Whalen v. Connelly, PRC-M

Citation593 N.W.2d 147
Decision Date28 April 1999
Docket NumberPRC-M,No. 97-1452,97-1452
PartiesMichael L. WHALEN, a Limited Partner in The Connelly Group, L.P., on Behalf of The Connelly Group, L.P., Appellant, v. John E. CONNELLY: The Connelly Group, L.P.; Della III, Inc.; Della IV, Inc.; President Riverboat Casinos, Inc.; PRC Iowa; PRC Holding; PRC Management; International Game Technology; Iowa Riverboat Corporation;ississippi;issouri; Edward S. Ellers; and Ralph J. Vaclavik, Appellees.
CourtUnited States State Supreme Court of Iowa

Lawrence L. Marcucci and Michael A. Dee of Shearer, Templer & Pingel, West Des Moines, for appellant.

W. Stanley Walch and Lawrence C. Friedman of Thompson Coburn, St. Louis, Mo., and R. Richard Bittner and Jeffrey S. Bittner of Carlin, Hellstrom & Bittner, Davenport, for appellees Connelly, et al.

Kasey W. Kincaid of Faegre & Benson, LLP, Des Moines, for appellees International Game Technology and Iowa Riverboat Corporation.

Considered by McGIVERIN, C.J., and LARSON, CARTER, SNELL, and TERNUS, JJ.

McGIVERIN, Chief Justice.

This case involves further proceedings concerning a dispute between plaintiff, Michael L. Whalen, and his business partners concerning operation of a riverboat casino in Davenport, Iowa. In a prior decision regarding this matter, see Whalen v. Connelly, 545 N.W.2d 284 (Iowa 1996) (Whalen I ), we concluded that the district court properly dismissed on summary judgment Whalen's claims brought in his individual capacity against his business partners for alleged breach of partnership agreements and fiduciary duties.

In the present case, Whalen, a limited partner in the limited partnership of The Connelly Group, L.P., brought a derivative action against his general partner in the riverboat/casino venture, PRC-Iowa, Inc., asserting that PRC-Iowa breached fiduciary duties in the course of operating the limited partnership, The Connelly Group, L.P. Whalen also named as defendants, John E. Connelly, Edward S. Ellers, The Connelly Group, L.P., Della III, Inc., Della IV, Inc., PRC Holding, PRC Management, PRC-Mississippi, PRC-Missouri, and Ralph J. Vaclavik. We will collectively refer to those parties throughout both appeals as defendants or TCG unless otherwise indicated because they, along with PRC-Iowa, Inc., are Whalen's main present adversaries. Whalen also named as additional defendants International Game Technology (IGT) and Iowa Riverboat Corporation (IRC).

The district court dismissed Whalen's derivative claims on all defendants' motions for summary judgment. Upon appeal by plaintiff Whalen, we affirm.

I. Background facts and proceedings.

A detailed summary of the background facts concerning Whalen's dispute with defendants can be found in Whalen I. See 545 N.W.2d at 287-290. We will only discuss the relevant facts of Whalen I that pertain to the case presently before us.

At the outset, we point out that section 17.3 of the limited partnership agreement which governs operation of The Connelly Group, L.P., entered into by Whalen, PRC-Iowa and several defendants, provides that Delaware law is the law governing the partnership agreement. Thus, as agreed by the parties, Whalen's claims in the present action are governed by Delaware law.

A. Whalen I.

The Connelly Group, L.P, hereinafter referred to as TCG, is a Delaware limited partnership, created in 1990, that owns and operates a riverboat casino in Davenport, Iowa. Plaintiff, Michael L. Whalen, is the sole limited partner in TCG, with five percent ownership. Whalen's present general partner in TCG is PRC-Iowa, Inc., a Delaware corporation with ninety-five percent ownership. PRC-Iowa has two board of director members, John E. Connelly, and Edward S. Ellers. Both are named defendants in the case and appeal presently before us. PRC-Iowa, in turn, is a wholly-owned subsidiary of President Riverboat Casinos, Inc. (PCI), a Delaware corporation.

The events leading to our decision in Whalen I began in May 1993 when Whalen filed a petition at law in district court, asserting, inter alia, claims of mismanagement and diversion of partnership assets, breaches of oral and written agreements, and breach of fiduciary duties. 1 See 545 N.W.2d at 290. Whalen's claims were made in his individual capacity, not as a limited partner and not on behalf of the partnership as a whole.

Defendants filed a motion for summary judgment, asserting that Whalen's breach of fiduciary duty claim was derivative in nature and thus could not be asserted by Whalen acting in his individual capacity. See id. at 292. In response, Whalen sought leave to amend his petition to allege certain claims as derivative in nature and on behalf of the partnership.

The district court denied Whalen's motion to amend and dismissed certain claims as derivative in nature and not belonging to Whalen individually. See id. at 290.

Whalen's remaining claims, the substance of which are not relevant to this appeal, were dismissed on defendants' motion for a directed verdict during trial. See id.

Whalen filed his notice of appeal in Whalen I on November 18, 1994.

B. Whalen II--The present dispute.

The events giving rise to the present dispute, which we will refer to as Whalen II, were initiated on November 18, 1994. On that date, Whalen filed his notice of appeal concerning the district court's decision that certain of his claims were derivative, and Whalen also sent a written demand to the board of PRC-Iowa, the general partner of TCG, asking that it pursue various claims regarding diversion of assets and breach of fiduciary duties by TCG's officers and directors. 2 At that time, the board of directors of PRC-Iowa consisted of Connelly and Ellers.

On November 30, 1994, PRC-Iowa, through its attorney, informed Whalen that it intended to appoint a special committee to investigate the claims asserted in the demand letter.

Later, Whalen was informed by letter that a special committee, consisting of Floyd R. Ganassi and William C. Nelson, had been appointed to review the claims asserted in the demand letter. The letter explained that Ganassi and Nelson "are directors, but not officers or employees" of PCI, the parent company of PRC-Iowa and that the special committee had retained outside counsel to assist with the investigation. 3

Before the special committee completed its investigation, and while Whalen I was pending before our court, Whalen filed a petition in equity in district court on May 9, 1995, asserting a derivative claim on behalf of the partnership.

On June 6, 1995, the attorneys for the special committee submitted their report to the special committee. The report stated that upon completion of their investigation, the attorneys recommended that PRC-Iowa not pursue litigation. A memorandum from the special committee concerning the report then was addressed to the "Board of Directors President Riverboat Casinos-Iowa, Inc.," stating the committee had concluded "there is no legal basis for the company to institute any proceeding against the various entities, officers and directors suggested as possible defendants in Mr. Whalen's demand letter."

On June 21, the board of directors of PRC-Iowa voted to adopt the findings and recommendations of the special committee and decided not to pursue litigation concerning the claims asserted by Whalen in the demand letter.

On June 26, Whalen's counsel received a letter from Ganassi indicating that the special committee had completed its investigation and that the board of directors of PRC-Iowa, Inc. had accepted the committee's conclusion that PRC-Iowa should take no action concerning the claims raised in the demand letter.

On March 20, 1996, we issued our decision in Whalen I. See 545 N.W.2d 284. We affirmed the district court's decision that Whalen's claims were derivative in nature "because Whalen was not injured 'directly or independently' of the partnership." Id. at 292 (quoting Litman v. Prudential-Bache Properties, 611 A.2d 12, 15-16 (Del.Ch.1992)). We stated that by failing to make a demand and by failing to plead his failure to do so, Whalen did not comply with the requirements of Delaware law and thus lacked standing to bring his claims. Whalen I, 545 N.W.2d at 293.

After our decision in Whalen I, the district court lifted a prior stay and matters concerning Whalen's derivative claim proceeded in district court.

Defendants and Whalen eventually filed cross-motions for summary judgment.

After hearing, the district court entered two rulings; one overruling Whalen's motion for summary judgment and one granting defendants' motions for summary judgment.

With respect to plaintiff's motion, the court concluded that Whalen was not entitled to summary judgment on his contention that a pre-suit demand would be futile. The district court concluded that pursuant to Delaware law, Whalen conceded the independence and disinterest of the general partner PRC-Iowa by making the demand on PRC-Iowa on November 18, 1994.

With respect to defendants' motions, the court concluded that there was no genuine issue of material fact concerning whether the special committee reasonably investigated the allegations made in Whalen's demand letter and whether the PRC-Iowa board acted in good faith upon the recommendation of the special committee. The court concluded that Delaware law allows appointment of a special committee and that the limited partnership agreement impliedly gave PRC-Iowa the authority to appoint a special committee.

Whalen appeals, asserting that the district court erred in applying the applicable Delaware law.

II. Standard of review.

Our review of a grant or denial of summary judgment is for correction of errors at law. Iowa R.App. P. 4; accord Gabrilson v. Flynn, 554 N.W.2d 267, 270 (Iowa 1996). Summary judgment is only appropriate when no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. Iowa R. Civ. P. 237(c); see Phipps v. IASD Health Servs. Corp., 558 N.W.2d 198, 201 (Iowa 1997). To...

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