Opinion ID: 867012
Heading Depth: 2
Heading Rank: 2

Heading: Direct and Derivative Claims

Text: The dispositive question is whether the Kepleys’ claim is direct or derivative, and it must be answered by looking at the law in the state of incorporation. See Casden v. Burns, 306 F. App’x 966, 974 (6th Cir. 2009). ATA is incorporated in Kentucky, and both parties agree that Kentucky law is applicable. It is undisputed that the Kentucky Supreme Court has yet to render a decision articulating a particular test to be applied in determining whether a claim is direct or derivative under these circumstances. The Kepleys correctly note that the district court failed to undertake an Erie analysis of Kentucky law. Such an analysis, they argue, reveals that Kentucky’s highest court would apply the Delaware Supreme Court’s test to determine whether a claim is direct or derivative: “(1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?” Tooley v. Donaldson, No. 12-5078 Kepley, et al. v. Lanz Page 5 Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004). The Kepleys note that in the context of addressing whether a breach of fiduciary claim could be brought directly or derivatively, a federal district court in Kentucky cited Tooley favorably and also recognized that Kentucky appellate courts have relied upon Delaware’s courts as leading authorities on the subject of corporate law. See 2815 Grand Realty Corp. v. Goose Creek Energy, Inc., 656 F. Supp. 2d 707, 716 (E.D. Ky. 2009). Lanz argues that the district court did not err in applying the “separate and distinct” injury standard. He correctly contends that the Kentucky Court of Appeals has applied some form of the test used by the district court. See Sahni v. Hock, 369 S.W.3d 39, 47 (Ky. Ct. App. 2010) (finding that shareholder “failed to demonstrate a specific injury to herself outside the diminution in value of [the corporation’s] stock”). Another decision by the Kentucky Court of Appeals, rendered shortly after briefing was concluded in this case, applied the same test. See Watkins v. Stock Yards Bank & Trust Co., __ S.W.3d __, 2012 WL 2470692, at  (Ky. Ct. App. June 29, 2012). There is little substantive distinction between the tests proposed by the parties. Cf. Remora Invs., L.L.C. v. Orr, 673 S.E.2d 845, 848 (Va. 2009) (noting that regardless of the test applied, the claims were derivative). The question of whether the shareholder’s injury is “separate and distinct” from that of the corporation’s is essentially the same inquiry as the first step of Delaware’s Tooley test, though the second step also informs the analysis. Under either test, we find the focus to be on (1) the nature of the duty owed and (2) the nature of the injury suffered. Therefore, the district court did not err in its choice of law. We disagree, however, with the district court’s application of these principles in determining that the Kepleys’ injury was not “separate and distinct” from any injury suffered by ATA. Lanz’s duty under the IRA not to sell his stock was owed to both ATA and the Kepleys, but this does not foreclose a finding that the Kepleys’ claim may be asserted directly against Lanz. The nature of the injury alleged here is one that, if proven, was suffered only by the Kepleys. The Kepleys allege that Lanz and his associates used the threat of the sale of his preferred—and restricted—share, along with No. 12-5078 Kepley, et al. v. Lanz Page 6 the threat that opposition to the sale would result in either costly litigation or being “squeezed out,” to force the Kepleys to sell their 30% ownership interest in the company they created. There is nothing in the record to suggest that any of the other shareholders sold their stock or were pressured to do so. It also appears that after the Kepleys were forced out, Lanz never carried out his threat to sell his stock. Thus, by selling their stock for less than it was worth, the Kepleys suffered an injury that was not suffered by either the corporation or the other shareholders. Their injury is therefore “separate and distinct.” A policy rationale—the familiar repugnance for a wrong without a remedy—also supports a finding that the Kepleys have standing to bring a direct claim. In Kentucky, the sale of the Kepleys’ stock means that they are no longer shareholders and do not have a right to bring a derivative claim. See, e.g., Bacigalupo v. Kohlhepp, 240 S.W.3d 155, 158 (Ky. Ct. App. 2007) (noting that following a merger, the former shareholders lack standing to bring a derivative claim because they “would receive no benefit from any corporate recovery”). Thus, if the complaint were dismissed on the grounds articulated by the district court, there would be a loss suffered that could not be addressed either individually or derivatively—the Kepleys would have no direct claim, yet by selling their stock in an effort to minimize their damages, they could no longer bring a derivative claim. Moreover, even if the Kepleys could bring a derivative claim, Lanz and Crimson—whose threat to sell and purchase the stock, respectively, caused the alleged harm to the Kepleys—would stand to benefit from the recovery and the Kepleys would not. Cf. Kollman v. Cell Tech Int’l, Inc., 279 P.3d 324, 332 (Or. Ct. App. 2012) (accepting plaintiff’s argument that if his breach of fiduciary duty claim were treated as derivative, the person “who ultimately obtained ownership of more than 90 percent of the shares of the corporation[] would be the primary beneficiary of the recovery of damages,” even though that person was the “primary beneficiary of [the] wrongdoing in the first place”). Thus, the Kepleys’ allegations fit squarely within key purposes underlying direct claims. No. 12-5078 Kepley, et al. v. Lanz Page 7 At this point in the litigation, “[t]he facts alleged by the plaintiff must be accepted as true.” VIBO Corp. v. Conway, 669 F.3d 675, 683 (6th Cir. 2012). The Kepleys’ complaint alleges that they were parties to the IRA that Lanz threatened to breach and they were placed in the position of having to sell their shares or be “squeezed out.” The Kepleys properly contend that they suffered a separate and distinct injury as a result of Lanz’s breach of the IRA. Cf. Kollman, 279 P.3d at 336 (affirming judgment on plaintiff’s direct claim because “the series of events culminating in the breach of fiduciary duty here were not intended to—and did not—equally harm all shareholders”). We find the Kepleys have standing to bring a direct claim and reverse the district court’s sua sponte dismissal of their claim against Lanz.