Court Opinion

ID: 4666992
Source: CourtListenerOpinion
Date Created: 2021-03-11 22:04:46.393142+00
Date Added: 2024-06-11T08:02:52.811410
License: Public Domain

COURT OF CHANCERY
                                    OF THE
    SAM GLASSCOCK III
     VICE CHANCELLOR
                              STATE OF DELAWARE                    COURT OF CHANCERY COURTHOUSE
                                                                            34 THE CIRCLE
                                                                     GEORGETOWN, DELAWARE 19947

                            Date Submitted: March 1, 2021
                            Date Decided: March 11, 2021

    Blake A. Bennett, Esq.                         Raymond J. DiCamillo, Esq.
    COOCH AND TAYLOR, P.A.                         Srinivas M. Raju, Esq.
    The Nemours Building                           Robert L. Burns, Esq.
    1007 N. Orange St., Suite 1120                 Matthew D. Perri, Esq.
    Wilmington, Delaware 19899                     Angela Lam, Esq.
                                                   RICHARDS, LAYTON & FINGER, P.A.
                                                   One Rodney Square
                                                   920 North King Street
                                                   Wilmington, Delaware 19801

                 RE: In re USG Corporation Stockholder Litigation,
                     C.A. No. 2018-0602-SG

Dear Counsel:

         I have before me the Plaintiffs’ Motion for Leave to File a Second Amended

Class Action Complaint (the “Motion”), 1 the Defendant’s Opposition,2 and the

Plaintiffs’ Letter3 advising that they do not intend to file a reply. For the reasons

that follow, the Plaintiffs’ Motion is denied.

1
  Pls.’ Mot. for Leave to File Second Am. Class Action Compl., Dkt. No. 115 [hereinafter the
“Motion”].
2
  Defs.’ Opp’n to Pls.’ Mot. for Leave to File Second Am. Class Action Compl., Dkt. No. 116
[hereinafter the “Opposition”].
3
  Ltr. To the Court from Blake A. Bennet, Dkt. No. 118.
       Background

       This Motion comes to me in oddly circuitous fashion. The parties have

already fully briefed and argued a motion to dismiss (the “Motion to Dismiss”).4 I

granted that motion in its entirety in a memorandum opinion on August 31, 2020

(the “Memorandum Opinion”). 5 In the Memorandum Opinion, I found that the

Plaintiffs had (via a sufficient allegation that disclosures in way of a stockholder

vote were inadequate) shown that Corwin cleansing did not apply.6 Nonetheless, I

found that the Plaintiffs had also failed to “plead facts that make it reasonably

conceivable that the Defendants” acted in bad faith or in breach of the duty of

loyalty, and that the Motion to Dismiss must be granted.7 In the Memorandum

Opinion, I asked the parties to submit an appropriate form of order consistent with

my findings in the opinion.8 Before that could occur, however, the Plaintiffs moved

to reargue, positing that I had “overlooked the fact that one Defendant, Jennifer

Scanlon, was an officer as well as a director of USG, and that, in her officer role, she

was not exculpated from damages for a violation of a duty of care in relation to a

4
  Defs.’ Mot. to Dismiss the Verified Am. Class Action Compl., Dkt. No 86.
5
  In re USG Corp. S’holder Litig., 2020 WL 5126671 (Del. Ch. Aug. 31, 2020), reargument denied,
2020 WL 7041190 (Del. Ch. Dec. 1, 2020).
6
  Id. at *13.
7
  Id. at *2.
8
  Id. at *31.
                                              2
disclosure to stockholders.”9 I denied that motion as well via a letter opinion (the

“Letter Decision”), on the grounds that

      [i]t does not appear that the Complaint alleges Ms. Scanlon, as a
      corporate officer, was grossly negligent in the dissemination of
      disclosures. To the extent that, given the Plaintiff-friendly pleading
      standard on this Motion to Dismiss, it may be so read, the Plaintiffs
      failed to brief the issue in response to the Motion sufficiently to
      consider it raised, and failed to raise it at oral argument as well. The
      claim, accordingly, was waived. 10

      After the Letter Decision was issued, the Defendants submitted a proposed

order implementing the Memorandum Opinion. 11 The Plaintiffs did not stipulate to

the proposed order, and indicated that they intended to seek leave to file an amended

complaint.12 The Motion was filed two days later, on December 11, 2020, and was

fully briefed by December 21, 2020.

      However, on January 4, 2021, the Plaintiffs filed a notice of appeal of my

decision granting the Defendants’ Motion to Dismiss, despite there being no final

order (or request to certify interlocutory appeal) in the case.13 In any event, in light

of the appeal, I stayed this action—including the fully briefed Motion—until

resolution of the appeal. 14 The Supreme Court subsequently dismissed the appeal.15

9
   See In re USG Corp. S’holder Litig., 2020 WL 7041190, at *1 (Del. Ch. Dec. 1, 2020)
(summarizing the Plaintiffs’ Motion for Reargument, Dkt. No. 102).
10
   Id.
11
   Ltr. from Angela Lam to Vice Chancellor Glasscock, Dkt. No. 113.
12
   Ltr. to the Court from Blake A. Bennet, Dkt. No. 114.
13
   Copy of notice of appeal to the Supreme Court filed 12-30-20, Dkt. No 119.
14
   Ltr. To Counsel, Dkt. No 121.
15
   Ltr. To the Honorable Sam Glasscock from Blake A. Bennet, Esq., Dkt. No 123.
                                           3
The parties have informed me that the Motion for Leave to File an Amended

Complaint is fully submitted for adjudication.16

         Analysis

         Court of Chancery Rule 15 governs amendments to pleadings and two

subsections are pertinent here. Rule 15(a) provides that a party may amend its

pleadings “once as a matter of course” before a responsive pleading is served;

“[o]therwise a party may amend the party’s pleading only by leave of Court or by

written consent of the adverse party; and leave shall be freely given when justice so

requires.” Rule 15(aaa), however, forms an exception to that general and liberal

rule; it provides a more stringent standard when a motion to dismiss has been

submitted before a motion to amend is made. In that case, “[n]otwithstanding

subsection (a),” if “a party fails to timely file an amended complaint . . . and the

Court thereafter concludes that the complaint should be dismissed . . . such dismissal

shall be with prejudice . . . unless the Court, for good cause shown, shall find that

dismissal with prejudice would not be just under all the circumstances.”

         “The purpose of Rule 15(aaa) was to curtail the number of times that the Court

of Chancery was required to adjudicate multiple motions to dismiss the same

action.”17      The pernicious conduct so addressed was the tendency to file an

16
     Id.
17
     Braddock v. Zimmerman, 906 A.2d 776, 783 (Del. 2006).
                                               4
inadequate complaint and, once a successful motion to dismiss was adjudicated,

attempt to address the deficiencies noted by the court with another iteration of the

cause of action, perhaps serially, to unwarranted expense and effort. Accordingly,

the rule requires plaintiffs, “when confronted with a motion to dismiss . . . to elect

to either: stand on the complaint and answer the motion; or, to amend or seek leave

to amend the complaint before the response to the motion was due.” 18 In other

words, Rule 15(aaa) was written precisely for situations such as the one here, in

which the parties have fully briefed and argued a motion to dismiss and the court has

decided it.

              Rule 15(aaa), not Rule 15(a), applies.

       The Plaintiffs nevertheless argue that Rule 15(a), rather than Rule 15(aaa),

should apply here. In support, they cite TVI Corp. v. Gallagher. 19 In TVI, the Court

treated a motion to amend made during the pendency of a motion to dismiss “as if it

had been submitted after [the] disposition of the Motion to Dismiss,”20             and

proceeded to grant the motion to amend. The court reached both results because the

amendment “seeks only to add a new direct claim” and, of the “several other minor

changes, . . . only one . . . relates to the claims that have been dismissed in response

18
   Id.
19
   TVI Corp. v. Gallagher, 2013 WL 5809271, at *21 (Del. Ch. Oct. 28, 2013).
20
   Id.
                                              5
to Defendants’ Motion to Dismiss.”21 In other words, the holding in TVI is that Rule

15(aaa) is not applicable to an amendment that states a new claim not addressed in

a motion to dismiss.

       The Plaintiffs argue that TVI is on point here, because the “Complaint

attempted to (although apparently did not) plead” the gross negligence claim against

Defendant Scanlon. 22 Accordingly, per the Plaintiffs, the gross negligence claim

was “not within the purview of the motion to dismiss” and the Motion should be

reviewed under Rule 15(a) instead of Rule 15(aaa).23 The Plaintiffs confuse absence

of a pleading with an insufficient pleading, however. An amended pleading to cure

the former is addressed in TVI; the latter is before me.

       The revised pleading proposed here would not state a claim outside “the

purview of the motion to dismiss.” 24 The claim that Defendant Scanlon breached

her fiduciary duty of care—the claim that the Plaintiffs seek to reform and perfect in

the proposed amended pleading—was subject to the Motion to Dismiss. The Motion

to Dismiss sought dismissal of the entire Amended Complaint—which, in turn,

included only one count: a breach of “fiduciary duties” against all the Defendants.25

By definition, a breach of Scanlon’s duty of care would fall within that count, the

21
   Id. (emphasis added).
22
   The Motion ¶ 15.
23
   The Motion ¶ 14.
24
   TVI, 2013 WL 5809271, at *21.
25
   Pls.’ Verified Am. Class Action Compl. ¶¶ 207–211, Dkt. No. 78.
                                              6
dismissal of which was sought in the Motion to Dismiss. Accordingly, the TVI

exception does not apply here.

              The Plaintiffs have not shown good cause.

       The Plaintiffs, with their Motion, seek to amend their Amended Complaint to

perfect a claim that they had “attempted”26 to make, after I decided that the claim

was insufficiently alleged. This is not a case where a new and unique claim is being

raised against the Defendants. Rather, “[t]he parties went through full briefing and

argument, yet [the Plaintiffs] did not once identify any additional allegations that

might bolster [their] claim.” 27

       To quote the Plaintiffs,

       The Operative Complaint, inter alia: (i) identified Scanlon as a
       defendant in her capacity as the CEO and President of USG in addition
       to her position as a director (¶ 12); (ii) identified her as a member of
       ‘management’ (e.g., ¶ 62); (iii) explained that Defendants ‘were in a
       fiduciary relationship with Plaintiff and the other public shareholders
       of USG and owed them a duty of care, loyalty, good faith, candor, and
       independence’ ‘[b]y reason of the Defendants’ positions with the
       Company as officers and/or directors,’ (¶ 34); (iv) explained why the
       Proxy was materially incomplete and misleading (¶¶ 204-06); and (v)
       asserted that ‘Plaintiffs and the Class . . . suffered the injury of an
       uninformed stockholder vote.28

Such allegations, as I have found, are insufficient to state a claim against Scanlon.

They fail to allege that the Company’s incomplete and misleading disclosures—

26
   The Motion ¶ 15.
27
   Mooney v. E. I. du Pont de Nemours & Co., 2017 WL 5713308, at *8 (Del. Super. Ct. Nov. 28,
2017), aff’d, 192 A.3d 557 (Del. 2018).
28
   The Motion ¶ 2 (emphasis in the original).
                                             7
issuance of which is the sole breach of care that the Plaintiffs articulate—are the

result of Scanlon’s gross negligence—a point I articulated in my Letter Decision.29

The Plaintiffs’ allegations merely allege that the proxy in question was insufficient

and conclude that it may be Scanlon’s fault. Although the standard at a motion to

dismiss is plaintiff-friendly, it does not require the Court to accept the plaintiff’s

conclusory allegations. 30

       Finally, as I noted in my Letter Decision, even if the plaintiff-friendly motion

to dismiss standard may be read to allow an inference that Scanlon was grossly

negligent in causing the corporation to issue the incomplete and misleading proxy,

“the Plaintiffs failed to brief the issue in response to the Motion sufficiently to

consider it raised, and failed to raise it at oral argument as well.”31 Indeed, the

Plaintiffs raised the duty of care allegation with regards to Scanlon (if at all) only in

a footnote of their motion to dismiss briefing that stated: “§ 102(b)(7) does not

exculpate officers in their capacity as officers, such that exculpation is not available

to Scanlon.”32 True, but unhelpful to the Plaintiffs. The footnote does not provide

29
   A disclosure violation, I note, does not necessarily implicate the duty of care; that is, gross
negligence. The Memorandum Opinion found that the pleadings, viewed in a plaintiff-friendly
light, implied negligence regarding the disclosures. In re USG Corp. S’holder Litig., 2020 WL
5126671, at *28 (Del. Ch. Aug. 31, 2020) (“While I may infer that the Proxy Statement negligently
failed to inform USG’s stockholders of the Board’s view of USG’s intrinsic value, in light of the
other disclosures made, it is not reasonably conceivable that such non-disclosure rises to the level
of conscious disregard of duty.”), reargument denied, 2020 WL 7041190 (Del. Ch. Dec. 1, 2020).
30
   Pfeffer v. Redstone, 965 A.2d 676, 683 (Del. 2009).
31
   In re USG Corp. S’holder Litig., 2020 WL 7041190, at *1 (Del. Ch. Dec. 1, 2020).
32
   See the Motion ¶ 4.
                                                 8
any argument as to how the factual allegations support gross negligence on

Scanlon’s part with respect to the disclosures, or how such gross negligence caused

the harm to the Plaintiffs.

          The Plaintiffs in their original pleading attempted and failed to plead breach

of fiduciary duty against Scanlon. Rule 15(aaa) precludes a second such attempt

here.       Application of that rule does not work an injustice “under all the

circumstances” here.33

          For the forgoing reasons, the Plaintiffs’ Motion for Leave to File a Second

Amended Complaint is DENIED. An appropriate Order is attached.

                                                 Sincerely,

                                                 /s/ Sam Glasscock III

                                                 Sam Glasscock III

cc:       All counsel of record (by File & ServeXpress)

33
     Ct. Ch. R. 15(aaa).
                                             9
  IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE USG CORPORATION                      ) CONSOLIDATED
STOCKHOLDER LITIGATION                     ) C.A. No. 2018-0602-SG

                                   ORDER

     For the reasons set forth in my Letter Decision of March 11, 2021, IT IS

HEREBY ORDERED:

  1. The Plaintiffs’ Motion for Leave to File Second Amended Class Action

     Complaint is DENIED.

     IT IS SO ORDERED this 11th day of March, 2021.

                                           /s/ Sam Glasscock III

                                           Vice Chancellor

                                      10