complaint named BFI Regional Vice President Bruce E. Ranck ("Ranck") as an individual defendant. Ranck was a BFI officer who was elected to the BFI Board of Directors for the first time in 1990. In soliciting proxies in favor of Ranck's election, the defendants did not disclose in the proxy materials that in 1987, Ranck had received a "target letter" in connection with the same alleged conspiracy involved in the Ohio Attorney General's civil antitrust suit. In September 1987, Ranck received a letter from the United States Department of Justice stating that the Ohio "grand jury has substantial evidence" linking him to the "commission of a crime," and that the Department of Justice was "seriously considering recommending to the grand jury" that he be indicted. (Complaint, ¶¶ 48-49; Exhibit B). BFI settled the federal antitrust case by a guilty plea to one count and payment of a $1 million fine. (Complaint, ¶¶ 48-49, 51). BFI settled the Ohio Attorney General's case by a consent judgment and payment of a $350,000 fine. (Complaint, ¶¶ 46-51). Mr. Ranck was not indicted.

Plaintiffs also allege that in 1987, BFI's Board sought shareholder approval for changes to the by-laws and certificate of incorporation narrowing the liabilities of the directors and officers and providing indemnification for certain liabilities. Plaintiffs allege that these amendments, referred to as the "Raincoat Provisions," were impermissibly tainted by defendants' failure to disclose facts material to the shareholders' approval. (Complaint, ¶¶ 55, 56, 99, 101-102, 106).

In 1987, BFI was sued again in a class action alleging nationwide price-fixing on the part of BFI and its top corporate officers. This lawsuit was subsequently settled for $30 million. (Complaint, ¶¶ 57-59). In 1990, BFI was again sued in a class action alleging that it prepared false information to investors regarding its liability in the antitrust class action and other litigation. This suit is now pending in the Southern District of Texas. (Complaint, ¶ 59).

Plaintiffs allege that throughout BFI's history, it has failed to take any action against the officers and employees responsible for the events that resulted in this litigation and for the resulting losses to the company. (Complaint, ¶¶ 39, 41, 44, 52, 59).

Plaintiffs also allege a twenty-five year history of BFI's violations of environmental laws around the country which have resulted in civil and criminal charges that BFI settled by paying fines and penalties. (Complaint, ¶¶ 68-69, 72-81). As a result of these charges, BFI has lost large amounts of money invested in operations that had to be suspended or abandoned due to regulatory violations.

Plaintiffs finally allege two occasions of insider trading by certain BFI officers and directors in 1987 and 1991, shortly before BFI's announcement of poor results. These allegations are not made the basis of any claim, but are raised in the consolidated amended complaint as evidence of "management's continued pattern of placing individual interests above the interests of BFI." (Complaint, ¶ 86).

c. The Derivative Claims

On September 18, 1990, and again on November 13, 1990, plaintiff Sally Yeager, through her counsel, presented written demands on BFI's Board to pursue the same claims that all plaintiffs now make in this consolidated suit. The first demand sought legal action by BFI against various individuals for claims of mismanagement and waste. The second demand asked the Board to institute legal action against various individuals responsible for BFI's losses in connection with the class action securities litigation filed in 1990. The Board convened a special committee to review the demands and submit a report. That report, issued in September 1991, recommended that the Board reject the first demand and decline to take any action on the second on the ground that it was premature because the class action was still pending and the effect on BFI unknown.

The Yeager suit, a purported class and derivative action, was filed on October 4, 1991, in the United States District Court for the Eastern District of Pennsylvania. On October 15, 1991, Melvin Ronald Cardonick filed a derivative and class action suit in the same court, Civil No. H-91-3638. On October 25, 1991, Susan Cohen filed a derivative shareholder suit in this Court, Civil No. H-91-3142. The cases were subsequently consolidated and an amended consolidated complaint filed. None of the named plaintiffs besides Yeager made any demand on the BFI Board before filing suit.

The derivative claim focuses on alleged breaches of fiduciary duties under Delaware law, based on the waste of corporate assets by defendants from alleged ultra vires criminal conduct; gross mismanagement; abuse of control; fraud and deceit; and negligent misrepresentation. Plaintiffs seek a declaration that the individual defendants have breached their fiduciary duties; an injunction requiring BFI to develop and implement court-supervised policies to prevent recurrences; a requirement that the individual defendants pay BFI the...