Lochhead v. Alacano
| Decision Date | 07 October 1988 |
| Docket Number | Civ. No. 86-C-0875A. |
| Citation | 697 F. Supp. 406 |
| Parties | Raymond R. LOCHHEAD, Plaintiff, v. Enes "Sam" ALACANO, George D. Morgan, William G. Gee, David L. Reynolds and Don J. Edwards, Defendants. |
| Court | U.S. District Court — District of Utah |
Rodney G. Snow, Neil A. Kaplan, Salt Lake City, Utah, for plaintiff.
Richard W. Casey, Salt Lake City, Utah, for defendants.
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS PLAINTIFF'S THIRD AMENDED COMPLAINT
On June 29, 1988, the court heard oral arguments regarding defendants' Motion to Dismiss Plaintiff's Third Amended Complaint. After studying these arguments, the parties' supporting memoranda, and the relevant legal authorities, the court is now prepared to rule. The court's determination is based upon the following facts and legal analysis.
Raymond R. Lochhead first brought suit in September 1986, claiming that defendants Enes "Sam" Alacano, George D. Morgan, William G. Gee, David L. Reynolds, and Don J. Edwards1, acting as officers, directors and majority shareholders of Arctic Circle, Incorporated Arctic Circle, fraudulently adopted and executed a stock option plan. The acts associated with those events allegedly injured Mr. Lochhead as a minority shareholder of Arctic Circle by decreasing the amount of converted stock he would have otherwise received when Arctic Circle merged with Quaker State Minit-Lube, Incorporated Quaker State. Although this basic allegation remains unchanged, Mr. Lochhead has continued to refine his legal theories through a series of amended complaints.
In ruling on the First Amended Complaint, the court dismissed Mr. Lochhead's claim for breach of fiduciary duty, finding it could be brought only as a derivative suit and not by an individual shareholder. Additionally, plaintiff's claims based upon state common law fraud and federal violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b) Section 10(b), and its corollary rule 10b-5, 17 C.F.R. § 240.10b-5 Rule 10b-5, were dismissed for failure to plead those claims with particularity. See Lochhead v. Alacano, 662 F.Supp. 230, 231-32, 235 (D.Utah 1987).
A Second Amended Complaint was filed. Mr. Lochhead thereafter retained new counsel and the Third Amended Complaint —the present subject for the court's consideration — was substituted. The Third Amended Complaint alleges common law fraud and federal securities law violations as causes of action and, additionally, states racketeering claims under the federal Racketeering Influenced and Corrupt Organization Act RICO.2
Plaintiff relies upon a single set of alleged facts to underpin all causes of action. These facts present a unique set of circumstances for the court's consideration.
It is undisputed that the five defendants, as directors, officers and majority shareholders, controlled the affairs of Arctic Circle during the time period relevant to this suit. On or about September 24, 1982, defendants purportedly approved a stock option plan 1982 Stock Option Plan or Plan as sole members of the Arctic Circle Board of Directors. However, Mr. Lochhead alleges that the 1982 Stock Option Plan was never adopted at a duly noticed and properly held meeting of the shareholders as required by the Plan. Plaintiff states that a purported special meeting of Arctic Circle shareholders did not take place on June 25, 1982, or, if this meeting was held, notices and proxies were not provided. Thus, the alleged meeting did not meet legal requirements.
Plaintiff further contends that at some unidentified point in time defendant Morgan prepared, signed and maintained false and fraudulent notice and meeting minutes in Arctic Circle's minute book in concert and conspiracy with the other defendants. Plaintiff alleges:
the false minutes of the purported June 25, 1982, meeting represent that each of the five (5) defendants, plus nine (9) other shareholders of Arctic Circle were present at the meeting or represented by proxy at the meeting. In fact, none of the other nine shareholders received notice, were present at any alleged meeting on June 25, 1982, or submitted proxies for such a meeting.
Third Amended Complaint at 9. In this way, any legal deficiencies or falsehoods regarding the meeting and its conduct were further misrepresented in the meeting minutes.
On or about July 30, 1985, the merger of Arctic Circle into Quaker State was publicly announced. Between August 5, 1985, and October 11, 1985, defendants exercised their options to purchase the full amount of stock available under the 1982 Stock Option Plan, a total of 24,150 shares. Defendants benefitted from obtaining the stock in several ways. First, under the terms of the merger, a fixed number of Quaker State shares were exchanged regardless of the number of Arctic Circle shares outstanding. Thus, defendants received proportionally more Quaker State stock than otherwise would have occurred. Second, plaintiff points out that the 1982 Stock Option Plan allowed defendants to purchase shares at the fair market value at the time the option was granted, rather than the price at the time of the option's exercise, and to receive preferential tax treatment on the difference in value. See Internal Revenue Code of 1954, 26 U.S.C.A. § 422A IRS Section 422A.
Mr. Lochhead alleges a fraudulent scheme in that defendants knew the 1982 Stock Option Plan was not adopted and the shares issued to them were invalid:
In a further attempt to conceal the invalidity of the 24,150 shares of Arctic Circle stock that were issued to them after the announcement of the merger, ... defendants Alacano, Morgan, Reynolds, Gee and Edwards each signed, on or about November 14, 1985, a certificate required and relied upon by Arctic Circle's counsel, Quaker State, plaintiff and the other Arctic Circle shareholders in determining the number and validity of shares to be exchanged in the merger. In the certificate, each of the defendants falsely and fraudulently represented that the notice and minutes of the purported June 25, 1982, meeting were true and correct.
Third Amended Complaint at 9. Thus, plaintiff asserts that because of these and other related false statements certified to in the Directors' and Officers' Certificate or Certificate, Arctic Circle's counsel issued a legal opinion on November 14, 1985, concluding that the 1982 Stock Option Plan had been validly adopted and that the defendants held valid stock options after the merger announcement. Additionally, when the proxy and prospectus materials relating to the merger were mailed in interstate commerce to plaintiff and other shareholders, those materials failed to disclose that the defendants held 24,150 shares of Arctic Circle stock which otherwise would not have been included as part of the total outstanding stock of Arctic Circle. Plaintiff claims that, as a result, shareholders approved the merger at a shareholders' meeting on November 14, 1985, and subsequently exchanged their Arctic Circle stock for Quaker State stock at a now disputed ratio. Plaintiff complains that he alone would have received 30,194 more shares of Quaker State stock had not the purportedly invalid stock options been exercised.
Plaintiff also alleges that, in order to qualify for special tax benefits, it was necessary for each defendant to represent to the IRS that the 1982 Stock Option Plan was validly adopted by the shareholders. Plaintiff essentially claims that the IRS relied on false statements and did not inquire into the matter. Hence, plaintiff and the other shareholders did not learn of the misrepresentation.
In support of their motion to dismiss, defendants first argue that plaintiff lacks standing since the claims he alleges may only be pursued in a shareholder's derivative action. Second, defendants maintain that the factual allegations as stated in the Third Amended Complaint fail to meet the particularity requirements of Rule 9(b) of the Federal Rules of Civil Procedure or Rule 9(b). Furthermore, defendants maintain that the Third Amended Complaint is legally insufficient in two respects: a) plaintiff's claims of damages did not arise in connection with the alleged acts and, consequently, the requisite causation is lacking; and b) the racketeering claims do not meet the pattern requirement for RICO causes of action. Therefore, it is contended that the Third Amended Complaint failed to state a cause of action upon which relief can be granted. Fed.R.Civ.P. 12(b)(6) or Rule 12(b)(6).
In his Third Amended Complaint, Mr. Lochhead contends that he suffered a direct and individualized loss when his proportionate shareholder's interest in Arctic Circle was reduced due to defendants' fraudulent adoption of the 1982 Stock Option Plan. Defendants argue that, similar to the claims set out in the First Amended Complaint, the claims now asserted can only be brought as a shareholder's derivative action, giving the plaintiff no standing to individually bring this suit.
State standing rules apply to plaintiff's claim of common law fraud, see Drachman v. Harvey, 453 F.2d 722, 726-27, 730 (2nd Cir.1972) (reh'g en banc), while federal law determines whether plaintiff has standing to assert federal violations in an individual action. Id. at 726-30. However, the precepts used to classify a cause of action as either derivative or individual spring from common law and are broadly employed unless modified by state or federal law. See generally Fletcher, Cyc Corp §§ 5908-5937 (Perm Ed). Thus, even though the parties' or the court's own research have located little precedent demonstrating the precise facts of this unusual case, well established principles of the derivative action rule and its exceptions can be applied.
To continue reading
Request your trial
-
King v. Douglass
...have held that dilution from the issuance of additional common stock creates a direct, not a derivative, harm. Lochhead v. Alacano, 697 F.Supp. 406, 411-13 (D.Utah 1988); Swanson v. American Consumer Indus., 415 F.2d 1326 (7th Cir.1969); Zinman v. FDIC, 567 F.Supp. 243 (E.D.Pa.1983); Cadiz ......
-
BRIXEN & CHRISTOPHER ARCH. v. State
...However, to survive a motion for summary judgment the evidence must suggest reasonable inferences of conspiracy."); Lochhead v. Alacano, 697 F.Supp. 406, 417 (D.Utah 1988) ("[B]ehavior may imply an agreement to conspire where no formal agreement has been ¶ 36 Agreements can be horizontal be......
-
Strougo v. Scudder, Stevens & Clark, Inc., 96 Civ. 2136 (RWS).
...controlling shareholders inflicted special injuries that fell only on minority shareholders. For example, in Lochhead v. Alacano, 697 F.Supp. 406, 411-13 (D.Utah 1988) (Lochhead II), minority shareholders had standing to bring a direct suit when the directors and majority shareholders appro......
-
Amos v. Franklin Fin. Servs. Corp.
...injury to the corporation, and satisfies RICO proximate cause. In making this argument, Plaintiffs principally rely on Lochhead v. Alacano, 697 F. Supp. 406 (D. Utah 1988). However, Lochhead is distinguishable. In that case, the plaintiff shareholder in Arctic Circle, Incorporated, sued fiv......