Lukas ex rel. Miller Energy Res., Inc. v. McPeak

• Decision Date: 08 January 2014
• Docket Number: No. 12–6285.,12–6285.
• Parties: Patrick P. LUKAS, derivately on behalf of Miller Energy Resources, Inc., Plaintiff–Appellant, v. Merrill A. McPEAK, Scott M. Boruff, Deloy Miller, Jonathan S. Gross, Herman Gettelfinger, David Hall, Charles M. Stivers, Don A. Turkleson, David Voyticky, and Miller Energy Resources, Inc., Defendants–Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

730 F.3d 635

Patrick P. LUKAS, derivately on behalf of Miller Energy Resources, Inc., Plaintiff–Appellant,

v.Merrill A. McPEAK, Scott M. Boruff, Deloy Miller, Jonathan S. Gross, Herman Gettelfinger, David Hall, Charles M. Stivers, Don A. Turkleson, David Voyticky, and Miller Energy Resources, Inc., Defendants–Appellees.

No. 12–6285.

United States Court of Appeals,Sixth Circuit.

Argued: July 24, 2013.

Decided and Filed: Sept. 19, 2013.

Rehearing and Rehearing En Banc Denied Jan. 8, 2014.^*

ARGUED:W. Scott Holleman, Levi & Korsinsky LLP, New York, New York, for Appellant. Robert D. Weber, DLA Piper LLP (US) LLP, Los Angeles, California, for Appellees McPeak, Miller, Gross, Gettelfinger, Hall, Stivers, Turkleson, Voyticky, and Miller Energy Resources. Lawrence P. Leibowitz, Leibowitz Law Firm, Knoxville, Tennessee, for Appellee Boruff. ON BRIEF:W. Scott Holleman, Levi & Korsinsky LLP, New York, New York, Al Holifield, Holifield & Associates, PLLC, Knoxville, Tennessee, for Appellant. Robert D. Weber, DLA Piper LLP (US) LLP, Los Angeles, California, Lawrence P. Leibowitz, Leibowitz Law Firm, Knoxville, Tennessee, Stephen A. Marcum, Marcum & Petroff, P.C., Huntsville, Tennessee, for Appellees.

Before: SILER and COLE, Circuit Judges; DOWD, District Judge. ^**

COLE, J., delivered the opinion of the court, in which SILER, J., joined. DOWD, D.J. (pp. 641–45), delivered a separate dissenting opinion.

OPINION

COLE, Circuit Judge.

Plaintiff–Appellant Patrick P. Lukas appeals the dismissal of his derivative suit on behalf of Miller Energy Resources, Inc. (“Miller”). The district court, applying Tennesee law, dismissed Lukas's derivative suit against Miller and nine of its directors because Lukas brought suit without first making a demand on the Miller Board of Directors to pursue this action, as required by Tennessee law. Lukas argues that the district court erred in rejecting his argument that, under Tennessee law, he was excused from bringing a demand because such a demand would have been futile. We affirm the dismissal.

I.

Lukas is a shareholder of Miller, a publicly owned Tennesee corporation “engaged in the exploration, production and drilling of oil and natural gas.” On December 16, 2009, Miller announced that it had acquired assets (“Alaska assets”) worth $325 million for a cost of only $2.25 million. Miller announced several increases in the value of the Alaska assets over the next nine months, claiming that they were worth over $1.2 billion in August 2010. The resulting impact on Miller's financial reports led to increases in its stock price.

On December 23, 2010, Miller, in recognition of its improved financial performance, amended its employment agreement with its Chief Executive Officer, Defendant Scott Boruff, substantially increasing his compensation and giving him stock options. The Compensation Committee (Defendants Merrill McPeak, Charles Stivers, and Herman Gettelfinger) recommended the amendment and the Board approved it. At the time, the Board was composed of the four already-named Defendants, as well as Defendants Deloy Miller, Jonathan S. Gross, David Hall, Don Turkleson, and David Voyticky.

In the summer of 2011, a series of revelations led Miller's stock price to decrease. A website published a report claiming that the Alaska assets—on the books for $350 million—were worth only $25 to $30 million and offset by $40 million in liabilities. Then, a series of SEC filings by Miller acknowledged “errors in ... financial statements” and “computational errors,” and advised that the misstatements “may have a material adverse effect on ... business and stock price” and “adversely impact [Miller's] ability to raise additional capital.” The stock price decreased after the website report and SEC disclosures.

On August 31, 2011, Lukas filed suit against the above-named Defendants, as well as Miller itself, in the district court, alleging six counts: (1) breach of fiduciary duty and disseminating materially false and misleading information; (2) breach of fiduciary duties for failing to properly oversee and manage the company; (3) unjust enrichment; (4) abuse of control; (5) gross mismanagement; and (6) waste of corporate assets. Defendants moved to dismiss on the grounds that (1) Lukas had not made a demand on the Miller board prior to initiating his suit and (2) Lukas failed to state a valid cause of action against any of the individual defendants. Lukas opposed the motion, arguing that demand would have been futile and that he had stated valid claims. The district court granted the motion on the ground that Lukas “ha[d] not adequately pled specific facts demonstrating that his failure to make a pre-suit demand ... should be excused.” Lukas appeals.

II.

We “review de novo a district court's dismissal of a plaintiff's complaint for failure to state a claim under Rule 12(b)(6).” Kottmyer v. Maas, 436 F.3d 684, 688 (6th Cir.2006). We review a district court's application of state law de novo. See Rawe v. Liberty Mut. Fire Ins. Co., 462 F.3d 521, 526 (6th Cir.2006) (citing Salve Regina Coll. v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 113 L.Ed.2d 190 (1991)).

Defendants argue that the panel should review the district court's decision for abuse of discretion because the disposition of the motion to dismiss in this case was based on findings of fact. Defendants cite a number of cases from other circuits for the proposition that abuse-of-discretion review applies when the determination of the sufficiency of allegations of demand futility “depends on the circumstances of the individual case.” See, e.g., Halebian v. Berv, 590 F.3d 195, 203 (2d Cir.2009); Kanter v. Barella, 489 F.3d 170, 175 (3d Cir.2007). However, we have previously reviewed demand-futility issues under a de novo standard. See, e.g., McCall v. Scott, 239 F.3d 808, 815–16 (6th Cir.2001); In re Ferro Corp. Derivative Litig., 511 F.3d 611, 617 (6th Cir.2008). We do likewise in this case.

In resolving questions of Tennessee law, this Court must first look to the decisions of the Tennessee Supreme Court. See West v. Am. Tel. & Tel. Co., 311 U.S. 223, 236, 61 S.Ct. 179, 85 L.Ed. 139 (1940). This Court must abide by any directly applicable holding of the Tennessee Supreme Court, unless the state court itself has “given clear and persuasive indication that its [earlier] pronouncement will be modified, limited or restricted.” Id.Where no on-point precedent from the Tennessee Supreme Court is available, this Court must consider any available precedent from the state appellate courts, whether published or unpublished:

Where an intermediate appellate state court rests its considered judgment upon the rule of law which it announces, that is a datum for ascertaining state law which is not to be disregarded by a federal court unless it is convinced by other persuasive data that the highest court of the state would decide otherwise.

Id. at 237, 61 S.Ct. 179;see also Talley v. State Farm Fire & Cas. Co., 223 F.3d 323, 328 (6th Cir.2000) (stating that the West rule applies “irrespective of whether a state appellate decision is published or unpublished”). State appellate court precedent is to be considered particularly persuasive where the Tennessee Supreme Court has refused to review the decision. See Six Cos. of Cal. v. Joint Highway Dist. No. 13, 311 U.S. 180, 188, 61 S.Ct. 186, 85 L.Ed. 114 (1940); King v. Order of United Commercial Travelers of Am., 333 U.S. 153, 158 n. 13, 68 S.Ct. 488, 92 L.Ed. 608 (1948).

Ordinarily, a plaintiff in a shareholder derivative suit must state in his complaint that, prior to filing suit, he made a written demand on the corporation's directors requesting that they pursue the suit on behalf of the corporation or take other suitable corrective action, and that they refused or ignored his demand. SeeTenn.Code Ann. § 48–17–401(b); Tenn. R. Civ. P. 23.06. However, Tennessee law recognizes that, in some circumstances, demand would be futile. In such cases, the plaintiff is excused from making a pre-suit demand, but the complaint must state “with particularity” why demand was futile. SeeTenn.Code Ann. § 48–17–401; Tenn. R. Civ. P. 23.06. The contours of Tennessee's demand-futility standard are at issue in this case.

The district court held that a Tennessee appellate court had set out the “test for demand futility in Tennessee” that the district court was “bound to follow.” See Lewis ex rel. Citizens Sav. Bank & Trust Co. v. Boyd, 838 S.W.2d 215 (Tenn.Ct.App.1992). The district court read Lewis as adopting a form of the Delaware Supreme Court's two-part test for demand futility, known as the Aronson test:

In demand excused cases, the grounds for the shareholder's claim are (1) that the board is interested and not independent and (2) that the challenged transaction is not protected by the business judgment rule.

Lewis, 838 S.W.2d at 222 (citing Aronson v. Lewis, 473 A.2d 805, 814 (Del.1984)). The district court held that Lukas must meet “both prongs” for demand to be excused, and that his failure to meet the first prong—to show that a majority of directors were interested and not independent—made analysis of the second prong unnecessary.

On appeal, Lukas argues that the district court erred in applying the demand-futility standard from Lewis because the Tennessee Supreme Court has definitively answered the central question of state law in this case. Lukas cites Deaderick v. Wilson, wherein the Tennessee Supreme Court held that demand would be excused when “the corporation is still under the control of those who must be defendants in the suit.” 67 Tenn. 108, 131 (1874) (emphasis omitted). Since the entire board is named in this suit, Lukas contends demand is excused under Deaderick.

Deaderick has been repeatedly affirmed by the Tennessee Supreme Court. See, e.g., Boyd v. Sims, 87 Tenn. 771, 11 S.W. 948, 950 (1889) (“[A] demand of the agents of a corporation ... is not necessary if these agents are themselves guilty of the wrongs...