Louisiana World Exposition v. Federal Ins. Co.
| Decision Date | 11 October 1988 |
| Docket Number | No. 87-3264,87-3264 |
| Citation | 858 F.2d 233 |
| Parties | LOUISIANA WORLD EXPOSITION, Plaintiff-Appellant, v. FEDERAL INSURANCE COMPANY, et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Joseph E. Friend, Friend, Wilson, Spedale & Draper, New Orleans, La., Claude F. Reynaud, Jr., Christine Lipsey, Breazeale, Sachse & Wilson, Baton Rouge, La., for plaintiff-appellant.
Dermot S. McGlinchey, B. Franklin Martin, III, Stephen W. Rider, McGlinchey, Stafford, Mintz, Cellini & Lang, New Orleans, La., for Bagneris, et al.
John T. Nesser, III, Eric H. Weimers, New Orleans, La., Lee Squitieri, New York City, for Terence R.D. Burn, et al.
Appeal from the United States District Court for the Eastern District of Louisiana.
Before TIMBERS *, KING and HIGGINBOTHAM, Circuit Judges.
Louisiana World Exposition, Inc. appeals from the district court's dismissal, for failure to state a claim upon which relief may be granted, of LWE's complaint against its officers and directors (and their respective insurers) for gross negligence, mismanagement and breach of fiduciary duty. LWE is a Louisiana nonprofit corporation presently in a case under Chapter 11 of the Bankruptcy Code. After having been authorized by the bankruptcy court to do so, the Contractor Creditors' Committee of LWE brought this lawsuit on behalf and in the name of LWE. The district court dismissed the action for failure to state a claim upon which relief may be granted. It reasoned that because Louisiana law precludes individual corporate creditors from maintaining such a cause of action against the officers and directors of the corporation, a creditors' committee composed of such creditors may not assert the action on behalf of the corporate debtor in bankruptcy. Finding that the district court erred as a matter of law in dismissing LWE's complaint, we reverse the judgment and remand to the district court for further proceedings.
Louisiana World Exposition, Inc. ("LWE"), a Louisiana nonprofit corporation, is the entity that organized the New Orleans World's Fair of 1984. The fair was beset by severe financial difficulties, leaving LWE heavily in debt. As a result, on November 6, 1984, LWE filed for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Code" or "Bankruptcy Code"). LWE continued as a debtor-in-possession. Thereafter, the bankruptcy court appointed a Contractor Creditors' Committee ("the Committee"), see 11 U.S.C. Sec. 1102(a), to represent the interests of a group of creditors of the bankruptcy estate of LWE.
In an April 8, 1985 letter to LWE's Chapter 11 counsel, the Committee demanded that LWE file a complaint against various LWE officers and directors for gross negligence, mismanagement and breach of fiduciary duty. 1 The Committee's demand was presented to the management committee of LWE's Board of Directors at an April 10, 1985 meeting. The management committee, recognizing that it had an inherent conflict of interest, declined to vote on the demand. Construing that response as a refusal on the part of the debtor-in-possession to pursue the claim, the Committee filed an application in the bankruptcy court seeking permission to institute the suit on LWE's behalf. In that application, the Committee summarized the acts of mismanagement alleged in the demand letter, see supra note 1, and noted that LWE's management had effectively refused to file suit. The Committee asserted that "[t]he benefits to be derived from the action, if successful, would accrue greatly to the benefit of all of the Debtor's creditors;" in addition, the Committee included a proposed contingent attorney's fee schedule for the bankruptcy court's evaluation.
A hearing on the Committee's application was conducted on June 13, 1985. That day, in a minute entry, the bankruptcy court found that the notice given by the Committee to LWE's management was adequate and that there was no opposition to the application. Accordingly, the bankruptcy court concluded that the application was timely filed and was in order. It then granted the Committee "leave to file a complaint on behalf of and in the name of the Debtor, [LWE], against various of the officers, directors, and managers of [LWE] and their respective insurers."
The contemplated action was filed by the Committee on LWE's behalf on July 10, 1985 in the United States District Court for the Eastern District of Louisiana against various officers and directors of LWE and their insurers (collectively, "the appellees"). 2 In summary, the complaint alleged that the appellees are liable to LWE for gross negligence, mismanagement and breach of fiduciary duty. 3 With respect to damages, the complaint asserted that "LWE has incurred damages in the amount of $120,956,959.06 plus additional amounts not yet quantified as a direct result of the individual defendants' failure to fulfill their obligations to LWE." On January 20, 1987, the appellees filed a motion to dismiss, pursuant to Federal Rule of Civil Procedure 12(b)(6), or in the alternative, a motion for summary judgment.
On March 17, 1987, the district court granted the motion to dismiss and, accordingly, did not rule on the summary judgment motion. The transcript of the hearing does not reveal the grounds for the district court's decision. On March 19, however, the Committee filed a motion for a rehearing which the district court denied after oral argument on April 10. At the hearing on the Committee's petition for rehearing, the district court clarified the basis for its earlier ruling when it concluded that a group of creditors, simply by virtue of being a creditors' committee and filing suit in the name of the corporation, cannot bring suit against the officers and directors of an insolvent corporation where, absent allegations of fraud, state law prevents injured creditors of that corporation from bringing suit directly against its officers and directors. The district court, uneasy with what it termed the "legal fiction" that the Committee, for the purpose of this suit, stood in LWE's shoes, concluded that the Committee had no greater right to successfully maintain such an action than would any injured creditor. The Committee filed notice of appeal from the district court's dismissal of its suit on April 9.
This appeal involves the interaction of Louisiana corporate law and federal bankruptcy law. The fundamental question before us is whether the Committee--suing on behalf and in the name of LWE--can maintain an action against the appellees, absent allegations of fraud, for gross negligence, mismanagement and breach of fiduciary duty. The parties have raised a wide variety of arguments in support of their respective answers to this central inquiry. We shall address their arguments within the framework of our general analysis of the question presented.
As the parties cannot seem to agree on a characterization of the instant action, we must, as an initial matter, examine the complaint in order to divine the nature of this lawsuit. In doing so, we leave aside for the moment such thorny issues as whether the cause of action alleged actually exists under state law and whether the Committee is entitled to assert it even if it does exist. We begin by noting that on its face, the complaint names LWE as the plaintiff in this lawsuit, not individual creditors of LWE or the Committee. The complaint charges that the named individual defendants, in their capacity as officers and directors of LWE, are liable to LWE for gross negligence, mismanagement and breach of fiduciary duty. In general terms, the complaint alleges: (1) conflicts of interest on the part of officers and directors which, in many cases, were resolved against the interests of LWE and in favor of outside interests; (2) grossly inadequate formulation, implementation and monitoring of budgetary constraints which led to expenditures far in excess of reasonable expectations of income; (3) insufficient oversight of personnel; (4) inadequate marketing and planning of the fair itself; and (5) unreasonable failure to enforce the terms and conditions of LWE's contracts and agreements. Having determined that the Committee's complaint alleges that the appellees were grossly negligent, mismanaged LWE and breached their fiduciary obligations to the corporation, 4 we must now determine as a threshold issue whether those allegations state a claim under Louisiana law. Where, as here, no cause of action is asserted arising under the Bankruptcy Code and thereby implicating "some federal interest," the viability of the claim asserted by LWE must be evaluated under Louisiana law. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979).
In Louisiana, nonprofit corporations are governed by the Louisiana Nonprofit Corporation Law, La.Rev.Stat.Ann. Sec. 12:201 et seq. (West 1969). Section 12:226(A) of the Louisiana Nonprofit Corporation Law defines the obligation or duty owed by an officer or director of a nonprofit corporation to that corporation, and provides as follows:
Officers and directors shall be deemed to stand in a fiduciary relation to the corporation and its members, and shall discharge the duties of their respective positions in good faith, and with that diligence, care, judgment and skill which ordinarily prudent men would exercise under similar circumstances in like positions.
La.Rev.Stat.Ann. Sec. 12:226(A) (West 1969). As is clear from the language of the statute, section 12:226(A) creates a fiduciary duty on the part of corporate officers and directors which runs to the nonprofit corporation and its members. It also describes the standard of care which governs the conduct of corporate officers and directors in fulfilling their respective obligations to the nonprofit corporation.
While the Louisiana courts have not...
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