Opinion
Index No. 652580/11
12-29-2014
DAVID SHAEV PROFIT SHARING PLAN, Plaintiff, v. BANK OF AMERICA CORPORATION, Defendant.
DECISION AND ORDER Motion Sequence No. 002 003 MELVIN L. SCHWEITZER, J. :
David Shaev Profit Sharing Plan (Plaintiff) asserts claims in this putative derivative shareholder action on behalf of Bank of America Corporation (Bank of America) against certain of Bank of America's current and former directors (Individual Defendants) for breaches of fiduciary duty. Bank of America, in its capacity as nominal defendant, moves to dismiss this action pursuant to CPLR 3211 (a) (3). The Individual Defendants join Bank of America in its motion under CPLR 3211 (a) (3) and further move for dismissal pursuant to CPLR 3211 (a) (7) and CPLR 3211 (a) (8).
Background
The following facts are drawn from allegations contained in Plaintiff's Sixth Amended Complaint and the other undisputed court and public records filed by the parties in relation to the motions at bar. (See RGH Liquidating Trust v Deloitte & Touche LLP, 71 AD3d 198, 207 [1st Dept 2009] [on a motion to dismiss, "a court may take judicial notice of undisputed court records and files"], revd on other grounds, 17 NY3d 397 [2011]; see also In re Avon Products, Inc., 2013 WL 4022625 (NY Sup), 1 [a court may consider on a motion to dismiss publicly available documents such as SEC filings and press releases]).
Bank of America is a multinational banking and financial services corporation incorporated under the laws of Delaware with a principal headquarters in Charlotte, North Carolina. Bank of America, directly or through its subsidiaries, conducts substantial business and maintains a significant presence in New York with numerous offices, banking branches, and real estate holdings in the state.
Plaintiff filed its original complaint on September 20, 2011 alleging a single claim on behalf of Bank of America for breaches of fiduciary duty related to improper residential mortgage-backed securitization practices (RMBS Claim). In an amended complaint filed on August 20, 2012, Plaintiff added a new cause of action relating to Bank of America's purported participation in a scheme to manipulate the London Interbank Offered Rate (LIBOR Claim). In total, Plaintiff has submitted six amendments to its complaint, including the operative Sixth Amended Complaint on September 26, 2013.
Plaintiff asserts that Individual Defendants Brian T. Moynihan, Charles O. Holliday, Jr., Susan S. Bies, William F. Boardman, Frank P. Bramble Sr., Charles K. Gifford, D. Paul Jones, Jr., Monica C. Lozano, Thomas J. May, Donald E. Powell, Charles O. Rossotti (mistakenly referred to as "Charles O. Rosetti" in the Sixth Amended Complaint and caption), and Robert W. Scully were current directors of Bank of America at the time Plaintiff submitted the Sixth Amended Complaint in September 2013. Plaintiff asserts that the remaining Individual Defendants served as former directors of Bank of America. Bank of America disputes the particular composition of Bank of America's board that Plaintiff sets forth in the Sixth Amended Complaint.
Plaintiff names William F. Boardman as a defendant in the complaint, although Mr. Boardman does not appear in the caption.
The remaining Individual Defendants (i.e. those that are not named as current directors at the time the Sixth Amended Complaint was filed) are William Barnett, III, Charles W. Coker, Virgis W. Colbert, John T. Collins, Gary L. Countryman, Tommy R. Franks, Paul Fulton, Donald E. Guin (mistakenly referred to as "Donald E. Grimm" in the caption), W. Steven Jones, Kenneth D. Lewis, Walter E. Massey, Patricia E. Mitchell, Joseph W. Prueher, Edward L. Romero, Thomas M. Ryan, Jr., O. Temple Sloan, Jr., Meredith R. Spangler, Robert L. Tillman, and Jackie M. Ward.
In its affirming brief, Bank of America establishes that, in fact, at the time Plaintiff submitted the Sixth Amended Complaint, Bank of America's board of directors consisted of Individual Defendants Moynihan, Holliday, Bies, Bramble, Gifford, Lozano, and May, as well as eight additional non-defendants.
Plaintiff maintains the RMBS Claim and LIBOR Claim in the Sixth Amended Complaint. With respect to the RMBS Claim, Plaintiff alleges, inter alia, that the Individual Defendants "encouraged, approved and pushed" Bank of America to engage in risky activity related to its mortgage securitization business and, consequently, Bank of America "has been and will be significantly damaged." With respect to the LIBOR Claim, Plaintiff alleges, inter alia, that, "with the express approval and authorization of the Individual Defendants," Bank of America "engaged in a scheme with other prominent financial institutions to depress LIBOR" and, consequently, Bank of America "has been sued by investors seeking substantial recoveries and it may be and will be liable for substantial damages."
The Individual Defendants and Bank of America move to dismiss the action under CPLR 3211 (a) (3) on the ground that Plaintiff has failed to establish derivative standing under the applicable laws. The Individual Defendants further move for dismissal under CPLR 3211 (a) (7) on the ground that Plaintiff has failed to sufficiently plead a claim for breach of fiduciary duty, and under CPLR 3211 (a) (8) on the ground that this Court lacks jurisdiction over several of the Individual Defendants.
Discussion
CPLR 3211 (a) (3) provides that a court may dismiss an action on the ground that "the party asserting the cause of action has not legal capacity to sue." The primary issue in such a motion to dismiss is whether a plaintiff has standing to bring a shareholder derivative action on behalf of the nominal defendant. Plaintiff contends that this determination should be made under New York law, specifically the New York Banking Law (NY Banking Law) and the New York Business Corporation Law (NY Business Corporation Law). In support of this contention, Plaintiff notes Bank of America's real estate holdings in New York as well as the banking operations of its numerous subsidiaries, several of which are registered in the state as banking institutions. Bank of America and the Individual Defendants contend that Delaware law should govern this action in deference to the "internal affairs doctrine."
New York Banking LawSection 6025 of the NY Banking Law provides a procedural basis by which a stockholder may bring a derivative action on behalf of a banking "corporation," which term is defined under Section 1001 as "all banks, trust companies, safe deposit companies, investment companies, [and] mutual trust investment companies[.]" Section 1002 of the NY Banking Law excludes from such definition "any other banking organization" that is not enumerated within Section 1001. The nominal defendant in this action, Bank of America, is not a "corporation" as defined under Section 1001, but rather it is a bank holding company and a separate corporate entity from its bank subsidiaries. As such, the applicable provisions of the NY Banking Law do not apply here.
New York Business Corporation Law
Similarly, Section 626 of the NY Business Corporation Law provides shareholders of corporations with the ability to initiate derivative actions in New York, and Section 1319 makes Section 626 applicable to foreign corporations doing business in New York. (See Business Corporation Law § 1319 [McKinney], [Section 626 "shall apply to a foreign corporation doing business in this state, its directors, officers and shareholders[.]"; Culligan Soft Water Co. v Clayton Dubilier & Rice LLC, 118 AD3d 422 [1st Dept 2014], [Section 1319 "expressly provides that...the issue of plaintiffs' standing to bring a shareholder derivative action is governed by New York law[.]"])
Bank of America is considered a foreign corporation under the NY Business Corporation Law, and, thus, certain provisions of the NY Business Corporation law apply here. However, Section 1319 of the NY Business Corporation Law should not be interpreted as a conflict of laws rule that absolutely compels its application to matters of substantive law. Rather, it provides a procedural basis that enables the courts in New York to assume jurisdiction of derivative actions involving foreign corporations and to apply the applicable substantive law. (See Potter v Arrington, 11 Misc 3d 962, 966 [ Sup Ct 2006 ]; citing Lewis v Dicker, 118 Misc 2d 28 [ Sup Ct 1982 ]).
As a procedural matter, to succeed in bringing a derivative action in New York, Section 626 (c) of the NY Business Corporation Law provides that a plaintiff must "set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort." The Court of Appeals has interpreted this statute as requiring that a plaintiff must demand that Bank of America's board of directors initiate an action, or otherwise thoroughly set forth why such demand would be futile. (See Marx v Akers, 88 NY2d 189, 193 [1996]; citing Barr v Wackman, 36 NY2d 371, 377 [1975]). As Plaintiff failed to make demand on Bank of America's board of directors prior to initiating its derivative action, the only manner in which the instant action may proceed is for this Court to find that Plaintiff has sufficiently pled the futility of any demand. (See Barr v Wackman, 36 NY2d at 379, ["The basic question is whether from the particular circumstances of the liability charged it may be inferred that the making of such a demand would indeed be futile."]) Within this procedural framework, the issue of whether the demand requirement has been met or can be excused as futile is a matter of substantive law. (See Lewis v Dicker, 118 Misc 2d at 31)
Choice of Substantive Law
New York's courts frequently apply the substantive law of the state of incorporation - in this case, Delaware law - when evaluating whether demand may be excused on the ground that such demand would be futile. (See Lerner ex rel. Citigroup Inc. v Prince, 36 Misc 3d 297, 305 [ Sup Ct 2012 ], affd, 119 AD3d 122 [1st Dept 2014]: see also David Shaev Profit Sharing Account v Cayne, 24 AD3d 154 [1st Dept 2005]; Zion v Kurtz, 50 NY2d 92, 100 [1980]; Graczykowski v Ramppen, 101 AD2d 978, 979 [3d Dept 1984]; Cent. Laborers' Pension Fund v Blankfein, 111 AD3d 40, 44-45 [1st Dept 2013]). Furthermore, since the issue of demand is a matter that inherently concerns the internal relations of Bank of America, the application of Delaware law in the instant action is consistent with the "internal affairs doctrine" espoused by the US Supreme Court. (See Edgar v MITE Corp., 457 US 624, 102 S Ct 2629, 73 L Ed 2d 269 [1982].)
Despite the strong public policy of New York's courts favoring the use of the "internal affairs doctrine," the court must still use discretion before automatically applying it in matters where the subject corporation has significant contacts with New York. (See Greenspun v Lindley, 36 NY2d 473, 478 [1975]). Noting the Court of Appeals decision in German-Am. Coffee Co. v Diehl (216 NY 57 [1915]), Plaintiff argues that Bank of America's physical presence in New York provides grounds for the Court's application of New York substantive law rather than Delaware law. The circumstances in Diehl, however, can be distinguished from the instant action. The defendant corporation in Diehl was both headquartered and "managed, directed and conducted its business" from New York. Here, in contrast, Bank of America's principal place of business is in North Carolina, and Plaintiff makes no particularized allegations of misconduct by the Individual Defendants in New York. While Bank of America maintains a substantial presence and significant contacts in New York, "it is Delaware, not New York, which has an interest superior to that of all other states in deciding issues concerning directors' conduct of the internal affairs of corporations chartered under Delaware law." (See Hart v Gen. Motors Corp., 129 AD2d 179, 185 [1st Dept 1987].)
Plaintiff also raises the recent Culligan decision in which the First Department held that New York law applies in derivative suits involving foreign corporations to the extent a plaintiff alleges violations of Section 720 of the NY Business Corporation Law (e.g. waste and unlawful conveyance). (See Culligan v Dubilier, 118 AD3d at 423). However, in Culligan, the First Department also declared that the law of the state of incorporation should be applied to claims arising from Section 717 of the NY Business Corporation Law, which governs the duty of directors. (Culligan v Dubilier, 118 AD3d at 423). Here, where Plaintiff alleges that the directors of a Delaware corporation breached their fiduciary duties, the issues pertaining to whether Plaintiff has met the threshold for pleading demand futility will be decided under Delaware substantive law.
Demand Futility Under Delaware Law
Delaware's demand requirement in derivative actions is codified in Delaware Chancery Court Rule 23.1, which provides, in relevant part, that the complaint must 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." The court is tasked with focusing "on whether the shareholder has exhausted intracorporate remedies, namely whether the shareholder has made a demand on the board of directors." (see In re Morgan Stanley Derivative Litig., 542 F Supp 2d 317, 321 [SDNY 2008]) In the event that Plaintiff failed to make pre-suit demand on the ground that such demand would be futile, as is the case here, a plaintiff must plead with particularity why the shareholder was justified in having demand excused.
The futility of Plaintiff's demand is examined with respect to the membership of Bank of America's board of directors at the time each claim is asserted and validly in litigation (see Braddock v Zimmerman, 906 A2d 776, 785 [Del 2006]; citing Harris v Carter, 582 A2d 222 [Del Ch 1990]). Plaintiff asserted the RMBS Claim in its original complaint on September 20, 2011, and the LIBOR Claim in an amended complaint on August 20, 2012. Thus, to excuse the RMBS Claim and LIBOR Claim, Plaintiff must show that demand of a majority of the 2011 board and 2012 board, respectively, would be futile. If Plaintiff "makes no effort to identify the directors who would have received demand for [a] new claim" at each relevant point in time, that claim may be "dismissed pursuant to Rule 23.1". (see Saito v McCall, CIV.A. 17132-NC, 2004 WL 3029876, at *11 [Del Ch Dec. 20, 2004] overruled on other grounds by Lambrecht v O'Neal, 3 A3d 277 [Del 2010])
In pleading futility of such demand, Plaintiff must satisfy Delaware Chancery Court Rule 23.1 and must "comply with stringent requirements of factual particularity that differ substantially from the permissive notice pleadings governed solely by Chancery Rule 8 (a)" that simply requires a "short and plain statement showing the pleader is entitled to relief." (See Brehm v Eisner, 746 A2d 244, 254 [Del 2000]; see also Sec. Police and Fire Professionals of Am. Retirement Fund v Mack, 30 Misc 3d 663, 670 [ Sup Ct 2010 ]). The particularized allegations must be pled in a "director-by-director" fashion and conclusory statements will be disfavored and rejected. (See Khanna v McMinn, CIV.A. 20545-NC, 2006 WL 1388744, at *12 [Del Ch May 9, 2006]; see also Levine v Smith, 591 A2d 194, 207 [Del 1991], 746 A2d 244; Scattered Corp. v Chicago Stock Exch., Inc., 701 A2d 70, 75 [Del 1997]) Should a plaintiff fail to meet this heavy burden, dismissal of the suit is warranted.
Delaware courts have established two tests relevant here to evaluating the futility of demand: the Aronson test and the Rales test. The Aronson test applies when conscious and affirmative decisions of the board are at issue, and requires Plaintiff to plead particularized facts spawning a reasonable doubt that either "(1) the directors are disinterested and independent" or "(2) the challenged transactions are otherwise the product of a valid exercise of business judgment." (See Aronson v Lewis, 473 A2d 805, 814 [Del 1984]). If the court finds a reasonable doubt to either prong of the Aronson test, demand is excused. (See Sec. Police and Fire Professionals of Am. Retirement Fund v Mack, 30 Misc 3d 663, 670 [ Sup Ct 2010 ]). The Rales test applies when the board's failure to act is at issue. Under the Rales test, the court examines whether "the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to the demand." (See Rales v Blasband, 634 A2d 927, 934 [Del 1993]). To satisfy the Rales test, Plaintiff must show that "a majority of the company's board of directors were incapable of objectively responding to a demand because they either (1) face a sufficiently substantial threat of personal liability and arc thus themselves interested, or (2) are compromised in their ability to act independently of the interested directors." (See In re Facebook, Inc., IPO Sec. and Derivative Litig., 13 CIV. 2830, 2013 WL 6798160, at *17 [SDNY Dec. 23, 2013]; see also Desimone v Barrows, 924 A2d 908, 928 [Del Ch 2007]).
The court is persuaded to grant dismissal on the ground that the Plaintiff has failed to adequately plead particular facts that would enable the court to evaluate the interestedness and independence of, or the valid exercise of business judgment by, a majority of the directors at the times each claim was submitted. The Sixth Amended Complaint fails to specify which Individual Defendants were members of Bank of America's board in 2008 and 2011, when the RMBS and LIBOR claims were respectively asserted. The Sixth Amended Complaint simply alleges that certain Individual Defendants were directors at the time the Sixth Amended Complaint was submitted (e.g. September 2013) while certain other Individual Defendants were no longer members of the board at that time. In its answering brief, Plaintiff fails to rectify this fatal deficiency, but instead continues to allege wrongdoing by the board as a group rather then in a director-by-director fashion. As a result of this deficiency, the court is unable to evaluate the interestedness or judgment of the individual directors who composed a majority of the 2008 and 2011 boards.
Even if Plaintiff had identified which Individual Defendants served as directors at the relevant points in time, the court finds that Plaintiff has failed to plead demand cxcusal with the particularity required by the Delaware Court of Chancery Rule 23.1. While the Sixth Amended Complaint is abounding with generalized and conclusory allegations, it is devoid of any facts - either particular or conclusory - regarding the specific misconduct of any individuals or their involvement in Bank of America's wrongdoing. For example, the Sixth Amended Complaint does not identify any resolutions of the board approving Bank of America's mortgage securitization practices or LIBOR submissions, or point to any other facts implicating individual directors in those practices. (See Sec. Police and Fire Professionals of Am. Retirement Fund v Mack, 30 Misc 3d at 674 [the court dismissed a claim that a board breached its fiduciary duties because plaintiffs pled "no specific evidence" that the board approved the challenged action; see also Wilson v Tully, 243 AD2d 229, 234 [1st Dept 1998] [the court dismissed a derivative complaint because plaintiff failed to "point to any specific conduct of the individual directors" to support the conclusory assertion that they "made a conscious decision to authorize" certain company practices)].
With respect to the allegations that amount to issues of Board oversight and would thus be evaluated under the Rales test, Plaintiff's contentions are also wholly conclusory. Such allegations are insufficient to excuse demand because they fail to establish that any of the Individual Defendants consciously acted in bad faith or failed to act in good faith. (See In re Dow Chem. Co. Derivative Litig., CIV.A. 4349-CC, 2010 WL 66769 [Del Ch Jan. 11, 2010] [the court dismissed oversight claim on demand grounds because plaintiff failed to plead particularized allegations of bad faith); see also In re Citigroup Inc. Shareholder Derivative Litig., 964 A2d 106, 128 [Del Ch 2009]; Ash v McCall, CIV.A. 17132, 2000 WL 1370341 [Del Ch Sept. 15, 2000]).
For the foregoing reasons, the defendants' motion to dismiss pursuant to CPLR 3211 (a) (3) is granted. The Individual Defendants' additional motions brought pursuant to CPLR 3211 (a) (7) and CPLR 3211 (a) (8) are therefore moot, and the court declines to consider them at this time.
Conclusion
ORDERED that Bank of America's and the Individual Defendants' motion to dismiss Plaintiff's complaint pursuant to CPLR 3211 (a) (3) is granted; and it is further
ORDERED that the Individual Defendants' motions to dismiss Plaintiffs' complaint pursuant to CPLR 3211 (a) (7) and CPLR 3211 (a) (8) are denied as moot. Dated: December 29, 2014
ENTER:
/s/_________
J.S.C.