FILED
United States Court of Appeals
UNITED STATES COURT OF APPEALS Tenth Circuit
FOR THE TENTH CIRCUIT February 17, 2017
_________________________________
Elisabeth A. Shumaker
Clerk of Court
BRANZAN ALTERNATIVE
INVESTMENT FUND, LLLP, on behalf
of itself and all others similarly situated,
Plaintiff - Appellant,
v. No. 16-1068
(D.C. No. 1:14-CV-02513-REB-MJW)
BANK OF NEW YORK MELLON (D. Colo.)
TRUST COMPANY, NA,
Defendant - Appellee,
and
ENERGY CORPORATION OF
AMERICA,
Defendant.
_________________________________
ORDER AND JUDGMENT*
_________________________________
Before LUCERO, HARTZ, and McHUGH, Circuit Judges.
_________________________________
Branzan Alternative Investment Fund, LLLP appeals from the dismissal of its
putative class-action claims against The Bank of New York Mellon Trust Company, N.A.
(Trustee) for failure to comply with the procedural requirements for derivative claims.
*
This order and judgment is not binding precedent, except under the doctrines of law of
the case, res judicata, and collateral estoppel. It may be cited, however, for its persuasive
value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
Branzan was an investor in units of the Eastern American Natural Gas Trust (the Trust).
It claims that Trustee breached the terms of the trust agreement that governed liquidation
of the Trust by, among other things, selling Trust assets without first obtaining an
appraisal.1 Exercising jurisdiction under 28 U.S.C. § 1291, we affirm.
The parties agree that Delaware law governs the dispute. As framed by Branzan,
the sole issue on appeal is whether its claims are direct or derivative. A direct claim is
one brought by an investor for a violation of the investor’s rights. See Tooley v.
Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1036 (Del. 2004). A derivative
claim, in contrast, is one brought by an investor (say, a stockholder) on behalf of the
entity (say, a corporation) in which the investor has invested. See id. (a derivative suit
“enables a stockholder to bring suit on behalf of the corporation for harm done to the
corporation”). The investor seeks to increase the value of its investment by obtaining a
recovery for the entity. To prevent derivative suits from interfering with the proper
management of the entity, however, they are subject to certain procedural requirements.
See In re ZAGG Inc. S’holder Derivative Action, 826 F.3d 1222, 1227 (10th Cir. 2016);
Fed. R. Civ. P. 23.1 (requirements for derivative claims); Del. Ch. Ct. R. 23.1 (same).
For example, under Delaware law, “the right of a stockholder to prosecute a derivative
suit is limited to situations where the stockholder has demanded that the directors pursue
the corporate claim and they have wrongfully refused to do so or where demand is
1
Branzan also claims that Trustee breached other trust provisions concerning voting and
informational rights of unitholders. But it has conceded, perhaps ill-advisedly, that this
claim rises or falls with the appraisal claim.
2
excused because the directors are incapable of making an impartial decision regarding
such litigation.” Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993). Branzan does not
contend that it has complied with these procedural requirements. Rather, it says that the
requirements do not apply because its claims are direct ones.
Branzan further narrows the issues before us by forgoing other potential
arguments. It has not contested that Delaware case law regarding derivative actions in
the corporation and limited-partnership context also applies to investment trusts. In
addition, it agreed at oral argument that even though the Trust has been liquidated, a
Delaware statute would permit it to pursue a derivative claim on behalf of the Trust. See
12 Del. C. § 3810(g) (relating to statutory trusts after cancellation of certificate of trust).
And its original briefing in this court acknowledged the general rule set forth in Tooley
that the test for determining whether an action is a derivative action, rather than a direct
claim, turns “solely on the following questions: Who suffered the alleged harm . . . and
who would receive the benefit of the recovery or other remedy?” Tooley, 845 A.2d at
1035.
Against this backdrop, Branzan’s principal arguments on appeal have been that the
Tooley test does not apply here because Delaware law has established (1) that the test
applies only to breach-of-fiduciary-duty claims and (2) that breach-of-contract claims
(such as its appraisal claim) can be pursued as direct actions. After oral argument in this
appeal, however, the Delaware Supreme Court concluded otherwise in El Paso Pipeline
3
GP Co., L.L.C. v. Brinckerhoff, No. 103, 2016, 2016 WL 7380418 (Del. Dec. 20, 2016);
and Branzan concedes that the above two arguments are now foreclosed.2
Branzan therefore pursues only a third argument, which it touched on in its
opening brief: It contends that El Paso supports the proposition that the Tooley test is
subject to exceptions based on equity and policy considerations. We disagree. El Paso
reaffirmed Tooley’s statement that the derivative-action test turns “‘solely’” on the
answers to the two questions it poses. El Paso, 2016 WL 7380418, at *10 (quoting
Tooley, 845 A.2d at 1033). And nothing in those two questions relates to equity or policy
considerations. Although Branzan points to language in El Paso that speaks of policy
concerns, that language does not relate to whether an action is a direct action or a
derivative action. Rather, it appears only in the discussion of a distinct issue—whether a
derivative claim survives a merger. The claim in El Paso was by a limited partner
against the general partner for breach of a conflict-of-interest provision in the limited-
partnership agreement. See id. at *7. The court’s primary ruling was that this claim was
exclusively a derivative claim under the Tooley test. See id. at *13. The claim-survival
issue arose because the limited partnership, as the true owner of the claim, had been
acquired in a merger and thereby ceded ownership of the claim to the partnership’s
successor. See id. at *1–2. In holding that the limited partner therefore could no longer
pursue its derivative claim, the court discussed the contrary decision by the lower court,
2
At our request the parties submitted supplemental briefs on whether (and if so how) the
El Paso decision impacts this appeal.
4
which had relied on equity and policy. See id. It is this discussion, not the discussion of
claim characterization, that Branzan has mistakenly invoked. And in any event, that
discussion culminated in the rejection of the argument that equity and policy
considerations justified survival of the derivative claim. See id. at *2. In our view, El
Paso makes clear that equity and policy considerations are irrelevant to the Tooley test.3
We AFFIRM the judgment of the district court. Trustee’s Conditional Motion to
Certify Questions to the Delaware Supreme Court, and Branzan’s request for similar
certification are DENIED.
Entered for the Court
Harris L Hartz
Circuit Judge
3
Further, we question whether equity favors Branzan. For example, although it argues
that a derivative recovery would unjustly enrich a “wrongdoer” unitholder complicit in
some of the alleged breaches, Aplt. Br. at 61, that is simply a reason to bring a claim
against that wrongdoer. (For reasons not apparent in the appellate record, Branzan
dropped its claims against the alleged miscreant unitholder in this appeal. See id. at 3
n.1.) And Trustee could not be unjustly enriched, as it was not a unitholder. Branzan’s
opening brief on appeal also says that equity must provide relief because “[a]t the time
[it] filed its lawsuit the Trust had terminated and thus no derivative claims were
possible.” Id. at 57. As previously noted, however, Branzan has now conceded that
Delaware law permits derivative suits on behalf of terminated trusts.
5