Opinion
No. Civ. S-90-1480 LKK.
March 30, 1992.
Paul H. Dawes, Timothy P. Crudo, Latham Watkins, San Francisco, Cal., for plaintiff and counterdefendant Country Nat. Bank and third party defendant John Oakes.
David L. Edwards, Redding, Cal., Michael L. Wachtell, G. Forsythe Bogeaus, Buchalter, Nemer, Fields Younger, Los Angeles, Cal., for defendant, counterclaimant and third party plaintiff Marshall S. Mayer.
ORDER
This matter is before the court on the motion of Country National Bank and certain of the Bank's directors to dismiss Marshall S. Mayer's second amended counterclaim and third-party complaint for failure to state a claim. For the reasons explained herein, the motion is GRANTED in part and DENIED in part.
I PROCEDURAL BACKGROUND
Plaintiff Country National Bank ("Bank") filed suit in state court against defendant Marshall S. Mayer, a shareholder and a former member of the Bank's board of directors, alleging that Mayer violated the Change in Bank Control Act of 1978, 12 U.S.C. § 1817(j), by failing to timely report acquisition of more than 10 percent of the Bank's stock. The Bank also alleges that Mayer is liable under the Securities and Exchange Act of 1934, 15 U.S.C. § 78a, for insider trading with regard to a prospective purchase of the Bank's shares.
Defendant removed the action to this court, answered the complaint, and filed a counterclaim against the Bank and a third-party complaint against John O. Oakes, President and Chief Loan Officer of the Bank. The counterclaim alleged four causes of action: (1) a shareholder's derivative action; (2) intentional infliction of emotional distress; (3) negligent infliction of emotional distress; and (4) interference with prospective economic advantage.
The Bank and Oakes moved to dismiss the countercomplaint and third-party complaint pursuant to Fed.R.Civ.P. 12(b)(6). In response to the motion, Mayer lodged a first amended counterclaim and third-party complaint which substituted defamation for the fourth claim. I granted the Bank's and Oakes' motion to dismiss the shareholder derivative suit on the ground that Mayer's conclusory allegations of demand and futility failed to state a claim based on federal law. I also dismissed the claims for intentional and negligent infliction of emotional distress. I denied the Bank's and Oakes' motion to dismiss the defamation claim, and granted leave to amend.
Mayer timely filed a second amended counterclaim against the Bank and a third-party complaint ("SAC") against 11 directors of the board. Mayer's first claim is a shareholder derivative action which is substantially similar to that alleged in his previous complaint, although he includes new facts relative to demand and futility. Mayer also realleges his claim for defamation.
Mayer names as defendants Dan Gover, Phil Grauel, Richard Guiton, Sim Nathan, John Oakes, Robert Peterson, Roy Ramsey, Charles Raudman, William Reuss, Richard Steffans and Ray Toney.
The directors and the Bank again moved to dismiss the derivative action for failure to state a claim premised on an assertion of insufficient demand upon the Bank's board of directors and failure to show that such a demand would have been futile. As to the defamation claim, the directors and Bank seek dismissal on the ground that Mayer's counterclaim does not allege that the defamatory statement is untrue. I continued the hearing on the motion to permit the parties to submit supplemental briefing on the question of which law governs the court's determination of sufficiency of demand, in light of Kamen v. Kemper Financial Services, Inc., ___ U.S. ___, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991), coincidentally decided the same day I dismissed the first amended counterclaim and third-party complaint with leave to amend. A further hearing was held, and the matter is disposed of herein.
II STANDARDS ON A MOTION TO DISMISS
On a motion to dismiss, the allegations of the complaint must be accepted as true. Cruz v. Beto, 405 U.S. 319, 322, 92 S.Ct. 1079, 1082, 31 L.Ed.2d 263 (1972). The court is bound to give the plaintiff the benefit of every reasonable inference to be drawn from the "well-pleaded" allegations of the complaint. Retail Clerks International Ass'n v. Schermerhorn, 373 U.S. 746, 753 n. 6, 83 S.Ct. 1461, 1466 n. 6, 10 L.Ed.2d 678 (1963). Thus, the plaintiff need not necessarily plead a particular fact if that fact is a reasonable inference from facts properly alleged. Id. See also Wheeldin v. Wheeler, 373 U.S. 647, 648, 83 S.Ct. 1441, 1443, 10 L.Ed.2d 605 (1963) (inferring fact from allegations of complaint).
In general, the complaint is construed favorably to the pleader. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974). So construed, the court may not dismiss the complaint for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim which would entitle him or her to relief. Hishon v. King Spaulding, 467 U.S. 69, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957)). In spite of the deference the court is bound to pay to the plaintiff's allegations, however, it is not proper for the court to assume that "the [plaintiff] can prove facts which [he or she] has not alleged, or that the defendants have violated the . . . laws in ways that have not been alleged." Associated General Contractors v. California State Council, 459 U.S. 519, 526, 103 S.Ct. 897, 902, 74 L.Ed.2d 723 (1983).
III SHAREHOLDER DERIVATIVE ACTION
A. Federal Rule of Civil Procedure 23.1
The directors and Bank move to dismiss the shareholder derivative claim arguing that Mayer failed to plead with sufficient particularity that before he filed suit, an adequate demand was made that the directors themselves bring suit, or that such a demand is excused. Below, I sketch the derivation of the demand/futility rule and determine which law governs its application.
"The derivative form of action permits an individual shareholder to bring `suit to enforce a corporate cause of action against officers, directors, and third parties.'" Kamen, ___ U.S. ___, ___, 111 S.Ct. 1711, 1716, 114 L.Ed.2d 152, 163 (quoting Ross v. Bernhard, 396 U.S. 531, 534, 90 S.Ct. 733, 736, 24 L.Ed.2d 729 (1970)). To prevent abuse of the shareholder's right to bring suit to protect the interests of the corporation from directors' and managers' "misfeasance and malfeasance," equity courts established the requirement that the shareholder demonstrate that it demanded that the corporation itself bring suit, and that the demand was refused or otherwise excused. Kamen, ___ U.S. at ___ — ___, 111 S.Ct. at 1716-17, 114 L.Ed.2d at 163-64.
I pass over without further comment what some might see as the anomaly inherent in the suggestion that hired hands need protection from suits by owners testing their employee's fealty.
The demand requirement is accommodated by Fed.R.Civ.P. 23.1, which provides,
In a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association . . . [t]he complaint shall . . . allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority . . . and the reasons for the plaintiff's failure to obtain the action or for not making the effort.
In Kamen, the Supreme Court clarified the meaning and application of Rule 23.1. The Court explained that although the Rule contemplates a demand requirement and the possibility that the demand may be excused in shareholder derivative suits brought in federal court, it does not " create a demand requirement of any particular dimension." ___ U.S. at ___, 111 S.Ct. at 1716, 114 L.Ed.2d at 164. "Rule 23.1 speaks only to the adequacy of the representative shareholder's pleadings." Id.
In Kamen, ___ U.S. ___, 111 S.Ct. 1711, 114 L.Ed.2d 152, plaintiff filed a shareholder derivative suit in federal court against a Maryland corporation alleging violations of the Investment Company Act of 1940 (ICA), a federal statute. Plaintiff alleged in her complaint that she had made no demand on the directors that they themselves bring suit because such a demand would have been futile. Id. ___ U.S. at ___, 111 S.Ct. at 1715, at 162. The district court dismissed the complaint on the ground that plaintiff had failed to plead facts excusing demand with sufficient particularity so as to satisfy Rule 23.1. Id. ___ U.S. at ___, 111 S.Ct. at 1715, at 163. The Seventh Circuit affirmed, concluding that plaintiff's failure to make a pre-complaint demand "was fatal to her case." Id. The Seventh Circuit "adopted as a rule of federal common law the [American Law Institute's] so-called `universal demand' rule, under which the futility exception is abolished." Id. The Supreme Court reversed.
Although Rule 23.1 itself has no substantive element, such an element exists. The Supreme Court held in Kamen that the "contours of the demand requirement in a derivative action founded on [a federal statute] are governed by federal law." Id. ___ U.S. at ___, 111 S.Ct. at 1717, at 165. Nonetheless, the Court explained that the content of the federal rule relative to the demand requirement is not "wholly the product of a federal court's own devising." Id. Only when the federal remedial scheme at issue "evidences a distinct need for nationwide legal standards," or "when express provisions in analogous statutory schemes embody congressional policy choices readily applicable to the matter at hand," should a federal court attempt to develop a federal rule. Id. Otherwise, the court should "`incorporat[e] [state law] as the federal rule of decision,' unless `application [of the particular] state law [in question] would frustrate specific objects of the federal programs.'" Id. (quoting United States v. Kimbell Foods, Inc., 440 U.S. 715, 728, 99 S.Ct. 1448, 1458, 59 L.Ed.2d 711 (1979)).
In Greenspun v. Del E. Webb Corp., 634 F.2d 1204, 1210 (9th Cir. 1980), the Ninth Circuit considered whether the Rule 23.1 requirement that demand and futility be pled with particularity had been satisfied in the shareholder derivative suit before the court. The court applied federal law, even though the defendant was an Arizona corporation. See Sax v. World Wide Press, Inc., 809 F.2d 610, 613 (9th Cir. 1987); Johnson v. Hui, 752 F. Supp. 909, 912 (N.D.Cal. 1990). In light of Kamen, ___ U.S. ___, 111 S.Ct. 1711, 114 L.Ed.2d 152, Greenspun likely was erroneously decided; the Ninth Circuit should have applied the law of the place of defendant's incorporation to determine the substantive contours of the demand and futility requirement.
The Supreme Court explained that the presumption that state law is incorporated into federal common law as the rule of decision is particularly compelling in the area of corporate law. Kamen, ___ U.S. at ___, 111 S.Ct. at 1717, 114 L.Ed.2d at 165; see also Burks v. Lasker, 441 U.S. 471, 478, 99 S.Ct. 1831, 1837, 60 L.Ed.2d 404 (1979) (noting that corporations, as a rule, are creatures of state law). Consequently, the Court held that:
[G]aps in [federal] statutes bearing on the allocation of governing power within the corporation should be filled with state law "unless the state la[w] permit[s] action prohibited by [those statutes], or unless [the] application of state law would be inconsistent with the federal policy underlying the cause of action."Kamen, ___ U.S. at ___, 111 S.Ct. at 1717-18, 114 L.Ed.2d at 166 (quoting Burks, 441 U.S. at 479, 99 S.Ct. at 1837). As the Court noted in Kamen, the law prescribing the nature and extent of a demand requirement and a futility exception to the demand requirement "relate[ ] to the allocation of governing powers within the corporation," because those rules determine who has the power to control corporate litigation. Id. at ___, 111 S.Ct. at 1713, 114 L.Ed.2d at 167.
Because application of state law concerning the futility exception would not be inconsistent with the federal statute at issue, Kamen, ___ U.S. at ___, 111 S.Ct. at 1722, 114 L.Ed.2d at 171, the Court concluded that in adjudicating derivative claims brought under the ICA, federal courts "must apply the demand futility exception as it is defined by the law of the state of incorporation." Id. at ___, 111 S.Ct. at 1723, 114 L.Ed.2d at 172.
The matter at bar differs from Kamen in two significant respects. First, because Kamen involved a derivative action founded on a federal statute, the contours of the demand requirement were governed by federal law. In contrast, Mayer's claim is a shareholder derivative action founded on state law. Moreover, unlike Kamen, the Bank here is not a corporation organized under state law, but rather a federally-chartered bank, organized under the laws of the United States. See National Bank Act, 12 U.S.C. § 21-216d.
Counterdefendants argue that because the allocation of governing power within a federally-chartered bank is a question of federal law, the court should apply a federal common law rule of demand and futility to Mayer's state law claims. I cannot agree. The Supreme Court has held that "national banks are subject to state laws, unless those laws infringe the national banking laws or impose an undue burden on the performance of the banks' functions." Anderson Nat'l Bank v. Luckett, 321 U.S. 233, 248, 64 S.Ct. 599, 607, 88 L.Ed. 692 (1944); see also McKee Co. v. First Nat'l Bank of San Diego, 265 F. Supp. 1, 5 (S.D.Cal. 1967), aff'd, 397 F.2d 248 (9th Cir. 1968). Although it is true that the National Bank Act, 12 U.S.C. § 93, provides a federal cause of action against the directors of a national bank in certain circumstances, that section is not an exclusive federal remedy preempting state law claims such as shareholder derivative actions. Harmsen v. Smith, 693 F.2d 932, 940-41 (9th Cir. 1982), cert. denied, 464 U.S. 822, 104 S.Ct. 89, 78 L.Ed.2d 97 (1983). I conclude that state law governs the rule of demand and excuse applicable to Mayer's shareholder derivative claim against the Bank, unless the law of demand and excuse infringes the National Bank Act or otherwise imposes an undue burden on the performance of the Bank's functions. I turn now to that question.
Even if the court were to conclude that federal law governs Mayer's claims against the Bank, the court would nonetheless be required to consider whether state law should be incorporated to provide the content of that federal law. See Mardan Corp. v. C.G.C. Music, Ltd., 804 F.2d 1454, 1457 (9th Cir. 1986). To resolve this question, the court would first discern whether Congress intended the courts to develop a federal common law rule or to incorporate state law to fill the interstices of the National Bank Act. Id. at 1458. In the absence of clear congressional intent, one way or the other, the court would determine: (1) whether the issue requires a nationally uniform body of law; (2) whether application of state law would frustrate specific objectives of the federal program; and (3) whether application of a federal rule would disrupt commercial relationships predicated on state law. Id. (citing Kimbell Foods, 440 U.S. at 728-29, 99 S.Ct. at 1458-59).
The National Bank Act describes the requisites to formation and organization of national banks. See 12 U.S.C. § 21-42. Section 24 describes in general terms the corporate powers of a national bank, including the power to make contracts, to sue and be sued "in any court of law and equity," to elect or appoint directors, to prescribe bylaws, and "[t]o exercise by its board of directors or duly authorized officers or agents, subject to law, all such incidental powers as shall be necessary to carry on the business of banking," to issue and sell securities, and to invest in tangible property. 12 U.S.C. § 24. Subchapter III describes in general terms the number, qualifications and process for electing directors of a national bank. 12 U.S.C. § 71-78. Other than authorizing a national bank "to sue and be sued," id. § 24, the Act does not specify how the power to sue is allocated between directors and shareholders. In sum, nothing in the statute creating national banks suggests a conflict with a state's demand and futility requirement in the context of a shareholder derivative suit, nor does the statute suggest that application of state law would impose an undue burden on the Bank's functions. I conclude that application of state law is wholly appropriate.
The California Supreme Court recently considered the language of § 24 of the National Bank Act and concluded that the power to sue and be sued devolves on the bank, rather than being specifically delegated to the directors. Wells Fargo Bank v. Superior Court of the City and County of San Francisco, 53 Cal.3d 1082, 1097-98, 282 Cal.Rptr. 841, 811 P.2d 1025 (1991).
The question of which state's law to apply in determining the contours of demand and futility is readily at hand. Mayer alleges that the Bank's principal place of business is Redding, California. SAC ¶ 4. Under the Act, the Bank is required to designate the place of operation in its organization certificate. 12 U.S.C. § 22. Counterdefendants have not asserted that the Bank's place of operation is other than California. Thus, while Rule 23.1 governs the adequacy of Mayer's pleadings, Kamen, ___ U.S. at ___, 111 S.Ct. at 1716, 114 L.Ed.2d at 164, the court applies the substantive law of California, the Bank's principal place of business, in determining whether Mayer's allegations of demand and futility state a claim for relief.
I also note that for purposes of diversity jurisdiction, a national bank is a "citizen" of the state where it has its principal place of business. American Surety Co. of New York v. Bank of California, 44 F. Supp. 81, 83 (D.Or.), aff'd, 133 F.2d 160 (9th Cir. 1943).
B. Allegations of the Complaint
Mayer alleges that he was a member of the board of directors of the Bank, and was and is now a shareholder. SAC ¶ 3. The Bank's board consists of 13 directors. Id. ¶ 9. The 11 third-party defendants — Gover, Grauel, Guiton, Nathan, Oakes, Peterson, Ramsey, Raudman, Reuss, Steffans and Toney — are alleged to be directors of the Bank. Id. ¶¶ 5, 6.
Mayer seeks redress on behalf of the corporation for the following acts: (1) defendants approved loans and credit for one John Meamber without adequate security and against the advice of other bank officers, at the same time that Oakes entered into and maintained an undisclosed personal transaction with Meamber, id. ¶ 10; (2) defendants approved loans to directors Dawson, Guiton, Ramsey, Raudman, Steffans and Toney on terms more favorable than those made to members of the general public, id. ¶ 12; (3) defendants refused to remove Oakes as President and Chief Loan Officer of the Bank, despite the fact that during the time relevant to this lawsuit, other local banks in Shasta County paid about $2 million in cash dividends, while the Bank paid none, id. ¶ 15; (4) defendants permitted the Bank to enter into a lease agreement with Tri-Penta leasing, a partnership whose principal partners were ten defendant directors — Gover, Grauel, Guiton, Nathan, Peterson, Ramsey, Raudman, Reuss, Steffans, and Toney, id. ¶ 16; (5) defendants caused the Bank to enter into contracts with Ramsey and Raudman, without competitive bidding, to provide Bank services for houseboat repairs, id. ¶ 17; (6) defendants caused the Bank to enter into participation loans with West Point Bank of Sacramento in consideration for reciprocal credit extensions by West Point Bank to Steffans and Toney, id. ¶ 18; (7) defendants caused the Bank to initiate and prepare a stock offering to enable the Bank to make larger loans to directors, id. ¶ 19; (8) defendants prepared a 1989 shareholder notice that failed
Mayer alleges that these loans were made in violation of federal banking regulations, and that during Mayer's term on the board, he was the only director who did not receive a loan from the bank. Id. ¶ 12. When Dawson defaulted on his loan, Mayer alleges defendants failed to take any collection action. Id. ¶ 11. Mayer further alleges that an independent banking consultant hired by the Bank to evaluate its loan portfolio, informed the Bank that the loans to Guiton, Ramsey, Steffans, and Toney were graded "three" on a scale of one to five. Id. ¶ 13. Mayer alleges that at the time these loans were made, the directors knew or should have known that the Comptroller of the Currency had reviewed the Bank's lending policy to directors, and had identified numerous violations regarding insider lending transactions. Id. ¶ 14.
"Mayer called to the attention of the defendant directors that the Bank's poor performance was due in part to the failure of defendant Oakes to take remedial action to correct the Bank's poor lending practices, as alleged [in the complaint]." Id. ¶ 15.
Under the lease, the Bank allegedly leased its office premises at a cost far in excess of comparable leaseholds in the local area. Id. ¶ 16.
The offering allegedly was subsequently withdrawn, at a loss of $125,000 to the Bank. Id. ¶ 19.