Pasternack v. Shrader, Docket Nos. 16-217 (Lead)

CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
Writing for the CourtJACOBS, Circuit Judge
Citation863 F.3d 162
Parties Bruce PASTERNACK, Plaintiff-Appellant, Reginald Boudinot, Paul Kocourek, Consolidated-Plaintiffs-Appellants v. Ralph W. SHRADER, C.G. Appleby, Samuel R. Strickland, Joseph E. Garner, Dennis O. Doughty, Francis J. Henry, Christopher M. Kelly, Daniel C. Lewis, Joseph W. Mahaffee, John D. Mayer, Patrick F. Peck, Booz Allen Hamilton Incorporated, Gary D. Ahlquist, Martin J. Bollinger, Lloyd W. Howell, Jr., William C. Jackson, Pamela M. Lentz, Eric A. Spiegel, Defendants-Counter Claimants-Appellees, Explorer Coinvest LLC, Explorer Holding Corporation, Explorer Investor Corporation, Credit Suisse Securities (USA) LLC, Consolidated-Defendants, Deanne M. Aguirre, Shumeet Banerji, Peter Bertone, Christian Burger, Heather L. Burns, Mark J. Gerencser, Davig G. Knott, Helmut Meier, Horacio D. Rozanski, Joe Saddi, Douglas G. Swenson, Steven B. Wheeler, Carlyle Group, Carlyle Partners V, L.P., Defendants.
Decision Date13 July 2017
Docket NumberDocket Nos. 16-217 (Lead),16-218 (Con),August Term, 2016

863 F.3d 162

Bruce PASTERNACK, Plaintiff-Appellant,

Reginald Boudinot, Paul Kocourek, Consolidated-Plaintiffs-Appellants
v.
Ralph W. SHRADER, C.G. Appleby, Samuel R. Strickland, Joseph E. Garner, Dennis O. Doughty, Francis J. Henry, Christopher M. Kelly, Daniel C. Lewis, Joseph W. Mahaffee, John D. Mayer, Patrick F. Peck, Booz Allen Hamilton Incorporated, Gary D. Ahlquist, Martin J. Bollinger, Lloyd W. Howell, Jr., William C. Jackson, Pamela M. Lentz, Eric A. Spiegel, Defendants-Counter Claimants-Appellees,

Explorer Coinvest LLC, Explorer Holding Corporation, Explorer Investor Corporation, Credit Suisse Securities (USA) LLC, Consolidated-Defendants,

Deanne M. Aguirre, Shumeet Banerji, Peter Bertone, Christian Burger, Heather L. Burns, Mark J. Gerencser, Davig G. Knott, Helmut Meier, Horacio D. Rozanski, Joe Saddi, Douglas G. Swenson, Steven B. Wheeler, Carlyle Group, Carlyle Partners V, L.P., Defendants.

Docket Nos. 16-217 (Lead)
16-218 (Con)
August Term, 2016

United States Court of Appeals, Second Circuit.

Argued: December 15, 2016
Decided: July 13, 2017


863 F.3d 165

MARK M. ELLIOTT (Jared R. Clark on the brief), Phillips Nizer LLP, New York, NY, for Plaintiff-Appellant Bruce Pasternack.

MICHAEL Q. ENGLISH, Finn Dixon & Herling LLP, Stamford, CT, for Plaintiff-Appellant Reginald Boudinot.

Mark Kelly, Kelly & Hazen, New York, NY, for Consolidated-Plaintiffs-Appellants Reginald Boudinot and Paul Kocourek.

J. SCOTT BALLENGER (Everett C. Johnson, Jr., J. Christian Word, Sarah A. Greenfield, and Jonathan Y. Ellis on the brief), Latham & Watkins LLP, Washington, DC, for Defendants-Counter Claimants-Appellees.

Before: WINTER, JACOBS, and POOLER, Circuit Judges.

JACOBS, Circuit Judge:

The plaintiffs are retired officers of Booz Allen Hamilton, a privately-held corporation. Bruce Pasternack, Reginald Boudinot, and Paul Kocourek allege that they were improperly denied compensation when, after their retirement, Booz Allen Hamilton sold one of its divisions to the Carlyle Group (the "Carlyle Transaction"). They sued Booz Allen Hamilton and several of its officers (collectively "Booz Allen"), as well as various individuals and entities involved in the Carlyle Transaction. Numerous amended complaints were filed by each plaintiff. On appeal, we review the legal sufficiency of various claims under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq. , the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. , federal securities law, and common law. In general, all three plaintiffs allege that Booz Allen improperly discriminated among different Booz Allen officers and violated the duties of due care, loyalty, and good faith, in violation of ERISA. Kocourek separately argues that Booz Allen fraudulently induced him and others to sell Booz Allen stock at prices below fair value, in violation of federal securities regulations and other law.

The United States District Court for the Southern District of New York (Kaplan, J. ) dismissed the ERISA claims on the ground that Booz Allen's stock-distribution program was not a pension plan within the meaning of ERISA, and denied as futile leave to amend to "augment" the ERISA claims with new allegations. The RICO claims were dismissed on the ground that they were barred by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), see 18 U.S.C. § 1964(c). Kocourek's request to amend his complaint to add securities-fraud

863 F.3d 166

claims was denied on the grounds of futility and undue delay. It appears that the district court did not directly address Kocourek's proposed common law claims; so Kocourek asks us to remand to the district court for reconsideration of those claims. No other claim is before us on appeal.

We affirm the district court in all respects save one. We vacate the judgment of the district court to the extent it denied Kocourek leave to amend to add securities-fraud causes of action, and we remand the case to the district court to consider those claims.

I

Booz Allen is a privately-owned corporation that operates in all material respects like a partnership. The company has no outside investors, avoids outside debt, and is wholly owned by its officers, who are referred to internally as partners.

A

Booz Allen allocates its stock via its Stock Rights Plan (the "SRP"). For purposes of this opinion, Booz Allen stock can be classed as "common stock" or "Class B stock," although the actual operation of the SRP is more complicated. The SRP operates as follows. In an officer's first participation year, the officer is given the option to purchase a block of shares, of which 10% is common stock and 90% is Class B. The officer pays book value for the common stock tranche, and a nominal amount for the Class B tranche. In each successive year, the officer exchanges some of the Class B stock for common stock, so that the percentage of common stock in the initial grant increases annually by 10%. Thus, at the end of the second year, the block is composed of 20% common stock and 80% Class B stock; at the end of the third year, 30% common and 70% Class B; and so on, until at the end of ten years, the block is 100% common stock. The officer pays for the incremental conversions to common stock at the price of half of book value at the time of the initial grant.

A new, parallel, ten-year process begins every year, as the officer continuously receives new amounts of both common stock and Class B stock.

When an officer separates from Booz Allen, the disposition of the officer's remaining Class B stock depends on how the officer leaves. If the officer is terminated for cause or leaves the company before retirement, the officer loses the right to exchange the Class B stock for common stock and must return the Class B stock to Booz Allen. If the participant retires with Booz Allen's approval, all outstanding Class B stock may be converted into common stock. Retirees are allowed to continue holding their stock for two years into retirement, after which Booz Allen has the option of repurchasing the retiree's common stock at the current book value.1 Common stock and Class B stock have voting rights in the management of Booz Allen, and the common stock pays a small annual dividend.

As a matter of policy, the only owners of Booz Allen stock are the company itself and its partners. Partners can sell their stock only to Booz Allen. Although at least one SRP policy document states that partners may sell their common stock back to Booz Allen at any time, the plaintiffs allege that partners were effectively unable to do so until retirement.

863 F.3d 167

The SRP is a lucrative arrangement that allows participants to realize handsome profits when they sell their common stock. The relevant measure of the common stock's worth is its book value, i.e., Booz Allen's net assets divided by the number of outstanding shares of common stock. The company undertakes to increase the actual book value of the common stock by 10% annually, and has done so every year since 1978. Participants buy shares either at book value (measured at the time of the initial grant) for the 10% portion of the annual grant composed of common stock, or at half of book value (again measured at the time of issuance) for the remaining 90% of those shares that begin as Class B stock and convert to common stock over the ensuing nine years. Because the book value appreciates at a compounded rate of 10% annually, the current book value in any year will be higher than the purchase price—generally much higher. A participant who received an initial grant of 100 shares in 2001, with a book value of $100 per share, would ultimately pay $5,500 by 2010 to receive 100 shares of common stock, which by then would be worth $23,579—a 329% return on investment with nominal risk.

B

Plaintiffs Pasternack, Boudinot, and Kocourek are all former officers of Booz Allen. They retired with the company's blessing in 2004, 2005, and 2007, respectively. They all participated in the SRP.

C

In 2008, Booz Allen sold its Government Contracting Division to an affiliate of the Carlyle Group. The Carlyle Transaction was approved by a supermajority of Booz Allen stockholders (i.e., participants in the SRP). Then-current stockholders received $763 per share of common stock, an amount far in excess of book value.

At the time of the Carlyle Transaction, Pasternack and Boudinot had no common stock because Booz Allen exercised its option under the SRP to re-purchase their shares two years after their retirement. Since Kocourek's two-year post-retirement period had not elapsed, Kocourek still held common stock, which he sold in the Carlyle Transaction for approximately $20 million.

D

The three plaintiffs filed individual complaints in 2009. Initially, there was no allegation that the SRP was governed by ERISA; but each complaint was amended (with the defendants' consent) to add ERISA claims. The three complaints were consolidated.

Most of the claims in the consolidated complaint were dismissed on motion,...

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91 practice notes
  • Berlin v. Jetblue Airways Corp., 18-CV-1545 (MKB) (LB)
    • United States
    • United States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
    • January 30, 2020
    ...436 F.Supp.3d 571 must satisfy both [Federal Rules of Civil Procedure] 15 and 16 to be permitted to amend." Pasternack v. Shrader, 863 F.3d 162, 174 n.10 (2d Cir. 2017) (citations and internal quotation marks omitted). See also Grochowski v. Phoenix Const., 318 F.3d 80, 86 (2d Cir. 2003) ("......
  • State St. Global Advisors Trust Co. v. Visbal, 1:19-cv-01719-GHW
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • January 3, 2020
    ...showing of bad faith or undue prejudice does not provide a basis for a district court to deny the right to amend." Pasternack v. Shrader , 863 F.3d 162, 174 (2d Cir. 2017) (quotation omitted). An amendment to a pleading is futile if the proposed claim could not withstand a motion to dismiss......
  • Richard v. N.Y.C. Dep't of Educ., 16-CV-957 (MKB)
    • United States
    • United States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
    • September 15, 2022
    ...of the dispute; or (iii) prevent the plaintiff 79 from bringing a timely action in another jurisdiction.” Pasternack v. Shrader, 863 F.3d 162, 174 (2d Cir. 2017) (quoting Block, 988 F.2d at 350). Courts should be “hesitant to allow amendment where doing so unfairly surprises the non-movant ......
  • Constr. Laborers Pension Trust for S. Cal. v. CBS Corp., 18-CV-7796 (VEC)
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • January 15, 2020
    ...(quotation omitted), and "complaints dismissed under Rule 9(b) are almost always dismissed with leave to amend," Pasternack v. Shrader , 863 F.3d 162, 175 (2d Cir. 2017) (quotation omitted). That said, leave to amend may be denied "for good reason, including futility, bad 433 F.Supp.3d 552 ......
  • Request a trial to view additional results
93 cases
  • Berlin v. Jetblue Airways Corp., 18-CV-1545 (MKB) (LB)
    • United States
    • United States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
    • January 30, 2020
    ...436 F.Supp.3d 571 must satisfy both [Federal Rules of Civil Procedure] 15 and 16 to be permitted to amend." Pasternack v. Shrader, 863 F.3d 162, 174 n.10 (2d Cir. 2017) (citations and internal quotation marks omitted). See also Grochowski v. Phoenix Const., 318 F.3d 80, 86 (2d Cir. 2003) ("......
  • State St. Global Advisors Trust Co. v. Visbal, 1:19-cv-01719-GHW
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • January 3, 2020
    ...showing of bad faith or undue prejudice does not provide a basis for a district court to deny the right to amend." Pasternack v. Shrader , 863 F.3d 162, 174 (2d Cir. 2017) (quotation omitted). An amendment to a pleading is futile if the proposed claim could not withstand a motion to dismiss......
  • Richard v. N.Y.C. Dep't of Educ., 16-CV-957 (MKB)
    • United States
    • United States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
    • September 15, 2022
    ...of the dispute; or (iii) prevent the plaintiff 79 from bringing a timely action in another jurisdiction.” Pasternack v. Shrader, 863 F.3d 162, 174 (2d Cir. 2017) (quoting Block, 988 F.2d at 350). Courts should be “hesitant to allow amendment where doing so unfairly surprises the non-movant ......
  • Constr. Laborers Pension Trust for S. Cal. v. CBS Corp., 18-CV-7796 (VEC)
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • January 15, 2020
    ...(quotation omitted), and "complaints dismissed under Rule 9(b) are almost always dismissed with leave to amend," Pasternack v. Shrader , 863 F.3d 162, 175 (2d Cir. 2017) (quotation omitted). That said, leave to amend may be denied "for good reason, including futility, bad 433 F.Supp.3d 552 ......
  • Request a trial to view additional results

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