Opinion ID: 481717
Heading Depth: 2
Heading Rank: 2

Heading: The Claims for Damages

Text: 7 In diversity actions, the characterization of an action as derivative or direct is a question of state law. C. Wright, A. Miller & M. Kane, Federal Practice and Procedure Sec. 1821 (2d ed. 1986); see Lewis v. Chiles, 719 F.2d 1044, 1048-49 (9th Cir.1983) (citing state law in diversity action to determine the nature of the appropriate cause of action). Once state law characterizes the action as either derivative or direct, the applicable procedural rules are determined by federal law. Gadd v. Pearson, 351 F.Supp. 895, 900 (M.D.Fla.1972); see Hanna v. Plumer, 380 U.S. 460, 464-74, 85 S.Ct. 1136, 1140-45, 14 L.Ed.2d 8 (1965); Olympic Sports Prod., 760 F.2d at 913-16. In federal courts, derivative suits are subject to the procedural requirements of Fed.R.Civ.P. 23.1. See Greenspun v. Del E. Webb Corp., 634 F.2d 1204, 1208-10 (9th Cir.1980) (affirming district court's dismissal of derivative action for failure to comply with Fed.R.Civ.P. 23.1). Rule 23.1 governs derivative actions  'to enforce a right of a corporation' when the corporation itself 'failed to enforce a right which may properly be asserted by it' in court. Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 533-34, 104 S.Ct. 831, 836-37, 78 L.Ed.2d 645 (1984) (quoting Fed.R.Civ.P. 23.1). 8 Under Montana law, a shareholder can enforce a corporate right in a derivative action if certain conditions are met. Mont.R.Civ.P. 23.1; see S-W Co. v. John Wight, Inc., 179 Mont. 392, 402-03, 587 P.2d 348, 354 (1978). As a general rule, an action enforces a corporate right if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock or property without any severance or distribution among individual holders. 12B W. Fletcher, Cyclopedia of the Law of Private Corporations, Sec. 5911 (rev. perm. ed. 1984) (footnotes omitted); see Annotation, Stockholder's Right to Maintain (Personal) Action Against Third Person as Affected by Corporations' Right of Action for the Same Wrong, 167 A.L.R. 279, 280 (1947) (cited by Mont.R.Civ.P. 23.1 comment). Therefore, if the corporate wrong decreases the value of the corporation's stock, it does not necessarily create a direct cause of action for shareholders. Lewis, 719 F.2d at 1049 (applying Oregon law); W. Fletcher, supra, Sec. 5913; Annot., 167 A.L.R. 279, 280 (1947). The general rule that a shareholder cannot enforce corporate rights in a direct action applies to actions arising out of either contract or tort law. Schaffer v. Universal Rundle Corp., 397 F.2d 893, 896 (5th Cir.1968) (applying Texas law). A direct action can be brought either when there is a special duty, such as a contractual duty, between the wrongdoer and the shareholder, or when the shareholder suffers injury separate and distinct from that suffered by other shareholders. W. Fletcher, supra, Sec. 5911; see Schaffer, 397 F.2d at 896. 9 Sax argues that the district court improperly dismissed the damage counts of his amended complaint. He contends that he has an individual cause of action to which Rule 23.1 does not apply because he gave up his prior job in Indiana, moved to Montana, successfully started World Wide, was refused his contractual right to purchase additional stock and therefore resigned, and because he was unable to sell his stock as a result of the defendants' actions. He cites Jones v. H.F. Ahmanson & Co., 1 Cal.3d 93, 460 P.2d 464, 81 Cal.Rptr. 592 (1969) and Davis v. Ben O'Callaghan Co., 238 Ga. 218, 232 S.E.2d 53 (1977), as support for the argument that he has stated grounds for a direct action. We disagree. The damages sought by Sax for the loss of interest income on his stock investment are incidental to injuries to World Wide and, therefore, are not injuries to Sax personally. See W. Fletcher, supra p. 6, at Sec. 5913; Annot., 167 A.L.R. 279, 280 (1947). 10 Sax alleges that the conspiracy depleted World Wide's assets through corporate mismanagement and diversion of corporate assets. These actions are injuries to the corporation. See W. Fletcher, supra p. 6, at Sec. 5913. Even if the defendants depleted World Wide's assets with the sole purpose of decreasing the value of Sax's stock and destroying his return on his investment, the action would nonetheless be derivative. See id. 11 Sax attempts to invoke the exception to the general rule that actions to redress corporate injuries must be brought derivatively by establishing that his employment contract with World Wide created a special duty between himself and the defendants. However, the employment relationship is irrelevant to the gravamen of Sax's complaint. The acts that allegedly caused Sax's damages occurred after Sax terminated his employment with World Wide and are unrelated to the defendants' breach of the employment agreement. Indeed, Sax does not request damages for World Wide's refusal to sell him the promised stock; rather, the alleged damages are based on the unmarketability of his stock as a result of the defendants' actions. This is an injury suffered by all of World Wide's shareholders and not by Sax alone. Therefore, the injury is incidental to injuries to World Wide and is not an injury to Sax personally. 12 In the third count of his complaint, Sax seeks to extend Montana's tort of bad faith. Montana courts have characterized this tort as the tort of breach of the implied covenant of good faith and fair dealing. See Nicholson v. United Pac. Ins. Co., 710 P.2d 1342, 1347 (Mont.1985). He alleges that the defendants tortiously violated the implied covenant of good faith. Sax argues that the covenant is implicit in the fiduciary relationship between the defendants and all other stockholders of World Wide. However, Sax has not identified a fiduciary duty owed to him that is separate and distinct from that owed to other shareholders and that would allow him to maintain a direct action. The injury he alleges affected the whole body of [World Wide] stock and is, therefore, an injury to the corporation. 13 Sax cites Jones v. H.F. Ahmanson & Co. as support for his contention that he can bring a direct action under Montana law. This case is distinguishable. In Jones, the majority shareholders of a closely held corporation contributed their shares to a new corporation in exchange for stock. They sold a portion of their shares in the new corporation for a considerable profit. As a result, the value of the minority shareholders' stock in the close corporation fell. The California Supreme Court permitted the class of minority shareholders to bring a direct action. Unlike the present case, however, the minority shareholders in Jones were excluded from participating in the new corporation and, therefore, were uniquely injured by the acts of the majority shareholders. Moreover, because the majority shareholders were merely selling their stock at a profit, they probably breached no fiduciary duty to the corporation. Therefore, unlike the present case, it is questionable whether the corporation could have collected damages in a derivative suit. 14 Sax also argues that he should be permitted to bring a direct action on the grounds that the defendants control the corporation and that a derivative action would place any judgment into the corporate treasury and therefore under the defendants' control. See Davis, 238 Ga. at 222, 232 S.E.2d at 56; Thomas v. Dickson, 162 Ga.App. 569, 571, 291 S.E.2d 747, 749 (1982), aff'd, 250 Ga. 772, 301 S.E.2d 49 (1983); W. Fletcher, supra p. 6, at Sec. 5911. Although some jurisdictions recognize this exception, it is an undecided question in Montana courts. However, the official comment in the annotations to Mont. Code Ann. Sec. 35-1-514 states that [t]he need for the derivative remedy is best illustrated when those in control of the corporation are the alleged wrongdoers. (emphasis added). Moreover, we believe that the strong policy in favor of preventing unnecessary litigation countenances against recognizing such an exception in the case of suits brought individually by shareholders 2 . Otherwise, there would be as many suits as there were shareholders in the corporation. See 4 D. Dowling, Mont. Code Annotated (Annotations) 66-67 (1986) (Redress in the form of a separate suit by each individual shareholder whenever the value of his shares is impaired by a wrong to the corporation would result in unnecessary multiplicity of actions.). Therefore, we refrain from recognizing this exception under the facts of this case. Accordingly, we affirm the district court's dismissal of the damage counts of Sax's complaint because they state a derivative cause of action and Sax failed to comply with the requirements of Fed.R.Civ.P. 23.1.