Sollins Lambrechet v. O’Neal

11-1589; 11-1285 Sollins; Lambrechet v. O’Neal UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT SUMMARY ORDER RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL. 1 At a stated term of the United States Court of Appeals 2 for the Second Circuit, held at New York Law School, 185 3 West Broadway, in the City of New York, on the 4th day of 4 December, two thousand twelve. 5 6 PRESENT: DENNIS JACOBS, 7 Chief Judge, 8 ROBERT A. KATZMANN, 9 DEBRA A. LIVINGSTON, 10 Circuit Judges. 11 12 - - - - - - - - - - - - - - - - - - - -X 13 N.A. LAMBRECHT, Derivatively on 14 Behalf of Nominal Defendant BANK OF 15 AMERICA CORPORATION and Double 16 Derivatively on Behalf of Nominal 17 Defendant MERRILL LYNCH & CO., INC., 18 19 Plaintiff-Appellant, 20 21 -v.- 11-1285 22 23 E. STANLEY O’NEAL, AHMASS L. 24 FAKAHANY, GREGORY J. FLEMING, DO WOO 25 “DOW” KIM, OSMAN SEMERCI, DOUGLAS J. 26 MALLACH, JOHN A. THAIN, KENNETH D. 27 LEWIS, BRIAN T. MOYNIHAN, JOSEPH L. 1 1 PRICE, GREGORY L. CURL, and JEFFREY 2 N. EDWARDS, 3 4 Defendants-Appellees 5 6 -and- 7 8 MERRILL LYNCH & CO., INC., and BANK 9 OF AMERICA CORPORATION, 10 11 Nominal Defendants- 12 Appellees. 13 14 - - - - - - - - - - - - - - - - - - - -X 15 S. LEONARD SOLLINS, as representative 16 for the estate of MIRIAM LOVEMAN, 17 Derivatively on Behalf of Nominal 18 Defendant BANK OF AMERICA CORPORATION 19 and Double Derivatively on Behalf of 20 Nominal Defendant MERRILL LYNCH & 21 CO., INC., 22 23 Plaintiff-Appellant, 24 25 -v.- 11-1589 26 27 E. STANLEY O’NEAL, JOHN A. THAIN, 28 AHMASS L. FAKAHANY, GREGORY J. 29 FLEMING, JEFFREY N. EDWARDS, CAROL T. 30 CHRIST, ARMANDO M. CODINA, VIRGIS W. 31 COLBERT, ALBERTO CRIBIORE, JOHN D. 32 FINNEGAN, JUDITH MAYHEW JONAS, JOSEPH 33 W. PRUEHER, ANN N. REESE, CHARLES O. 34 ROSSOTTI, and AULANA L. PETERS, 35 36 Defendants-Appellees 37 38 -and- 39 40 BANK OF AMERICA CORPORATION and 41 MERRILL LYNCH & CO., INC., 42 43 Nominal Defendants- 44 Appellees. 45 46 - - - - - - - - - - - - - - - - - - - -X 2 1 FOR APPELLANT LAMBRECHT: Jonathan W. Cuneo, Cuneo Gilbert 2 & Laduca, LLP, Washington D.C. 3 (Matthew E. Miller, Cuneo 4 Gilbert & Laduca, LLP, 5 Washington D.C.; Richard D. 6 Greenfield, Greenfield & Goodman 7 LLC, New York, NY; Adam Balick, 8 Balick & Balick, LLC, 9 Wilmington, DE; Bartholemew J. 10 Dalton, Dalton & Associates, 11 Wilmington, DE, on the brief). 12 13 FOR APPELLANT SOLLINS: David A.P. Brower, Brower Piven, 14 P.C., New York, NY. 15 16 FOR APPELLEES: Jay B. Kasner, Skadden, Arps, 17 Slate, Meagher & Flom LLP, New 18 York, NY (Paul J. Lockwood, 19 Scott D. Musoff, Skadden, Arps, 20 Slate, Meagher & Flom LLP, New 21 York, NY; Gregory A. Markel, 22 Cadwalader, Wickersham & Taft 23 LLP, New York, NY; Michael J. 24 Chepiga and Sarah L. Dunn, 25 Simpson Thacher & Bartlett LLP, 26 New York, NY; Jonathan D. Polkes 27 and Stephen A. Radin, Weil 28 Gotshal & Manges LLP, New York, 29 NY; Richard D. Bernstein, 30 Willkie Farr & Gallagher LLP, 31 Washington D.C.; James C. Dugan, 32 Willkie Farr & Gallagher LLP, 33 New York, NY; Andrew J. Levander 34 and David S. Hoffner, Dechert 35 LLP, New York, NY; James N. 36 Benedict, Milbank, Tweed, Hadley 37 & McCloy LLP, New York, NY; 38 William Michael Moran, McCarter 39 & English, LLP, New York, NY; 40 Andrew J. Ceresney and Colby A. 41 Smith, Debevoise & Plimpton LLP, 42 Washington, DC; Lucia Chapman, 43 Law Office of Henry Putzel, III, 44 New York, NY; Richard D. Winberg 3 1 and Eli J. Mark, Morvillo, 2 Abramowitz, Grand, Iason, Anello 3 & Bohrer, P.C., New York, NY; 4 Hollis Gonerka Bart, Brian 5 Dunefsky, and Chaya Weinberg- 6 Brodt, Withers Bergman LLP, New 7 York, NY; William H. Jeffress, 8 Julia Evans Guttman, and Maureen 9 P. Reid, Baker Botts LLP, New 10 York, NY; Richard M. Strassberg 11 and Mary K. Dulka, Goodwin 12 Procter LLP, New York, NY, on 13 the brief) 14 15 Appeal from a judgment of the United States District 16 Court for the Southern District of New York (Rakoff, J.). 17 18 UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED 19 AND DECREED that the judgment of the district court be 20 AFFIRMED. 21 22 N.A. Lambrecht and S. Leonard Sollins appeal an order 23 of the district court dismissing two double derivative 24 actions brought on behalf of Bank of America Corporation 25 (“BofA”) and its wholly owned subsidiary Merrill Lynch & Co. 26 (“Merrill”) following a merger of the two companies on 27 January 1, 2009 (“the Merger”). We assume the parties’ 28 familiarity with the underlying facts, the procedural 29 history, and the issues presented for review. 30 31 We review dismissals pursuant to Rule 12(b)(6) of the 32 Federal Rules of Civil Procedure de novo. See Velez v. 33 Levy, 401 F.3d 75, 84 (2d Cir. 2005). Where “determination 34 of the sufficiency of allegations of futility depends on the 35 circumstances of the individual case, the standard of review 36 for dismissals based on Fed. R. Civ. P. 23.1 is abuse of 37 discretion.”1 Halebian v. Berv, 590 F.3d 195, 203 (2d Cir. 1 Lambrecht and Sollins challenge our use of an abuse of discretion standard for assessing the sufficiency of allegations under Rule 23.1 and instead urge that de novo review is more appropriate here. We decline to decide the issue, as the appellants’ claims would fail under either standard. 4 1 2009) (citation omitted). Under Rule 23.1, a plaintiff must 2 “state with particularity . . . any effort by the plaintiff 3 to obtain the desired action from the directors or 4 comparable authority . . . and . . . the reasons for not 5 obtaining the action or not making the effort.” Fed. R. 6 Civ. P. 23.1(b)(3). 7 8 On March 28, 2011, the United States District Court for 9 the Southern District of New York (Rakoff, J.) dismissed 10 Sollins’ and Lambrecht’s complaints for different, but 11 related, reasons. The court determined, first, that 12 Sollins–-whose predecessor-in-interest filed the action 13 without making pre-suit demand upon the Board--had failed to 14 establish demand futility. The court also held that 15 Lambrecht, who made three demands upon the BofA Board, was 16 unable to show that the Board had wrongfully refused her 17 request to pursue claims against Merrill’s former officers 18 and directors. We see no error in those rulings. 19 20 In a post-merger double derivative action, “the claim 21 is now (post merger) the property of the acquiring 22 corporation, [and] that corporation is now the only party 23 with standing to enforce the claim.” Lambrecht v. O’Neal, 3 24 A.3d 277, 284 (Del. 2010).2 Accordingly, a “double 25 derivative suit cannot go forward except in the unusual case 26 where the parent company board is shown to be incapable of 27 deciding impartially whether or not to enforce the claim 28 that the parent company now (indirectly) owns.” Id. at 290. 29 To satisfy this standard, a plaintiff must put forth 30 particularized allegations that “create a reasonable doubt 31 that, as of the time the complaint is filed, the board of 32 directors could have properly exercised its independent and 33 disinterested business judgment in responding to a demand.” 34 Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993). 35 36 Notwithstanding Sollins’ arguments to the contrary, 37 “[d]emand futility analysis is conducted on a claim-by-claim 38 basis.” Beam v. Stewart, 833 A.2d 961, 977 n.48 (Del. Ch. 39 2003), aff’d, 845 A.2d 1040 (Del. 2003). Thus, “[e]ach 40 derivative claim for which no demand was made on the board 41 must be evaluated independently to determine whether demand 2 The parties agree that Delaware law governs our substantive legal analysis. 5 1 was futile as to that claim.” MCG Capital Corp. v. Maginn, 2 No. 4521-CC, 2010 WL 1782271, at *7 (Del. Ch. May 5, 2010). 3 Sollins brought five claims relating to BofA’s activities in 4 connection with the Merger, but these claims were dismissed 5 as part of a settlement. The majority of the remaining 6 claims (Counts I - XI) relate to Merrill’s pre-Merger 7 investment activities, while one claim (Count XII) relates 8 to Merrill’s distribution of approximately $3.4 billion in 9 employee bonuses in 2008. 10 11 Sollins suggests that BofA became “complicit” in the 12 wrongdoing relating to Merrill’s pre-Merger forays into the 13 subprime market by agreeing to allow Merrill to pay bonuses 14 at 2007 levels; agreeing to indemnify each present and 15 former director of Merrill for pre-Merger misconduct; 16 approving the Merger without determining the amount of 17 Merrill’s growing losses; failing to fully inform investors 18 of these losses; and consummating the Merger despite grave 19 reservations about Merrill’s financial position. But 20 Sollins’ arguments are misplaced. Sollins could have, and 21 did, assert claims based on the above-described actions that 22 the BofA Board took when entering into the Merger with 23 Merrill. Those claims settled. As the district court 24 correctly stated, Sollins cannot simply bootstrap his 25 subprime claims against Merrill onto these Merger-related 26 allegations against BofA in an attempt to circumvent the 27 demand requirement. See In re Bear Stearns Cos., Inc. Sec., 28 Derivative, and ERISA Litig., No. 08-MDL-1963, 2011 WL 29 4063685, at *5 (S.D.N.Y. Sept. 13, 2011) (rejecting 30 plaintiff’s argument that “the JPMorgan Board was complicit 31 in and ratified the wrongdoing at Bear Stearns” in 32 attempting to justify its failure to make demand on the 33 JPMorgan Board). 34 35 In any event, because BofA’s directors are protected by 36 an exculpatory provision in the company’s articles of 37 incorporation, Sollins cannot demonstrate even a “mere 38 threat of personal liability” facing the BofA Board for 39 Merrill’s alleged pre-Merger misconduct, let alone a 40 “substantial likelihood.” Rales, 634 A.2d at 936. 41 42 Sollins’ demand futility argument with respect to Count 43 XII is a bit more troublesome. Unlike the wrongful acts 44 alleged in Counts I through XI, in which the BofA Board 45 clearly had no involvement, Count XII asserts a claim for 6 1 corporate waste in connection with the 2008 bonuses, which 2 were a subject of pre-Merger negotiations between the 3 Merrill and BofA Boards. In addition, a district court in 4 this circuit has concluded that the BofA Board faced a 5 substantial likelihood of liability under Section 14(a) and 6 Rule 14a-9 of the Exchange Act for its alleged failure to 7 adequately disclose these bonuses to shareholders in an 8 October 31, 2008 joint proxy statement. See In re Bank of 9 Am. Corp. Sec., Derivative, & ERISA Litig., 757 F. Supp. 2d 10 260, 329-31 (S.D.N.Y. 2010) (Castel, J.). 11 12 But the case before Judge Castel arose in a different 13 context. There, BofA shareholders filed direct and 14 derivative claims against the BofA Board for, inter alia, 15 alleged misstatements and omissions in the 2008 joint proxy, 16 whereas here Merrill shareholders seek to assert claims 17 against the Merrill Board for corporate waste. Even 18 assuming that the BofA Board would be unable to impartially 19 assess certain disclosure allegations being brought against 20 BofA’s officers and directors, that assumption is 21 insufficient here to demonstrate the BofA Board’s inability 22 to consider claims against the Merrill Board for its pre- 23 Merger bonus distribution scheme. Due to the strong 24 possibility that the BofA Board could pursue a claim against 25 the Merrill Board for corporate waste without substantially 26 undermining its ability to defend against disclosure 27 allegations under Section 14(a), Sollins has not shown a 28 “substantial likelihood of director liability.” Aronson v. 29 Lewis, 473 A.2d 805, 815 (Del. 1984). Accordingly, the 30 connection between Count XII and any disclosure-related 31 liability facing the BofA Board is too attenuated to excuse 32 demand under these circumstances. 33 34 As to Lambrecht’s arguments, a board’s refusal to act 35 on a shareholder’s demands is analyzed under the business 36 judgment rule. Levine v. Smith, 591 A.2d 194, 200 (Del. 37 1991), overruled on other grounds, Brehm v. Eisner, 746 A.2d 38 244 (Del. 2000). That rule establishes “a presumption that 39 in making a business decision the directors of a corporation 40 acted on an informed basis, in good faith and in the honest 41 belief that the action taken was in the best interests of 42 the company.” Aronson, 473 A.2d at 812 (citing Kaplan v. 43 Centex Corp., 284 A.2d 119, 124 (Del. Ch. 1971)). To 44 overcome this presumption, a plaintiff must “carry the 45 considerable burden of showing that the decision not to 7 1 bring the lawsuit was made in bad faith or was based on an 2 unreasonable investigation.” RCM Sec. Fund, Inc. v. 3 Stanton, 928 F.2d 1318, 1328 (2d Cir. 1991). 4 5 Lambrecht’s claims do not surmount this high bar. By 6 making a demand upon the Board, she has conceded the Board’s 7 independence. See Rales v. Blasband, 634 A.2d 927, 935 n.12 8 (Del. 1993). This independent Board delegated the task of 9 investigating Lambrecht’s claims to an audit committee, 10 which ultimately concluded that it was not in the company’s 11 best interests to pursue Lambrecht’s claims. In particular, 12 the committee cited [i] the possible compromise of pending 13 litigation and ongoing government inquiries involving BofA; 14 and [ii] the low probability of recovery against Merrill’s 15 former directors and officers in light of an exculpatory 16 clause in Merrill’s certificate of incorporation and the 17 difficulty of prevailing on a Caremark claim under Delaware 18 law. Given the foregoing, the district court was well 19 within its discretion in concluding that Lambrecht failed to 20 demonstrate that the Board either acted in bad faith or 21 conducted an unreasonable investigation. 22 23 Finding no merit in either Lambrecht’s or Sollins’ 24 remaining arguments, we hereby AFFIRM the judgment of the 25 district court. 26 27 28 FOR THE COURT: 29 CATHERINE O’HAGAN WOLFE, CLERK 30 8