Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_11-cv-02269/USCOURTS-casd-3_11-cv-02269-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

GEORGE ASSAD, Derivatively on

Behalf of PICO HOLDINGS, INC.

Plaintiff,

CASE NO. 11cv2269 WQH (BGS)

ORDER

vs.

JOHN R. HART; RONALD LANGLEY;

ROBERT G. DEUSTER; RICHARD D.

RUPPERT; JULIE H. SULLIVAN;

KRISTINA M. LESLIE; CARLOS C.

CAMPBELL; KENNETH J. SLEPICKA;

DOES 1-12, inclusive,

 Defendants,

- and -

PICO HOLDINGS, INC., 

 Nominal Party.

HAYES, Judge:

The matters before the Court are the Motion to Dismiss filed by Defendants John R.

Hart, Ronald Langley, Ronald G. Deuster, Richard D. Ruppert, Julie H. Sullivan, Kristina M.

Leslie, Carlos C. Campbell, and Kenneth J. Slepicka (ECF No. 6) and the Motion to Remand

to State Court filed by Plaintiff George Assad, suing derivatively on behalf of PICO Holding,

Inc. (ECF No. 7). 

Case 3:11-cv-02269-WQH-BGS Document 18 Filed 01/06/12 Page 1 of 8
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I. Background

On August 26, 2011, Plaintiff Assad initiated this shareholder derivative action by filing

a Complaint in the Superior Court of the State of California for the County of San Diego,

where it was assigned case number 37-2011-00096962-CU-BT-CTL. (ECF No. 1-4 at 7). On

September 30, 2011, Defendants filed a Notice of Removal, removing the case to this Court.

(ECF No. 1). Defendants assert that the Court has original jurisdiction over the case pursuant

to 28 U.S.C. § 1331 because allegations regarding the negative say on pay vote in the

Complaint raises “a substantial and novel federal question.” Id. at 4. 

On October 7, 2011, Defendants filed a Motion to Dismiss. (ECF No. 6). Plaintiff filed

an Opposition. (ECF No. 14). Defendants filed a Reply. (ECF No. 16). 

On October 13, 2011, Plaintiff filed a Motion to Remand to State Court. (ECF No. 7).

Defendants filed an Opposition. (ECF No. 15). Plaintiff filed a Reply. (ECF No. 17).

II. Allegations of the Complaint

Plaintiff George Assad is a shareholder of PICO Holdings, Inc. (“PICO”). (ECF No.

1-1 at ¶ 18). PICO is a California corporation located in La Jolla, CA. Id. at ¶ 19. PICO

“engages in water resource and water storage, real estate insurance, and agribusiness

businesses.” Id. at ¶ 36. Defendants Hart, Langley, Deuster, Ruppert, Sullivan, Leslie,

Campbell, and Slepicka serve on the board of directors for PICO. Id. at ¶¶ 20-27. 

PICO maintains a “pay-for-performance” policy that “rewards executive[s] for

achieving a superior return ....” Id. at ¶ 5. On April 2, 2011, PICO filed a proxy statement in

which the board “represented that the intent of its compensation policy was to align

shareholder and executive interests.” Id. In 2010, PICO’s stock performance “lagged the Dow

by nearly 14%” and the amount of free cash flow per share decreased. Id. at ¶ 7. “In direct

violation of their publicly stated pay for performance policy,” the board increased executive

salaries from $2.4 million in 2009 to nearly $14.3 million in 2010. Id. “This was pay for

under performance, in direct violation of the board’s purported pay for performance policy and

its own public statements ....” Id. “The directors on the board breached their fiduciary duties

by materially increasing 2010 executive compensation in the wake of substantial diminution

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in shareholder value after claiming to adhere to a strict pay-for-performance policy, which

purportedly hinged upon delivering ‘superior return’ to shareholders ....” Id. at ¶ 54. 

On May 13, 2011, sixty-one percent of shareholders “rejected the Board’s senior officer

compensation recommendation” in a “say on pay” vote conducted pursuant to the provisions

of Dodd-Frank Wall Street Reform Act. Id. at ¶¶ 10, 12. “The inference that the board

breached its fiduciary duties is supported by the fact that: (a) a majority of the company’s

stockholders voted that 2010 executive compensation was not in their best interests; and (b)

the board has yet to respond to the majority will of its stockholders ....” Id. at ¶¶ 12, 54. 

Plaintiff asserts four claims against Defendants as follows: (1) breach of fiduciary duty

in connection with the issuance of false and misleading statements; (2) breach of fiduciary duty

in connection with the board’s compensation practices; (3) breach of the fiduciary duty in

connection with the failure to respond to the negative say on pay vote; and (4) unjust

enrichment. 

Plaintiff’s first claim for breach of fiduciary duty in connection with the issuance of

false and misleading statements alleges that Defendants “breached their fiduciary duties of

loyalty, good faith, candor and independence owed to PICO and its shareholders, and failed

to disclose material information and/or made material misrepresentations... regarding PICO’s

2010 executive compensation scheme.” Id. at ¶ 75. Defendants “conceal[ed] the fact that the

company was overpaying its directors, officers and employees via compensation plans

premised on an illusory ‘pay for performance’ executive compensation scheme ....” Id. at ¶

79.

Plaintiff’s second claim for breach of fiduciary duty in connection with the board’s

compensation practices alleges that Defendants “breached their fiduciary duties ... by failing

to adhere to the Company’s purported pay-for-performance policy.” Id. at ¶ 85. The policy

was to “‘reward executive[s] for achieving a superior return’ for stockholders and to align

shareholder and executive interests[;]” however, the board increased executive compensation

as the company’s stock value decreased. Id. 

Plaintiff’s third claim for breach of the fiduciary duty in connection with the failure to

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respond to the negative say on pay vote alleges that Defendants breached their fiduciary duties

“by failing to amend or alter 2010 executive compensation (or even issue a response) in

connection with the negative say on pay vote.” Id. at ¶ 92. “[D]espite having their executive

compensation program rejected by 61% of voting shareholders the board has done nothing in

response, in direct violation of their fiduciary duties.” Id. 

Plaintiff’s fourth claim for unjust enrichment alleges that Defendants “will be and have

been unjustly enriched... in the form of unjustified salaries, benefits, and stock option grants.”

Id. at ¶ 98. 

III. Discussion

Federal Rule of Civil Procedure 12(b)(6) permits dismissal for “failure to state a claim

upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). Federal Rule of Civil Procedure

8(a) provides: “A pleading that states a claim for relief must contain ... a short and plain

statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2).

Dismissal under Rule 12(b)(6) is appropriate where the complaint lacks a cognizable legal

theory or sufficient facts to support a cognizable legal theory. See Balistreri v. Pacifica Police

Dep’t, 901 F.2d 696, 699 (9th Cir. 1990).

To sufficiently state a claim to relief and survive a Rule 12(b)(6) motion, a complaint

“does not need detailed factual allegations” but the “[f]actual allegations must be enough to

raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544,

555 (2007). “[A] plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’

requires more than labels and conclusions, and a formulaic recitation of the elements of a cause

of action will not do.” Id. (quoting Fed. R. Civ. P. 8(a)(2)). When considering a motion to

dismiss, a court must accept as true all “well-pleaded factual allegations.” Ashcroft v. Iqbal,

556 U.S. 662, 129 S. Ct. 1937, 1950 (2009). However, a court is not “required to accept as

true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable

inferences.” Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001); see, e.g.,

Doe I v. Wal-Mart Stores, Inc., 572 F.3d 677, 683 (9th Cir. 2009) (“Plaintiffs’ general

statement that Wal-Mart exercised control over their day-to-day employment is a conclusion,

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not a factual allegation stated with any specificity. We need not accept Plaintiffs’ unwarranted

conclusion in reviewing a motion to dismiss.”). “In sum, for a complaint to survive a motion

to dismiss, the non-conclusory factual content, and reasonable inferences from that content,

must be plausibly suggestive of a claim entitling the plaintiff to relief.” Moss v. U.S. Secret

Serv., 572 F.3d 962, 969 (9th Cir. 2009) (quotations omitted).

As discussed above, Plaintiff asserts a claim for “breach of the fiduciary duty in

connection with the failure to respond to the negative say on pay vote.” (ECF No. 1-1 at 26).

Plaintiff alleges that Defendants breached their fiduciary duties “by failing to amend or alter

2010 executive compensation (or even issue a response) in connection with the negative say

on pay vote.” Id. at ¶ 92. “[D]espite having their executive compensation program rejected

by 61% of voting shareholders the board has done nothing in response, in direct violation of

their fiduciary duties.” Id. (emphasis added). 

Section 951 of the Dodd-Frank Wall Street Reform Act provides:

The shareholder vote referred to in subsections (a) and (b) [outlining the

requirements of the say on pay vote] shall not be binding on the issuer or the

board of directors of an issuer, and may not be construed– (1) as overruling a

decision by such issuer or board of directors; (2) to create or imply any change

to the fiduciary duties of such issuer or board of directors; (3) to create or imply

any additional fiduciary duties for such issuer or board of directors; or (4) to

restrict or limit the ability of shareholders to make proposals for inclusion in

proxy materials related to executive compensation.

15 U.S.C. § 78n-1(c). “[A] court may not infer a private right of action from a federal statute

unless Congress has displayed ‘an intent to create not just a private right of action but also a

private remedy.’” Potter v. Hughes, 546 F.3d 1051, 1064 (9th Cir. 2008) (citing Alexander v.

Sandoval, 532 U.S. 275, 286-89 (2001)).

The language of the statute expressly states that it “may not be construed ... to create

or imply any change to fiduciary duties” nor does it “create or imply any additional fiduciary

duties.” See 15 U.S.C. § 78n-1(c) (emphasis added). The Dodd-Frank Wall Street Reform Act

did not create a private right of action or create new fiduciary duties. The Court concludes that

Plaintiff has failed to state a claim for breach of fiduciary duty based on the failure to respond

to the negative say on pay vote pursuant to 15 U.S.C. § 78n-1. The motion to dismiss

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1

 The Court does not rule on the motion to dismiss claims one, two, and four. 

- 6 - 11cv2269 WQH BSG

Plaintiff’s third claim is GRANTED.1 

The federal supplemental jurisdiction statute provides: “[I]n any civil action of which

the district courts have original jurisdiction, the district courts shall have supplemental

jurisdiction over all other claims that are so related to claims in the action within such original

jurisdiction that they form part of the same case or controversy under Article III of the United

States Constitution.” 28 U.S.C. §1367(a). A district court may decline to exercise

supplemental jurisdiction over a state law claim if:

(1) the claim raises a novel or complex issue of State law,

(2) the claim substantially predominates over the claim or claims over which the

district court has original jurisdiction, 

(3) the district court has dismissed all claims over which it has original

jurisdiction, or

(4) in exceptional circumstances, there are other compelling reasons for

declining jurisdiction.

28 U.S.C. §1367(c). In this case, the Court has dismissed claim three, the only claim that

purports to assert a violation of a federal law. The remaining claims one, two and four assert

violations of state law and does no confer federal jurisdiction. 

Defendants contend that Plaintiff’s reference to the “say on pay” vote as evidence of

breach of fiduciary duty “requires the interpretation and application of Dodd-Frank” because

it “implies a change in directors’ fiduciary duties with respect to compensation” (ECF No. 15

at 9). 

A state law claim presents a substantial federal question if the claim “necessarily 

raise[s] a stated federal issue, actually disputed and substantial, which a federal forum may

entertain without disturbing any congressionally approved balance of federal and state judicial

responsibilities.” Grable & Sons Metal Prods. Inc. v. Darue Eng’g & Mfg., 545 U.S. 308, 314

(2005). However, even “[t]he invocation of [a federal law] as a basis for establishing an

element of a state law cause of action does not confer federal question jurisdiction” where there

is a state law basis for the same element. See Rains v. Criterion Sys., 80 F.3d 339, 345 (9th

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Cir. 1996). “Because each of [plaintiff’s] claims is supported by at least one state law theory

of recovery... the complaint does not state a claim ‘arising under’ [the statute] for purposes of

removal jurisdiction.” Duncan v. Stuetzle, 76 F.3d 1480, 1490 (9th Cir. 1996); see also Rains,

80 F.3d at 346.

To the extent that Plaintiff seeks to use the negative say on pay vote as evidence that

the business judgment presumption was rebutted, resolution of the issue depends on California

state law. Federal question jurisdiction does not exist. See Franchise Tax Bd. of State of Cal.

v. Construction Laborers Vacation Trust for Southern California, 463 U.S. 1, 9 (1983) (finding

that federal question jurisdiction does not exist where “the vindication of a right under state

law [does not] necessarily turn on some construction of federal law.”). Accordingly, Plaintiff’s

remaining claims for violation of state law do not necessarily raise a substantial issue of federal

law. 

The Court declines to exercise supplemental jurisdiction over the remaining state law

claims against Defendants pursuant to 28 U.S.C. §1367(c). See Ove v. Gwinn, 264 F.3d 817,

826 (9th Cir. 2001) (“A court may decline to exercise supplemental jurisdiction over related

state-law claims once it has dismissed all claims over which it has original jurisdiction.”). The

Court declines to exercise supplemental jurisdiction over the remaining state law claims.

This case was removed from state court. The removal statute provides: “If at any time

before final judgment it appears that the district court lacks subject matter jurisdiction, the case

shall be remanded.” 28 U.S.C. § 1447(c). 

IV. Conclusion

IT IS HEREBY ORDERED that the Motion to Dismiss filed by Defendants John R.

Hart, Ronald Langley, Ronald G. Deuster, Richard D. Ruppert, Julie H. Sullivan, Kristina M.

Leslie, Carlos C. Campbell, and Kenneth J. Slepicka (ECF No. 6) is GRANTED in part.

Plaintiff’s third claim for “breach of fiduciary duty in connection with the failure to respond

to the negative say on pay vote” is DISMISSED. The Motion to Remand to State Court filed

by Plaintiff George Assad, suing derivatively on behalf of PICO Holding, Inc., (ECF No. 7)

is GRANTED in part. Pursuant to 28 U.S.C. § 1447(c), this action is REMANDED to the 

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California Superior Court for the County of San Diego, where it was originally filed and

assigned Case No. 37-2011-00096962-CU-BT-CTL.

DATED: January 6, 2012

WILLIAM Q. HAYES

United States District Judge

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