Justia Civil Procedure Opinion Summaries

Taj Jerry Mahabub, founder and Chief Executive Officer (“CEO”) of GenAudio, Inc. (“GenAudio”; collectively referred to as “Appellants”) attempted to secure a software licensing deal with Apple, Inc. (“Apple”). Mahabub intended to integrate GenAudio’s three-dimensional audio software, “AstoundSound,” into Apple’s products. While Appellants were pursuing that collaboration, the Securities and Exchange Commission (“SEC”) commenced an investigation into Mr. Mahabub’s conduct: Mahabub was suspected of defrauding investors by fabricating statements about Apple’s interest in GenAudio’s software and violating registration provisions of the securities laws in connection with sales of GenAudio securities. The district court found Mahabub defrauded investors and violated the securities laws. The court determined that Appellants were liable for knowingly or recklessly making six fraudulent misstatements in connection with two offerings of GenAudio’s securities in violation of the antifraud provisions of the securities laws. Appellants appealed, but finding no reversible error, the Tenth Circuit affirmed the district court’s grant of summary judgment in favor of the SEC. View "SEC v. GenAudio Inc., et al." on Justia Law

Leslie Murphy, a former shareholder of Covisint Corporation, brought an action against Samuel Inman, III and other former Covisint directors, alleging they breached their statutory and common-law fiduciary duties owed to plaintiff when Covisint entered into a cash-out merger agreement with OpenText Corporation in 2017. Defendants moved for summary judgment, arguing plaintiff lacked standing because his claim was derivative in nature and he did not satisfy the requirements for bringing a derivative shareholder action under MCL 450.1493a. Plaintiff responded that he was permitted to bring a direct shareholder action under MCL 450.1541a, and that defendants owed common-law fiduciary duties to plaintiff as a shareholder. The trial court granted defendants’ motion, ruling that plaintiff lacked standing to bring a direct shareholder action because he could not demonstrate an injury to himself without showing injury to the corporation, nor could he show harm separate and distinct from that of other Covisint shareholders. The court also rejected plaintiff’s common-law theory because it arose out of the same alleged injury as his statutory claim. The Court of Appeals affirmed. The Michigan Supreme Court reversed, however, finding that a shareholder who alleges the directors of the target corporation breached their fiduciary duties owed to the shareholder in handling a cash-out merger could bring that claim as a direct shareholder action. The Court of Appeals erred by concluding that plaintiff’s claim was derivative. View "Murphy v. Inman" on Justia Law

In March 2012, First Solar, Inc. stockholders filed a class action lawsuit against the company alleging that it violated federal securities laws by making false or misleading public disclosures ("Smilovits Action"). National Union Fire Insurance Company of Pittsburgh, PA (“National Union”) provided insurance coverage for the Smilovits Action under a 2011–12 $10 million “claims made” directors and officers insurance policy. While the Smilovits Action was pending, First Solar stockholders who opted out of the Smilovits Action filed what has been referred to as the Maverick Action. The Maverick Action alleged violations of the same federal securities laws as the Smilovits Action, as well as violations of Arizona statutes and claims for fraud and negligent misrepresentation. In this appeal the issue presented for the Delaware Supreme Court's review was whether the Smilovits securities class action, and a later Maverick follow-on action were related actions, such that the follow-on action was excluded from insurance coverage under later-issued policies. The Superior Court found that the follow-on action was “fundamentally identical” to the first-filed action and therefore excluded from coverage under the later-issued policies. The Supreme Court found that even though the court applied an incorrect standard to assess the relatedness of the two actions, judgment was affirmed nonetheless because under either the erroneous “fundamentally identical” standard or the correct relatedness standard defined by the policies, the later-issued insurance policies did not cover the follow-on action. View "First Solar, Inc. v. National Union First Insurance Company of Pittsburgh, PA" on Justia Law

The Enterprises, Fannie Mae and Freddie Mac, suffered financial losses in 2008 when the housing market collapsed. The Housing and Economic Recovery Act of 2008 (HERA), created the Federal Housing Finance Agency (FHFA), tasked with regulating the Enterprises, including stepping in as conservator, 12 U.S.C. 4511. FHFA placed the Enterprises into conservatorship, then negotiated preferred stock purchase agreements (PSPAs) with the Treasury Department to allow the Enterprises to draw up to $100 billion in exchange for senior preferred non-voting stock having quarterly fixed-rate dividends. A “net worth sweep” under the PSPAs replaced the fixed-rate dividend formula with a variable one that required the Enterprises to make quarterly payments equal to their entire net worth, minus a small capital reserve amount, causing the Enterprises to transfer most of their equity to Treasury, leaving no residual value for shareholders.In a companion case, the Federal Circuit affirmed the dismissal of shareholders’ direct claims challenging the net worth sweep and concluded that the shareholders’ derivatively pled allegations should also be dismissed.The Washington Federal Plaintiffs alleged direct takings and illegal exaction claims, predicated on the imposition of the conservatorships, rather than on FHFA's subsequent actions. The Federal Circuit affirmed the dismissal of those claims. Where Congress mandates the review process for an allegedly unlawful agency action, plaintiffs may not assert a takings claim asserting the agency acted in violation of a statute or regulation. These Plaintiffs also lack standing to assert their substantively derivative claims as direct claims. View "Washington Federal v. United States" on Justia Law

In October 2018, a Boeing 737 MAX airliner crashed in the sea near Indonesia, killing everyone on board. In March 2019, a second 737 MAX crashed in Ethiopia, again killing everyone on board. Within days of the second crash, all 737 MAX airliners around the world were grounded. The FAA kept the planes grounded until November 2020, when it was satisfied that serious problems with the planes’ flight control systems had been corrected. The Pension Plan, a shareholder of the Boeing Company, filed a derivative suit on behalf of Boeing under the Securities Exchange Act of 1934, 15 U.S.C. 78n(a)(1), alleging that Boeing officers and board members made materially false and misleading public statements about the development and operation of the 737 MAX in Boeing’s 2017, 2018, and 2019 proxy materials.The district court dismissed the suit without addressing the merits, applying a Boeing bylaw that gives the company the right to insist that any derivative actions be filed in the Delaware Court of Chancery. The Seventh Circuit reversed. Because the federal Exchange Act gives federal courts exclusive jurisdiction over actions under it, applying the bylaw to this case would mean that the derivative action could not be heard in any forum. That result would be contrary to Delaware corporation law, which respects the non-waiver provision in Section 29(a) of the federal Exchange Act, 15 U.S.C. 78cc(a). View "Seafarers Pension Plan v. Bradway" on Justia Law

Christopher Kjelgren appealed a district court judgment entered in favor of Cavare, Inc., and the subsequent order denying his motion for relief from the judgment. In 2017, Cavare, Inc. (also referred to as “Cavare USA”) commenced this action seeking a judgment declaring Cavare USA the rightful owner of a one-third interest in Petroleum Services Drilling Motors, Inc. (“PSDM”), and claiming breach of fiduciary duty, conversion, and unjust enrichment to recover $230,000 in shareholder distributions that PSDM had made to Kjelgren. Following a bench trial, the district court found Cavare USA was the owner of the disputed PSDM shares and $230,000 in shareholder distributions issued to Kjelgren belonged to Cavare USA. The North Dakota Supreme Court concluded the court’s finding that Cavare, Inc. was the rightful owner of disputed shares corresponding to a one-third interest in Petroleum Services Drilling Motors, Inc. was not clearly erroneous. Furthermore, the Supreme Court concluded the court did not abuse its discretion in denying his motion for relief from the judgment under N.D.R.Civ.P. 60. View "Cavare v. Kjelgren" on Justia Law

In 2017, the Delaware Court of Chancery held that Plaintiff Robert Lenois had pled with particularity that the controlling stockholder of Erin Energy Corporation (“Erin” or the “Company”) had acted in bad faith. It further held that Lenois had pled either “very serious claims of bad faith” or “a duty of care claim” against the remainder of Erin’s board in connection with two integrated transactions. In those transactions, the controller allegedly obtained an unfair windfall by selling certain Nigerian oil assets to Erin. The trial court dismissed the derivative claims on standing grounds (i.e., holding that demand was not excused). Lenois appealed that decision. During the pendency of the appeal, Erin voluntarily filed for bankruptcy. The Chapter 7 Trustee obtained the permission of the Bankruptcy Court to pursue, on a direct basis, the claims that had been asserted in the Lenois action in the Court of Chancery. As a result of the bankruptcy proceedings, which vested the Trustee with control over the claims, the Delaware Supreme Court determined that the sole issue on appeal was moot. The case was remanded to the Court of Chancery to resolve two pending motions — a Rule 60(b) motion and the Trustee’s motion pursuant to Rule 25(c) to be substituted for nominal defendant Erin and then realigned as plaintiff (the “Realignment Motion”). The Court of Chancery denied the Rule 60(b) motion and summarily denied the Rule 25(c) motion. Here, the Supreme Court reversed, holding the Court of Chancery should have granted the Trustee’s Substitution and Realignment Motion. View "Lenois v. Lukman" on Justia Law

The issue presented from this interlocutory appeal of a Court of Chancery order holding that Appellees/Cross-Appellants, former stockholders of TerraForm Power, Inc. (“TerraForm”), had direct standing to challenge TerraForm’s 2018 private placement of common stock to Appellant/Cross-Appellees Brookfield Asset Management, Inc. and its affiliates, a controlling stockholder, for allegedly inadequate consideration. The trial court held that Plaintiffs did not state direct claims under Tooley v. Donaldson, Lufkin & Jennette, Inc., but did state direct claims predicated on a factual paradigm “strikingly similar” to that of Gentile v. Rossette, and that Gentile was controlling here. Appellants contended Gentile was inconsistent with Tooley, and that the Delaware Supreme Court’s decision in Gentile created confusion in the law and therefore ought to be overruled. Having engaged in a "full and fair presentation and searching inquiry has been made of the justifications for such judicial action," the Supreme Court overruled Gentile. Accordingly, the Court of Chancery's decision was reversed, but not because the Court of Chancery erred, but rather, because the Vice Chancellor correctly applied the law as it existed, recognizing that the claims were exclusively derivative under Tooley, and that he was bound by Gentile. View "Brookfield Asset Management, Inc., v. Rosson" on Justia Law

In 2017, a third-party entity acquired Authentix Acquisition Company, Inc. (“Authentix”). The cash from the merger was distributed to the stockholders pursuant to a waterfall provision. The Authentix common stockholders received little to no consideration. A group of common stockholders filed a petition for appraisal to the Court of Chancery under Section 262 of the Delaware General Corporation Law (“DGCL”). Authentix moved to dismiss the petition, arguing that the petitioners had waived their appraisal rights under a stockholders agreement that bound the corporation and all of its stockholders. The Court of Chancery granted the motion to dismiss, holding that the petitioners had agreed to a clear provision requiring that they “refrain” from exercising their appraisal rights with respect to the merger. The court awarded the petitioners equitable interest on the merger consideration and declined to award Authentix pre-judgment interest under a fee-shifting provision. All parties appealed the Court of Chancery’s decisions. Pointing to Delaware’s "strong policy favoring private ordering," Authentix argued stockholders were free to set the terms that will govern their corporation so long as such alteration was not prohibited by statute or otherwise contrary to Delaware law. Authentix contended a waiver of the right to seek appraisal was not prohibited by the DGCL, and was not otherwise contrary to Delaware Law. "As a matter of public policy, there are certain fundamental features of a corporation that are essential to that entity’s identity and cannot be waived." Nonetheless, the Delaware Supreme Court determined the individual right of a stockholder to seek a judicial appraisal was not among those fundamental features that could not be waived. Accordingly, the Court held that Section 262 did not prohibit sophisticated and informed stockholders, who were represented by counsel and had bargaining power, from voluntarily agreeing to waive their appraisal rights in exchange for valuable consideration. Further, the Court found the Court of Chancery did not abuse its discretion by awarding the petitioners equitable interest on the merger consideration; nor did the court abuse its discretion by declining to award Authentix pre-judgment interest under a fee-shifting provision. Accordingly, the Court of Chancery’s judgment was affirmed. View "Manti Holdings, LLC et al. v. Authentix Acquisition Company, Inc." on Justia Law

In March 2010, Orrstown made a stock offering at $27 per share. SEPTA invested some of its pension funds in Orrstown stock during this offering and later purchased Orrstown stock on the open market. In 2011-2012 Orrstown made disclosures concerning its financial health. Orrstown’s stock price dropped following each disclosure falling to $8.20 by April 2012.SEPTA filed a purported class action in May 2012, on behalf of a “Securities Act Class" of investors who purchased Orrstown stock “in connection with, or traceable to,” Orrstown’s 2010 Registration Statement, and the “Exchange Act Class” of investors who later purchased Orrstown stock on the open market. A first amended complaint added the Underwriters and the Auditor. The district court dismissed the amended complaint without prejudice for failure to meet pleading requirements. SEPTA filed its Second Amended Complaint in February 2016. The court dismissed all Securities Act claims against Orrstown but did not dismiss the Exchange Act claims except for some individual Orrstown officers. The court dismissed all claims against the Underwriters and the Auditor. The parties began discovery, which triggered a lengthy process in which the parties sought to have federal and state regulators review the relevant documents. In April 2019, SEPTA moved for leave to file a Third Amended Complaint, arguing it had identified evidence to support previously-dismissed claims through discovery.The court granted SEPTA’s motion despite the expiration of the three-year (Securities Act) and five-year (Exchange Act) repose periods. The Third Circuit affirmed. Federal Rule of Civil Procedure 15(c), which provides an exception more commonly applied to statutes of limitations, also allows amendment of a pleading after the expiration of a repose period here because the Rule’s “relation-back” doctrine leaves the legislatively-mandated deadline intact and does not disturb any of the defendants’ vested rights. View "Southeastern Pennsylvania Transportation Authority v. Orrstown Financial Services Inc." on Justia Law