Court Opinion

ID: 9559602
Source: CourtListenerOpinion
Date Created: 2023-08-21 17:32:14.946172+00
Date Added: 2024-06-11T09:11:26.031052
License: Public Domain

FABE, Justice,
with whom COMPTON, Chief Justice, joins, dissenting.
I. INTRODUCTION
Although I agree with the court’s opinion that the trial court erred in converting the motion to dismiss into a summary judgment motion without prior notice of the conversion, I disagree with its conclusion that the judgment should be vacated and remanded. I believe that it would be preferable to proceed under the second option presented by Martin v. Mears, 602 P.2d 421, 427 (Alaska 1979), which allows us to “review the superior court’s decision as a Rule 12(b)(6) dismissal, treating that decision as if a motion for dismissal had been granted after exclusion of the outside materials as required.” Because analysis under the second Martin option reveals that the superior court was correct in concluding that plaintiffs’ allegations must proceed as derivative actions, I respectfully dissent.
II. DISCUSSION
The court rejects the second Martin option on the theory that it “seems inappropriate since the superior court’s decision and the parties’ appellate briefs focus on the propriety of summary judgment.” Op. at 612. First, when we review the trial court’s conversion of a Rule 12(b)(6) motion to a motion for summary judgment, it is inevitable that the trial court’s decision and the parties’ appellate briefs will focus on the propriety of summary judgment. Were this fact sufficient to defeat our selection of the second option, the second option would never be available. Second, although the appellate briefing focused on the propriety of summary judgment, the parties’ arguments in the trial court focused almost exclusively on the legal issues raised by the motion to dismiss. Specifically, the plaintiffs argued that their claims were appropriately brought as direct actions, and Kootznoowoo contended that “the gravamen of Plaintiffs’ complaint is in the nature of a derivative action where the alleged injured party is the Corporation.”
The issue of whether plaintiffs’ claims were required to be filed as derivative actions should have been decided on the basis of the pleadings without reliance on outside materials. Although “the trial court is free to disregard the parties’ characterization of the cause of action,” it is my view that the law does not “afford[] the trial court latitude in making its determination” of the nature of the action. Hanson v. Kake Tribal Corp., 939 P.2d 1320, 1334 (Alaska 1997) (Fabe, J., dissenting). Rather, the trial court must look to the body of the complaint to determine its true nature. See id. In this case, despite plaintiffs’' characterization of their claims as direct actions, the superior court concluded that plaintiffs’ allegations of corporate waste and ultra vires payments must proceed as derivative actions. For the reasons discussed below) I believe that the superior court’s conclusion was correct as a matter of law.
Scrutiny of the plaintiffs’ complaint itself discloses that there is an even stronger case to be made than in Hanson that the allegations must proceed as derivative actions. First, the plaintiffs in this case expressly allege in the complaint that the travel payments at issue were ultra vires and “amount[ed] to waste and gifting of corporate assets.” Because these causes of action represent breaches of the directors’ fiduciary duty to the corporation and a harm to the corporation as a whole, they should be treated as derivative actions. See Hanson, 939. P.2d at 1327 (stating that “ ‘when á wrong *614has been done to the corporation, the shareholder’s right to sue the directors or wrongdoers for redress is derivative and not primary’ ”) (quoting Charles R.P. Keating & Jim Perkowitz-Solheim, 13 Fletcher Cyclopedia of the Law of Private Corporations § 5928 (perm. ed. rev.vol.1993)); 12B Fletcher, supra, § 5911 (“The action is derivative if the gravamen of the complaint is injury to the corporation_”).
Second, the travel payments described in the complaint are even less like dividends than the distributions in Hanson. Dividends are generally distributed pro rata among shares. See Black’s Law Dictionary 429 (5th ed.1979). A finding that a distribution is a dividend “establishes a contractual right on the part of the individual shareholder to sue the corporation directly.” Hanson, 939 P.2d at 1335 n. 6 (Fabe, J., dissenting). In Hanson, the distributions were tied to the number of shares owned by each shareholder such that only shareholders with one hundred shares could participate in the financial security plan. See id. at 1322. The travel payments in this case, by contrast, were unrelated to the number of shares owned by each shareholder.
Third, the percentage of shareholders allegedly given preferential treatment in this ease is smaller than in Hanson and constitutes a small minority of the shareholder class. The plaintiffs allege in the complaint that approximately sixty to seventy of the Kootznoowoo shareholders received travel subsidies and that approximately 550 to 600 did not. Where approximately ten percent of shareholders have received travel subsidies, the proper remedy is not to extend the illegal distributions to the remaining ninety percent of shareholders. Rather, common sense prescribes that a derivative action is appropriate. If, as the complaint alleges, the directors’ travel payments were ultra vires and amounted to waste and gifting of corporate assets, the proper remedy would be to require the directors to repay the corporation. This approach would make the corporation whole and place the plaintiffs in the same position they would have been in had the improper distributions not been made. Although the subsidized shareholders would receive a windfall, the windfall would be paid by the directors, not the corporation. Thus, “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.” Hanson, 939 P.2d at 1334 (Fabe, J., dissenting).
Finally, the court in Hanson was particularly concerned with providing the plaintiffs a meaningful remedy. See id. at 1326-27. The court observed that it was unlikely that a derivative suit would yield an adequate remedy for the plaintiffs because the beneficiaries of the payments would not be hable and because it was “unlikely that any damages collected from the responsible directors and officers would approximate the sum of payments made under the plan.” Id. at 1327. In this case, however, the complaint aheges improper payments to only sixty to seventy shareholders, and there is nothing to suggest that the directors would be unable to repay the amount spent on these travel payments. This rationale for departing from the basic principles of corporate law and for allowing a direct action is therefore less a factor in this case than it was in Hanson.
III. CONCLUSION
Because the gravamen of plaintiffs’ complaint is a wrong to the corporation as a whole, it is my view that the superior court was correct as a matter of law in rejecting plaintiffs’ characterization of their allegations as direct actions and in determining that the claims were in fact derivative in nature. Given the trial court’s legal conclusion, I believe this court should proceed under the second option provided by Martin and review the court’s decision as a Rule 12(b)(6) dismissal. This approach would avoid the need for the parties to relitigate the issues and would promote judicial efficiency. As the court declines to take this approach, I dissent.