IN THE COURT OF APPEALS OF TENNESSEE AT JACKSON ______________________________________________
VALERIE HUMPHREYS (HUMPHRIES)
Appellant, Shelby Circuit No. 93759 Vs. C.A. No. 02A01-9811-CV-00323
PLANT MAINTENANCE SERVICES, INC., RECLAMATION TECHNOLOGIES, INC., BOLD-ARK OF TEXAS, INC., FILED ROBERT B. BAKER, STEPHEN BROWN, July 30, 1999
Appellees. Cecil Crowson, Jr. Appellate Court Clerk ____________________________________________________________________________
FROM THE SHELBY COUNTY CIRCUIT COURT THE HONORABLE GEORGE H. BROWN, JR., JUDGE
J. Jay Cheatwood of Lawrenceburg For Appellant
Robert D. Flynn, Minton P. Mayer of Memphis For Appellees, Plant Maintenance Services, Reclamation Technologies, Inc., and Baker
AFFIRMED
Opinion filed:
W. FRANK CRAWFORD, PRESIDING JUDGE, W.S.
CONCUR:
ALAN E. HIGHERS, JUDGE
DAVID R. FARMER, JUDGE
This is a shareholder’s derivative action. Plaintiff/Appellant, Valerie Humphreys1
1 Appellant’s name was spelled Humphreys on the complaint and on subsequent pleadings; however, on appeal her name has been spelled Humphries. For purposes of this (Humphreys), appeals the order of the trial court dismissing her action against
Defendants/Appellees, Plant Maintenance Services Corporation (PMSC)2, Reclamation
Technologies, Inc. (RTI), Bold-Ark of Texas, Inc. (Bold-Ark), Robert Baker (Baker), and
Stephen Brown (Brown).
In 1991, Covenant Environmental Technologies, Inc. (Covenant) was incorporated for
the purpose of obtaining oil from old tires through the use of mobile retort units (MRU) designed
by Bold-Ark. Baker was on the board of directors of Covenant at that time. He also formed RTI
in 1992 and serves as an officer of the company and also serves as president of PMSC. Brown
is a Memphis attorney who performed work for Covenant and Bold-Ark prior to 1994.
Humphreys became a shareholder in Covenant in December 1995. She now serves as president
of the company.
On March 26, 1998, Humphreys, pro se, filed the instant case as a shareholder’s
derivative action on behalf of Covenant. She alleges fraud, misappropriation of funds, and
interference with economic development against PMSC, RTI, Bold-Ark, Baker, and Brown for
business dealings involving Covenant in the early 1990s. Defendants filed a motion to dismiss
on April 30, 1998, alleging (1) that Humphreys’ causes of action were time barred by the
respective statutes of limitations; (2) that Humphreys’ complaint failed to allege fraud with
particularity as required by Tenn. R. Civ. P. 9.02; (3) that the action was barred by collateral
estoppel and/or res judicata; (4) that Humphreys did not have standing to bring suit on behalf
of the corporation; and finally, (5) that the complaint fails to state a claim upon which relief can
be granted.3
On May 19, 1998, Humphreys filed a pleading styled “Plaintiff’s Objections to
Defendants Motion to Dismiss” in which she stated that she was a major shareholder in
Covenant and was entitled to bring a derivative action on behalf of the corporation under the
“Doctrine of Corporate Alter Ego.” On June 30, 1998, Humphreys filed another pleading along
opinion she will be called Humphreys. 2 PMSC’s name is improperly styled Plant Maintenance Services, Inc. at the trial level and on appeal. 3 Defendant Brown, represented by separate counsel, filed a separate motion to dismiss alleging failure to state a claim, and that the action was time barred by the applicable statute of limitation.
2 with some fifty (50) exhibits styled “Plaintiff’s First Set of Material Facts to Support Allegations
. . .” In this pleading, she alleged among other things that:
6. The cover-up of wrongdoings by Defendants over the past decade have . . . escalated into fraudulent claims amounting to $1.5 million, FBI cover-up, harassing calls to Plaintiff, threats, fraudulent claims of Contempt against Plaintiff, criminal actions by several attorneys to cripple the corporation, illegal lien and foreclosure on Covenant’s facility in Tulsa, falsification of court records to force payment of fraudulent judgment, tampering with Covenant’s Dun & Bradstreet, wire tapping, tampering with Covenant’s and Plaintiff’s personal mail, corporate sabotage, fraud by Covenant’s own patent attorney who coincidentally was the Defendant’s patent attorney in the Diet Cookie scam.
* * *
22. Another reason to go public was to protect the Plaintiff from bodily harm. The Plaintiff is the only witness to an [sic] cover-up of FBI involvement in a fire that resulted in a death.
On September 21, 1998, the trial court entered an order dismissing Humphreys’ action
against PMSC, RTI, and Baker on the grounds that the action was barred by the doctrine of res
judicata and collateral estoppel, and that the complaint did not state allegations of fraud with
particularity. The trial court also entered an order granting Brown’s motion to dismiss on the
grounds that the action was time barred under the applicable statute of limitations, and that
Humphreys did not have standing to bring the action.4
Humphreys timely appealed the trial court’s order5 and requests this Court to determine
(1) whether her complaint pleads fraud with particularity sufficient to withstand a motion to
dismiss, and (2) whether her complaint should have been dismissed pursuant to the doctrines of
res judicata and collateral estoppel. The defendants present the issue of whether Humphreys’
complaint should have been dismissed for her lack of standing to bring claims on behalf of
Covenant.
Humphreys first raises the issue that the trial court erred by dismissing her action for
failure to plead fraud with particularity. Tenn. R. Civ. P. 9.02 states:
4 An order dismissing Bold-Ark was never entered in the trial court. However, during oral argument, appellant’s counsel was informed of this error and, in order to avoid dismissal of the appeal, was allowed to take a voluntary non-suit in the trial court as to Bold-Ark in order to make the trial court’s judgment final. The order of non-suit was filed on May 28, 1999. 5 Although no order in this Court exists, appellant asserts in her brief that “Stephen Brown is no longer a part of the lawsuit, having been dismissed from the appeal.” We will consider this a stipulation of dismissal.
3 9.02. Fraud, Mistake, Condition of the Mind. -- In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other conditions of mind of a person may be averred generally.
Although fraud must be pled with particularity, the Committee Comments to Tenn. R.
Civ. P. 9.02 explain in pertinent part that:
The requirement in Rule 9.02 -- in averments of fraud or mistake the circumstances constituting fraud or mistake must be set forth with particularity -- is not intended to require lengthy recital of detail. Rather, the Rule means only that general allegations of fraud and mistake are insufficient; the pleader is required to particularize, but by the “short and plain” statement required by Rule 8.01.
Humphreys’ complaint does allege acts of a fraudulent nature. Specific examples include:
10. Baker diverted $50,000 of Covenant’s funds into an account in the name of Bold-Ark on March 32, 1992 [sic] and most of those funds were distributed to Covenant’s officers. There was also a payment of a tax return of B.A.R. 1.
40.
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IN THE COURT OF APPEALS OF TENNESSEE AT JACKSON ______________________________________________
VALERIE HUMPHREYS (HUMPHRIES)
Appellant, Shelby Circuit No. 93759 Vs. C.A. No. 02A01-9811-CV-00323
PLANT MAINTENANCE SERVICES, INC., RECLAMATION TECHNOLOGIES, INC., BOLD-ARK OF TEXAS, INC., FILED ROBERT B. BAKER, STEPHEN BROWN, July 30, 1999
Appellees. Cecil Crowson, Jr. Appellate Court Clerk ____________________________________________________________________________
FROM THE SHELBY COUNTY CIRCUIT COURT THE HONORABLE GEORGE H. BROWN, JR., JUDGE
J. Jay Cheatwood of Lawrenceburg For Appellant
Robert D. Flynn, Minton P. Mayer of Memphis For Appellees, Plant Maintenance Services, Reclamation Technologies, Inc., and Baker
AFFIRMED
Opinion filed:
W. FRANK CRAWFORD, PRESIDING JUDGE, W.S.
CONCUR:
ALAN E. HIGHERS, JUDGE
DAVID R. FARMER, JUDGE
This is a shareholder’s derivative action. Plaintiff/Appellant, Valerie Humphreys1
1 Appellant’s name was spelled Humphreys on the complaint and on subsequent pleadings; however, on appeal her name has been spelled Humphries. For purposes of this (Humphreys), appeals the order of the trial court dismissing her action against
Defendants/Appellees, Plant Maintenance Services Corporation (PMSC)2, Reclamation
Technologies, Inc. (RTI), Bold-Ark of Texas, Inc. (Bold-Ark), Robert Baker (Baker), and
Stephen Brown (Brown).
In 1991, Covenant Environmental Technologies, Inc. (Covenant) was incorporated for
the purpose of obtaining oil from old tires through the use of mobile retort units (MRU) designed
by Bold-Ark. Baker was on the board of directors of Covenant at that time. He also formed RTI
in 1992 and serves as an officer of the company and also serves as president of PMSC. Brown
is a Memphis attorney who performed work for Covenant and Bold-Ark prior to 1994.
Humphreys became a shareholder in Covenant in December 1995. She now serves as president
of the company.
On March 26, 1998, Humphreys, pro se, filed the instant case as a shareholder’s
derivative action on behalf of Covenant. She alleges fraud, misappropriation of funds, and
interference with economic development against PMSC, RTI, Bold-Ark, Baker, and Brown for
business dealings involving Covenant in the early 1990s. Defendants filed a motion to dismiss
on April 30, 1998, alleging (1) that Humphreys’ causes of action were time barred by the
respective statutes of limitations; (2) that Humphreys’ complaint failed to allege fraud with
particularity as required by Tenn. R. Civ. P. 9.02; (3) that the action was barred by collateral
estoppel and/or res judicata; (4) that Humphreys did not have standing to bring suit on behalf
of the corporation; and finally, (5) that the complaint fails to state a claim upon which relief can
be granted.3
On May 19, 1998, Humphreys filed a pleading styled “Plaintiff’s Objections to
Defendants Motion to Dismiss” in which she stated that she was a major shareholder in
Covenant and was entitled to bring a derivative action on behalf of the corporation under the
“Doctrine of Corporate Alter Ego.” On June 30, 1998, Humphreys filed another pleading along
opinion she will be called Humphreys. 2 PMSC’s name is improperly styled Plant Maintenance Services, Inc. at the trial level and on appeal. 3 Defendant Brown, represented by separate counsel, filed a separate motion to dismiss alleging failure to state a claim, and that the action was time barred by the applicable statute of limitation.
2 with some fifty (50) exhibits styled “Plaintiff’s First Set of Material Facts to Support Allegations
. . .” In this pleading, she alleged among other things that:
6. The cover-up of wrongdoings by Defendants over the past decade have . . . escalated into fraudulent claims amounting to $1.5 million, FBI cover-up, harassing calls to Plaintiff, threats, fraudulent claims of Contempt against Plaintiff, criminal actions by several attorneys to cripple the corporation, illegal lien and foreclosure on Covenant’s facility in Tulsa, falsification of court records to force payment of fraudulent judgment, tampering with Covenant’s Dun & Bradstreet, wire tapping, tampering with Covenant’s and Plaintiff’s personal mail, corporate sabotage, fraud by Covenant’s own patent attorney who coincidentally was the Defendant’s patent attorney in the Diet Cookie scam.
* * *
22. Another reason to go public was to protect the Plaintiff from bodily harm. The Plaintiff is the only witness to an [sic] cover-up of FBI involvement in a fire that resulted in a death.
On September 21, 1998, the trial court entered an order dismissing Humphreys’ action
against PMSC, RTI, and Baker on the grounds that the action was barred by the doctrine of res
judicata and collateral estoppel, and that the complaint did not state allegations of fraud with
particularity. The trial court also entered an order granting Brown’s motion to dismiss on the
grounds that the action was time barred under the applicable statute of limitations, and that
Humphreys did not have standing to bring the action.4
Humphreys timely appealed the trial court’s order5 and requests this Court to determine
(1) whether her complaint pleads fraud with particularity sufficient to withstand a motion to
dismiss, and (2) whether her complaint should have been dismissed pursuant to the doctrines of
res judicata and collateral estoppel. The defendants present the issue of whether Humphreys’
complaint should have been dismissed for her lack of standing to bring claims on behalf of
Covenant.
Humphreys first raises the issue that the trial court erred by dismissing her action for
failure to plead fraud with particularity. Tenn. R. Civ. P. 9.02 states:
4 An order dismissing Bold-Ark was never entered in the trial court. However, during oral argument, appellant’s counsel was informed of this error and, in order to avoid dismissal of the appeal, was allowed to take a voluntary non-suit in the trial court as to Bold-Ark in order to make the trial court’s judgment final. The order of non-suit was filed on May 28, 1999. 5 Although no order in this Court exists, appellant asserts in her brief that “Stephen Brown is no longer a part of the lawsuit, having been dismissed from the appeal.” We will consider this a stipulation of dismissal.
3 9.02. Fraud, Mistake, Condition of the Mind. -- In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other conditions of mind of a person may be averred generally.
Although fraud must be pled with particularity, the Committee Comments to Tenn. R.
Civ. P. 9.02 explain in pertinent part that:
The requirement in Rule 9.02 -- in averments of fraud or mistake the circumstances constituting fraud or mistake must be set forth with particularity -- is not intended to require lengthy recital of detail. Rather, the Rule means only that general allegations of fraud and mistake are insufficient; the pleader is required to particularize, but by the “short and plain” statement required by Rule 8.01.
Humphreys’ complaint does allege acts of a fraudulent nature. Specific examples include:
10. Baker diverted $50,000 of Covenant’s funds into an account in the name of Bold-Ark on March 32, 1992 [sic] and most of those funds were distributed to Covenant’s officers. There was also a payment of a tax return of B.A.R. 1.
40. After Baker resigned as director of Covenant and all production was halted on the Covenant Mobile Retort System, Baker failed to return proprietary drawings and equipment to Covenant and maintained these drawings and equipment in his possession illegally for five years.
Tenn. R. Civ. P. 8.01 requires that the complaint contain “a short plain statement of the
claim showing that the pleader is entitled to relief.” Humphreys puts forth detailed facts such
as the date and amount allegedly procured by fraud. While Humphreys’ complaint is somewhat
unclear, we believe that she states several averments with sufficient particularity to satisfy the
requirements of Rule 9.02. See Petty v. Call, 599 S.W.2d 791, 795 (Tenn. 1980); City State
Bank v. Dean Witter Reynolds, Inc., 948 S.W.2d 729, 738 (Tenn. App. 1996). Thus, the trial
court erred by dismissing the action on this basis.
I t a p p e a r s t h a t a s t o res judicata, t h e t r i a l c o u r t e x a m i n e d e v i d e n c e o t h e r t h a n t h e p l e a d i n g s f i l e d b y t h e
p a r t i e s . When considering a motion to dismiss, the trial court retains discretion to consider
extrinsic evidence outside the pleadings. Hixson v. Stickley, 493 S.W.2d 471, 473 (Tenn. 1973).
In the event that the trial court does consider extrinsic evidence, the motion “shall be treated as
one for summary judgment and disposed of as provided in Rule 56.” Tenn. R. Civ. P. 12.02;
4 Hixson, 493 S.W.2d at 473; Hunt v. Shaw, 946 S.W.2d 306, 307 (Tenn. App. 1996). All
parties, however, must be provided a “reasonable opportunity” to proffer sufficient evidence in
accordance with Rule 56. Tenn. R. Civ. P. 12.02.
A motion for summary judgment should be granted when the movant demonstrates that
there are no genuine issues of material fact and that the moving party is entitled to a judgment
as a matter of law. Tenn. R. Civ. P. 56.04. The party moving for summary judgment bears the
burden of demonstrating that no genuine issue of material fact exists. Bain v. Wells, 936 S.W.2d
618, 622 (Tenn. 1997). On a motion for summary judgment, the court must take the strongest
legitimate view of the evidence in favor of the nonmoving party, allow all reasonable inferences
in favor of that party, and discard all countervailing evidence. Id. In Byrd v. Hall, 847 S.W.2d
208 (Tenn. 1993), our Supreme Court stated:
Once it is shown by the moving party that there is no genuine issue of material fact, the nonmoving party must then demonstrate, by affidavits or discovery materials, that there is a genuine, material fact dispute to warrant a trial. In this regard, Rule 56.05 [now Rule 56.06] provides that the nonmoving party cannot simply rely upon his pleadings but must set forth specific facts showing that there is a genuine issue of material fact for trial.
Id. at 211 (citations omitted) (emphasis in original).
Summary judgment is only appropriate when the facts and the legal conclusions drawn
from the facts reasonably permit only one conclusion. Carvell v. Bottoms, 900 S.W.2d 23, 26
(Tenn. 1995). Since only questions of law are involved, there is no presumption of correctness
regarding a trial court's grant of summary judgment. Bain, 936 S.W.2d at 622. Therefore, our
review of the trial court’s grant of summary judgment is de novo on the record before this Court.
Warren v. Estate of Kirk, 954 S.W.2d 722, 723 (Tenn. 1997).
Humphreys contends that the trial court erred in dismissing the action based on the
principles of res judicata and/or collateral estoppel. She cites in her brief the case of Gregory
v. Gregory, 803 S.W.2d 242 (Tenn. App. 1990) to support her contention that the defendants
have not carried the burden in proving res judicata by placing into the record evidence of the
former case. The Gregory Court stated in pertinent part:
In order to succeed on a plea of res judicata, or estoppel by judgment, the party raising the defense must plead it, Tenn. R. Civ. P. 8.03, and must carry the burden of proving it. Carter County v. Street, 36 Tenn. App. 166, 252 S.W.2d 803 (1952).
5 To carry that burden, the party raising the defense must generally put in evidence the record or a copy of the record of the former case. American National Bank v. Bradford, 28 Tenn. App. 239, 188 S.W.2d 971 (1945). If the record does not conclusively show that a particular matter was determined in the former proceeding, the party relying on res judicata as a defense must supplement the record by other proof. Carter County v. Street, 36 Tenn. App. 166, 252 S.W.2d 803 (1952).
Id. at 243-44.
Prior to the filing of the present lawsuit, Covenant prosecuted an action for breach of
contract against PMSC which was dismissed on summary judgment. It is this judgment that the
defendants assert bars the present action because of res judicata or collateral estoppel. The
defendants filed a copy of the order granting summary judgment and the order denying plaintiff’s
motion to set aside summary judgment but did not file any other portion of the trial record.
However, Humphreys filed a substantial portion of the trial record with her pleading styled
“Plaintiff’s First Set of Material Facts. . . .” We believe that there is enough evidence presented
in the record on appeal to determine whether res judicata and/or collateral estoppel apply.
T h i s C o u r t s t a t e d t h e g e n e r a l r u l e r e g a r d i n g res judicata a n d c o l l a t e r a l e s t o p p e l i n Collins v. Greene
County Bank, 9 1 6 S . W . 2 d 9 4 1 , 9 4 5 ( T e n n . A p p . 1 9 9 5 ) .
Res judicata b a r s a s e c o n d s u i t b e t w e e n t h e s a m e p a r t i e s o n t h e s a m e c a u s e o f a c ti o n a s t o a l l i s s u e s w h i c h w e r e o r c o u ld h a v e b e e n li t i g a te d in t h e f o r m e r s u i t . Scales v. Scales, 5 6 4 S . W . 2 d 6 6 7 ( T e n n . A p p . 1 9 7 7 ) . T h e p a r t y a s s e r t in g t h e d e f e n s e m u s t d e m o n s t r a te : ( 1 ) t h a t t h e u n d e r l y i n g j u d g m e n t w a s r e n d e r e d b y a c o u r t o f c o m p e t e n t j u r i s d ic t i o n ; ( 2 ) t h a t t h e s a m e p a r ti e s w e r e i n v o l v e d i n b o t h s u it s ; ( 3 ) t h a t t h e s a m e c a u s e o f a c ti o n w a s i n v o l v e d i n b o t h s u it s ; a n d ( 4 ) t h a t t h e u n d e r l y i n g j u d g m e n t w a s o n t h e m e r i t s . Lee v. Hall 7 9 0 S .W .2 d 2 9 3 , 2 9 4 ( T e n n . A p p . 1 9 9 0 ) .
C o l la t e r a l e s to p p e l , i n c o n t r a st , b a r s a s e c o n d s u i t b e t w e e n t h e s a m e p a r t i e s o n a d if f e r e n t c a u s e o f a c ti o n w h e r e th e i s s u e s w e r e a c t u a l l y l i t i g a te d a n d d e t e r m i n e d i n t h e f o r m e r s u i t . Scales. [ s i c ] .
The suit that the defendants rely upon to assert res judicata and collateral estoppel was
styled Covenant Environmental Technologies, Inc. v. Plant Maintenance
Services Corp. The basis for this suit was PMSC’s alleged breach of contract in the construction
of three MRUs. RTI, Baker, and Brown are not listed as defendants to the action.
As previously stated, res judicata applies when the action involves the same parties and
the same cause of action. In the present instance, Humphreys is suing on behalf of Covenant,
one of the parties in the prior litigation. Her present suit is for fraud and misappropriation, and
6 the previous suit was for breach of contract for services. These are entirely different causes of
action. We find that the action against PMSC is not barred by the doctrine of res judicata.
Moreover, the trial court erred in dismissing the remaining defendants. Neither RTI nor
Baker were parties to the prior suit, a fundamental requirement for res judicata to apply. Thus,
the suit against RTI and Baker is not barred by res judicata. Further, collateral estoppel does not
apply to parties in this action because “it must be shown . . . that the issue sought to be
concluded not only was litigated in the prior suit but was necessary to the judgment in that suit.”
Scales v. Scales, 564 S.W.2d 667, 670 (Tenn. App. 1977).
F i n a l l y , t h e d e f e n d a n t s r a i s e th e i s s u e o f w h e t h e r H u m p h r e y s h a s s ta n d i n g t o s u e i n a d e r i v a t i v e a c t i o n .
C o r p o r a ti o n s a r e d i s ti n c t l e g a l e n t i t i e s . T h e c o r p o r a t i o n ’ s o f f ic e r s a n d d i r e c t o r s , n o t it s s h a r e h o l d e r s , h a v e t h e
r e s p o n s ib i l i t y f o r m a n a g in g a c o r p o r a t i o n ’ s b u s i n e s s a n d a f f a i r s , a n d “ [ t ] h i s r e s p o n s i b i li ty e x t e n d s t o d e t e r m i n i n g
w h e t h e r t h e c o r p o r a t i o n s h o u l d p u r s u e j u d i c i a l r e m e d i e s f o r i t s i n j u r i e s . ” Lewis on Behalf of Citizens Sav.
Bank & Trust Co. v. Boyd, 8 3 8 S . W . 2 d 2 1 5 , 2 2 0 ( T e n n . A p p . 1 9 9 2 ) .
T h e U n i te d S ta te s S u p r e m e C o u r t h a s n o te d th a t th e s h a re h o ld e r d e riv a tiv e a c tio n " c o u ld , if u n r e s tr a in e d ,
u n d e r m i n e t h e b a s i c p r i n c i p l e o f c o r p o r a t e g o v e r n a n c e t h a t th e d e c i s i o n s o f a c o r p o r a t i o n - - i n c l u d i n g t h e d e c i s io n t o
i n i t i a t e l i t i g a t i o n - - s h o u l d b e m a d e b y t h e b o a r d o f d i r e c t o r s o r t h e m a j o r i t y o f s h a r e h o l d e r s . " Daily Income Fund,
Inc. v. Fox, 4 6 4 U . S . 5 2 3 , 5 3 1 , 1 0 4 S . C t . 8 3 1 , 8 3 5 , 7 8 L . E d . 2 d 6 4 5 ( 1 9 8 4 ) ( c i t i n g Hawes v. Oakland, 1 0 4 U . S .
( 1 4 O t t o ) 4 5 0 , 4 5 4 - 4 5 7 , 2 6 L . E d . 8 2 7 ( 1 8 8 2 ) ) . B e c a u s e t h e s h a r e h o l d e r s ' a b i l i t y t o i n s ti t u t e a n a c t i o n o n b e h a lf o f t h e
c o r p o r a t i o n i n h e r e n t l y i m p i n g e s u p o n t h e d i r e c t o r s ' p o w e r to m a n a g e t h e a f f a ir s o f t h e c o r p o r a t i o n t h e l a w i m p o s e s
c e r t a i n p r e r e q u i s it e s o n a s to c k h o l d e r 's r i g h t t o s u e d e r i v a t i v e l y . I n T e n n e s s e e , t h e l a w g o v e r n i n g d e r i v a t i v e a c t i o n s
i s lo c a t e d a t T .C .A . § 4 8 - 1 7 - 4 0 1 a n d s t a t e s in p e r ti n e n t p a r t :
48-17-401. Procedure in derivative proceedings. -- ( a ) A p e r s o n m a y n o t c o m m e n c e a p r o c e e d i n g i n th e r ig h t o f a d o m e s t ic o r f o re ig n c o r p o r a tio n u n l e s s th e p e rs o n w a s a sh a re h o ld e r o f th e c o rp o r a tio n w h e n th e tr a n s a c tio n c o m p l a i n e d o f o c c u r r e d o r u n l e s s th e p e r s o n b e c a m e a s h a r e h o l d e r t h r o u g h t r a n s f e r b y o p e r a ti o n o f la w f r o m o n e w h o w a s a s h a r e h o l d e r a t t h a t t i m e . ( b ) A c o m p la in t in a p r o c e e d in g b r o u g h t in th e rig h t o f a c o rp o r a tio n m u s t b e v e r i f i e d a n d a ll e g e w i t h p a r t i c u la r i t y t h e d e m a n d m a d e , i f a n y , t o o b t a in a c ti o n b y t h e b o a r d o f d i r e c t o r s a n d e i th e r t h a t t h e d e m a n d w a s r e f u s e d o r i g n o r e d o r w h y t h e p e r s o n d id n o t m a k e t h e d e m a n d . W h e t h e r o r n o t a d e m a n d f o r a c ti o n w a s m a d e , i f t h e c o r p o r a ti o n c o m m e n c e s a n i n v e s t i g a ti o n o f t h e c h a r g e s m a d e in t h e d e m a n d o r c o m p l a i n t , t h e c o u r t m a y s t a y a n y p r o c e e d i n g s u n ti l t h e i n v e s t i g a t i o n is c o m p le te d .
* * * A l s o , T e n n . R . C i v . P r o c . 2 3 . 0 6 s ta t e s :
23.06. Derivative Actions by Shareholders.-- I n a d e r i v a t i v e a c t i o n
7 b r o u g h t b y o n e o r m o r e s h a r e h o l d e r s o r m e m b e r s to e n f o r c e a r i g h t o f a c o rp o r a tio n o r o f a n u n in c o rp o r a te d a ss o c ia tio n , th e c o rp o r a tio n o r a s s o c ia tio n h a v i n g f a il e d t o e n f o r c e a r i g h t w h i c h m a y p r o p e r l y b e a s s e r t e d b y i t , t h e c o m p l a i n t s h a l l b e v e r i f i e d a n d s h a l l a l l e g e t h a t th e p l a i n t i f f w a s a s h a r e h o l d e r o r m e m b e r a t t h e t i m e o f t h e tr a n s a c ti o n o f w h i c h th e p la in t i f f c o m p l a in s o r t h a t t h e p l a i n t if f ’ s s h a r e o f m e m b e r s h ip t h e r e a f t e r d e v o l v e d o n t h e p l a i n t i f f b y o p e r a t i o n o f la w . T h e c o m p la in t s h a ll a ls o a lle g e w ith p a rtic u la rity th e e ff o r ts , if a n y , m a d e b y t h e p la in t i f f t o o b t a in t h e a c t i o n d e s i r e d f r o m t h e d ir e c to r s o r c o m p a r a b le a u th o r ity a n d , if n e c e s sa ry , f r o m th e s h a re h o ld e rs , o r m e m b e rs , a n d th e re a so n s f o r th e p la i n t i f f ’ s fa ilu r e to o b ta in th e a c tio n o r f o r n o t m a k in g th e e ff o r t. T h e d e r i v a ti v e a c ti o n m a y n o t b e m a in t a in e d if i t a p p e a r s th a t t h e p la in t i f f d o e s n o t f a i r l y a n d a d e q u a t e ly r e p r e s e n t t h e i n t e r e s ts o f t h e s h a r e h o l d e r s o r m e m b e r s s i m i l a r l y s it u a t e d i n e n f o r c i n g t h e r i g h t o f t h e c o r p o r a t i o n o r a s s o c i a t i o n . T h e a c ti o n s h a l l n o t b e v o lu n t a r i l y d i s m i s s e d o r c o m p r o m i s e d w i t h o u t t h e a p p r o v a l o f t h e c o u r t, a n d n o t i c e o f th e p r o p o s e d d i s m i s s a l o r c o m p r o m i s e s h a l l b e g i v e n to s h a r e h o l d e r s o r m e m b e r s in s u c h m a n n e r a s t h e c o u r t d i r e c t s .
H u m p h r e y s f a i l e d t o s a t i s f y t h e d e m a n d r e q u i r e m e n t u n d e r th e s t a t u t e b y n o t f il i n g a w r it t e n r e q u e s t w i t h t h e
b o a r d o f d i r e c to r s o f C o v e n a n t t o b r i n g s u it a g a in s t t h e d e f e n d a n ts i n t h i s a c t i o n . H o w e v e r , t h e c o u r t s o f t h i s s t a t e h a v e
l o n g r e c o g n iz e d th a t “ t h e d e m a n d r e q u i r e m e n t s h o u ld b e e x c u s e d i f m a k i n g t h e d e m a n d w o u l d b e ‘ id l e c e r e m o n y . ’ ”
Lewis, 8 3 8 S . W . 2 d a t 2 2 1 .
H u m p h r e y s a lle g e s in h e r p le a d i n g s a n d o n a p p e a l th a t s h e s h o u l d b e e x c u s e d f ro m th e d e m a n d r e q u i re m e n t
b e c a u s e C o v e n a n t h a s i n s u f f ic i e n t f u n d s t o p r o s e c u t e a n a c t io n a g a i n s t t h e d e f e n d a n ts a n d r e q u e s t i n g t h a t i t b r i n g s u it
w o u l d b e f u t i l e . T h i s C o u r t i n Lewis, 8 3 8 S . W . 2 d a t 2 2 2 s t a t e d i n p e r t i n e n t p a r t :
C o u r t s i n s o m e j u r is d ic t i o n s l i k e T e n n e s s e e th a t d o n o t r e q u ir e a p r e c o m p l a i n t d e m a n d i n e v e r y c a s e h a v e s e g r e g a te d d e r i v a t i v e a c t i o n s in t o t w o c a te g o r i e s . “ D e m a n d r e f u s e d ” c a s e s a r e t h o s e i n w h i c h t h e c o r p o r a t i o n ’ s d i r e c to r s h a v e r e f u s e d t o t a k e a c t i o n i n r e s p o n s e t o a s h a r e h o l d e r ’ s d e m a n d . “ D e m a n d e x c u s e d ” c a s e s a r e t h o s e i n w h i c h a s h a r e h o l d e r is n o t r e q u ir e d t o m a k e a d e m a n d b e c a u s e d o i n g s o w o u l d b e f u tile .
T h e f o c u s in a d e m a n d e x c u se d p ro c e e d in g d if f e rs fr o m a d e m a n d r e f u s e d p r o c e e d in g . I n d e m a n d e x c u s e d c a se s , th e g r o u n d s fo r th e s h a r e h o ld e r ’s c l a i m a r e ( 1 ) t h a t t h e b o a r d is in t e r e s te d a n d n o t in d e p e n d e n t a n d ( 2 ) th a t t h e c h a l l e n g e d t r a n s a c t i o n i s n o t p r o t e c t e d b y t h e b u s i n e s s j u d g m e n t r u l e . Aronson v. Lewis, 4 7 3 A . 2 d 8 0 5 , 8 1 4 ( D e l . 1 9 8 4 ) . T h u s , d e m a n d e x c u s e d c a s e s r e q u i r e a n e x a m i n a t i o n o f th e c o r p o r a t e d e c i s i o n - m a k e r s ’ in t e r e s t a n d i n d e p e n d e n c e , Levine v. Smith, 5 9 1 A . 2 d a t 2 1 2 , a s w e l l a s t h e g o o d f a i t h a n d r e a s o n a b l e n e s s o f i t s in v e s t i g a t i o n .
P l a i n t i f f h a s f a il e d t o p r e s e n t s w o r n p r o o f th a t s h e w a s “ a s h a r e h o l d e r o f t h e c o r p o r a t i o n w h e n t h e t r a n s a c ti o n
c o m p l a i n e d o f o c c u r r e d , o r . . . [ th a t s h e ] b e c a m e a s h a r e h o l d e r t h r o u g h t r a n s f e r b y o p e r a ti o n o f la w f r o m o n e w h o w a s
a s h a r e h o l d e r a t th a t tim e .” T . C .A . § 4 8 - 1 7 - 4 0 1 ( a ). M o r e o v e r, th e c o m p la in t in th is c a s e is n o t v e rif ie d , n o d e m a n d
w a s m a d e , a n d o t h e r w i s e d o e s n o t c o m p l y w i t h t h e p r o v i s i o n s o f T . C . A . § 4 8 - 1 7 - 4 0 1 ( b ) . A c c o r d i n g l y , w e f in d t h a t
p l a i n t if f h a s n o t e s t a b l i s h e d t h a t s h e h a s s ta n d i n g t o b r i n g t h i s a c t i o n o n b e h a lf o f t h e c o r p o r a t i o n . A l t h o u g h w e f i n d
8 t h a t t h e c a s e w a s i m p r o p e r ly d i s m i s s e d f o r t h e r e a s o n s s t a t e d b y t h e t r ia l c o u r t , w e a r e a u t h o r i z e d to a f f i r m a j u d g m e n t
o f t h e t r i a l c o u r t c o r r e c t i n r e s u l t r e n d e r e d u p o n d i f f e r e n t , i n c o m p l e t e , o r e r r o n e o u s g r o u n d s . Hopkins v. Hopkins,
5 7 2 S .W .2 d 6 3 9 ( T e n n . 1 9 7 8 ) .
T h e o r d e r o f t h e t r ia l c o u r t d i s m i s s i n g t h e c a s e is a f f i r m e d . C o s t s o f t h e a p p e a l a r e a s s e s s e d a g a i n s t t h e
a p p e ll a n t.
_________________________________ W. FRANK CRAWFORD, PRESIDING JUDGE, W.S.
____________________________________ ALAN E. HIGHERS, JUDGE
____________________________________ DAVID R. FARMER, JUDGE