Opinion
Master File No. 98-1664, Civil Action No. 98-4385
August 19, 2003
Andrew I. Entwistle, Esq., Entwistle Cappucci LLP., Florham Park, NJ., Attorneys for Plaintiff State Board of Administration of Florida.
Steven S. Radin, Sills Cummis Radin Tischman Epstein Gross, Newark, NJ., Attorneys for Defendants Walter A. Forbes, Christopher K. McLeod, Burton C. Perfit, T. Barnes Donnelley, Stephen A. Greyser, Kenneth A. Williams, Barlett Burnap, Robert P. Rittereiser and Stanley M. Rumbough, Jr.
Richard Schaeffer, Esq., Dornbush Mensch Mandelstam Schaeffer, LLP., New York, NY., Attorneys for Defendant E. Kirk Shelton.
OPINION
Plaintiff State Board of Administration of Florida ("FSBA") moves for leave to file a third amended complaint. Pursuant to Fed.R.Civ.P. 78, the motion is decided without oral argument. The motion is denied.
This case arises out of the April 15, 1998 disclosure by defendant Cendant Corporation ("Cendant") of potential accounting irregularities and the ensuing collapse of the company's stock price. The announcement produced a raft of complaints, including a shareholder class action complaint and a shareholder derivative action, each of which has been settled. The shareholder derivative action, which alleged causes of action that included claims for breach of fiduciary duty against the former officers and directors of CUC (the "CUC Directors"), was settled in July, 2002, pending this Court's approval, which was granted by opinion dated November 19, 2002 and order and final judgment dated November 27, 2002 (the "Order and Final Judgment"). The Order and Final Judgment released and dismissed all derivative claims against the CUC Directors.
CUC was one of the entities which took part in the December 1997 merger that created Cendant. The CUC Directors, for purposes of this Opinion, are Walter A. Forbes, E. Kirk Shelton, Christopher K. McLeod, Burton C. Perfit, T. Barnes Donnelley, Stephen A. Greyser, Kenneth A. Williams, Barlett Burnap, Robert P. Rittereiser, and Stanley M. Rumbough, Jr.
This action was filed in 1998, with a first amended complaint filed on or about March 31, 1999. The first amended complaint included various claims against the CUC Directors, but not a claim for breach of fiduciary duty. The CUC Directors, however, were never served with either the original complaint or the first amended complaint. In September 2002, FSBA retained new counsel, who filed a second amended complaint that included a variety of federal and state law claims against the CUC Directors, but not a claim for breach of fiduciary duty. According to FSBA's new counsel, it was only after filing the second amended complaint that counsel learned that service of process had never been completed on the initial pleadings against the CUC Directors. Counsel concluded that the causes of action asserted against the CUC Directors in the second amended complaint were time barred and could not be maintained. Counsel determined, however, that a claim could be brought for breach of fiduciary duty under the common law of the state of New Jersey, which provided for a six-year limitations period.
FSBA now moves for leave to file the third amended complaint, which drops the previously-asserted claims against the CUC Directors and adds a claim against those defendants for breach of fiduciary duty under New Jersey law. The CUC Directors have filed written objections to the motion which argue that leave should be denied because the new claim is barred by both the settlement of the derivative suit and the statute of limitations, and because of undue delay in seeking to amend the complaint.
The Court must first decide whether to consider the objections of the CUC Directors. FSBA says that the CUC Directors, as non-parties to this lawsuit (having never been served with a pleading), have no standing to objection to their motion seeking leave to amend the complaint. The CUC Directors could only have filed a motion to intervene pursuant to Fed.R.Civ.P. 24, according to FSBA. Having failed to do so, their challenges to the purported cause of action asserted against them in the third amended complaint may be brought only by motion to dismiss, after leave to filed the third amended complaint is granted.
Though mindful of FSBA's position, the Court will consider the CUC Defendants' arguments now, rather than waiting for a motion to dismiss. Rule 15(a) allows a party to amend a complaint by leave of the court. "[L]eave shall be freely given when justice so requires," and leave is denied only on grounds of undue delay, bad faith, dilatory motive, prejudice, and futility. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1434 (3d Cir. 1997) (citation omitted). Ordinarily, any objections to motions for leave to amend are brought by individuals or entities who have already been made parties. However, if a proposed amendment to a pleading would indeed be futile, it would serve little purpose to permit the amendment solely because the futility was pointed out by an individual who was to be made a party by the amendment. To require the CUC Directors to accept service of the third amended complaint and then file a motion to dismiss, raising identical arguments to those of their opposition to the current motion, would place form over substance and waste the resources of the parties and the Court. Particularly here, where the amendment is sought solely to add new parties to the litigation, the Court fails to see whom it would prejudice to hear the new parties now rather than later. The Court will consider the CUC Directors' objections. See State of New York v. Solvent Chem. Co., 179 F.R.D. 90, 91 (W.D.N.Y. 1998) (court considered arguments from non-party in rejecting motion for leave to amend complaint adding the non-party).
Foremost among the CUC Directors' objections is that the claim asserted against them in the third amended complaint is barred by the Order and Final Judgment, which settled and dismissed the derivative claim. As FSBA concedes, the Order and Final Judgment dismissed with prejudice all derivative claims against the CUC Directors. FSBA asserts that their claim against the CUC Directors is not derivative, however, but rather is a direct claim and is therefore not barred by the Order and Final Judgment. The issue before the Court is straightforward: if the claim is derivative, then it is barred and the motion for leave to amend should be denied for futility; if it is direct, then it is not barred and, unless there is some other viable objection, leave to amend should be granted.
Because a corporation is regarded as an entity separate and distinct from its shareholders, "suits to redress corporate injuries which secondarily harm all shareholders alike are brought only by the corporation." Strasenburgh v. Straubmiller, 146 N.J. 527, 549, 683 A.2d 818, 829 (1996) (citations omitted). Accordingly, "[w]hen an injury to corporate stock falls equally upon all stockholders, then an individual stockholder may not recover for the injury to his stock alone, but must seek recovery derivatively in behalf of the corporation."Id. at 550, 683 A.2d at 829, quoting Cowin v. Bresler, 741 F.2d 410, 414 (D.C. Cir. 1984). In New Jersey, "[s]hareholders cannot sue for injuries arising from the diminution in value of their shareholdings resulting from wrongs allegedly done to their corporations." Id., quoting Pepe v. General Motors Acceptance Corp., 254 N.J. Super. 662, 666, 604 A.2d 194 (App.Div.), certif. denied 130 N.J. 11, 611 A.2d 650 (1992). This general rule allows a "special injury" exception, which applies "where there is a wrong suffered by [a] plaintiff that was not suffered by all stockholders generally or where the wrong involves a contractual right of the stockholders, such as the right to vote." Id., quoting In re Tri-Star Pictures, Inc., 634 A.2d 319, 330 (Del. 1993). Claims of breach of fiduciary duty on the part of corporate directors will generally be regarded as derivative claims unless the injury to the plaintiff's shares is distinct from the injury to other shares, or where the breach of duty cases a "special injury." Id. at 552, 683 A.2d 830 (citations omitted). Here, the third amended complaint must allege an injury to FSBA distinct from the injuries suffered by other shareholders, or a "special injury" that would give rise to a direct action.
A review of the third amended complaint reveals, however, that FSBA complains of injuries related exclusively to the diminution of the value of its Cendant shares. Indeed, the claim for breach of fiduciary duty against the CUC Directors states in part, "[The CUC Directors] have violated their fiduciary duties to FSBA and are liable to FSBA for the losses sustained in connection with its purchases of CUC and Cendant shares." (Proposed third amended complaint ¶ 249 (emphasis added)). No effort is made to distinguish this injury from the injury suffered by all other shareholders — namely, the diminution in share price resulting from the corporate fraud — and there is no allegation of "special injury." In their written submissions supporting their motion for leave to amend, FSBA makes no effort to explain how its injuries were distinct from injuries suffered by other shareholders or were anything other than a reduction in the market value of their shares. Rather, FSBA merely says in conclusory fashion that its injures were direct, not derivative. Stating it does not make it so, however. To say again, where a plaintiff's injury is the diminution in value of its shares, and that injury is identical to the diminution in value of all shareholders' holdings, the resulting claim is derivative, not direct.
The FSBA's cause of action against the CUC Directors alleged in the third amended complaint is a derivative claim. All derivative claims were dismissed with prejudice by the Order and Final Judgment. It follows then that the proposed third amended complaint is futile, and leave to amend is properly denied.
ORDERS
Plaintiffs State Board of Administration of Florida filed a motion for leave to file a third amended complaint. The Court, having found that the proposed third amended complaint would be futile, on this 19th day of August, 2003, hereby ORDERS that the motion for leave to amend is DENIED.