Shepard v. Emp'rs Mut. Cas. Co.

• Decision Date: 03 August 2020
• Docket Number: No. 4:19-cv-00374-JAJ-CFB,4:19-cv-00374-JAJ-CFB
• Parties: Gregory M. SHEPARD, Plaintiff, v. EMPLOYERS MUTUAL CASUALTY COMPANY and Bruce G. Kelley, Defendants.
• Court: U.S. District Court — Southern District of Iowa

476 F.Supp.3d 862

Gregory M. SHEPARD, Plaintiff,

v.EMPLOYERS MUTUAL CASUALTY COMPANY and Bruce G. Kelley, Defendants.

No. 4:19-cv-00374-JAJ-CFB

United States District Court, S.D. Iowa, Central Division.

Signed August 3, 2020

Stephen R. Eckley, Eckley Law PLLC, Des Moines, IA, Brad J. Brady, Matthew L. Preston, Brady, Preston, Gronlund, PC, Cedar Rapids, IA, Steven E. Sexton, Thomas K. Cauley, Jr., Pro Hac Vice, Sidley Austin LLP, Chicago, IL, for Plaintiff.

John E. Lande, Mollie Pawlosky, Dickinson Mackaman Tyler & Hagen PC, Des Moines, IA, Beth Boland, Pro Hac Vice, Foley & Lardner, LLP, Boston, MA, Bryan B. House, Pro Hac Vice, Eric Pearson, Pro Hac Vice, Philip C. Babler, Pro Hac Vice, Foley & Lardner LLP, Milwaukee, WI, Joseph S. Harper, Pro Hac Vice, Foley & Lardner LLP, Madison, WI, for Defendant Employers Mutual Casualty Company.

Terri L. Combs, Kwesi Atta-Krah, Faegre Drinker Biddle & Reath LLP, Des Moines, IA, Daniel Robert Kelley, Pro Hac Vice, Faegre Drinker Biddle & Reath LLP, Indianapolis, IN, for Defendant Bruce G. Kelley.

OPINION AND ORDER REGARDING DEFENDANTS’ MOTIONS TO DISMISS

JOHN A. JARVEY, Chief Judge

In this case, a minority shareholder in what was then a publicly-traded property and casualty insurance company claims breach of fiduciary duty by the majority shareholder, which was a mutual insurance company, and an individual director. This case is before the court on the majority shareholder's May 15, 2020, Motion To Dismiss [Dkt. No. 42] and the director's separate May 15, 2020, Motion To Dismiss [Dkt. No. 43]. The minority shareholder filed his Response To Defendants’ Motions To Dismiss [Dkt. No. 52] on June 12, 2020. The defendants filed separate Replies [Dkt. Nos. 72 and 73] on July 7, 2020. For the reasons set out below, the defendants’ Motions To Dismiss are both GRANTED .

I. INTRODUCTION

A. Factual Background

Because this case is before the court on motions to dismiss for failure to state a claim on which relief can be granted pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, this statement of the factual background is drawn from the allegations in the operative pleading, taken as true. See Klein v. Credico Inc. , 922 F.3d 393, 396 (8th Cir. 2019). The operative pleading is the plaintiff's April 10, 2020, Amended Complaint For Breach Of Fiduciary Duty [Dkt. No. 38]. This statement of the factual background is only a summary of the much more extensive factual allegations in the Amended Complaint, however.

According to the Amended Complaint, plaintiff Gregory M. Shepard was a longtime shareholder of EMC Insurance Group Inc. (EMCI), a property and casualty insurance holding company that was traded on the NASDAQ at the relevant times. Shepard first acquired shares in EMCI in October of 2005. On June 24, 2019, Shepard owned 1.1 million shares of common stock in EMCI, or approximately 5% of EMCI's total outstanding stock. The majority shareholder of EMCI was defendant Employers Mutual Casualty Company (EMCC), a mutual insurance company that was founded in 1911 by defendant Bruce G. Kelley's great-grandfather. EMCI was "spun-off" of EMCC by Kelley's father in 1974. As of mid-2019, EMCC owned approximately 54% of EMCI's stock.

Shepard alleges that EMCC and Kelley structured EMCI as a shell company with no employees or operating assets of its own, which prevented EMCI from ever growing into a valuable company in its own right or acting independently from EMCC. EMCI had no employees or senior executives of its own and did not have its own brand or business relationships. EMCI also had no underwriting, claims service, or investment management capabilities of its own, and no information technology systems to quote, issue, bill, and service policies or administer its claims or investments. All EMCI's business arose from, and was managed by, EMCC. EMCI had four independent directors, but the fifth director was Kelley, who also served as EMCI's chief executive officer (CEO). Kelley was also a director and the CEO of EMCC. All of EMCI's other officers were also officers of EMCC.

On November 16, 2018, EMCI announced that it had received an offer from EMCC to acquire the outstanding shares of EMCI's minority shareholders at $30 per share. That offer was subsequently increased to $36 per share. A Special Committee, comprised of EMCI's independent directors, notified EMCC on April 22, 2019, that it would accept $36 per share. The merger agreement was then negotiated and drafted. Shepard alleges that the $36 per share that EMCC paid was not a fair price based on the fair value of EMCI on September 19, 2019, when the merger was completed, even setting aside breaches of fiduciary duty by EMCC and Kelley, which Shepard alleges depressed EMCI's share price.

The Amended Complaint states, in part, as follows:

This action arises from gross breaches by EMCC and Kelley of the fiduciary duties they owed to Shepard. Shepard was one of the largest minority public shareholders of EMC Insurance Group Inc. ("EMCI"), until EMCI's controlling shareholder EMCC squeezed him out on September 19, 2019 and took EMCI private (the "Squeeze-out"). While Shepard was a shareholder of EMCI, EMCC and Kelley owed Shepard and other EMCI minority shareholders a fiduciary duty to enhance and promote the business and value of EMCI and maximize its share price. While, EMCC and Kelley also owed fiduciary duties to the insurance policyholders of EMCC, they plainly could have satisfied their fiduciary duties to both EMCC's policyholders and to EMCI's minority shareholders, but elected not to do so.

Amended Complaint, ¶ 1 (emphasis added).

B. Procedural Background

Shepard filed a "non-public version" of his original Complaint For Breach Of Fiduciary Duty, which nevertheless was not sealed, on November 20, 2019, and a separate Motion To File Complaint Publicly Or, Alternatively, To File Unredacted Complaint Under Seal, which was subsequently withdrawn. On January 24, 2020, the defendants filed a Motion To Stay Proceedings Pending Resolution Of Related State Court Actions. On February 7, 2020, Shepard filed a second Motion To File Complaint And Resistance Publicly Or, Alternatively, To File An Unredacted Complaint And Resistance Under Seal (Motion To File Publicly). After a hearing on March 4, 2020, a magistrate judge entered an Order on March 16, 2020, denying Shepard's Motion To File Publicly and also denying defendants’ Motion To Stay.

More specifically, in the March 16, 2020, Order, the magistrate judge denied a stay, because she doubted that this case was "parallel" with two other cases pending in state court, which pertained to the merger, and because there are no exceptional circumstances justifying a stay of this case. She denied leave to file the Complaint publicly and, instead, directed Shepard to file an Amended Complaint, omitting any confidential information obtained in the "Books and Records Action" in state court that is the subject of a previous Confidentiality Agreement. In so doing, the magistrate judge observed,

Using the standard for pleadings set by Fed. R. Civ. P. 8, which requires a "short and plain statement" of a claim for relief, the Court finds that Shephard has stated a claim without the redacted material. Even assuming that ... a heightened pleading standard under Fed. R. Civ. P. 9 applies, which requires Shepard to identify with particularity false or fraudulent acts, due to his allegation of Defendants’ willful and reckless breach of fiduciary duty, the Court finds that Shephard has stated a claim without the redacted material. Shephard has stated sufficient factual allegations to meet the pleading requirements for federal court under both rules.

March 16, 2020, Order [Dkt. No. 34], 12 (citing, inter alia, Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ).

In response to the defendants’ Motion For Clarification Regarding March 16, 2020 Order, the magistrate judge entered a Text Order on March 24, 2020, stating the following:

In the Order of March 16, 2020 [ECF 34], the Court ruled that Plaintiff had "stated a claim," relating to the pleading standards under Fed. Rls. Civ. P. 8 and 9. The Court was referring to the requirement for pleading simple, concise, and direct statements of the allegations, not the standard required under a responsive pleading filed [under] Fed. R. Civ. P. 12(b)(6) for raising a defense of "failure to state a claim upon which relief can be granted." By May 15, 2020, Defendants are free to file whatever responsive pleading is appropriate, after Plaintiff files his Amended Complaint as Ordered.

Text Order [Dkt. No. 36].

Shepard filed his Amended Complaint on April 10, 2020. The single count of the Amended Complaint alleges breach of fiduciary duty against EMCC and Kelley. After realleging preceding paragraphs, that count alleges the following:

98. Defendants EMCC and Kelley owed Shepard fiduciary duties of care, loyalty and good faith.

99. Defendants EMCC and Kelley breached their fiduciary duties when they, inter alia and as further described above, failed to promote the value of EMCI for the benefit of its minority shareholders, including Shepard, and acted to promote the interests of EMCC to the detriment of EMCI and its minority shareholders.

100. As a direct and proximate result of the breaches of fiduciary duty by EMCC and Kelley, Shepard has been directly damaged, which entitles him to monetary damages in an amount to be proven at trial.

101. EMCC and Kelley's breaches were willful and in reckless disregard for the rights of minority shareholders.

Amended Complaint, ¶¶ 98-101. As relief, the Amended Complaint prays for compensatory damages, punitive damages, attorney's fees and costs, and such further relief as this court deems just and proper.

The Motions To Dismiss now before the court followed on May 15, 2020.

II. LEGAL ANALYSIS

Both Motions To Dismiss now before the court seek dismissal pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Thus,...