Potter v. Hughes

Citation546 F.3d 1051
Decision Date10 October 2008
Docket NumberNo. 06-56082.,06-56082.
PartiesKatherine G. POTTER; Charles B. Krieger, Plaintiffs-Appellants, v. B. Wayne HUGHES; Public Storage, Inc., a California corporation; B. Wayne Hughes, Jr.; Tamara Hughes Gustavson; Dann V. Angeloff; Marvin M. Lotz; Harvey Lenkin; Ronald L. Havner, Sr.; Thomas J. Barrack, Jr.; Robert J. Abernethy; William C. Baker; Uri P. Harkham; Daniel C. Staton; John T. Evans; John Reyes; David Goldberg; A. Timothy Scott, Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Edward M. Gergosian and Robert J. Gralewski, Gergosian & Gralewski, LLP, San Diego, CA, for the appellants.

David Dinielli and Shoshana Bannett, Munger, Tolles & Olson LLP, Los Angeles, CA, for appellees B. Wayne Hughes, Jr., and Tamara Hughes Gustavson.

Richard B. Specter, Corbett, Steelman & Specter, Irvine, CA, for appellees Dann V. Angeloff, Thomas J. Barrack, Jr., Robert J. Abernethy, William C. Baker, Uri P. Harkham, Daniel C. Staton, and John T. Evans.

John M. Potter and Scott G. Lawson, Quinn Emanuel Urquhart & Hedges LLP, San Francisco, CA, for appellees Marvin M. Lotz, Harvey Lenkin, Ronald L. Havner, Jr., John Reyes, David Goldberg, A. Timothy Scott, and Public Storage, Inc.

Appeal from the United States District Court for the Central District of California; George P. Schiavelli, District Judge, Presiding. D.C. No. CV-04-10607-GPS.


Opinion by Judge GOULD; Dissent by Judge IKUTA.

GOULD, Circuit Judge:

In this shareholder's derivative action, Plaintiff-Appellant Katherine Potter ("Potter") alleges that the Defendants-Appellees (collectively, "Defendants"), who are managers and directors of Public Storage, Inc. ("PS"), wrongfully managed PS. The district court dismissed the action on the grounds that Potter failed to make an adequate demand on the Board of Directors of PS ("Board") before filing her suit. We affirm.


PS is a California corporation that is publicly traded on the New York Stock Exchange. Potter and Co-Plaintiff Charles Krieger ("Krieger") filed a derivative complaint against PS and sixteen individual defendants on December 30, 2004, alleging twelve causes of action including waste of corporate assets, breach of fiduciary duty, fraud, and violation of the Sarbanes-Oxley Act of 2002, 15 U.S.C. §§ 7201-7266. These allegations related to three alleged transactions: (1) PS's acquisition of an entity known as PSIC ("PSIC transaction"); (2) the use of PS resources to provide services to a Canadian business owned by the Hughes family, who are prominent members of the Board ("Canadian transaction"); and (3) PS's payment of management and advisory fees to entities owned by other defendants ("M & A transaction"). Upon Defendants' motion to dismiss, the district court dismissed the complaint with leave to amend, concluding that Krieger and Potter did not satisfy the requirements of Rule 23.1 of the Federal Rules of Civil Procedure and California law.1

Potter and Krieger filed an amended complaint on July 12, 2005, alleging the same twelve causes of action but this time relating them to only two transactions, the PSIC transaction and the Canadian transaction. Defendants once again moved to dismiss, and the district court dismissed the second complaint, concluding that Krieger failed the contemporaneous ownership requirement and that Potter failed to make an adequate demand on the Board.

Krieger does not appeal his dismissal, so this appeal concerns only the adequacy of Potter's demand on the Board. However, Krieger plays a major role in the facts leading to Potter's appeal. Krieger sent a demand letter to the Board on November 21, 2002. This letter complained of the PSIC transaction but did not discuss the Canadian transaction. It also did not mention Potter by name, but noted that "[t]wo individuals ... who reside in Southern California where the lawsuit will be filed will join with me to bring the action." Potter alleges that she was one of the two unnamed individuals to whom Krieger was referring in the letter.

On January 6, 2003, Krieger and attorney Douglas Connon ("Connon") met with members of the special committee established by the Board to investigate the allegations in the November 21 letter. At the meeting, Connon told the members of the committee that he was representing Potter and that he had her power of attorney. In a series of later letters, dated March 19, 2003, April 7, 2003, June 23, 2003, and November 1, 2003, Krieger wrote to the Board reiterating the complaints relating to the PSIC transaction that he had raised in the demand letter, and also asked the Board to provide him information concerning the Canadian transaction. When the Board did not take action that Krieger and Potter found satisfactory, they sued.


Having doubts about the foundation for federal question jurisdiction under 28 U.S.C. § 1331, the panel by order raised the issue of subject matter jurisdiction sua sponte and received additional briefing. Having reviewed the briefing and having considered the matter further, we take no position on whether Appellants' complaint raises a sufficient federal question under 28 U.S.C. § 1331 because we instead conclude that we may consider at the outset whether Potter satisfied Federal Rule of Civil Procedure 23.1. Deciding that Rule 23.1 was not satisfied, we hold that the complaint should be dismissed and we need not further address jurisdiction.

Supreme Court precedent is clear that we "may choose among threshold grounds for denying audience to a case on the merits." Wilbur v. Locke, 423 F.3d 1101, 1106 (9th Cir.2005) (quoting Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 585, 119 S.Ct. 1563, 143 L.Ed.2d 760 (1999)); see also Ruhrgas AG, 526 U.S. at 584, 119 S.Ct. 1563 ("While Steel Co. [v. Citizens for a Better Environment, 523 U.S. 83, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998),] reasoned that subject-matter jurisdiction necessarily precedes a ruling on the merits, the same principle does not dictate a sequencing of jurisdictional issues."). These precedents apply most commonly where both of the competing threshold issues go to the court's power under the Constitution.

However, there are non-constitutional grounds on which we may dismiss a suit before considering the existence of federal subject matter jurisdiction. These include jurisdictional grounds that are discretionary, such as pendent jurisdiction or Younger abstention, see Steel Co., 523 U.S. at 100 n. 3, 118 S.Ct. 1003, grounds of prudential standing, such as statutory standing, see National R.R. Passenger Corp. v. National Ass'n of R.R. Passengers, 414 U.S. 453, 465 n. 13, 94 S.Ct. 690, 38 L.Ed.2d 646 (1974) ("Since we hold that no right of action exists, questions of standing and jurisdiction became immaterial."), and grounds that are "logically antecedent to the existence of any Article III issues," such as class certification under Federal Rule of Civil Procedure 23, see Ortiz v. Fibreboard Corp., 527 U.S. 815, 831, 119 S.Ct. 2295, 144 L.Ed.2d 715 (1999); Amchem Prods. v. Windsor, 521 U.S. 591, 612-13, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997).

In this case, the issue of whether Potter satisfied the demand pleading requirements of Rule 23.1 is "logically antecedent" to the issue of whether we have jurisdiction over this action. Pursuant to Rule 23.1, a putative derivative plaintiff can initiate a derivative action only if he or she makes an adequate demand on the Board under applicable state law. Fed.R.Civ.P. 23.1 (2008); see also Kayes, 51 F.3d at 1463 n. 10. Therefore, unless we determine that a proper demand was made, there is no lawsuit over which to exercise jurisdiction. Thus, as in Ortiz and Amchem, the jurisdictional issue would not exist but for this court's determination regarding the adequacy of Potter's demand. Accordingly, it is appropriate for us to reach the Rule 23.1 issue first. See Ortiz, 527 U.S. at 831, 119 S.Ct. 2295; Amchem, 521 U.S. at 613, 117 S.Ct. 2231.

We note also that a valid demand is a requirement for statutory standing under California law. Shields v. Singleton, 15 Cal.App.4th 1611, 1618, 19 Cal.Rptr.2d 459 (1993). Although California courts do not define the limits of our jurisdiction, this required demand supports our conclusion that the satisfaction of the requirements of Rule 23.1 is a logical antecedent to federal jurisdictional questions. See Ortiz, 527 U.S. at 831, 119 S.Ct. 2295 (noting that Rule 23 certification is "logically antecedent to Article III concerns, and ... pertain[s] to statutory standing, which may properly be treated before Article III standing").

Accordingly, we address whether Rule 23.1 was satisfied both because compliance with Rule 23.1 is `logically antecedent' to assessing Article III issues, and because this raises an issue of state statutory standing.2


The parties disagree about the applicable standard of review. Potter argues that because her complaint was dismissed, we should review the district court's dismissal de novo. Defendants argue that district court determinations regarding the demand requirement for derivative actions are reviewed for abuse of discretion.

Defendants are correct. Although dismissals for failure to state a claim are reviewed de novo, the district court's determination that Potter did not comply with Rule 23.1 or California law regarding the demand and regarding demand futility is reviewed for abuse of discretion. In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 983 (9th Cir.1999); see also Greenspun v. Del E. Webb Corp., 634 F.2d 1204, 1210 (9th Cir.1980) ("The district court determined that Greenspun failed to make a demand and that such a demand would not have been futile. We must affirm unless the district court abused its discretion in reaching this conclusion.").

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