Court Opinion

ID: 9576963
Source: CourtListenerOpinion
Date Created: 2023-08-21 21:30:18.814737+00
Date Added: 2024-06-11T13:19:44.969352
License: Public Domain

FABE, Justice,
dissenting.
I. INTRODUCTION
I dissent from the opinion of the court because I disagree with its decision to allow plaintiffs to bring a direct rather than a derivative action. The gravamen of the plaintiffs’ complaint is a wrong to the corporation as a whole. Basic principles of corporation law therefore require the plaintiffs to bring a derivative shareholder action to remedy that wrong. The court’s failure to adhere to this well-established rule leads it to adopt a result that rather than remedying the discriminatory plan, continues it. Under the court’s decision, shareholders who are as innocent of wrongdoing as the plaintiffs will be forced to pay for a recovery that bears little relationship to any harm the plaintiffs actually suffered.
II. DISCUSSION
A. As a Native Corporation, Kake Differs Significantly from Novr-Native Corporations in Purpose and History.
The facts of this case cannot be properly understood without a brief discussion of the history and aims of the Alaska Native Claims Settlement Act (ANCSA). Although Kake’s “financial security plan” was not permissible under ANCSA, the distributions under the plan did not arise from greed or bad faith. Rather, they resulted from the conflicts inherent in the difficult role ANCSA gave to Native corporations.
In enacting ANCSA, Congress intended to settle Native land claims in a way that both initiated Natives into the “American mainstream,” Monroe E. Price, A Moment in History: The Alaska Native Claims Settlement Act, 8 UCLA-Alaska L.Rev. 89, 95 (1979), and addressed their “real economic and social needs.” 43 U.S.C. § 1601(b) (1994). Under ANCSA, Congress imposed on the myriad Alaska Native communities a “formidable framework” of corporations to distribute settlement land and funds and serve as a vehicle for Native development. Felix S. Cohen’s Handbook of Federal Indian Law 752-53 (Rennard Strickland et al. eds., 1982) (hereinafter Cohen). These corporations, as the Ninth Circuit recently noted, “differ markedly from ordinary business corporations” in their structure and purposes. State v. Native Village of Venetie Tribal Gov’t, 101 F.3d 1286, 1295 (9th Cir.1996). John Shively, an expert witness for Kake in the instant case, testified that ANC-SA’s use of the corporate model should be understood as a “social experiment,” unprecedented in Congress’s dealings with Native Americans elsewhere. See Cohen, supra, at 740.
In 1987, Congress amended ANCSA to reconcile the corporate form and the needs of Native communities. Alaska Native Claims Settlement Act Amendments of 1987, S.Rep. No. 100-201, 100th Cong., 1st Sess. 19-21 (1987), reprinted in 1987 U.S.C.C.A.N. 3269-72 (hereinafter S. Rep. 100-201). Under these amendments, Native corporations are allowed to convey assets to a “settlement trust” to “promote the health, education, and welfare of its beneficiaries and preserve the heritage and culture of Natives.” 43 U.S.C. § 1629e(b)(l) (1994).1 The amendments also allow regional corporations to issue different classes of stock so as to benefit “Natives who have attained the age of sixty-five” and “other identifiable groups of Natives.” 43 U.S.C. § 1606(g)(2)(B)(iii)(I) and (II) (1994). The result, as John Shively testified, has been to “recognize the nativeness of the settlement, not the corporateness of the settlement” and to “provide for what the [N]atives felt met their ... real economic and social needs.” See S. Rep. 100-201, supra p. 29, at 20-21, *1333U.S.Code Cong. & Admin.News 1987, pp. 3270-72.
It is against this backdrop that Kake’s financial security plan must be understood. The plan began as a means to assist shareholders in the village corporation who had seen little direct compensation from the ANCSA settlement.2 Rather than “merely a method of distributing corporate assets to certain shareholders,” Op. at 1324, the plan was an attempt to overcome the “ ‘limitations of the corporate form of organization as the means of delivering benefits.’ ” Martha Hirschfield, Note, The Alaska Native Claims Settlement Act: Tribal Sovereignty and the Corporate Form, 101 Yale L.J. 1331, 1338 (quoting U.S. Dep’t of the Interior, ANCSA 1985 Study, at ES-14 (June 29,1984) (unpublished draft)).
Kake chose the structure of the plan at the suggestion of Mutual Life Insurance Company of New York (MONY), which then sold Kake the insurance to fund it. MONY assured Kake’s president that the plan would “fit into the provision [sic] of the Alaska Native Claim [sic] Act” and “protect both Kake Tribal Corporation and Mutual of New York from not only dissatisfied [sic] shareholder [sic], but eager attornies [sic] and the Internal Revenue Service as well.”
The board of directors adopted the plan and publicized it “for the welfare of our people who were retired or for the welfare of those whom they left behind when they died.” Clarence Jackson, the president of Kake and a member of the board of directors when the plan was adopted, stated that the board “feared that ANCSA meant that various welfare programs of the United States for Alaska Natives might be phased out leaving it to the corporations to provide for the security of these people.” Along with the benefits described by the court, Op. at 1322-1323, the corporation also paid the funeral expenses for all deceased shareholders, whether or not they were plan members. The plan, while untenable for a traditional business corporation, was in line with ANC-SA’s purposes and similar to the programs approved by Congress in the 1988 amendments to ANCSA and recently upheld by the Ninth Circuit. See 43 U.S.C. § 1606(g)(2)(B)(iii)(I); Broad v. Sealaska Corp., 85 F.3d 422 (9th Cir.1996).
However, while the context of this case is unusual, I agree with the court that the financial security plan was not permitted under ANCSA or Alaska law. Kake never undertook any of the procedural steps to establish a settlement trust under 43 U.S.C. § 1629e (1994). Therefore, Kake’s financial security plan cannot be approved under the 1988 amendments to ANCSA. The question remains, however, what legal consequences should flow from that conclusion.
B. The Superior Court Should Have Required Plaintiffs to Frame Their Complaint as a Derivative Shareholders’ Action, Not a Direct Action.
Under basic principles of corporation law, when the board of directors and executives of a corporation make an impermissible payment of corporate funds, the shareholders’ right to redress is derivative and not direct. Charles R.P. Keating & Jim Perkowitz-Sol-heim, 12B Fletcher Cyclopedia of the Law of Private Corporations §§ 5928, 5929.20 (perm. ed. rev.vol. 1993) (hereinafter Fletcher). This is the rule even if the illegal payments are made to other shareholders. See, e.g., Mann-Paller Found, v. Econometric Research, 644 F.Supp. 92, 93-94, 98 (D.D.C.1986). The reasoning behind this rule is that such impermissible payments, by reducing the corporation’s assets and thus the value of each share of stock, harm all shareholders equally. Id. at 98; see also 12B Fletcher, supra p. 5, § 5913. Thus, for the shareholders to be made “whole,” the misspent assets must be recovered by the corporation so that they can be used for proper corporate purposes. Hikita v. Nichiro Gyo-*1334gyo Kaisha, Ltd., 713 P.2d 1197, 1199 (Alaska 1986).
The court acknowledges the merit of this analysis, Op. at 1327, but avoids its application. Instead, relying on its conviction that the harm to the plaintiffs consisted in Kake’s failure to make payments to them under the plan, the court concludes that Kake must pay the plaintiffs the same amount as it paid the elders. Op. at 1328, 1330. This reasoning can be summarized as follows: (1) the plaintiffs’ only possibility for a recovery is through a direct action; (2) the trial court has broad discretion in allowing direct actions; (3) a direct action is justifiable in this case because the plaintiffs complain of a “special injury;” and (4) the trial court can modify the remedy to alleviate the problems created by permitting a direct action. I address each step of this argument in order.
The court’s opinion states that “a direct action ... is the only way to provide an adequate remedy” to the plaintiffs. Op. at 1326-1327. It reasons first that “the corporation may not be entitled to any damages from the shareholders who received payments under the financial security plan.” Op. at 1327. I agree. The court also states, however, that “it is unlikely that any damages collected from the responsible directors and officers will approximate the sum of payments made under the plan.” Op. at 1327. There is no support for this assumption in the record before us. Furthermore, even if this assertion were supported by the record, I fail to see its legal relevance. The proper focus in determining whether a shareholder may bring a direct or a derivative action is not the likelihood of complete recovery, but the nature of the harm. 12B Fletcher, supra p. 5, § 5908.
The court further argues that “even if the corporation actually did recover damages equivalent to the total payments under the financial security plan, any part of the damages paid by the directors and officers would be a windfall for the shareholders who received distributions under the plan.” Op. at 1327 n. 4. However, such a “windfall” would not harm the plaintiffs. The plaintiffs would receive no more and no less than what they were entitled to: the full value of their shares in the corporation. Any extra payment to shareholders who received distributions under the plan would be funded entirely by those found liable for the impermissible distributions, not by the plaintiffs or the corporation. Furthermore, the payments would not reward wrongdoing, since, as the court notes, the shareholders who were included in the plan most likely did not know “the payments violated the law.” Op. at 1327.
As the next step in its analysis, the court states that the superior court has “wide discretion in interpreting whether a complaint states a derivative or primary claim.” Op. at 1327. The full statement of the rule is as follows:
[Cjourts generally have wide discretion in interpreting whether a complaint states a derivative or primary claim. The caption and prayer may aid in determining which is the true character of the action, although the complaint does not make an action individual or derivative by calling it one or the other, and the prayer for relief may be disregarded in determining whether the action is an individual or a derivative one. The nature of the action -is to be determined from the body of the complaint rather than from its title.
12B Fletcher, supra p. 32, § 5912. This passage means that the trial court is free to disregard the parties’ characterization of the cause of action, not that the law affords the trial court latitude in making its determination. This principle, in my view, is central to a correct understanding of this case. The superior court erred in this ease because it failed to look beyond the plaintiffs’ characterization of their claim.
There are cases, as the court’s opinion points out, in which a shareholder may bring both a derivative and a direct action. See, e.g., Hikita, 713 P.2d at 1199. However, in such cases the shareholder must have an independent basis for the direct action, usually the corporation’s violation of a duty “arising from contract or otherwise, and owed to the shareholder directly.” 12B Fletcher, supra p. 32, § 5921. Such an independent *1335basis is not present in this case.3
In the third step of its analysis, the court contends that the plaintiffs may bring a direct action in this case because they suffered an injury “separate and distinct from other shareholders.” Op. at 1327. As the majority goes on to point out, however, courts have not adopted this “special injury” exception in cases like this one where all the shareholders, even the ones who received the illegal payments, were harmed by the misspending of corporate assets and the corresponding diminution in the value of shares. Op. at 1328. This reasoning also applies here. All the shareholders of Kake were injured by the financial security plan, many of them to an extent almost as great as the plaintiffs.4 The fact that ten of the 575 shareholders received, through no fault of their own, a payment of $9,800 should not be allowed to alter the analysis of this ease. As the plaintiffs correctly state, most shareholders “received an inexpensive distribution, a cheap insurance policy costing only a fraction of what the Cadillac policies cost.”
The court recognizes this crucial point when it states in the section of the opinion discussing its remedy: “[I]t is conceivable that requiring Kake to pay damages immediately and in a lump sum would disrupt Kake’s operations or prevent Kake from pursuing a profitable business opportunity. The result would be that all Kake shareholders would be injured.'’’’ Op. at 1328 (emphasis supplied). In other words, the court acknowledges that even though plaintiffs will benefit by receiving a damage award, they will also be harmed by the impact of that award on the value of their shares. This statement applies equally to the payments made under the plan and stands in contradiction to the majority’s statement that the “shareholders who received payments under the plan suffered no meaningful injury whatsoever.” Op. at 1327.
As its “second point supporting the contention that a direct action is appropriate,” the court asserts that “there are many reported eases concerning discriminatory distributions which proceeded as direct actions.” Op. at 1328. The six cases cited to support this statement, however, are distinguishable. In the first two, Amalgamated Sugar Co. v. NL Industries, 644 F.Supp. 1229, 1234 (S.D.N.Y. 1986) and Asarco, Inc. v. Holmes A. Court, 611 F.Supp. 468, 479-80 (D.N.J.1985), the plaintiffs sought injunctions against ultra vires corporate acts. Such a direct action to enjoin the plan, rather than to recover monetary damages, would have been appropriate in this case.5 See 12B Fletcher, supra p. 32, § 5915.10.
The rest of the cited eases deal with closely held corporations.6 While some courts *1336“recognize the right of a close corporation shareholder to sue directly ... on a cause of action which would normally have to be brought derivatively,” 12B Fletcher, supra p. 32, § 5911.50, this court does not. Arctic Contractors, Inc. v. State, 573 P.2d 1385, 1386 n. 2 (Alaska 1978) (stating that the “rule against individual shareholder suits also applies where all the stock in the corporation is held by one person or by a small number of people”). Even if we did recognize this exception, however, Kake is not a close corporation. Furthermore, the policy reasons for treating close corporations differently than other corporations in regard to direct actions do not support allowing a direct action in this case.7
Finally, the court attempts to address the “policy concerns” raised by its decision by instructing the superior court to make two findings. Op. at 1329. Rather than alleviate those concerns, however, the findings required by the majority highlight them, demonstrating even more clearly why the plaintiffs should not have been allowed to bring a direct action in this ease. This court stated in Nikita, 713 P.2d at 1199, that one reason direct actions are not permitted where the harm is to the corporation is to protect “the prerogative of the board of directors to determine how the recovered damages should be utilized.” We have recognized that, because “[jjudges are not business experts, ... courts are reluctant to substitute their judgment for that of the board of directors.” Alaska Plastics, Inc. v. Coppock, 621 P.2d 270, 278 (Alaska 1980). The majority opinion, however, orders the superior court to consider if Kake’s “operations or investment opportunities would be impaired if it were compelled to pay immediately the entire amount of the judgment.” Op. at 1329. This represents exactly the type of intrusion courts have traditionally avoided.
The court’s opinion also requires the superior court, if it “concludes that an immediate lump sum payment of damages would be inappropriate,” to “consider ordering Kake to suspend the payment of dividends to shareholders until Kake fully compensates the shareholders in the plaintiff class.” Op. at 1329. This suspension of dividends underlines that the majority of shareholders, whom the plaintiffs acknowledge suffered considerable discrimination under the plan, will fund the plaintiffs’ recovery. Thus, for these shareholders, the majority’s decision, rather than remedying the plan, continues it: Kake will now be forced to make more cash payments to yet another, larger group of select shareholders.
III. CONCLUSION
Kake erred in adopting its financial security plan. This mistake injured not only the plaintiffs, but all of those who own shares in the corporation. These individuals, who became corporate shareholders by Congressional action rather than through individual investment decisions, have a tremendous stake in the success of their corporation. Allowing plaintiffs to recover directly from the corporation is not only unfair to the rest of the shareholders, it is inconsistent with the principles of corporation law. Ironically, this same body of law that has so often been a stumbling block for Native corporations should, in this case, have worked in Kake’s favor. Therefore, I respectfully dissent.

. The Ninth Circuit recently upheld such a settlement trust established by Sealaska Corporation to make a one time payment of $2,000 to each shareholder who reaches 65 years of age. Broad v. Sealaska Corp., 85 F.3d 422, 425 (9th Cir. 1996). In so holding, the court determined that ANCSA preempted state law with respect to the establishment of trusts and the distribution of trust assets. Id. at 426.

. ANCSA settlement funds were distributed differently to Natives who own shares in both a village and a regional corporation than they were to those who only own shares in a regional corporation. See 43 U.S.C. § 1606(i), (j), (m) (1994). While those who only owned shares in regional corporations received direct distribution of settlement funds and revenues from the sale of timber and subsurface resources, those who owned shares in village corporations did not; their portion was distributed instead to the village corporation. Id.

. The U.S. Supreme Court case cited by the court's opinion, J.I. Case Co. v. Borak, 377 U.S. 426, 431, 84 S.Ct. 1555, 1559, 12 L.Ed.2d 423 (1964), contradicts the proposition for which it is cited. The Borak Court held that a derivative action could be brought under the Securities Exchange Act of 1934 for the injury suffered due to a deceptive proxy solicitation. Id. at 431-32, 84 S.Ct. at 1559-60. In fact, Borak states that ordinarily a direct action will not be available to a shareholder as a remedy for the injury caused by deceptive proxy solicitations, since that injury “flows from the damage done the corporation.” Id. at 432, 84 S.Ct. at 1560. Based on this reasoning, the Court concludes that “[t]o hold that derivative actions are not within the sweep of the section would therefore be tantamount to a denial of private relief.” Id.

. The court states that “the illegal payments in this case can be said to have ‘harmed the corporation’ ” in “a metaphysical sense.” Op. at 1327. As I see it, the plan's impact on the assets of the corporation and hence on the value of shares in the corporation is concrete and easily measured.

. These cases are distinguishable in other key respects as well. In Jones v. H.F. Ahmanson & Co., 1 Cal.3d 93, 81 Cal.Rptr. 592, 606, 460 P.2d 464, 478 (1969), the plaintiff sought a forced buyout of her shares, not a distribution. Donahue v. Rodd Electrotype Co., 367 Mass. 578, 328 N.E.2d 505, 511 (1975), involved a minority shareholder’s “equal opportunity to sell her shares to the corporation.” The court ordered the corporation either to reverse the purchase of the controlling shareholder’s stock or to purchase the minority shareholder's stock. Id. at 520-21. In Erdman v. Yolles, 62 Mich.App. 594, 233 N.W.2d 667, 669 (1975), the court found that the distribution at issue was a dividend. Such a finding, not warranted by the facts of this case, establishes a contractual right on the part of the individual shareholder to sue the corporation directly. Id.; see also 12B Fletcher, supra p. 32, § 5922. Similarly, the court in Stoddard v. Shetucket Foundry Co., 34 Conn. 542 (1868), held *1336that where a dividend had been paid to all of the stockholders except plaintiff, "the company could not set up as against [the plaintiff] that the dividend had not been earned.” 11 Timothy P. Bjur & James Solheim, Fletcher Cyclopedia of the Law of Prívate Corporations § 5352 n. 2 (perm, ed. rev.vol. 1995)(citing Stoddard, 34 Conn. 542 (1868)).

. Courts make the exception when the close corporation is similar to a partnership, when “there are no persons not before the court who can be affected by the litigation," and when there is "no danger of a multiplicity of lawsuits.” 12B Fletcher, supra p. 32, § 5911.50. None of these reasons applies to this case. Kake is not like a partnership, the majority of the shareholders affected by this litigation are not before the court, and there is a danger of a multiplicity of lawsuits.