Rothenberg v. Security Management Co., Inc., 81-7118

• Decision Date: 08 February 1982
• Docket Number: No. 81-7118,81-7118
• Citation: 667 F.2d 958
• Parties: Fed. Sec. L. Rep. P 98,450 Shirley ROTHENBERG, Plaintiff-Appellant, v. SECURITY MANAGEMENT CO., INC., Bruce R. Davis, Invesco International Corp., RFH Trust and Sandra B. Davis, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 958

667 F.2d 958

Fed. Sec. L. Rep. P 98,450

Shirley ROTHENBERG, Plaintiff-Appellant, v. SECURITY MANAGEMENT CO., INC., Bruce R. Davis, Invesco

International Corp., RFH Trust and Sandra B.

Davis, Defendants-Appellees.

No. 81-7118.

United States Court of Appeals, Eleventh Circuit.

Feb. 8, 1982.

Robert J. Hipple, Atlanta, Ga., for plaintiff-appellant.

Cotton, Katz & White, J. Michael Lamberth, Atlanta, Ga., for Security Mgt. and Bruce and Sandra Davis.

Slutzky, Wolf & Bailey, Danny C. Bailey, Atlanta, Ga., for RFH.

Smith, Shaw, Maddox, Davidson & Graham, Oscar M. Smith, Rome, Ga., for Invesco.

Appeal from the United States District Court for the Northern District of Georgia.

Before TUTTLE, HILL and JOHNSON, Circuit Judges.

JOHNSON, Circuit Judge:

Plaintiff-appellant Shirley Rothenberg filed a derivative suit against Security Management Co., Inc. (Security), Invesco International Corp. (Invesco) and various members of Security's board of directors alleging violations of state corporate and federal securities laws. The district court determined that the plaintiff did not "fairly and adequately" represent the interests of other similarly situated shareholders, a prerequisite for maintaining a derivative suit under Fed.R.Civ.P. 23.1, and dismissed the suit. We affirm.

Plaintiff and her husband purchased stock in Security in 1972. Between 1974 and 1976, the value of the stock underwent a precipitous decline. As a result of the decrease in value, the Rothenbergs filed both a derivative suit ¹ and a suit as individuals ² against Security. Mrs. Rothenberg also instituted a garnishment proceeding on a judgment against the corporation while Security sought declaratory relief against the Rothenbergs in state court. Thus at the time the district court dismissed the derivative action, plaintiff and defendants were entangled in a number of law suits.

Defendants sought dismissal of the derivative suit, contending that Mrs. Rothenberg was not a proper plaintiff under Fed.R.Civ.P. 23.1. The district court took cognizance of the fact that Mrs. Rothenberg held only 2.04% of Security's stock and therefore stood to personally recover very little, if anything, from a favorable outcome in the derivative action. ³ Moreover, the court determined that any recovery in the derivative suit would "pale ( ) in comparison with her possibility of recovery" in the suit that she filed as an individual. Accordingly, there existed a possibility that plaintiff could use the derivative suit as "leverage" in order to obtain a favorable settlement in the other actions. The court further emphasized that Mrs. Rothenberg lacked any meaningful knowledge about the suit and displayed an unwillingness to learn. Finally, the district court noted that Mrs. Rothenberg's status as a judgment creditor ⁴ raised the possibility that her interests might be antagonistic to those of the other similarly situated shareholders. Based upon a confluence of these factors, the lower court found that Mrs. Rothenberg was not a proper plaintiff and dismissed the suit.

In reviewing the decision rendered below, we are only free to determine whether the court abused its discretion by granting the motion to dismiss. ⁵ Owen v. Modern Diversified Indus., Inc., 643 F.2d 441, 443 (6th Cir. 1981); Honnreich v. Plant Industries, 535 F.2d 550, 552 (9th Cir. 1976).

Fed.R.Civ.P. 23.1 permits a shareholder to maintain a derivative suit so long as the plaintiff "fairly and adequately represent(s) the interests of the shareholders or members similarly situated ...." ⁶ The district court's determination that Mrs. Rothenberg would not "fairly and adequately" represent Security's other shareholders derived in part from the possibility that she might use the derivative action as leverage to obtain a favorable settlement in other actions brought against the corporation. ⁷ See Blum v. Morgan Guaranty Trust Co., 539 F.2d 1388, 1390 (5th Cir. 1976) ("the court may take into account outside entanglements that render it likely that the representative (plaintiff) may disregard the interests of the other class members."); accord, G. A. Enterprises, Inc. v. Leisure Living Commun., Inc., 517 F.2d 24, 26-27 (1st Cir. 1975). The possibility that the derivative action will be used as leverage, however, no longer exists. Following the dismissal of the derivative suit but before oral argument on this appeal, the district court directed a verdict in favor of the defendants in the suit filed by plaintiff as an individual. ⁸ Further, the declaratory judgment action and the garnishment suit have both been terminated. Thus, with the exception of this appeal, all litigation between the parties appears to have ceased. As a result, any danger that Mrs. Rothenberg could or would use the derivative suit as leverage to obtain a favorable settlement in other actions has been eliminated.

Despite our determination that the plaintiff cannot use the derivative suit as leverage, we nonetheless affirm the district court's ruling.

Whether a particular plaintiff will fairly and adequately represent the interests of other similarly situated shareholders as required by Rule 23.1 turns upon the total facts and circumstances of each case. Davis v. Comed, Inc., 619 F.2d 588, 593-94 (6th Cir. 1980). Some of the factors considered by courts include: (1) indications that the plaintiff is not the true party in interest, e.g., Nolen v. Shaw-Walker Co., 449 F.2d 506, 509 (6th Cir. 1971); (2) the plaintiff's unfamiliarity with the litigation and unwillingness to learn about the suit, e.g., Davis v. Comed, Inc., supra, 619 F.2d at 593; Levine v. Berg, 79 F.R.D. 95, 98 (S.D.N.Y.1978); (3) the degree of control exercised by the attorneys over the litigation, e.g., In re Com. Oil/Tesoro Pet. Sec. Lit., 484 F.Supp. 253, 263 (W.D.Tex.1979); Levine v. Berg, supra, 79 F.R.D. at 98; In re Goldchip Funding Co., 61 F.R.D. 592, 594-95 (M.D.Pa.1974); (4) the degree of support received by the plaintiff from other shareholders, see Schupack v. Covelli, 512 F.Supp. 1310, 1312 (W.D.Pa.1981); and (5) the lack of any personal commitment to the action on the part of the representative plaintiff, e.g., Cohen v. Bloch, 507 F.Supp. 321, 326 (S.D.N.Y.1980).

Based upon a combination of the aforementioned factors, we conclude that Mrs. Rothenberg would not fairly and adequately represent the interests of the other shareholders. The district court found that Mrs. Rothenberg lacked any understanding of the nature of the derivative suit and displayed an unwillingness to learn, a conclusion abundantly supported by the record. In a series of exhaustive depositions, Mrs. Rothenberg acknowledged that the complaint was not filed at her request. She repeatedly testified that she had no personal knowledge concerning a significant portion of the factual basis of the complaint. Any familiarity with the facts or allegations in the complaint that she did have derived largely from conversations with her attorney. ⁹ Mrs. Rothenberg admitted that she had not read the amendment to the complaint and had no personal knowledge concerning the facts in the amendment. As to damages, she initially testified that her objective in both the derivative suit and the suit filed as an individual was the same-to recover her personal losses incurred in connection with the purchase of Security's stock. Thus she originally brought the suit for her own personal benefit and not the benefit of the corporation. Moreover, it appears that the plaintiff had no clear understanding that a recovery in a derivative suit went to the corporation and only indirectly benefited shareholders by increasing the value of the stock. ¹⁰ Throughout the series of depositions, but particularly in the first two, Mrs. Rothenberg repeatedly pleaded a lack of knowledge or absence of memory in response to questions concerning either the facts or the legal issues raised in the complaint. Finally, Mrs. Rothenberg admitted that her lack of personal knowledge about the facts of the case rendered her unable to fairly and adequately represent the interests of Security in the derivative suit. ¹¹

The record clearly demonstrates that Mrs. Rothenberg remained unaware of the facts and issues involved in the derivative suit. Even she acknowledged that her lack of personal knowledge made her an inappropriate plaintiff to maintain the suit. Further, she displayed an obvious unwillingness to learn about the suit by not acquiring more than a rudimentary understanding of the case. Mrs. Rothenberg apparently had little to gain from the suit, see note 3, supra, and, perhaps not surprisingly, displayed no strong commitment to the action. The record also reveals that, with one possible exception, no other shareholders of Security evidenced any support for the derivative action. ¹² All of these factors indicate that Mrs. Rothenberg would not fairly and adequately represent the other similarly situated shareholders. Accordingly, we conclude that the district court did not abuse its discretion by dismissing plaintiff's derivative action.

In rendering our decision, we do not mean to infer that a representative plaintiff must have a precise understanding of every fact or legal issue in a derivative suit. Nor do we intimate that a plaintiff will sacrifice his/her status as a representative plaintiff by granting an attorney broad discretion to investigate and pursue a claim. The facts in this appeal are extreme. We simply conclude that plaintiff's almost total lack of knowledge about the facts of the case, her inability to comprehend the nature of the suit two years after the filing of the complaint, her apparent lack of personal commitment to the suit, repeated indications that her ultimate goal was to recover personal losses, and...