Smith v. Stevens

957 F. Supp. 2d 466, 2013 WL 3929712, 2013 U.S. Dist. LEXIS 107699
CourtDistrict Court, S.D. New York
DecidedJuly 30, 2013
DocketNo. 11 Civ. 7148(JSR)
StatusPublished
Cited by4 cases

This text of 957 F. Supp. 2d 466 (Smith v. Stevens) is published on Counsel Stack Legal Research, covering District Court, S.D. New York primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Smith v. Stevens, 957 F. Supp. 2d 466, 2013 WL 3929712, 2013 U.S. Dist. LEXIS 107699 (S.D.N.Y. 2013).

Opinion

MEMORANDUM ORDER

JED S. RAKOFF, District Judge.

By “bottom-line” Order dated October 12, 2012, the Court, after full consideration of the parties’ briefing and oral argument, granted defendants’ motion to dismiss the amended complaint in the above-captioned case pursuant to Federal Rules of Civil Procedure 12(b)(6) and 23.1(b). This Memorandum Order explains that ruling and directs the entry of final judgment.

This case is a shareholder derivative suit brought initially by Renee Smith but now by Duane Howell against certain of the directors and officers of Lockheed Martin Corporation (“Lockheed Martin”).1 The initial complaint relied heavily on factual allegations then sub judice in this Court as part of the City of Pontiac General Emp’s Retirement Syst. v. Lockheed Martin et al. securities class action, Case No. 11 Civ. 5026(JSR), which has since settled. Plaintiffs amended complaint added the allegation that “[f]or years, Lockheed has engaged in a pattern and practice of violating the law by submitting false claims and invoices to the United States related to government contracts.” Am. Compl., ECF No. 18, ¶ 3. Ultimately, the amended complaint alleged six causes of action: two allege breaches of fiduciary duty arising from the defendants’ “disseminating false and misleading information” and “failing to properly oversee and manage the company”; a count premised on “gross mismanagement”; a claim for contribution and indemnification; a claim alleging abuse of [469]*469control; and a claim alleging waste of corporate assets. Id. at 61-65.

Federal Rule of Civil Procedure 23.1(b)(1) requires this derivative plaintiff to allege that he owned stock in the corporation he sues throughout the period of alleged wrongful conduct. See Fed. R.Civ.P. 23.1(b)(1) (the complaint must “allege that the plaintiff was a shareholder or member at the time of the transaction complained of, or that the plaintiffs share or membership later devolved on it by operation of law.”). Similarly, under Maryland law (Lockheed Martin is incorporated in Maryland, Am. Compl. ¶ 11), the “contemporaneous ownership rule” provides that a shareholder does not have standing to recover against directors for acts that took place before the shareholder acquired his interest in the company. Danielewicz v. Arnold, 137 Md.App. 601, 769 A.2d 274, 281 (2001) (“This principle, referred to as the contemporaneous ownership rule, provides that ‘a shareholder does not have standing to recover against directors for acts which took place prior to the shareholder becoming a shareholder.’ ”). The contemporaneous ownership requirement serves two related purposes: it prevents aspiring derivative plaintiffs from acquiring the right to sue by purchasing stock, and it ensures that derivative actions are brought by shareholders who have actually suffered injury and thus have a genuine interest in the outcome of the case. See Silverstein ex rel. Tetragon Fin. Group v. Knief, 843 F.Supp.2d 441, 445 (S.D.N.Y.2012).

It is the law of this Circuit that a derivative plaintiff cannot evade the contemporaneous ownership rule by alleging that he owned a share at some point during the period of alleged wrongful conduct — he must have owned shares throughout the period of the wrongful conduct alleged in the complaint. See id. at 445 (“the Second Circuit, while rejecting the continuing wrong doctrine adopted by some other courts, has held that, in order to comply with Rule 23.1(b)(1), derivative plaintiffs must ‘have owned stock in the corporation throughout the course of activities that constitute the primary basis of the complaint.’ ”) (emphasis in the original).

Notwithstanding these well-settled procedural requirements, the amended complaint avers only that the plaintiff was a shareholder during a “Relevant Period.” Am. Compl. ¶ 10. Though capitalized, “Relevant Period” is not a defined term in the amended complaint, and the amended complaint pleads no dates of plaintiffs share ownership whatsoever, much less any allegation that he owned shares “throughout” the alleged wrongdoing.

Confronted with this problem on the instant motion, plaintiff rather tellingly responds with a patent evasion, arguing that he need not allege the period of plaintiffs ownership with particularity, see PL’s Mem. of L. in Opp. at 14-15. But the absence of a particularity requirement in this aspect of Rule 23.1 does not mean, in this post-Twombly era, that a mere allegation of ownership during an unspecified “Relevant Period” will suffice. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (discussed further below). Indeed, even before Twombly, the requirement that something more must be pled was effectively set forth in the Second Circuit’s touchstone case on this issue, In re Bank of New York Derivative Litigation, 320 F.3d 291 (2d Cir.2003). In that case, the plaintiff attempted to evade the continuous ownership rule by defining a “continuing wrong” using general and vague assertions about the temporal sweep of the wrongdoing. See id. at 299 (noting that “on occasion, the Complaint allege[d] that the relevant conduct occurred through 1996 and [470]*470‘beyond’ or ‘thereafter.’ ”). The Second Circuit affirmed the district court’s rejection of such vague and conclusory pleading, holding that “merely tacking on such words ... is insufficient to confer standing on plaintiffs.” Id. (internal alterations omitted). The Court discerns no reason that why a “tacking on” of a conclusory allegation of ownership during a “Relevant Period” should not meet the same fate.2 See also Wright & Miller, 7C Fed. Prac. & Proc. Civ. § 1828 (3d ed. 2012) (“The pleading requirement in Rule 23.1(b)(1) is best satisfied by allegations with respect to each separate claim set forth in the Complaint as to: (1) the dates of the events that are the subject of the action; (2) the dates on which plaintiff acquired shares; and (3) plaintiffs continuous ownership of the shares since their acquisition.”). In any event, Twombly’s subsequent requirement that a pleading state a plausible claim in order to survive dismissal plainly entails that a derivative plaintiff plead a plausible allegation of share ownership throughout the period of alleged misconduct, which the complaint just as plainly fails to do. See generally Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt. LLC, 595 F.3d 86, 91 (2d Cir.2010) (holding that to survive a motion to dismiss, a complaint must “allege a plausible set of facts sufficient to raise a right to relief above the speculative level.”) (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955) (internal quotation marks omitted).

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Cite This Page — Counsel Stack

Bluebook (online)
957 F. Supp. 2d 466, 2013 WL 3929712, 2013 U.S. Dist. LEXIS 107699, Counsel Stack Legal Research, https://law.counselstack.com/opinion/smith-v-stevens-nysd-2013.