Elliot Ex Rel. Ira R/O v. Ward (In Re Sandridge Energy, Inc. Shareholder Derivative Litigation)

FILED
United States Court of Appeals
PUBLISH Tenth Circuit

UNITED STATES COURT OF APPEALS November 17, 2017

Elisabeth A. Shumaker
FOR THE TENTH CIRCUIT Clerk of Court
_________________________________

IN RE: SANDRIDGE ENERGY, INC.
SHAREHOLDER DERIVATIVE
LITIGATION,

------------------------------

PAUL ELLIOT, on behalf of the Paul
Elliot IRA R/O, derivatively on behalf of
Sandridge Energy, Inc.; LISA EZELL,
derivatively on behalf of SandRidge
Energy, Inc.,

Plaintiffs - Appellees,
No. 16-6014
v.

TOM L. WARD; JIM J. BREWER;
EVERETT R. DOBSON; WILLIAM A.
GILLILAND; DANIEL W. JORDAN;
ROY T. OLIVER, JR.; JEFFREY S.
SEROTA; SPECIAL LITIGATION
COMMITTEE OF SANDRIDGE’S
BOARD OF DIRECTORS,

Defendants - Appellees,

and

SANDRIDGE ENERGY, INC.,

Nominal Defendant - Appellee,

and

TLW LAND & CATTLE, L.P.; WCT
RESOURCES, L.L.C.; 192
INVESTMENTS, L.L.C.,

Defendants.

------------------------------

DALE HEFNER,

Objector - Appellant.
_________________________________

Appeal from the United States District Court
for the Western District of Oklahoma
(D.C. No. 5:13-CV-00102-W)
_________________________________

George C. Aguilar, Robbins Arroyo LLP (Jay N. Razzouk, Robbins Arroyo, LLP, San
Diego, California, and Charles F. Alden, III, Oklahoma City, Oklahoma, with him on the
briefs), for Objector-Appellant.

Mark E. McKane, Kirkland & Ellis, LLP, San Francisco, California, and Reggie N.
Whitten, Whitten Burrage, Oklahoma City, Oklahoma (Michael Burrage and Randa K.
Reeves, Whitten Burrage, Oklahoma City, Oklahoma, Robert N. Kaplan and Jeffrey P.
Campisi of Kaplan, Fox & Kilsheimer, LLP, New York, New York, with them on the
brief), for Plaintiffs-Appellees.

Thomas B. Snyder, Crowe & Dunlevy, Oklahoma City, Oklahoma, Mark P. Gimbel and
C. William Phillips of Covington & Burling, LLP, New York, New York, for
Independent Directors.
_________________________________

Before KELLY, MURPHY, and MORITZ, Circuit Judges.
_________________________________

KELLY, Circuit Judge.
_________________________________

Objector-Appellant Dale Hefner appeals from the district court’s denial of his

motion for settlement-related discovery, approval of the settlement agreement, and order

regarding attorneys’ fees. In re Sandridge Energy Inc., No. CIV-13-102-W, 2015 WL

-2-
11899141 (W.D. Okla. Dec. 15, 2015); In re Sandridge Energy Inc., No. CIV-13-102-W,

2015 WL 11921422 (W.D. Okla. Dec. 22, 2015). Exercising jurisdiction under 28 U.S.C.

§ 1291, we affirm.

Background

This case concerns the settlement agreement and attorneys’ fees related to two

separate shareholder derivative suits on behalf of SandRidge Energy Inc. (“SandRidge”)

against its directors. The first of those actions was filed in federal district court in

January 2013. The federal derivative suit alleged self-dealing, usurpation of corporate

opportunities, and misappropriation by Tom Ward, SandRidge’s founding CEO, and

entities affiliated with him. See 2 Aplt. App. 247–343. It also claimed that certain

Sandridge officers and directors were complicit and breached their fiduciary duties. Id.

The second derivative suit was filed in Oklahoma state court in January 2013 by

Mr. Hefner. 5 Aplt. App. 1310–58. The director-defendants moved the state court to

stay the action pending a resolution in the federal case, or in the alternative to dismiss the

suit entirely. Mr. Hefner objected, and the state court stayed the action but denied the

motion to dismiss. 6 Aplt. App. 1417–18. After further briefing and a renewed motion to

dismiss, the state court again denied the motion. Id. at 1487. In November 2014, the

state court entered a stipulated and agreed to order granting SandRidge’s motion to stay.

Id. at 1492–93.

On October 9, 2015, the federal district court granted its preliminary approval of a

partial settlement in the federal suit. 4 Aplt. App. 1017–19. On October 30, 2015, Mr.

-3-
Hefner filed notice of his intent to appear at the settlement hearing, object to the

settlement, and request additional settlement-related discovery. Id. at 1025–26. The

federal plaintiffs filed a motion for final approval of the partial derivative settlement on

November 25, 2015. Key terms of the proposed settlement included (1) that the settling

defendants’ insurers would pay $38 million to SandRidge, “to the extent that funds

remain after deducting certain Designated Litigation Expenses . . . arising from a separate

Securities Litigation,” and (2) the institution of additional corporate governance measures

to prevent future occurrences of misconduct. Id. at 1047–48. Additionally, the plaintiffs

requested an award of attorneys’ fees and expenses totaling approximately $13 million.

Id. at 1069.

In response, Mr. Hefner (1) filed a contingent motion for attorneys’ fees and

reimbursement of expenses, (2) objected to the settlement, and (3) requested additional

settlement-related discovery. In his request for attorneys’ fees, Mr. Hefner contended

that without his “successful litigation in the State Action, the Settlement would not have

occurred — and certainly not on the same terms.” 5 Aplt. App. 1266. He also argued

that after the federal case initially was dismissed, he “helped turn the tide in [the federal]

litigation, beating a motion to dismiss [in state court] on demand futility grounds” and

then cooperated with the federal litigation by agreeing to temporarily stay his state-court

action. Id. at 1266, 1269.

Regarding the proposed settlement, Mr. Hefner argued that the federal court

lacked subject-matter jurisdiction; that the settlement was for the benefit of the attorneys

and insurance companies, but not of SandRidge itself since the funds would first be used

-4-
to pay attorneys, then to pay for separate litigation (which the insurance companies would

otherwise pay for), and would only then — if there was anything left — accrue to

SandRidge; that the request for $13 million in attorneys’ fees was too large, representing

over 34% of the total settlement fund; and that the proposed agreement would unfairly

settle unique claims brought by Mr. Hefner in the state-court action. 6 Aplt. App. 1572–

90. In sum, Mr. Hefner contended that the benefit to SandRidge did not outweigh the

value of continuing litigation and that the settlement should be rejected. Id. at 1592–93.

The district court denied Mr. Hefner’s motion for additional discovery and, after a

hearing on the other matters, entered a final order and judgment approving the proposed

partial settlement and denying Mr. Hefner’s request for attorneys’ fees. 8 Aplt. App.

2062–68.

Mr. Hefner appealed to this court, challenging the federal court’s jurisdiction to

approve the settlement and arguing that the district court abused its discretion by (1)

approving the settlement and (2) denying his motions for additional discovery and for

attorneys’ fees. Aplt. Br. at 8–9.

Thereafter, on May 16, 2016, SandRidge filed for Chapter 11 bankruptcy. We

abated the appeal pending the bankruptcy proceedings. On November 14, 2016,

SandRidge gave notice of the bankruptcy court’s approval of the company’s plan of

reorganization and filed a contemporaneous motion to dismiss the appeal as moot.1

SandRidge contends that (1) because the company’s stock was cancelled as part of the

1
Plaintiffs in the underlying derivative suit joined the motion to dismiss.

-5-
bankruptcy reorganization, neither Mr. Hefner nor anyone else had standing to pursue a

shareholder derivative claim; (2) the relevant shareholder derivative claims were released

and discharged as part of the reorganization; and (3) the right to pursue derivative

litigation vested in reorganized SandRidge. See Mot. to Dismiss at 1–2. In his response,

Mr. Hefner notified the court that he was seeking clarification from the bankruptcy court

regarding the effect of SandRidge’s reorganization. Opp’n to Mot. to Dismiss at 1. He

also argues that even though a plaintiff could no longer prosecute a derivative claim since

SandRidge cancelled its stock, an objector is not subject to the continuous-ownership

requirement. And finally, he contends that even if no further derivative action could be

pursued, his claim for attorneys’ fees was still live. Id. at 2.

We ordered appellate briefing resumed, reserving the motion to dismiss for the

merits panel. On April 24, 2017, Mr. Hefner reported that the bankruptcy court denied

his motion for clarification “so long as the issue . . . remains pending before the Tenth

Circuit Court of Appeals unless specifically requested to do so.” See Aplt. Status Report

Regarding Bankruptcy Ct. Inquiry (Aug. 24, 2017).

Discussion

A. Jurisdiction

Mr. Hefner contends that the district court erred in exercising subject-matter

jurisdiction over the federal derivative litigation because the underlying parties had not

proven diversity of citizenship. Aplt. Br. at 10–14. According to Mr. Hefner, “Plaintiffs

had to establish . . . that not only are the entities members’ citizenship diverse from that

-6-
of Plaintiffs, but that their members’ members, such as trustees, limited partners, and

beneficiaries, are also diverse.” Aplt. Br. at 13.

The initial disclosure statements did not say what states these entities are citizens

of, nor did they declare who the members’ members are or of what states those members

are citizens. Aplt. App. 145–50. Accordingly, we requested Plaintiffs to provide this

additional information. It shows the citizenship of each of the defendant parties. See

Aplee. Submission Regarding Defs.’ Citizenship (Aug. 9, 2017). The Ward entities,

based on the citizenship of their members, are citizens of Oklahoma. Thus, diversity

jurisdiction is proper under 28 U.S.C. § 1332.

B. Justiciability

Sandridge argues that Mr. Hefner no longer has standing to bring a claim because

the claim has been mooted by subsequent events. We agree that Mr. Hefner’s claims

have been mooted except his claim for attorneys’ fees.

As part of its approval of SandRidge’s plan of reorganization, the bankruptcy

court expressly approved the release by debtor SandRidge of any and all claims and suits,

including any derivative actions it had against former or current company directors and

officers. See Mot. to Dismiss Ex. 10, In re Sandridge, Dkt. No. 901, at 31–32

(Confirmation Order). This plan also extinguished all shares in pre-petition SandRidge.

Id. at 98–99.

In ascertaining whether a case has become moot, the court considers whether

subsequent events have deprived the plaintiff of standing. “Article III mootness is ‘the

doctrine of standing set in a time frame: The requisite personal interest that must exist at

-7-
the commencement of the litigation (standing) must continue throughout its existence

(mootness).” S. Utah Wilderness All. v. Smith, 110 F.3d 724, 727 (10th Cir. 1997). Put

differently, while standing is considered at the time the action is brought, mootness

involves the court asking whether standing exists as the case appears now.

According to SandRidge, the appeal is moot not only because Mr. Hefner himself

no longer has standing to pursue a derivative action or objection but because no one else

has standing to pursue such a claim either. Thus, “[i]f Mr. Hefner were somehow to

prevail on this appeal, the settlement would be unwound and the case would be

remanded, but after remand there would be no derivative plaintiffs with standing to

litigate the suit and all of the claims against the prepetition directors and officers have

been released and discharged in the bankruptcy.” Reply in Supp. of Mot. to Dismiss at 2.

It would therefore be impossible for the district court to grant the relief that Mr. Hefner

requests. Id.

Mr. Hefner responds that his lack of standing to pursue a derivative action does

not mean that he lacks standing to object to the settlement. Opp. to Mot. to Dismiss at 8–

10. This is ordinarily true. It is the derivative plaintiff who is subject to the continuous

ownership requirement, while the objector “need only own stock in the corporation at the

time of the settlement hearing.” Rosenbaum v. MacAllister, 64 F.3d 1439, 1443 n.2

(10th Cir. 1995). As for the relief pursued, Mr. Hefner contends that while he is no

longer able to pursue a derivative action, there are many claims still ripe for adjudication.

“What matters now,” he contends, “is whether the District Court abused its discretion by

approving the Settlement based on the record before it.” Opp. to Mot. to Dismiss at 18.

-8-
 Nonetheless, ripeness on its own is not enough to establish justiciability. The

question still remains as to what relief the court could offer. To be justiciable, the suit

must remain “live” throughout the course of litigation such that there is a “legally

cognizable interest in the outcome.” Murphy v. Hunt, 455 U.S. 478, 481 (1982) (quoting

U.S. Parole Comm’n v. Geraghty, 445 U.S. 388, 396 (1980)). This includes the ability of

a court to provide effective relief. Jordan v. Sosa, 654 F.3d 1012, 1023 (10th Cir. 2011).

This latter point is where Mr. Hefner’s claims fail. If Mr. Hefner were to succeed

in showing that the district court abused its discretion in approving the settlement, this

court could reverse the settlement judgment and remand for further action. On remand,

the district court would then have to dismiss the derivative suit entirely because none of

the plaintiffs have standing to pursue it — all their shares have been cancelled, and all

their claims have become property of reorganized SandRidge. Thus, the relief initially

requested — a settlement that is more favorable to pre-petition SandRidge — is

impossible to grant, and Mr. Hefner’s revised request of a declaration that the district

court erred would be nothing more than “the satisfaction of a declaration that a person

was wronged.” Cox v. Phelps Dodge Corp., 43 F.3d 1345, 1348 (10th Cir. 1994). This

Article III does not permit. Id.

Because Mr. Hefner’s request for additional settlement-related discovery and his

challenge to the award of plaintiffs’ attorneys’ fees were also brought as an objector on

behalf of SandRidge, they are also moot for the same reasons as his objection to the

approval of the settlement.

-9-
 This leaves Mr. Hefner’s request for attorneys’ fees. Plaintiffs include this request

with the others on appeal as moot, but this claim is unlike the others. Mr. Hefner’s

argument is that his attorneys conferred a substantial benefit to SandRidge as part of the

settlement process and that they should be paid for that benefit. This is a backward-

looking claim for monetary compensation that does not depend on Mr. Hefner’s future

ability to pursue a derivative claim on behalf of SandRidge. See Cooter & Gell v.

Hartmarx Corp., 496 U.S. 384, 396–97 (1990) (listing examples of collateral issues, such

as attorneys’ fees, that can be ruled on after the underlying action is no longer pending).

For this reason, his claim for attorneys’ fees is not moot. We therefore consider the

district court’s decision not to award Mr. Hefner’s attorneys’ fees.

C. Attorneys’ Fees

Mr. Hefner next argues that the district court incorrectly denied his request for his

counsel’s attorneys’ fees. The district court concluded that Mr. Hefner conferred “no

substantial benefit to SandRidge or its shareholders,” “that no action taken either by

Hefner or by his counsel aided or advanced the prosecution of the Plaintiffs’ claims

against the Settling Defendants or contributed to the negotiation of the Settlement,” “and

that no objections to the Settlement lodged by Hefner or his counsel benefitted

SandRidge or its shareholders or assisted the Court either in assessing the fairness,

adequacy and reasonableness of the Settlement.” In re Sandridge Energy Inc., No. CIV-

13-102-W, 2015 WL 11921422, at *4 (W.D. Okla. Dec. 22, 2015). Mr. Hefner argues

that these findings are clearly erroneous and are also based upon an incorrect legal

assumption that counsel must be involved in the Plaintiffs’ federal action.

- 10 -
 Under the clearly erroneous standard, a district court’s factual findings will be

upheld unless “on the entire evidence [we are] left with the definite and firm conviction

that a mistake has been committed.” Ocelot Oil Corp. v. Sparrow Indus., 847 F.2d 1458,

1464 (10th Cir. 1988) (quoting United States v. U.S. Gypsum Co., 333 U.S. 364, 395

(1948)). The legal analysis providing the basis for the fee award is reviewed de novo.

Aguinaga v. United Food and Commercial Workers Int’l Union, 993 F.2d 1480, 1481

(10th Cir. 1993).

Mr. Hefner’s argument is that the $13 million the district court awarded from the

common fund to Plaintiffs’ attorneys unjustly “compensat[es] Plaintiffs for value

generated by Hefner and his counsel’s efforts.” Aplt. Br. at 49. Moreover, Mr. Hefner

argues that the district court erred by confining its analysis to the benefit Mr. Hefner may

have contributed in the federal-court action rather than to the company more generally.

Id. at 54.

In this last point, Mr. Hefner is correct that objectors and other parties who

contribute to the “collective good” of the corporation can still be compensated from the

common fund for any benefit they confer to the other shareholders. See Gottlieb v.

Barry, 43 F.3d 474, 488–89 (10th Cir. 1994). But the district court’s explanation for why

it chose not to reward Mr. Hefner attorneys’ fees did not overlook this legal rule; instead,

it simply concluded, as a factual matter, that “no substantial benefit to SandRidge or its

shareholders has been conferred by Hefner or his counsel.” In re SandRidge Energy,

Inc., 2015 WL 11921422, at *4. Mr. Hefner points to several actions that could have

been construed as helpful to the shareholders — but his arguments hardly compel a

- 11 -
finding that his efforts were causally linked to the settlement. Indeed, the district court

found that it was the extensive efforts of Plaintiffs’ counsel, not Mr. Hefner’s, which

moved the needle. The clearly erroneous standard is a high bar, and in this case, we are

not left with a definite and firm conviction that the district committed a mistake.

Mr. Hefner also contends that the district court abused its discretion by not

seriously considering Mr. Hefner’s objections given the record evidence. A district court

abuses its discretion when its decision is “arbitrary, capricious or whimsical, or

manifestly unreasonable.” Birch v. Polaris Indus., Inc., 812 F.3d 1238, 1247 (10th Cir.

2015) (quoting Rocky Mountain Christian Church v. Bd. of Cty. Comm’rs, 613 F.3d

1229, 1239–40 (10th Cir. 2010)). The district court’s ruling does not rise to that level.

The district court explained its rejection of Mr. Hefner’s position, noting that Mr. Hefner

already had received a “mountain of discovery” and provided nothing other than

conjecture as to why his objections would have benefited the shareholders. Accordingly,

we find that the district court did not abuse its discretion.

We AFFIRM the district court’s judgment insofar as attorneys’ fees and DISMISS

the balance of the appeal as moot. All pending motions are denied.

- 12 -