3 UNITED STATES DISTRICT COURT
4 DISTRICT OF NEVADA
5 * * *
6 JOHN SOLAK, derivatively Case No. 3:19-cv-00410-MMD-WGC on behalf of Ring Energy, Inc., 7 ORDER Plaintiff, 8 v.
9 LLOYD T. ROCHFORD, et al.,
10 Defendants.
11 and
12 RING ENERGY, INC., a Nevada Corporation, 13 Nominal Defendant. 14 15 16 I. SUMMARY 17 Plaintiff John Solak brings this derivative action on behalf of Ring Energy, Inc. 18 (“Ring”) against its directors.1 Before the Court is Defendants’ motion to dismiss (the 19 “Motion”) (ECF No. 48) the first amended complaint (“FAC”) (ECF No. 42) under Federal 20 Rules of Civil Procedure 12(b)(1), 12(b)(6), and 23.12 For the reasons explained below, 21 the Court grants the Motion under Rule 12(b)(1). 22 II. BACKGROUND 23 Plaintiff filed this action against Defendants, minus Roesener (collectively “Initial 24 Defendants”), who Plaintiff later added as a defendant in the FAC (ECF No. 42 at 3). Initial 25
26 1These directors are Lloyd T. Rochford, Kelly Hoffman, David A. Flower, Stanley M. McCabe, Anthony B. Petrelli, Clayton E. Woodrum, and Regina Roesener (collectively, 27 “Defendants”).
28 2The Court has also reviewed the briefs relating to the Motion. (ECF Nos. 28, 29.) 2 Plaintiff failed (1) to set forth the specific date on which Plaintiff first acquired shares of 3 Ring stock and (2) to sufficiently allege demand futility. (ECF No. 40 at 4.) Because Plaintiff 4 conceded the first argument (id.), the Court addressed the second argument, agreed with 5 Defendants, and dismissed the original complaint with leave to amend. (Id. at 6.) 6 The FAC essentially alleges that between 2013 and 2018, Defendants excessively 7 compensated themselves and that Ring failed to disclose such compensation in proxy 8 statements that it filed with the Securities and Exchange Commission (the “SEC”). (ECF 9 No. 42 at 4-10.) The FAC alleges for the first time that Roesener was appointed to Ring’s 10 board in September 2019 and that Ring filed a misleading proxy statement for 2018 in 11 November 2019. (ECF No. 42 at 5, 9, 10, 13.) Plaintiff asserts derivative claims for (1) 12 breach of the fiduciary duty of loyalty, (2) unjust enrichment, (3) waste of corporate assets, 13 and (4) violation of Section 14(a) of the Securities and Exchange Act and SEC Rule 14a- 14 9 (collectively the “Securities Law”). (Id. at 14-16.) 15 III. LEGAL STANDARD 16 Rule 12(b)(1) of the Federal Rules of Civil Procedure allows defendants to seek 17 dismissal of a claim or action for a lack of subject matter jurisdiction. Although the 18 defendant is the moving party in a motion to dismiss brought under Rule 12(b)(1), the 19 plaintiff is the party invoking the court’s jurisdiction. As a result, the plaintiff bears the 20 burden of proving that the case is properly in federal court. See McCauley v. Ford Motor 21 Co., 264 F.3d 952, 957 (9th Cir. 2001) (citing McNutt v. General Motors Acceptance Corp., 22 298 U.S. 178, 189 (1936)). Plaintiff’s burden is subject to a preponderance of the evidence 23 standard. See Leite v. Crane Co., 749 F.3d 1117, 1121 (9th Cir. 2014). 24 Federal courts are courts of limited jurisdiction. See Owen Equip. & Erection Co. v. 25 Kroger, 437 U.S. 365, 374 (1978). A federal court is presumed to lack jurisdiction in a case 26 unless the contrary affirmatively appears. See Stock West, Inc. v. Confederated Tribes of 27 the Colville Reservation, 873 F.2d 1221, 1225 (9th Cir. 1989). “Because subject matter 28 jurisdiction goes to the power of the court to hear a case, it is a threshold issue and may 2 Supp. 2d 949, 952 (D. Nev. 2004) (citing Fed. R. Civ. P. 12(b)(1)). The party invoking 3 federal jurisdiction, here Plaintiff, bears the burden of establishing the constitutional 4 minimum of standing. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992). To 5 establish standing, the plaintiff must have personally suffered an injury in fact—an invasion 6 of a legally protected interest. Id. Furthermore, standing must be established at the time 7 the complaint is filed to confer jurisdiction. See Lujan, 504 U.S. at 606. 8 IV. DISCUSSION 9 Defendants argue that: (1) Plaintiff lacks standing because he did not own shares 10 of Ring stock at the time of Defendants’ alleged misconduct; (2) Plaintiff failed to allege 11 demand futility; (3) Plaintiff failed to rebut the business judgment rule; and (4) Plaintiff’s 12 allegations pre-date Roesener’s appointment to the board and thus all claims against her 13 must be dismissed. (ECF No. 48 at 5-10) Because the Court agrees with Defendants’ first 14 argument, the Court declines to address the remaining arguments. 15 To have standing to bring a derivative action, Rule 23.1 requires that “a derivative 16 plaintiff be a shareholder at the time of the alleged wrongful acts and that the plaintiff retain 17 ownership of the stock for the duration of the lawsuit.” Lewis v. Chiles, 719 F.2d 1044, 18 1047 (9th Cir. 1983). Because “the general rule of American law is that the board of 19 directors controls a corporation . . . strict compliance with Rule 23.1 and the applicable 20 substantive law is necessary before a derivative suit can wrest control of an issue from 21 the board of directors.” Potter v. Hughes, 546 F.3d 1051, 1058 (9th Cir. 2008) 22 Defendants argue that Plaintiff lacks standing because Plaintiff’s claims are 23 predicated on transactions and conduct that occurred between 2013 and 2018, but Plaintiff 24 allegedly purchased Ring stock on January 22, 2019. (ECF No. 48 at 6.) Plaintiff counters 25 that the FAC explicitly alleges that “Plaintiff was a shareholder of Ring during the time of 26 the wrongdoing complained of herein, has continuously been a shareholder since that 27 time, and is currently a Ring shareholder.” (ECF No. 51 at 9 (citing to ECF No. 42 at 3).) 28 Yet, Plaintiff repeatedly admits that he became a shareholder in January 2019. (Id.) 2 became a Ring shareholder, the continuing wrong doctrine confers Plaintiff standing 3 where the alleged wrong before the stock acquisition continues after he becomes a 4 shareholder. (Id. at 10-11.) Defendants reply that courts have struggled to find any case 5 law demonstrating that the Ninth Circuit had adopted the continuing wrong doctrine. (Id. 6 at 5.) See Sokolowski ex rel. Las Vegas Sands Corp. v. Adelson, Case No. 2:14-cv-111 7 JCM NJK, 2014 WL 3748191, at *3 (D. Nev. July 30, 2014) (“[T]he court's own review 8 produced little case law demonstrating the Ninth Circuit's adoption of the continuing wrong 9 doctrine.”); Sprando ex rel. Int'l Game Tech. v. Hart, Case No. 3:10-cv-00415-ECR, 2011 10 WL 3055242, at *3 (D. Nev. July 22, 2011) (“We are unable to find support in this Circuit 11 that the continuing wrong exception is applicable.”). The Court agrees with Defendants. 12 Plaintiff effectively concedes that he was not a Ring shareholder at the time of 13 Defendants’ alleged misconduct. (See ECF No.
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3 UNITED STATES DISTRICT COURT
4 DISTRICT OF NEVADA
5 * * *
6 JOHN SOLAK, derivatively Case No. 3:19-cv-00410-MMD-WGC on behalf of Ring Energy, Inc., 7 ORDER Plaintiff, 8 v.
9 LLOYD T. ROCHFORD, et al.,
10 Defendants.
11 and
12 RING ENERGY, INC., a Nevada Corporation, 13 Nominal Defendant. 14 15 16 I. SUMMARY 17 Plaintiff John Solak brings this derivative action on behalf of Ring Energy, Inc. 18 (“Ring”) against its directors.1 Before the Court is Defendants’ motion to dismiss (the 19 “Motion”) (ECF No. 48) the first amended complaint (“FAC”) (ECF No. 42) under Federal 20 Rules of Civil Procedure 12(b)(1), 12(b)(6), and 23.12 For the reasons explained below, 21 the Court grants the Motion under Rule 12(b)(1). 22 II. BACKGROUND 23 Plaintiff filed this action against Defendants, minus Roesener (collectively “Initial 24 Defendants”), who Plaintiff later added as a defendant in the FAC (ECF No. 42 at 3). Initial 25
26 1These directors are Lloyd T. Rochford, Kelly Hoffman, David A. Flower, Stanley M. McCabe, Anthony B. Petrelli, Clayton E. Woodrum, and Regina Roesener (collectively, 27 “Defendants”).
28 2The Court has also reviewed the briefs relating to the Motion. (ECF Nos. 28, 29.) 2 Plaintiff failed (1) to set forth the specific date on which Plaintiff first acquired shares of 3 Ring stock and (2) to sufficiently allege demand futility. (ECF No. 40 at 4.) Because Plaintiff 4 conceded the first argument (id.), the Court addressed the second argument, agreed with 5 Defendants, and dismissed the original complaint with leave to amend. (Id. at 6.) 6 The FAC essentially alleges that between 2013 and 2018, Defendants excessively 7 compensated themselves and that Ring failed to disclose such compensation in proxy 8 statements that it filed with the Securities and Exchange Commission (the “SEC”). (ECF 9 No. 42 at 4-10.) The FAC alleges for the first time that Roesener was appointed to Ring’s 10 board in September 2019 and that Ring filed a misleading proxy statement for 2018 in 11 November 2019. (ECF No. 42 at 5, 9, 10, 13.) Plaintiff asserts derivative claims for (1) 12 breach of the fiduciary duty of loyalty, (2) unjust enrichment, (3) waste of corporate assets, 13 and (4) violation of Section 14(a) of the Securities and Exchange Act and SEC Rule 14a- 14 9 (collectively the “Securities Law”). (Id. at 14-16.) 15 III. LEGAL STANDARD 16 Rule 12(b)(1) of the Federal Rules of Civil Procedure allows defendants to seek 17 dismissal of a claim or action for a lack of subject matter jurisdiction. Although the 18 defendant is the moving party in a motion to dismiss brought under Rule 12(b)(1), the 19 plaintiff is the party invoking the court’s jurisdiction. As a result, the plaintiff bears the 20 burden of proving that the case is properly in federal court. See McCauley v. Ford Motor 21 Co., 264 F.3d 952, 957 (9th Cir. 2001) (citing McNutt v. General Motors Acceptance Corp., 22 298 U.S. 178, 189 (1936)). Plaintiff’s burden is subject to a preponderance of the evidence 23 standard. See Leite v. Crane Co., 749 F.3d 1117, 1121 (9th Cir. 2014). 24 Federal courts are courts of limited jurisdiction. See Owen Equip. & Erection Co. v. 25 Kroger, 437 U.S. 365, 374 (1978). A federal court is presumed to lack jurisdiction in a case 26 unless the contrary affirmatively appears. See Stock West, Inc. v. Confederated Tribes of 27 the Colville Reservation, 873 F.2d 1221, 1225 (9th Cir. 1989). “Because subject matter 28 jurisdiction goes to the power of the court to hear a case, it is a threshold issue and may 2 Supp. 2d 949, 952 (D. Nev. 2004) (citing Fed. R. Civ. P. 12(b)(1)). The party invoking 3 federal jurisdiction, here Plaintiff, bears the burden of establishing the constitutional 4 minimum of standing. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992). To 5 establish standing, the plaintiff must have personally suffered an injury in fact—an invasion 6 of a legally protected interest. Id. Furthermore, standing must be established at the time 7 the complaint is filed to confer jurisdiction. See Lujan, 504 U.S. at 606. 8 IV. DISCUSSION 9 Defendants argue that: (1) Plaintiff lacks standing because he did not own shares 10 of Ring stock at the time of Defendants’ alleged misconduct; (2) Plaintiff failed to allege 11 demand futility; (3) Plaintiff failed to rebut the business judgment rule; and (4) Plaintiff’s 12 allegations pre-date Roesener’s appointment to the board and thus all claims against her 13 must be dismissed. (ECF No. 48 at 5-10) Because the Court agrees with Defendants’ first 14 argument, the Court declines to address the remaining arguments. 15 To have standing to bring a derivative action, Rule 23.1 requires that “a derivative 16 plaintiff be a shareholder at the time of the alleged wrongful acts and that the plaintiff retain 17 ownership of the stock for the duration of the lawsuit.” Lewis v. Chiles, 719 F.2d 1044, 18 1047 (9th Cir. 1983). Because “the general rule of American law is that the board of 19 directors controls a corporation . . . strict compliance with Rule 23.1 and the applicable 20 substantive law is necessary before a derivative suit can wrest control of an issue from 21 the board of directors.” Potter v. Hughes, 546 F.3d 1051, 1058 (9th Cir. 2008) 22 Defendants argue that Plaintiff lacks standing because Plaintiff’s claims are 23 predicated on transactions and conduct that occurred between 2013 and 2018, but Plaintiff 24 allegedly purchased Ring stock on January 22, 2019. (ECF No. 48 at 6.) Plaintiff counters 25 that the FAC explicitly alleges that “Plaintiff was a shareholder of Ring during the time of 26 the wrongdoing complained of herein, has continuously been a shareholder since that 27 time, and is currently a Ring shareholder.” (ECF No. 51 at 9 (citing to ECF No. 42 at 3).) 28 Yet, Plaintiff repeatedly admits that he became a shareholder in January 2019. (Id.) 2 became a Ring shareholder, the continuing wrong doctrine confers Plaintiff standing 3 where the alleged wrong before the stock acquisition continues after he becomes a 4 shareholder. (Id. at 10-11.) Defendants reply that courts have struggled to find any case 5 law demonstrating that the Ninth Circuit had adopted the continuing wrong doctrine. (Id. 6 at 5.) See Sokolowski ex rel. Las Vegas Sands Corp. v. Adelson, Case No. 2:14-cv-111 7 JCM NJK, 2014 WL 3748191, at *3 (D. Nev. July 30, 2014) (“[T]he court's own review 8 produced little case law demonstrating the Ninth Circuit's adoption of the continuing wrong 9 doctrine.”); Sprando ex rel. Int'l Game Tech. v. Hart, Case No. 3:10-cv-00415-ECR, 2011 10 WL 3055242, at *3 (D. Nev. July 22, 2011) (“We are unable to find support in this Circuit 11 that the continuing wrong exception is applicable.”). The Court agrees with Defendants. 12 Plaintiff effectively concedes that he was not a Ring shareholder at the time of 13 Defendants’ alleged misconduct. (See ECF No. 51 at 9.) Moreover, Plaintiff has not 14 provided any caselaw showing that the Ninth Circuit has adopted continuing wrong 15 doctrine.3 Instead, Plaintiff cited to opinions that rely on caselaw outside the Ninth Circuit. 16 (Id. at 10-11.) See Myers v. Alstead, Case No. C16-1580 RAJ, 2017 WL 3872408, at *2- 17 3 (W.D. Wash. Sept. 5, 2017) (citing to a federal district case in Delaware, a Delaware 18 state case, and cases from the Second and Fifth Circuits); Bilunka v. Sanders, Case No. 19 C 93-20737 JW, 1994 WL 447156, at *2 (N.D. Cal. Mar. 1, 1994) (citing to a federal district 20 case in Delaware). Because the Ninth Circuit has required strict compliance with Rule 21 23.1, the Court declines to adopt the continuing wrong doctrine here. Furthermore, such 22 approach is consistent with the Supreme Court’s announcement that “[a] shareholder 23 derivative action is an exception to the normal rule that the proper party to bring a suit on 24 behalf of a corporation is the corporation itself.” Daily Income Fund, Inc. v. Fox, 464 U.S. 25 523, 542 (1984) (emphasis added). 26
27 3In support of the continuing wrong exception, Plaintiff puzzlingly cites to dicta in Gascue v. Saralegui Land & Livestock Co., 255 P.2d 335, 337 (Nev. 1953), but the Nevada 28 Supreme Court in that case held that a stockholder lacked standing to bring derivative claims. (ECF No. 51 at 10.) 1 The Court therefore finds that, at the time Plaintiff filed his original complaint on July 2 || 2019, Plaintiff lacked standing to bring his derivative claims. See Lujan, 504 U.S. at 606. 3 || As such, the Court must also dismiss Plaintiff's claims against Roesener—who was 4 || appointed to Ring’s board in September 2019—and any claims predicated on Ring’s 2018 5 || proxy statement that it filed in November 2019. See id. Plaintiff cannot rely on his 2019 6 || claims to “retroactively confer standing upon [himself].” Heizer v. Zephyr Heights Gen. 7 || Improvement Dist., Case No. 3:18-cv-606-MMD-CLB, 2019 WL 6529085, at *2 (D. Nev. 8 || Dec. 4, 2019). 9 Accordingly, the Court grants the Motion. Moreover, the Court denies leave to 10 || amend because amendment would be futile—Plaintiff already had an opportunity to cure 11 || the standing deficiency (ECF No. 40 at 4, 6) but has shown that he cannot (see ECF No. 12 || 51 at 9). See Fed. R. Civ. P. 15(a); Foman v. Davis, 371 U.S. 178, 182 (1962); DeSoto v. 13 || Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992). 14 || V. CONCLUSION 15 The Court notes that the parties made several arguments and cited to several cases 16 || not discussed above. The Court has reviewed these arguments and cases and determines 17 || that they do not warrant discussion as they do not affect the outcome of the Motion before 18 || the Court. 19 It is therefore ordered that Defendants’ motion to dismiss (ECF No. 48) the first 20 || amended complaint is granted. 21 The Clerk of Court is directed to enter judgment in accordance with this order and 22 || to close this case. 23 DATED THIS 3" day of September 2020. 2A rr 25 GD = MIRANDA M. DU 26 CHIEF UNITED STATES DISTRICT JUDGE 27 28