Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_06-cv-02341/USCOURTS-caed-2_06-cv-02341-9/pdf.json

Nature of Suit Code: 160
Nature of Suit: Stockholder's Suits
Cause of Action: 12:22 Securities Fraud

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

KENNETH TRAVIS, et al.,

Plaintiffs,

 v.

RONALD J. MITTELSTAEDT,

et al., AND WASTE

CONNECTIONS, INC.,

 Defendants. 

)

)

)

)

)

)

)

)

)

)

)

)

)

)

)

)

)

)

)

CV 07-1792 LEW 

ORDER GRANTING DEFENDANTS’

REQUEST AND SUPPLEMENTAL

REQUEST FOR JUDICIAL

NOTICE

ORDER GRANTING NOMINAL

DEFENDANT’S MOTION TO

DISMISS

ORDER DISMISSING AS MOOT

SPECIALLY-APPEARING

DEFENDANTS’ MOTION TO

DISMISS AND INDIVIDUAL

DEFENDANTS’ MOTION TO

DISMISS

Before the Court are Defendants’ Request and

Supplemental Request for Judicial Notice, as well as

Defendants’ three Motions to Dismiss: (1) Nominal

Defendant Waste Connections, Inc.’s Motion to Dismiss

for failure to make pre-suit demand; (2) Speciallyappearing Defendants’ Motion to Dismiss for lack of

CV 06-2341 LEW GGH

Case 2:06-cv-02341-JAM-GGH Document 72 Filed 03/19/08 Page 1 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 2

personal jurisdiction; and (3) Individual Defendants’

Motion to Dismiss for failure to state a claim. The

Court took this matter under submission on January 18,

2008. Having considered all papers submitted pertaining

to the above Motions, THE COURT NOW FINDS AND RULES AS

FOLLOWS:

As an initial matter, the Court GRANTS Defendants’

Request for Judicial Notice. The Court will take

judicial notice of the fact and existence of these

documents.

A. WCI’s Motion to Dismiss

Nominal Defendant WCI filed a single Motion to

Dismiss, entitled “...Motion to Dismiss for Failure to

Make Pre-Suit Demand.” WCI maintains that the Court

should dismiss the complaint based on the failure to

make pre-suit demand or in the alternative, dismiss the

complaint for the failure to plead contemporaneous stock

ownership.

1. Demand Futility

A derivative suit necessarily infringes on

directors’ managerial freedom. Aronson v. Lewis, 473

A.2d 805, 811 (Del. 1984). The demand requirement of

FRCP 23.1 is meant to insure plaintiffs have exhausted

other avenues before taking this drastic measure. Id.

Case 2:06-cv-02341-JAM-GGH Document 72 Filed 03/19/08 Page 2 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 3

Under Rule 23.1, plaintiffs must demand that

directors take action on an issue before bringing a

shareholder derivative action, or alternatively must

establish that demand would have been futile. Aronson,

473 A.2d at 812. 

When the alleged wrong constitutes a business

decision by the whole board of directors, a court should

employ the Aronson test, which evaluates whether, under

the particularized facts alleged, a reasonable doubt is

created that: 1) the directors are disinterested and

independent; or 2) the challenged transaction was

otherwise the product of a valid exercise of business

judgment. Aronson, 473 A.2d at 812, overruled on other

grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).

The Court finds that Plaintiffs have properly plead

that four of the five directors as of April 2007 were

interested directors. Moreover, Plaintiffs have

sufficiently plead, and the Court is satisfied, that

demand is properly excused in this case as futile.

///

///

///

///

Case 2:06-cv-02341-JAM-GGH Document 72 Filed 03/19/08 Page 3 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 4

2. Failure to Plead Contemporaneous Stock

Ownership

Rule 23.1 requires a shareholder derivative

plaintiff to plead that “the plaintiff was a

shareholder...at the time of the transaction of which

the plaintiff complains.” The Ninth Circuit has

interpreted this provision as requiring that the

derivative plaintiff "be a shareholder at the time of

the alleged wrongful acts" and "retain ownership of the

stock for the duration of the lawsuit." Lewis v.

Chiles, 719 F.2d 1044, 1047 (9th Cir. 1983). A

derivative plaintiff has no standing to sue for

misconduct that occurred prior to the time he became a

shareholder of the corporation. Kona Enterprises, Inc.

v. Estate of Bishop, 179 F.3d 767, 769 (9th Cir. 1999).

Thus, a shareholder derivative complaint must indicate

when plaintiffs bought stock in the company, and must

state that they have owned stock continuously since the

date of the filing of the lawsuit. In re Sagent

Technology, Inc., 278 F. Supp. 2d 1079, 1096 (N.D. Cal.

2003).

Plaintiffs’ only statement in their Complaint about

stock ownership was that they “are, and were at all

relevant times, shareholders of nominal defendant Waste

Connections.” (Corrected Verified Consolidated

Shareholder Derivative Complaint (“Complaint”) ¶ 11.)

Case 2:06-cv-02341-JAM-GGH Document 72 Filed 03/19/08 Page 4 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 5

Nominal Defendant argues in its Motion to Dismiss

that this statement did not reach the level of

specificity required by the 9th Circuit, citing Kona

Enterprises for the proposition that Plaintiffs must

allege specific facts establishing that they owned stock

in WCI at all times during alleged wrongdoing. (WCI MTD

at 8.) To buttress this assertion, Nominal Defendant

also claims that the statement that a “general

allegation” that a plaintiff “is, and was during the

relevant period” a shareholder is not sufficiently

specific. Id. (citing In re Computer Sciences Corp.

Derivative Litig., 2007 U.S. Dist. LEXIS 25414, at *48

(C.D. Cal. 2007)).

 Plaintiffs reply that they are not required to

plead such specific information regarding dates of stock

purchases, and moreover assert that at least one

plaintiff has held WCI stock since 1998. (Opp. at 41.)

Plaintiffs alsostate that they have standing under both

the fraudulent concealment and continuing harm doctrines

because they alleged Defendants concealed their

wrongdoing by misconduct or misrepresentations. (Opp.

at 41.)

Delaware law precludes Plaintiffs from bringing a

shareholder derivative complaint without specific

pleadings regarding when they purchased WCI stock and

Case 2:06-cv-02341-JAM-GGH Document 72 Filed 03/19/08 Page 5 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 6

how long they held it. See In re Computer Sciences

Corp. Derivative Litig., 2007 U.S. Dist. LEXIS 25414, at

*48 (C.D. Cal. 2007). Moreover, each alleged instance

of stock option backdating is considered an independent

event, not a “continuing wrong.” See In re Verisign,

Inc., Derivative Litigation, 2007 WL 2705221, at *24

(N.D. Cal. 2007).

Plaintiffs have failed to properly plead stock

ownership and therefore Nominal Defendant’s Motion to

dismiss is GRANTED as no shareholder derivative action

can proceed unless Plaintiff pleads with particularity

the dates of acquisition and sale of stock. Plaintiffs

are, however, GRANTED TWENTY DAYS LEAVE TO AMEND.

The Individual Defendants rightly noted that, if

this Court grants Nominal Defendant’s Motion to Dismiss

pursuant to Rule 23.1, there is no need for the Court to

reach the issues raised by the Individual Defendants.

(MTD at 1.) Because this was filed as a shareholder

derivative action, no part of it can proceed without the

proper showing of contemporaneous stock ownership. 

Therefore, Specially-appearing Defendants’ and

Individual Defendants’ Motions to Dismiss must be DENIED

AS MOOT at this time.

Case 2:06-cv-02341-JAM-GGH Document 72 Filed 03/19/08 Page 6 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 7

Nevertheless, because this technical pleading issue

is likely to be resolved quickly, the Court finds it

appropriate to offer Specially-Appearing Defendants some

guidance as to how the Court would rule on a similar

motion filed at a later time.

B. Specially-Appearing Defendants’ Motion to

Dismiss State Law Claims for lack of Personal

Jurisdiction

A plaintiff must make a prima facie showing of

jurisdictional facts in order to defeat a motion to

dismiss under Rule 12(b)(2). Doe v. Unocal Corp., 248

F.3d 915, 922 (9th Cir. 2001). Based on a defendant’s

“minimum contacts” with the forum state, a court can

obtain either general of specific jurisdiction over the

defendant. Id. at 923. General jurisdiction, which

subjects a defendant to suit even for acts unconnected

with a defendant’s activities in the forum state, is

available only if the defendant’s activities in the

forum state are “substantial, continuous and

systematic.” Id. A court has specific jurisdiction if

the litigation “arises out of or has a substantial

connection with” the defendant’s activities in the forum

state. Id.

The Ninth Circuit has developed a three-part test

for determining the existence of specific jurisdiction:

Case 2:06-cv-02341-JAM-GGH Document 72 Filed 03/19/08 Page 7 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 8

(1) The nonresident defendant must

purposefully avail himself of the

privilege of conducting activities in

the forum state;

(2) the claim must be one which arises out

of or results from the defendant's

forum-related activities; and

(3) exercise of jurisdiction must be

 reasonable.

Id.

While this Court cannot exercise general

jurisdiction over either specially-appearing defendant,

because their contacts cannot be considered

“substantial, continuous, and systematic”, this Court

can exercise specific jurisdiction over both of these

Defendants. All three of the elements the Ninth Circuit

has established for specific jurisdiction are met here. 

These defendants purposefully availed themselves of

California and its laws by choosing to join the board of

directors of a corporation with its principal place of

business in California.

This litigation unquestionably arises out of the

defendants’ activities in California, because all or

most of Plaintiff’s allegations are based on decisions

defendants made or did not make during board and

committee meetings in California.

Finally, exercise of this jurisdiction is

reasonable because these defendants were benefitting

from California laws throughout their service on this

Case 2:06-cv-02341-JAM-GGH Document 72 Filed 03/19/08 Page 8 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1

 As with the federal claims discussed above, the common

law and state statutory claims all should be dismissed at this

time due to the grant of Nominal Defendant’s Motion to Dismiss. 

However, additional treatment of the state claims is provided in

order to give the parties guidance in case of the filing of an

amended complaint. The treatment provided in this section

presumes Nominal Defendant’s Motion was not granted.

9

board of directors. California is also the most logical

location to hold them accountable for their actions- all

or most of the questioned activities took place in

California, and all of the other thirteen individual

defendants both live and work in the state.

Therefore, both Razzouk and Harlan are subject to

personal jurisdiction in the state of California, and

should be considered along with the other thirteen

individual Defendants for both federal and state claims. 

C. Common Law and State Statutory Claims

After the dismissal of the federal statutory

claims, all of Plaintiffs’ claims that are based on

common law or state statutes would remain.1 These

include: action for accounting, breach of fiduciary

duty, abuse of control, gross mismanagement,

constructive fraud, corporate waste, recission, insider

trading, and insider seller and misappropriation of

information. The Court hereby DEFERS on these claims at

this time, because if Plaintiff is not able to properly

plead the federal statutory claims in an amended

Case 2:06-cv-02341-JAM-GGH Document 72 Filed 03/19/08 Page 9 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 10

complaint, this Court should exercise its discretion to

allow these claims to be resolved in a state forum.

IT IS SO ORDERED.

 HONORABLE RONALD S.W. LEW

Senior, U.S. District Court Judge

DATE: March 18, 2008

Case 2:06-cv-02341-JAM-GGH Document 72 Filed 03/19/08 Page 10 of 10