Trondheim Capital Partners LP v. Life Ins. Co. of Ala.
| Decision Date | 25 March 2022 |
| Docket Number | Civil Action 4:19-cv-1413-KOB |
| Court | U.S. District Court — Northern District of Alabama |
| Parties | TRONDHEIM CAPITAL PARTNERS LP & MTP 401K PLAN, Plaintiffs, v. LIFE INSURANCE COMPANY OF ALABAMA, et al., Defendants. and MITCHELL PARTNERS, L.P., et al., Plaintiffs in Intervention, |
Plaintiffs filed this case in August 2019; Defendants have yet to answer. This delay arises largely from the original Plaintiffs' piecemeal pleadings, the intervention of additional Plaintiffs over six months later, a prior round of motions to dismiss, and the court's decision to stay the case for almost four months. Defendants have again moved to dismiss (doc. 57), and the court will please neither side by granting in part and denying in part that motion.
The Plaintiffs consist of several shareholders in the Life Insurance Company of Alabama (LICOA). They level direct and derivative claims against LICOA and six of its Directors. Plaintiffs allege derivatively that four of the Director Defendants devalued LICOA's stocks in an intentional effort to purchase shares for themselves at decreased values (Count 1); that three of the Director Defendants usurped LICOA's corporate opportunity by buying shares for themselves at reduced prices (Count 4) that all the Director Defendants usurped a corporate opportunity by failing to properly assess offers to buy out LICOA (Count 5); and that all the Director Defendants engaged in corporate waste (Count 6). (Doc. 54 at 41 et seq.). In their individual capacity, Plaintiffs directly ask the court to dissolve LICOA as a corporation because of the Director Defendants' corporate waste (Count 2); and Plaintiffs Trondheim and MTP allege that all Defendants violated their shareholder rights by refusing to make corporate records available for inspection (Count 3). (Doc 54 at 43 et seq.).
In December 2020, the court faced a flurry of documents including amended direct and derivative complaints, motions to dismiss the two operative complaints, and a motion to abstain under the Burford doctrine. While encouraging the parties to “tidy up” the case by consolidating their pleadings and filings, the court granted the motion to dismiss in part, denied that motion in part, and stayed the case. (Docs. 49 & 50). The court dismissed without prejudice Plaintiffs' dissolution claim because it found that it must abstain from adjudicating that claim under the Burford abstention doctrine. (Doc. 49 at 27 et seq.). The court then stayed proceedings as to Plaintiffs' remaining claims for damages to permit Plaintiffs to file their dissolution claim in state court.
The stay lasted from December 2020 until March 2021, when the Eleventh Circuit issued an opinion indicating that the Burford doctrine did not apply to claims for dissolution. See Deal v. Tugalo Gas Co., Inc., 991 F.3d 1313 (11th Cir. 2021). Based on Deal, the court withdrew its order insofar as the ruling relied on the Burford doctrine (doc. 51), and the court permitted Plaintiffs to file their current Third Amended Consolidated Complaint (doc. 53).
Thankfully, only one hiccup hampered this current round of motions. On May 3, 2021, Defendants filed their motion to dismiss Plaintiffs' third amended consolidated complain. (Doc. 57). Meanwhile, Defendants had hired the outside law firm of Lightfoot, Franklin, White, LLC to investigate Defendants' alleged wrongdoings. But Lightfoot was unable to conclude its investigation and produce a memorandum describing their findings until May 14, 2021-eleven days after Defendants had filed the current motion to dismiss but before Plaintiffs had responded. (Doc. 61-1). Even so, Plaintiffs did not oppose Defendants' filing the Lightfoot memo into the court's docket, stating their preference that the court handle all challenges to the derivative claims “in one briefing swoop.” (Doc. 62 at 2). The court permitted Defendants to file the second Lightfoot report and also granted Plaintiffs more time to respond. (Doc. 63). Plaintiffs responded both to the original motion and to Defendants' amendment, which included the Lightfoot report. (Doc. 65). Defendants replied (doc. 66), so the motion is ripe for review.
As explained below, the court finds that Defendants properly appointed independent directors to investigate Plaintiffs' derivative claims, and that LICOA properly rejected those claims. So the court will dismiss Plaintiffs' derivative claims in deference to LICOA's business judgment. See Roberts v. Alabama Power Co., 404 So.2d 629, 632 (Ala. 1981) (). Alternatively, the court finds that Defendants' conduct did not toll the statute of limitations as to Plaintiffs' derivative claims. So if the court were not dismissing the derivative claims under the business judgment rule, it would dismiss all derivative claims arising from factual bases occurring earlier than two years before Plaintiffs' complaint. But the court rejects Defendants' argument as to the direct individual claims. So the court will deny Defendants' motion to dismiss the claims that Plaintiffs state in their individual capacities.
Plaintiffs and Defendants present significantly more factual material than is typically presented at the motion to dismiss stage. When considering a motion to dismiss, courts usually only consider the complaint, documents attached to the complaint, and documents incorporated by reference in the complaint. Financial Sec. Assur., Inc. v. Stephens, Inc., 500 F.3d 1276, 1284 (11th Cir. 2007). But the accepted procedure is for defendants to move to dismiss shareholder derivative claims when the defendants have investigated and rejected those claims in good faith and after a thorough investigation. See Deal v. Tugalo Gas Co., Inc., 991 F.3d 1313, 1319 (11th Cir. 2021) (affirming lower court's dismissal of derivative claims after corporation's proper rejection and motion to dismiss); Kaplan v. Wyatt, 484 A.2d 501, 507 (Del. Ch. 1984), aff'd, 499 A.2d 1184 (Del. 1985).
Courts recognize that such a motion to dismiss and its supporting evidence “finds no ready pigeonhole” in the rules of civil procedure. Zapata Corp. v. Maldonado, 430 A.2d 779, 787 (Del. 1981). Because the court must assess the corporation's investigation into the plaintiff's derivative claims, courts often consider documents beyond the scope of a typical 12(b)(6) ruling. See Deal, 991 F.3d at 1321 (). These documents can include “a thorough written record of the investigation and its findings and recommendations, ” and any supporting “affidavits and/or verified documents.” Kaplan, 484 A.2d at 507.
As the court will explain below, Plaintiffs attached numerous exhibits to their complaint as a result of their pre-suit investigation of LICOA's alleged wrongdoings. Because Plaintiffs attached those documents to the complaint, the court will consider them under the traditional 12(b)(6) framework. See Financial Sec. Assur., Inc., 500 F.3d at 1284 ().
Also, Defendants hired the outside law firm of Lightfoot, Franklin, White, LLC to investigate Plaintiffs' claims regarding Defendants' alleged wrongdoings. Lightfoot produced two memoranda reflecting its investigation into Plaintiffs' derivative claims, which Defendants filed as exhibits to this motion. (Doc. 57-1; doc. 64-1). Plaintiffs' operative complaint heavily criticizes the first of these memoranda by specifically referring to its pages and findings. (Doc. 54 at 31 et seq.). Because of these references, the court will also consider the first Lightfoot memorandum under the traditional 12(b)(6) framework.
But Plaintiffs' complaint does not discuss the second Lightfoot memorandum because Lightfoot did not conduct the second portion of its investigation until after Plaintiffs filed their current complaint. Even so, Plaintiffs did not oppose Defendants' filing the second Lightfoot memo into the record for this motion. (Doc. 62). And the memo falls within the type of documents that courts routinely consider in assessing motions to dismiss derivative claims based on a good faith investigation. See Deal, 991 F.3d at 1321 (considering investigation report); Kaplan, 484 A.2d at 507 (same). So the court properly can consider the second Lightfoot report, which Plaintiffs had an opportunity to rebut in their response brief, as it considers the motion to dismiss.
In May 2018, Colin Peterson, Plaintiff Trondheim's principal met with Clarence Daugette and Steve Keck to discuss Peterson's misgivings with the company's management. (Doc. 54 at 10). Daugette is LICOA's president and board chairman, and Keck is LICOA's chief operating officer. Peterson shared his concerns that LICOA's non-voting shares “were trading at a greater than 50% discount to the tangible book value of the shares.” (Id.). In the meeting, Daugette allegedly admitted that “he did not mind the fact that LICOA is overcapitalized and the stock is cheap because it allows him and his family to buy back the stock at a good price personally.” (Doc. 54 at 11).
Daugette's admission led Plaintiffs to investigate further. Plaintiffs first consulted a report of the Alabama Department of Insurance's examination of LICOA, published in 2005. Plaintiffs attached the report to their complaint, and it details “highly unusual” internal practices,...
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