Stoner v. Walsh

• Decision Date: 22 August 1991
• Docket Number: No. 90 Civ. 7679 (MBM).,90 Civ. 7679 (MBM).
• Parties: Margaret G. STONER, Plaintiff, v. Leo WALSH; John E. Carter; Glenn H. Gettier; Richard H. Jenrette; Raymond L. Colotti; Thomas C. Gorman; Robert W. Barth; Joseph L. Dionne; Don Johnston; Winthrop Knowlton; Jewel S. Lafontant; Eleanor B. Sheldon; Raymond H. Wittcoff; John T. Hartley; Arthur Levitt, Jr.; Peter S. Heller; James J. Howard, III; and Strategic Planning Associates, Defendants, and The Equitable Life Assurance Company of the United States, Nominal Defendant.
• Court: U.S. District Court — Southern District of New York

772 F. Supp. 790

Margaret G. STONER, Plaintiff, v. Leo WALSH; John E. Carter; Glenn H. Gettier; Richard H. Jenrette; Raymond L. Colotti; Thomas C. Gorman; Robert W. Barth; Joseph L. Dionne; Don Johnston; Winthrop Knowlton; Jewel S. Lafontant; Eleanor B. Sheldon; Raymond H. Wittcoff; John T. Hartley; Arthur Levitt, Jr.; Peter S. Heller; James J. Howard, III; and Strategic Planning Associates, Defendants and The Equitable Life Assurance Company of the United States, Nominal Defendant.

No. 90 Civ. 7679 (MBM).

United States District Court, S.D. New York.

August 22, 1991.

COPYRIGHT MATERIAL OMITTED

Richard D. Greenfield, Greenfield & Chimicles, New York City, for plaintiff.

Jeffrey Barist, White & Case, New York City, for individual defendants.

Norman L. Tolle, New York City, for Equitable Life Assur. Soc. of the U.S.

Richard P. Swanson, Spengler Carlson Gubar Brodsky & Frischling, New York City, for Strategic Planning Associates.

OPINION AND ORDER

MUKASEY, District Judge.

Plaintiff Margaret Stoner sues derivatively on behalf of nominal defendant The Equitable Life Assurance Company of the United States against various present and former Officers and Directors of Equitable as well as Strategic Planning Associates, a management consulting firm, for alleged mismanagement and corporate waste. Before commencing this action, plaintiff's attorney demanded that Equitable sue those persons allegedly responsible for the company's "currently deteriorated financial state." The demand was unanimously rejected by Equitable's Board of Directors upon the recommendation of a committee of three outside Directors. Defendants move to dismiss the complaint under Fed. R.Civ.P. 12(b)(6) and 23.1, or, alternatively, for summary judgment. For the reasons set forth below, certain allegations in the complaint are dismissed for failure to make a demand. The rest of the complaint is dismissed because of plaintiff's failure to plead facts leading to a reasonable inference that her demand was wrongfully rejected.

I.

Because all assertions in the complaint are accepted as true upon a motion to dismiss, DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1244 (2d Cir.1987), the following facts are based on plaintiff's complaint and those documents which are incorporated into the complaint by reference. See Fed.R.Civ.P. 10(c). In particular, I consider the contents of plaintiff's initial demand letter, dated June 5, 1989, a follow-up demand letter, dated October 11, 1989, and certain correspondence from Equitable to plaintiff's counsel to have been incorporated into the complaint by reference. See Feinman v. Schulman Berlin & Davis, 677 F.Supp. 168, 170 (S.D.N.Y.1988). However, I have disregarded certain other materials that were not set forth in the complaint, including a joint affidavit submitted by the three outside Directors who recommended that the full Board reject plaintiff's demand.

Plaintiff, a citizen of Indiana, is an Equitable policyholder. Because nominal defendant Equitable is a mutual insurance company organized under the laws of New York with its principal place of business in New York, and all other defendants are citizens of states other than Indiana, there is subject-matter jurisdiction based on diversity of citizenship. Smith v. Sperling, 354 U.S. 91, 97, 77 S.Ct. 1112, 1116, 1 L.Ed.2d 1205 (1957) (corporation should be aligned as defendant in derivative action when management is antagonistic to shareholder's claims). Defendants Carter and Walsh are former Officers and Directors of Equitable.¹ (Compl. ¶¶ 5, 7) Defendant Gettier, Colotti, Gorman and Barth are former Officers of Equitable who were not Directors. (Compl. ¶¶ 6, 10, 11, 12) Defendants Lafontant and Levitt are former directors of Equitable who are not alleged to have been officers. (Compl. ¶ 9) Defendant Jenrette is Equitable's current Chairman of the Board and Chief Executive Officer. (Compl. ¶ 8) Defendants Hartley, Heller, Howard, Dionne, Johnston, Knowlton, Sheldon, and Wittcoff are all current Directors of Equitable.² (Compl. ¶ 9)

On June 5, 1989, plaintiff's attorney sent the Board of Directors a one and one-half page letter demanding that Equitable "commence legal proceedings against each of its present and former officers and directors who have caused Equitable to reach its currently deteriorated financial state." The letter alleged that "such financial deterioration has been the direct result of reckless and negligent business practices carried out by officers and directors of Equitable." Although the demand letter did not specify exactly which officers and directors were derelict or how their conduct would be actionable under applicable law, the letter did set forth the following as examples of "reckless and negligent business practices":

1. "an ill-conceived multi-million dollar plan to market the Equitable Asset Management Account ...";

2. "a costly and demoralizing scheme" to reorganize the company into twenty operating units;

3. the company's "inability to foresee and compensate for increased compensation in the HMO field and consequent inability to contain massive losses" by Equitable's HMO subsidiary;

4. the company's decision "to squander $200 million to construct its new art bedecked headquarters";

5. the decision to "reward some of the very individuals responsible for Equitable's financial decay with lavish raises, bonuses and other perks";

6. the company's "reckless failure to timely recognize and address the problems associated with the high interest rates being paid on its Guaranteed Investment Contracts (GIC's)."

The letter stated further that "as a result of the above-described actions, (many of them taken as a result of personal quests for power and aggrandizement within the Society), Equitable has breached the fiduciary duty owed to its policyholders." Plaintiff's counsel then warned that if Equitable did not take "action against the persons responsible as demanded above," he would file suit to "protect the company's rights and assets and, further to seek the replacement of those directors and officers responsible for the Society's fiscal irresponsibility." (Heines Aff., Exh. 1)

On June 28, 1989, Equitable's general counsel informed plaintiff's counsel that a committee (the "Committee") consisting of three Directors, defendants Hartley, Heller and Howard, had been "appointed ... to review the matters referenced in the demand letter and report to the Board" and that the Committee had retained the law firm of White & Case as independent counsel to the Committee and the entire Board with respect to the matters referred to in the demand. The general counsel also requested that plaintiff's counsel furnish White & Case with "all factual information and legal analyses that you believe would support your demand that Equitable commence legal proceedings against certain of its present and former officers and directors, and ... specify the individuals who ... should be the subject of the envisioned legal proceedings and the factual and legal basis for proceeding against each." (Heines Aff., Exh. 3)

More than three months later, on October 11, 1989, plaintiff's counsel sent the following response to Equitable's general counsel:

"While clearly we and our clients do not have access to the information that you and `independent counsel' have as insiders of Equitable, we have access to that information which has appeared in certain news media reports. In particular, I would like to recommend to you an article which appeared in the September 19, 1988 issue of Forbes entitled `The Mess at Equitable Life'. This article will certainly provide the Board of Directors with the degree of enlightenment that they presumably do not have.

At a minimum, it would appear appropriate that each of the members of the Board of Directors of Equitable should be the subject of the envisioned legal proceedings since each of such persons, based upon the information publicly available, would seem to have been responsible for the waste and mismanagement referred to in my letter of June 5, 1989 and in public documents. It is clear that there are other persons in the management of Equitable who are not directors but should, nevertheless, be named as defendants with respect to certain of the claims. However, the specific identity of such persons is not known to us, at least at this time."

On November 15, 1989, the Committee recommended that the full Equitable Board adopt the following resolution:

RESOLVED, that (i) the demand that legal action be taken based upon the allegations made in the policyholder's letter, dated June 5, 1989, from Richard D. Greenfield, as analyzed in the Report of White & Case, dated November 10, 1989 (a copy of which was submitted to and filed with the records of this meeting), in each and every case be rejected, all on the basis as more fully described in the Report of White & Case, and (ii) in the exercise of the business judgment of the directors, it is in the best interests of The Equitable that no claim for money damages based upon those allegations be pursued, through the initiation of litigation, against any of the individuals with whom the said policyholders' demand letter is concerned.

(Heines Aff., Exh. 6) The full Board unanimously adopted the recommended resolution on November 16, 1989. Plaintiff alleges that the Board's rejection of the demand was "wrongful, wholly unjustifiable, although quite predictable" because it was "an integral part of a larger cover-up and whitewash intended to insulate the defendants and their confederates from accountability for their wrongdoing." (Compl. ¶¶ 19, 20)

The body of the complaint purports to describe a "pattern of waste and mismanagement." (See Compl. ¶¶ 23-26 (Heading)) The allegations appear to be based almost entirely on the contents of the September 19, 1988 Forbes magazine article that plaintiff sent Equitable's counsel in response to the latter's request for...